U.S. SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                 ----------------------------------------------

                                   FORM 10-QSB


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                For the quarterly period ended December 31, 1996


              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


     For the transition period from___________________to___________________


                         Commission File Number 0-25884


                             REDWOOD FINANCIAL, INC.
  ----------------------------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)


                Minnesota                                 41-1807233
  ----------------------------------------------------------------------------
 (State or other jurisdiction of incorporation   (IRS Employer Identification
           or organization)                                 Number)


P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota     56283-0317
-------------------------------------------------------------     ----------
          (Address of principal executive offices)                (Zip Code)


Registrant's telephone number, including area code:   (507) 637-8730


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                                 [X]  Yes     [   ]    No


     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock as of February 4, 1997:


            Class                                      Outstanding
            -----                                      -----------
      Common stock, par value $0.10 per share          1,013,050


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION

                                                                  Page

     Item 1: Financial Statements

             Consolidated Balance Sheets at December 31, 1996 and
             June 30, 1996                                          3

             Consolidated Statements of Earnings for the Three
             and Six Months ended December 31, 1996 and 1995        4

             Consolidated Statement of Stockholders' Equity
             for the Six Months ended December 31, 1996             5

             Consolidated Statements of Cash Flows for the
             Six Months ended December 31, 1996 and 1995            6

             Notes to Consolidated Financial Statements          7- 9

     Item 2: Management's Discussion and Analysis of
             Financial Condition and Results of Operations     10 -19

PART II - OTHER INFORMATION

     Item 1: Legal Proceedings                                     20

     Item 2: Changes in Securities                                 20

     Item 3: Defaults Upon Senior Securities                       20

     Item 4: Submission of Matters to a Vote of Security Holders   20

     Item 5: Other Information                                     20

     Item 6: Exhibits and Reports on Form 8-K                      21

     Signatures                                                    22

                                        2


<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                         PART I - FINANCIAL INFORMATION

                         Item 1 - Financial Statements

                           Consolidated Balance Sheets
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                         December 31,       June 30,
                           Assets                           1996             1996
-------------------------------------------------------------------------------------
<S>                                                     <C>              <C>   
Cash                                                    $     15,217          15,345
Interest-bearing deposits with banks                       8,179,630       2,857,818
-------------------------------------------------------------------------------------
     Cash and cash equivalents                             8,194,847       2,873,163
-------------------------------------------------------------------------------------

Securities held to maturity:
     Mortgage-backed and related securities               15,058,154      15,805,305
     Investment securities                                11,260,235      15,288,913
-------------------------------------------------------------------------------------
Total securities held to maturity                         26,318,389      31,094,218
-------------------------------------------------------------------------------------

Loans receivable, net                                     18,171,579      16,513,727
Federal Home Loan Bank stock, at cost                        333,500         333,500
Accrued interest receivable                                  394,005         553,856
Premises and equipment, net                                   60,519          52,187
Other assets                                                  53,520          93,992
-------------------------------------------------------------------------------------
     Total Assets                                       $ 53,526,359      51,514,643
-------------------------------------------------------------------------------------

                 Liabilities and Stockholders' Equity
-------------------------------------------------------------------------------------
Deposits                                                  40,077,112      38,042,529
Advance payments by borrowers for taxes and insurance         52,010          55,686
Accrued expenses and other liabilities                       158,966         259,392
-------------------------------------------------------------------------------------
     Total Liabilities                                    40,288,088      38,357,607
-------------------------------------------------------------------------------------

Common stock ($.10 par value): Authorized and issued
     1,125,000 shares; outstanding 1,068,750 shares          112,500         112,500
Additional paid-in capital                                 8,463,658       8,457,017
Retained earnings, subject to certain restrictions         6,116,252       6,118,091
Unearned employee stock ownership plan shares               (562,624)       (595,744)
Unearned management stock bonus plan shares                 (350,109)       (393,422)
Treasury stock, at cost; 56,250 shares                      (541,406)       (541,406)
-------------------------------------------------------------------------------------
     Total Stockholders' Equity                           13,238,271      13,157,036
-------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity         $ 53,526,359      51,514,643
-------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements



                                       3
                 
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                       Consolidated Statements of Earnings
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                                                Three months             Six months
                                                                             ended December 31,       ended December 31,
                                                                             ------------------       ------------------
                                                                             1996         1995        1996          1995            
----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S>                                                                     <C>           <C>         <C>           <C>    
    Loans receivable                                                    $   378,600      336,521     740,556       671,927
    Mortgage-backed and related securities                                  266,099      183,142     538,670       359,290
    Investment securities                                                   209,841      317,260     435,914       618,598
    Cash equivalents                                                         54,503       27,928     103,664        87,835
----------------------------------------------------------------------------------------------------------------------------
               Total interest income                                        909,043      864,851   1,818,804     1,737,650

Interest expense on deposits                                                502,095      463,819   1,009,291       937,814
----------------------------------------------------------------------------------------------------------------------------

               Net interest income                                          406,948      401,032     809,513        799,836

Provision for losses on loans                                                     0            0            0             0
----------------------------------------------------------------------------------------------------------------------------

               Net interest income after provision for losses on loans      406,948      401,032      809,513       799,836

Noninterest income:
     Fees and service charges                                                12,209        8,379       26,183        15,171
     Other                                                                      503        9,488        1,462        18,264
----------------------------------------------------------------------------------------------------------------------------
                Total noninterest income                                     12,712       17,867       27,645        33,435

Noninterest expense:
      Compensation and employee benefits                                    186,276      178,813      353,013       320,086
      Advertising                                                             5,511        4,543        8,607         7,119
      Occupancy                                                               6,821        6,884       14,252        13,730
      Federal deposit insurance premiums                                     18,029       20,431       39,369        41,277
      Professional fees                                                     128,255       52,597      164,239        71,852
      Deposit insurance fund assessment                                           0            0      237,085             0
      Other                                                                  21,821       25,979       45,316        40,037
----------------------------------------------------------------------------------------------------------------------------
                Total noninterest expense                                   366,713      289,247      861,881       494,101
----------------------------------------------------------------------------------------------------------------------------
                Earnings (loss) before income taxes                          52,947      129,652      (24,723)      339,170

Income tax expense (benefit)                                                 17,239       54,496      (22,884)       90,576
----------------------------------------------------------------------------------------------------------------------------
                Net earnings (loss)                                      $   35,708       75,156       (1,839)      248,594
----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share                                     $     0.04         0.07         0.00          0.24
----------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding                             1,004,753    1,045,357    1,001,263     1,044,322
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements

                                        4

<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                 Consolidated Statement of Stockholders' Equity
                                  (Unaudited)
<TABLE>
<CAPTION>


                                                                           Unearned
                                                                           Employee      Unearned
                                                                             Stock       Management
                                             Additional                    Ownership    Stock Bonus                      Total
                                  Common       Paid in       Retained        Plan          Plan          Treasury     Stockholders'
                                  Stock        Capital       Earnings       Shares        Shares          Stock          Equity
---------------------------------------------------------------------------------------------------------------------------------

<S>                            <C>            <C>           <C>            <C>            <C>            <C>          <C>       
Balance, June 30, 1996         $  112,500     8,457,017     6,118,091      (595,744)      (393,422)      (541,406)    13,157,036

 Net loss                               0             0        (1,839)            0              0              0         (1,839)

 Earned employee stock
  ownership plan shares                 0         6,641             0        33,120              0              0         39,761

 Earned management
  stock bonus plan shares               0             0             0             0         43,313              0         43,313
---------------------------------------------------------------------------------------------------------------------------------

Balance,  December 31, 1996    $  112,500     8,463,658     6,116,252      (562,624)      (350,109)      (541,406)    13,238,271
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements          

                                       5

<PAGE>
                    REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                               Six months
                                                                                           ended December 31,
                                                                                           ------------------
                                                                                           1996         1995
-------------------------------------------------------------------------------------------------------------------------

Operating Activities:
<S>                                                                                  <C>            <C>    
   Net (loss) earnings                                                               $    (1,839)       248,594
   Adjustments to reconcile net earnings (loss) to net cash
      provided by operations
          Depreciation                                                                     9,074          8,246
          Amortization of premiums and discounts on investment
              securities, mortgage-backed and related securities
              and loans receivable, net                                                  (19,519)       (19,257)
          Decrease in other assets                                                        40,472         40,989
          Decrease (increase) in accrued interest receivable                             159,851       (168,197)
          Increase (decrease) in accrued interest payable                                 17,815        (70,997)
          Amortization of unearned ESOP shares                                            33,120         33,120
          Earned ESOP shares priced above original cost                                    6,641          5,347
          Earned Management Stock Bonus Plan shares                                       43,313              0
          Decrease in accrued expenses and other liabilities                            (100,426)      (163,607)
          Federal Home Loan Bank stock dividend                                                0         (6,500)
-------------------------------------------------------------------------------------------------------------------------
                        Net cash provided (used) by operating activities                 188,502        (92,262)

Investing Activities:
    Proceeds from maturities of investment securities held to maturity                 4,030,000              0
    Purchases of investment securities held to maturity                                        0     (2,487,720)
    Purchases of mortgage-backed and related securities held to maturity                       0     (3,881,340)
    Principal collected on mortgage-backed and related securities held to maturity       763,883        838,774
    Increase in loans receivable, net                                                 (1,656,387)       (52,680)
    Purchases of premises and equipment                                                  (17,406)        (1,365)
-------------------------------------------------------------------------------------------------------------------------
                        Net cash provided (used) by investing activities               3,120,090     (5,584,331)

Financing Activities:
    Decrease in funds held for stock subscriptions                                             0    (13,127,630)
    Decrease in deferred stock conversion costs                                                0        439,015
    Increase (decrease) in deposits, net                                               2,016,768     (1,121,225)
    Decrease in advance payments by borrowers for taxes and insurance                     (3,676)        (6,346)
    Proceeds from the sale of common stock                                                     0      8,549,361
    Increase in unearned ESOP shares                                                           0       (661,984)
-------------------------------------------------------------------------------------------------------------------------
                        Net cash provided (used) by financing activities               2,013,092     (5,928,809)
-------------------------------------------------------------------------------------------------------------------------
                        Increase (decrease) in cash and cash equivalents               5,321,684    (11,605,402)


Cash and cash equivalents, beginning of period                                         2,873,163     14,092,665
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                             $ 8,194,847      2,487,263
-------------------------------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:
    Cash paid for interest                                                           $   991,476      1,008,811
    Cash paid for income taxes                                                           103,700         67,980

</TABLE>

See accompanying notes to consolidated financial statements

                                       6

<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                December 31, 1996
                                   (Unaudited)

(1)  Redwood Financial, Inc.

     Redwood  Financial,  Inc. (the Company) was incorporated  under the laws of
     the State of  Minnesota  for the purpose of  becoming  the savings and loan
     holding company of Redwood Falls Federal Savings and Loan  Association (the
     Association)  in  connection  with  the  Association's  conversion  from  a
     federally-chartered    mutual   savings   and   loan   association   to   a
     federally-chartered  stock  savings and loan  association,  pursuant to its
     Plan of Conversion.

     The Company  commenced a Subscription and Community  Offering of its shares
     (the Offering) in connection  with the conversion of the Association on May
     22, 1995.  The Offering was closed on June 22, 1995 and the  conversion was
     completed July 7, 1995 (see note 5).

(2)  Basis of Presentation

     The accompanying  unaudited consolidated financial statements were prepared
     in accordance  with  instructions  for Form 10-QSB and,  therefore,  do not
     include  all  disclosures  necessary  for a  complete  presentation  of the
     consolidated   balance   sheets,   consolidated   statements  of  earnings,
     consolidated statement of stockholders' equity, and consolidated statements
     of cash flows in conformity with generally accepted accounting  principles.
     However, all adjustments,  consisting only of normal recurring adjustments,
     which  are,  in  the  opinion  of   management,   necessary  for  the  fair
     presentation of the interim  financial  statements have been included.  The
     statement of earnings for the three and six months ended  December 31, 1996
     are not necessarily indicative of the results which may be expected for the
     entire year.

     The  material  contained  herein is written with the  presumption  that the
     users of the interim  financial  statements have read or have access to the
     most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which
     contains  the  latest  audited  financial  statements  and  notes  thereto,
     together with Management's  Discussion and Analysis of Financial  Condition
     and Results of Operations as of June 30, 1996 and for the year then ended.

                                                                  (Continued)

                                        7


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(3)  Earnings Per Share

     Earnings  per share are based upon the  weighted  average  number of common
     shares and common stock  equivalents,  if dilutive,  outstanding during the
     period.  The only common stock equivalents are stock options.  The weighted
     average number of common stock equivalents is calculated using the treasury
     stock method.

(4)  Regulatory Capital Requirements

     At December 31, 1996, the Association met each of the three current minimum
     regulatory  capital  requirements.   The  following  table  summarizes  the
     Association's regulatory capital position at December 31, 1996:

                                                Amount    Percent (1)
        ---------------------------------------------------------------------
                                             (dollars in thousands)

         Tangible Capital:
          Actual                                $8,120      16.74%
          Required                                 728       1.50
        --------------------------------------------------------------------
          Excess                                $7,392      15.24%
        --------------------------------------------------------------------

        Core Capital:
          Actual                                $8,120      16.74%
          Required                               1,455       3.00
        --------------------------------------------------------------------
          Excess                                $6,665      13.74%
        --------------------------------------------------------------------

        Risk-Based Capital:
          Actual                                $8,308      54.59%
          Required                               1,217       8.00
        --------------------------------------------------------------------
          Excess                                $7,091      46.59%
        --------------------------------------------------------------------

        (1) Tangible and core capital  levels are shown as a percentage of total
            adjusted assets; risk-based capital levels are shown as a percentage
            of risk-weighted assets.

                                                                  (Continued)

                                        8


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(5)  Stockholders' Equity and Stock Conversion

     The  Association  converted from a  federally-chartered  mutual savings and
     loan   association  to  a   federally-chartered   stock  savings  and  loan
     association  pursuant to its plan of  Conversion  which was approved by the
     Association's members on June 23, 1995. The conversion was effected on July
     7, 1995,  and resulted in the issuance of 1,125,000  shares of common stock
     (par value $0.10) at $8.00 per share for a gross sales price of $9,000,000.
     Costs related to conversion (primarily underwriters' commission,  printing,
     and professional  fees) aggregated  $450,639 and were deducted to arrive at
     the net proceeds of $8,549,361.  The Company  established an employee stock
     ownership  trust  which  purchased  82,748  shares of  common  stock of the
     Company at the issuance  price of $8.00 per share from funds  borrowed from
     the holding company.

(6)  Stock Repurchases

     On January 15, 1997, the Company  purchased 3,000 shares of its outstanding
     common  stock at  $10.375  per share.  On January  28,  1997,  the  Company
     purchased 4,600 shares of its outstanding common stock at $10.75 per share.
     On January 30, 1997,  the Company  purchased 600 shares of its  outstanding
     common  stock at $10.75  per  share.  On  January  30,  1997,  the  Company
     purchased 600 shares of its  outstanding  common stock at $11.00 per share.
     Repurchased  shares are considered  treasury shares and may be utilized for
     general corporate and other purposes.

                                                                  (Continued)

                                        9


<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Item 2-Management's Discussion and Analysis
                of Financial Condition and Results of Operations

General

The Company's net earnings are dependent  primarily on its net interest  income,
which is the  difference  between  interest  income earned on its investment and
loan portfolio and interest paid on interest-bearing  liabilities.  Net interest
income  is  determined  by  (1)  the   difference   between   yields  earned  on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate  spread)  and (2) the  relative  amounts  of  interest-earning  assets  and
interest-bearing  liabilities. The Company's interest rate spread is affected by
regulatory,  economic,  and competitive  factors that influence  interest rates,
loan demand,  and deposit flows. To a lesser extent,  the Company's net earnings
also are affected by the level of noninterest  income,  which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.

The  operations  of  financial  institutions,  including  the  Association,  are
significantly affected by prevailing economic conditions,  competition,  and the
monetary  and  fiscal  policies  of  the  federal  government  and  governmental
agencies.  Lending  activities  are  influenced  by the demand for and supply of
housing,  competition  among  lenders,  the  level of  interest  rates,  and the
availability  of funds.  Deposit  flows and  costs of funds  are  influenced  by
prevailing market rates of interest, primarily on competing investments, account
maturities,  and the levels of personal income and savings in the  Association's
market area.

Financial Condition

The Company's total assets increased by $2,011,000 or 3.90%, from $51,515,000 at
June 30, 1996 to  $53,526,000  at December  31, 1996.  Changes in the  Company's
assets reflect an increase in the level of public unit fund deposits  during the
quarter ended December 31, 1996.

Cash and cash equivalents  increased by $5,322,000,  or 185.24%, from $2,873,000
at June 30, 1996 to  $8,195,000  at December 31, 1996.  The increase in cash was
primarily due to investment security maturities of $4,030,000 and an increase in
deposits of $2,017,000  during the six months ended  December 31, 1996. The high
level of cash and cash equivalents at December 31, 1996 is not indicative of the
liquidity levels that the Company generally  maintains,  but instead is a result
of $2,550,000 of  investment  securities  which matured in December 1996 and the
acceptance of a $2,000,000  in public unit fund deposits in late December  1996.
The Company is in process of reinvesting  the funds into higher  yielding loans,
investments and/or  mortgage-backed  and related securities  consistent with its
traditional lending and investment strategies.

                                                                  (Continued)

                                       10


<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The   Company's   securities,    which   include   investment   securities   and
mortgage-backed and related securities,  decreased by $4,776,000 or 15.36%, from
$31,094,000  at June 30, 1996 to  $26,318,000 at December 31, 1996. The decrease
in the level of  securities  during the six months  ended  December  31, 1996 is
attributable to investment security maturity and the principal repayments of the
Company's  mortgage-backed and related securities.  No investment  securities or
mortgage-backed or related securities were purchased during the six months ended
December 31, 1996.

The Company's loans receivable,  net, increased by $1,658,000,  or 10.04%,  from
$16,514,000  at June 30, 1996 to  $18,172,000 at December 31, 1996. The increase
in loans  receivable  was due to an increase in mortgage  loan demand during the
six months ended December 31, 1996.

The  Company's  deposits,  including  accrued  interest  payable,  increased  by
$2,034,000,  or 5.35%,  from  $38,043,000  at June 30,  1996 to  $40,077,000  at
December  31, 1996.  The increase in deposits is a result of higher  public unit
fund deposits at December 31, 1996.

Results of Operations

Net Earnings

Net earnings were $36,000 for the quarter  ended  December 31, 1996, as compared
to net  earnings  of $75,000 for the  quarter  ended  December  31,  1995.  This
represented  a decrease  of $39,000 or 52.00%.  The  decrease  in  earnings  was
primarily  attributable to a $78,000, or 26.99% increase in noninterest expense.
The increase in noninterest  expense was primarily a result of additional  costs
associated  with  the  Company's  unsuccessful  acquisition  attempt  of  Olivia
Bancorporation,  Inc. (See Recent Developments - Termination of Letter of Intent
to Acquire Olivia  Bancorporation,  Inc.).  These costs totaled  $102,000 and no
additional  costs  associated  with the  unsuccessful  acquisition  attempt  are
expected.  Net earnings  were also impacted by a $44,000  increase,  or 5.09% in
interest income, a $38,000, or 8.19% increase in interest expense, and a $37,000
decrease, or 68.52% in income tax expense.

The Company  incurred a net loss of $2,000 for the six months ended December 31,
1996, as compared to net earnings of $249,000 for the six months ended  December
31, 1995. This represented a decrease of $251,000,  or 100.80%. The decrease was
primarily attributable to a $368,000 increase, or 74.49% in noninterest expense.
The  increase  in  noninterest  expense was  primarily a result of the  $237,000
one-time  assessment  required by the federal deposit  insurance  authorities to
bring the  Savings  Association  Insurance  Fund  (SAIF) to parity with the Bank
Insurance  Fund (BIF) and the  aforementioned  $102,000  in  additional  expense
associated with the unsuccessful  acquisition attempt of Olivia  Bancorporation,
Inc. Net earnings were also impacted by a $81,000 increase, or 4.66% in interest
income,  a  $71,000,  or 7.57%  increase  in  interest  expense,  and a $114,000
decrease, or 125.27% in income tax expense.

                                                                  (Continued)

                                       11


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Net Interest Income

Net interest income increased by $6,000, or 1.50%, from $401,000 for the quarter
ended December 31, 1995 to $407,000 for the quarter ended December 31, 1996. The
increase in net interest income primarily  reflects an $4,560,000  increase,  or
9.72% in average  interest  earning  assets,  partially  offset by a  $3,774,000
increase,  or 11.02% in average  interest  bearing  liabilities  for the quarter
ended  December 31, 1996 as compared to the quarter ended  December 31, 1995. In
addition,  the increase in net interest income was partially offset by a decline
in the Company's net interest spread,  from 1.96% for the quarter ended December
31, 1995,  to 1.78% for the quarter  ended  December  31, 1996.  The decrease in
interest rate spread,  compared to the same period in the previous year, was due
to  primarily  to a  decrease  in yield  on the  Company's  loan and  investment
securities  portfolios  partially  offset by slight decrease in interest paid on
deposits.

Net interest income  increased by $10,000,  or 1.25%,  from $800,000 for the six
months ended December 31, 1995 to $810,000 for the six months ended December 31,
1996. The increase in net interest income primarily  reflects an increase in the
ratio of average interest-earning assets to average interest-bearing liabilities
from 133.25% for the six months  ended  December 31, 1995 to 135.27% for the six
months ended December 31, 1996.  This was partially  offset by a decrease in the
Company's  interest rate spread from 2.06% for the six months ended December 31,
1995,  to 1.76% for the six months  ended  December  31,  1996.  The decrease in
interest rate spread,  compared to the same period in the previous year, was due
primarily to a decrease in yield on the Company's loan and investment securities
portfolios and an increase in interest paid on deposits.

Interest Income

Interest  income was  $909,000  for the quarter  ended  December  31,  1996,  as
compared to $865,000 for the quarter ended  December 31, 1995,  representing  an
increase  of $44,000,  or 5.09%.  The  increase  in  interest  income was caused
primarily  by a  $4,560,000,  or  9.72%,  increase  in the  average  balance  of
interest-bearing  assets.  This was partially offset by a decline in the overall
yield on interest  earning assets.  For the quarter ended December 31, 1996, the
average yield on interest earning assets was 7.06%,  representing a decline from
7.37% for the quarter ended December 31, 1995.

Interest  income was  $1,819,000  for the six months ended December 31, 1996, as
compared to $1,738,000  for the six months ended  December 31, 1995, an increase
of $81,000,  or 4.66%. The increase in interest income was caused primarily by a
$3,974,000,  or 8.38%,  increase  in the  average  balance  of  interest-bearing
assets.  This was partially offset by a decline in the overall yield on interest
earning assets. For the six months ended December 31, 1996, the average yield on
interest earning assets was 7.08%, representing a decline from 7.33% for the six
months ended December 31, 1995.

                                                                  (Continued)

                                       12


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest on loans receivable increased by $42,000, or 12.46%, during the quarter
ended  December 31, 1996,  as compared to the quarter  ended  December 31, 1995.
Such increase was due to a $2,570,000, or 16.75% increase in the average balance
on loans  receivable from $15,342,000 for the quarter ended December 31, 1995 to
$17,912,000 for the quarter ended December 31, 1996.  This was partially  offset
by a decline in the average yield on loans receivable from 8.79% for the quarter
ended December 31, 1995 to 8.45% for the quarter ended December 31, 1996.

Interest on loans  receivable  increased by $69,000,  or 10.27%,  during the six
months ended December 31, 1996, as compared to the six months ended December 31,
1995.  The increase was due to a $1,986,000,  or 12.93%  increase in the average
balance on loans  receivable from  $15,360,000 for the six months ended December
31, 1995 to  $17,346,000  for the six months ended  December 31, 1996.  This was
partially  offset by a decline in the  average  yield on loans  receivable  from
8.75% for the six months  ended  December  31,  1995 to 8.54% for the six months
ended December 31, 1996.

Interest on  mortgage-backed  and related  securities  increased by $83,000,  or
45.36%,  during the quarter ended  December 31, 1996, as compared to the quarter
ended  December 31, 1995.  Such  increase  was due to a  $4,861,000,  or 47.13%,
increase in the average balance of  mortgage-backed  and related securities from
$10,313,000  for the quarter  ended  December  31, 1995 to  $15,174,000  for the
quarter  ended  December  31,  1996.  The  increase  in the  average  balance of
mortgage-backed  and related  securities  primarily  resulted from a decision to
invest the cash  proceeds  from  maturing  investment  securities  and principal
repayments on existing mortgage-backed securities into other mortgage-backed and
related securities during the first six months of 1996. The increase in interest
on  mortgage-backed  and related  securities  was  partially  offset by a modest
decrease in the average yield on  mortgage-backed  and related  securities  from
7.10% for the quarter  ended  December  31, 1995 to 7.01% for the quarter  ended
December 31, 1996.

Interest on  mortgage-backed  and related securities  increased by $180,000,  or
50.14%,  during the six months ended  December 31, 1996,  as compared to the six
months ended  December  31, 1995.  Such  increase  was due to a  $5,161,000,  or
50.26%,   increase  in  the  average  balance  of  mortgage-backed  and  related
securities  from  $10,269,000  for the six months  ended  December  31,  1995 to
$15,430,000  for the six months ended  December  31,  1996.  The increase in the
average balance of  mortgage-backed  and related  securities  primarily resulted
from the  aforementioned  decision  to invest the cash  proceeds  from  maturing
investment  securities  and  principal  repayments  on existing  mortgage-backed
securities into other  mortgage-backed  and related  securities during the first
six months of 1996.  The  increase in interest  on  mortgage-backed  and related
securities  was  partially  offset by a small  decrease in the average  yield on
mortgage-backed  and  related  securities  from 6.99% for the six  months  ended
December 31, 1995 to 6.98% for the quarter ended December 31, 1996.

                                                                  (Continued)

                                       13


<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest on investment securities,  including FHLB stock, decreased by $107,000,
or 33.75%,  during the  quarter  ended  December  31,  1996,  as compared to the
quarter  ended  December  31,  1995.  Such  decrease  was  due  primarily  to  a
$5,154,000,  or 27.81%, decrease in the average balance of investment securities
from  $18,535,000 for the quarter ended December 31, 1995 to $13,381,000 for the
quarter  ended  December  31,  1996.  The  decline  in the  average  balance  of
investment  securities  was a result of a decision to invest cash  proceeds from
the maturity of investment  securities into higher yielding  mortgage-backed and
related  securities.  Additionally,  this decrease was effected by a decrease in
the average yield on investment  securities  and FHLB stock, from 6.95% to 6.27%
for the quarters ended December 31, 1995 and 1996, respectively.

Interest on investment securities,  including FHLB stock, decreased by $183,000,
or 29.56%, during the six months ended December 31, 1996, as compared to the six
months ended  December 31, 1995. The decrease was due primarily to a $4,486,000,
or 23.75%,  decrease  in the  average  balance  of  investment  securities  from
$18,891,000  for the six months ended December 31, 1995 to  $14,405,000  for the
six months ended  December 31, 1996.  As previously  stated,  the decline in the
average balance of investment  securities was a result of the decision to invest
cash proceeds from the maturity of investment  securities  into higher  yielding
mortgage-backed and related securities. Additionally, this decrease was effected
by a decrease in the average  yield on  investment  securities,  including  FHLB
stock,  from 6.56% for the six months  ended  December 31, 1995 to 6.06% for the
six months ended December 31, 1996.

Interest Expense

Interest expense  increased by $38,000,  or 8.19%, from $464,000 for the quarter
ended December 31, 1995 to $502,000 for the quarter ended December 31, 1996. The
increase in interest expense  resulted from a $3,774,000,  or 11.02% increase in
the average balance of deposits from  $34,254,000 for the quarter ended December
31, 1995 to $38,028,000 for the quarter ended December 31, 1996. The increase in
interest expense was partially offset by a slight decline in the average cost of
deposits to 5.28% during the quarter  ended  December  31, 1996,  as compared to
5.42% for the quarter ended  December 31, 1995. The decrease in the average cost
of deposits  was due to  modestly  lower  prevailing  market  interest  rates on
deposits  during the quarter ended  December 31, 1996 as compared to the quarter
ended December 31, 1995.

                                                                  (Continued)

                                       14


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest  expense  increased  by $71,000,  or 7.57%,  from  $938,000 for the six
months ended  December 31, 1995 to $1,009,000  for the six months ended December
31, 1996. The increase in interest expense resulted primarily from a $2,406,000,
or 6.76% increase in the average  balance of deposits from  $35,587,000  for the
six months  ended  December  31, 1995 to  $37,993,000  for the six months  ended
December 31, 1996. The increase in interest expense was also effected by a small
increase in the average cost of deposits, from 5.27% during the six months ended
December 31, 1995, to 5.31% for the quarter ended December 31, 1995.

Provision for Loan Losses

The  Company's  provision for loan losses was $0 and $0 for the three months and
six  months  ended  December  31,  1996 and 1995,  respectively.  Due to lack of
substantive  problem loans (i.e. few nonaccrual  loans) during these periods and
stable real estate value in the Company's market area,  management believed that
the  allowance  for loan  losses was  adequate  throughout  these  periods.  The
allowance  for loan losses was  maintained  at $213,000 at December 31, 1996 and
1995.  The Company's net loan  charge-offs  were $0 and $0 for the three and six
months ended December 31, 1996 and 1995, respectively.  At December 31, 1996 and
1995, the allowance for loan losses  represented 1.16% and 1.27%,  respectively,
of loans receivable.  Nonaccrual loans totaled $57,000 and $0, respectively,  at
December 31, 1996 and 1995.

Noninterest Income

Noninterest income decreased by $5,000, or 27.78%,  from $18,000 for the quarter
ended  December 31, 1995 to $13,000 for the quarter ended December 31, 1996. The
decrease in noninterest income was primarily due to a $8,000, or 88.89% decrease
in other noninterest income. This was offset by a $4,000, or 50.00%, increase in
various fees and service charges.  The decrease in other noninterest  income was
primarily  due to a  $7,000  gain  taken on the  disposition  of an asset in the
quarter ended December 31, 1995. The increase in fees and service  charges was a
result of higher loan fee income (e.g. loan origination fees and appraisal fees)
resulting from the aforementioned increase in loan origination volume.

Noninterest  income  decreased  by $5,000,  or 15.15%,  from $33,000 for the six
months ended  December 31, 1995 to $28,000 for the six months ended December 31,
1996.  The decrease in  noninterest  income was primarily  due to a $17,000,  or
94.44% decrease in other noninterest  income.  This was offset by a $11,000,  or
73.33%,  increase in various  fees and service  charges.  The  decrease in other
noninterest  income was primarily due to a $12,000 gain taken on the disposition
of various  assets in the six months  ended  December 31,  1995.  As  previously
stated, the increase in fees and service charges was a result of higher loan fee
income (e.g.  loan  origination  fees and  appraisal  fees)  resulting  from the
aforementioned increase in loan origination volume.

                                                                  (Continued)

                                       15


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Noninterest Expense

Noninterest  expense  increased  by $78,000,  or 26.99%,  from  $289,000 for the
quarter ended  December 31, 1995 to $367,000 for the quarter ended  December 31,
1996.  The  increase  in total  noninterest  expense  was  primarily  due to the
aforementioned $102,000 in expenses associated with the unsuccessful acquisition
attempt of Olivia  Bancorporation,  Inc.  These  expenses  consist  primarily of
professional fees including various accounting,  investment  banking,  and legal
services provided the Company during the negotiations and due diligence.  In the
aggregate,  professional fees increased by $75,000,  or 141.51% from $53,000 for
the quarter ended  December 31, 1995, to $128,000 for the quarter ended December
31, 1996.

In  addition,  the  increase in  noninterest  expense  during the quarter  ended
December  31,  1996 was also  attributable  to a $7,000,  or 3.91%,  increase in
compensation and employee  benefits from $179,000 for the quarter ended December
31, 1995 to $186,000  for the quarter  ended  December  31,  1996,  and a $1,000
increase,  or 20.00% in  advertising  expense in comparison of the same periods.
The increase in  noninterest  expense during the quarter ended December 31, 1996
was  partially  offset by a $4,000,  or 15.38%  decrease in other  expenses from
$26,000 for the quarter  ended  December  31,  1995,  to $22,000 for the quarter
ended December 31, 1996,  and a $2,000  decrease,  or 10.00% in federal  deposit
insurance premiums in comparison of the same periods.

The increase in  compensation  and employee  benefits  was  attributable  to the
amortization of unearned  management  stock bonus plan shares and an increase in
staff during the quarter ended December 31, 1996.  The slight  decrease in other
expenses represents a lower level of miscellaneous  expenses incurred during the
quarter ended December 31, 1996.

Noninterest expense increased by $368,000,  or 74.49%, from $494,000 for the six
months ended December 31, 1995 to $862,000 for the six months ended December 31,
1996.  The  increase  in total  noninterest  expense  was  primarily  due to the
one-time  $237,000 federal deposit  insurance  assessment to bring to parity the
SAIF  and  BIF,  and the  $102,000  in  expenses  incurred  as a  result  of the
unsuccessful acquisition attempt of Olivia Bancorporation,  Inc. The increase in
noninterest  expense  during the six months  ended  December  31,  1996 was also
attributable  to a $33,000,  or 10.31%,  increase in  compensation  and employee
benefits  from  $320,000 for the six months ended  December 31, 1995 to $353,000
for the six months  ended  December  31,  1996.  Advertising  expense  and other
expenses  increased by $2,000,  or 28.57%,  and $5,000 or 12.50%,  respectively,
during the six months ended  December 31, 1996 in  comparison  to the six months
ended December 31, 1995.

                                                                  (Continued)

                                       16


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The increase in  compensation  and employee  benefits  was  attributable  to the
amortization of unearned  management  stock bonus plan shares and an increase in
staff  during the six months  ended  December  31,  1996.  The increase in other
expenses  represents a slightly higher level of miscellaneous  expenses incurred
during the six months ended December 31, 1996.

Excluding the $237,000 federal  insurance  premium  BIF/SAIF parity  assessment,
federal  deposit  insurance  premium expense  declined by $2,000,  or 4.88% from
$41,000 for the six months  ended  December  31, 1995 to $39,000  during the six
months  ended  December  31, 1996.  Similarly,  excluding  the $102,000 in costs
incurred in conjunction with the  unsuccessful  acquisition,  professional  fees
declined by $10,000  during the six months ended December 31, 1996 in comparison
to the same period ended December 31, 1995.

Income Taxes

The Company's income taxes declined by $37,000,  or 68.52%, from $54,000 for the
quarter ended December 31, 1995, to $17,000 the quarter ended December 31, 1996.
The change in income taxes was due  primarily to a decrease in pre-tax  earnings
of $77,000,  or 59.23%,  from pre-tax earnings of $130,000 for the quarter ended
December 31, 1995 to $53,000 for the quarter ended December 31, 1996.

The Company's  income taxes fluctuated by $114,000,  or 125.27%,  from an income
tax expense of $91,000 for the six months ended  December 31, 1995, to an income
tax benefit of $23,000 for the six months ended December 31, 1996. The change in
income taxes was due primarily to a decrease in pre-tax earnings of $364,000, or
107.37%, from pre-tax earnings of $339,000 for the six months ended December 31,
1995 to a pre-tax loss of $25,000 for the six months ended December 31, 1996. As
previously  stated,  the Company's  pre-tax loss is due to the one-time  deposit
insurance  assessment and costs  associated  with the  unsuccessful  acquisition
attempt of Olivia Bancorporation, Inc. The income tax benefit for the six months
ended December 31, 1996 reflects the tax benefit  associated  with the Company's
current negative earnings position adjusted for tax exempt interest.

Liquidity and Capital Resources

The Company's  primary  sources of funds are deposits and proceeds from maturing
investment   securities  and  principal  and  interest  payments  on  loans  and
mortgage-backed   and  related   securities.   While  maturities  and  scheduled
amortization  of  mortgage-backed   and  related  securities  and  loans  are  a
predictable  source  of  funds,  deposit  flows  and  mortgage  prepayments  are
generally   influenced  by  general   interest   rates,   economic   conditions,
competition, and other factors.

                                                                 (Continued)

                                       17


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The primary investing  activity of the Company is the purchase of investment and
mortgage-backed and related securities. During the six months ended December 31,
1996 and 1995, the Company purchased  investment and mortgage-backed and related
securities in the amounts of $0, and $6,369,000,  respectively.  Other investing
activities  include  originations  of loans and investment in FHLB of Des Moines
stock.  The  primary  financing  activity of the  Company is the  attraction  of
savings deposits.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Association  has the ability to obtain  advances from the Federal Home Loan Bank
(FHLB) of Des  Moines.  In  addition,  the  Company  maintains  a portion of its
investments in FHLB overnight funds that will be available when needed.

The Company is required to maintain  minimum  levels of liquid assets as defined
by OTS regulations.  This requirement,  which may be changed at the direction of
the OTS depending upon economic  conditions  and deposit flows,  is based upon a
percentage of deposits and short-term borrowings.  The required minimum ratio is
currently  5.0%.  Management of the Company seeks to maintain a relatively  high
level of  liquidity  in  order  to  retain  flexibility  in terms of  investment
opportunities  and deposit pricing.  Because liquid assets generally provide for
lower rates of return,  the  Company's  relatively  high  liquidity  will,  to a
certain extent, result in lower rates of return on assets.

The  Company's  most  liquid  assets  are cash and cash  equivalents,  which are
short-term,  highly liquid  investments  with  original  maturities of less than
three months that are readily  convertible  to known amounts of cash and include
interest-bearing  deposits.  The  levels of these  assets are  dependent  on the
Company's  operating,  financing,  and  investing  activities  during  any given
period.  At  December  31,  1996 and  1995,  cash and cash  equivalents  totaled
$8,195,000 and $2,487,000,  respectively.  Although the Company maintains higher
levels of liquidity,  the unusually  high level of cash and cash  equivalents at
December  31,  1996 is not  indicative  of the level of  liquidity  the  Company
typically  maintains;  but instead reflects a combination of funds obtained from
investment  securities  maturing in December  1996 as well as the  acceptance of
public unit funds during this month.

                                                                  (Continued)

                                       18


<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Recent Developments

(1)  Termination of Letter of Intent to acquire Olivia Bancorporation, Inc.

     On December  30,  1996,  the Company  announced  that the Letter of Intent,
     dated November 1, 1996, to acquire 100% of the outstanding  stock of Olivia
     Bancorporation, Inc. (the Bancorporation) and 100% of the stock of American
     State Bank of Olivia, Minnesota (the Bank) had terminated.  Consummation of
     the proposed  acquisition was subject to several conditions,  including the
     completion of satisfactory due diligence by the Company. Upon completion of
     due   diligence,   the  Company   decided  that  it  could  not  offer  the
     consideration  disclosed  in the  aforementioned  Letter of  Intent.  After
     further  negotiations,  the parties could not reach  agreement on a revised
     price for the proposed  acquisition.  No further negotiations on the matter
     are expected to be conducted in the foreseeable future.

(2)  Bank Insurance Fund/Savings Association Insurance Fund Assessment

     As a result of the omnibus appropriations bill signed September 30, 1996 by
     President  Clinton,  all  financial  institutions  insured  by the  Savings
     Association  Insurance  Fund  (SAIF)  were  assessed  a special  assessment
     intended  to bring to parity the fund  insuring  deposits  at most  savings
     institutions,  the SAIF,  with the fund  insuring  deposits  at  commercial
     banking  institutions,  the Bank  Insurance Fund (BIF).  Subsequently,  the
     Association  paid a one-time  $237,000  assessment  to the Federal  Deposit
     Insurance Corporation (FDIC) on November 29, 1996.

     As a result of the one-time assessment,  the FDIC will substantially reduce
     the premium  assessed  savings  institutions  insured by the SAIF beginning
     January 1, 1997. In December 1996, the Association was informed by the FDIC
     that its deposit insurance rate will be 6.5 basis points for each dollar of
     deposits.  Based upon the current  level of deposits,  the Company  expects
     that the  legislation  will  reduce  the  Association's  deposit  insurance
     expense by approximately 71.7% before taxes.

(3)  Association Dividend Payment to the Company

     During the quarter ended December 31, 1996, a $2,000,000  dividend was paid
     to the Company by the Association. The dividend payment reduces the capital
     the  Company has  invested in the  Association,  however,  the  Association
     continues to meet all  regulatory  capital  requirements.  The dividend was
     paid subsequent to notification by the Association's  regulator, the Office
     of Thrift Supervision, that it took no objection to the dividend payment.

                                                                  (Continued)

                                       19


<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION

ITEM 1:     Legal Proceedings.

            None.

ITEM 2:     Changes in Securities.

            Not Applicable.

ITEM 3:     Defaults upon Senior Securities.

            Not Applicable.

ITEM 4:     Submission of Matters to a Vote of Security Holders.

            On October 22, 1996, the Annual Meeting of the  shareholders  of the
            Company  was held to obtain  the  approval  of the  shareholders  of
            record  as of  September  3,  1996 in  connection  with the  matters
            indicated below. The following is a brief description of the matters
            voted on at the meeting,  and the number of votes cast for, against,
            or  withheld,  as  well as the  number  of  abstentions,  as to such
            matters:
<TABLE>
<CAPTION>
                                                                       Vote
                                                         --------------------------------
                                                                    Against or
                      Matter                               For       withheld    Abstain
            -----------------------------------------------------------------------------
<S>                                                       <C>          <C>        <C>     
            1.   Election of directors:
                   James P. Tersteeg                      1,049,122    10,150       N/A
                   J. Scott Nelson                        1,049,122    10,150       N/A

            2.   Appointment of KPMG Peat Marwick         1,058,272         0     1,000
                  LLP as auditors for 1997 fiscal year
</TABLE>

ITEM 5:     Other Information.

            None.

                                                                  (Continued)

                                       20


<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION

ITEM 6:     Exhibits and Reports on Form 8-K.

            During the quarter ended  December 31, 1996, a Form 8-K (Items 5 and
            7),  dated  November 4, 1996,  and a Form 8-K (Items 5 and 7), dated
            December 30, 1996, were filed.

                                       21


<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                REDWOOD FINANCIAL, INC.
                                Registrant



Date: February 5, 1997          /s/ Paul W. Pryor
      ----------------          -----------------
                                Paul W. Pryor, President and Chief Executive
                                Officer (Duly Authorized Officer)


Date: February 5, 1997          /s/ Anthony H. Acker
----------------------          --------------------
                                Anthony H. Acker, Chief Financial Officer
                                (Principal Accounting Officer)

                                       22