UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

[X]  Annual report under Section 13 or 15(d) of the  Securities  Exchange Act of
     1934

                 For the fiscal year ended December 31, 2000 or

[ ]  Transition  report  pursuant  to Section  13 or 15(d) of the  Securities
     Exchange Act of 1934



Commission file number:  0-19231


                             REDWOOD EMPIRE BANCORP
             (Exact Name of Registrant as Specified in Its Charter)

                   California                                   68-0166366
         (State or Other Jurisdiction of                      (IRS Employer
         Incorporation or Organization)                    Identification No.)

         111 Santa Rosa Avenue, Santa Rosa, California          95404-4905
          (Address of Principal Executive Offices)              (Zip Code)

       Registrant's telephone number, including area code: (707) 573-4800


Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value.

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed under 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 the
filing requirements for the past 90 days. Yes X No

     Indicate by check mark if disclosure of delinquent  filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]

     The  aggregate  market  value  of the  Registrant's  common  stock  held by
non-affiliates  on March 16, 2001 (based on the closing sale price of the Common
Stock) was $39,902,017.

     As of March  16,  2001  there  were  2,474,925  shares  outstanding  of the
Registrant's common stock.





                                       1
<PAGE>






                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following  document are  incorporated  by reference in this Form
10-K:



                   DOCUMENT                              FORM 10-K REFERENCE

Redwood's Definitive Proxy Statement                          Part III
For the 2001 Annual Meeting of Shareholders


                                       2
<PAGE>









                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                                      Page
                                                          PART I
<S>               <C>                                                                                                   <C>
Forward-Looking Information............................................................................................. 4
Item 1.           Business.............................................................................................. 5
Item 2.           Properties........................................................................................... 19
Item 3.           Legal Proceedings.................................................................................... 19
Item 4.           Submission of Matters to a Vote of Securities Holders................................................ 19



                                                          PART II

Item 5.           Market for the Registrant's Common Equity and Related Stockholder Matters............................ 19
Item 6.           Selected Financial Data.............................................................................. 21
Item 7.           Management's Discussion and Analysis of Financial Condition and
                  Results of Operations................................................................................ 22
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk........................................... 46
Item 8.           Financial Statements and Supplementary Data.......................................................... 50
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial
                  Disclosure........................................................................................... 87



                                                         PART III

Item 10.          Directors and Executive Officers of the Registrant................................................... 87
Item 11.          Executive Compensation................................................................................87
Item 12.          Security Ownership of Certain Beneficial Owners and Management........................................87
Item 13.          Certain Relationships and Related Transactions........................................................88



                                                          PART IV

Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................89

</TABLE>



                                       3
<PAGE>



                                     PART I


Forward-Looking Information

         This Annual Report on Form 10-K includes  forward-looking  information,
which is subject to the "safe harbor"  created by Section 27A of the  Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements (which involve, among other things,
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve  certain  risks and  uncertainties  that could cause  actual  results to
differ materially from those in the forward-looking  statements.  Such risks and
uncertainties include, but are not limited to, the following factors:

     o    Competitive  pressure  in the  banking  industry  and  changes  in the
          regulatory environment.

     o    Changes  in the  interest  rate  environment  and  volatility  of rate
          sensitive loans and deposits.

     o    A decline in the health of the economy  nationally or regionally which
          could  reduce the demand for loans or reduce the value of real  estate
          collateral securing most of the Company's loans.

     o    Credit  quality  deterioration  which  could  cause an increase in the
          provision for loan losses.

     o    Dividend restrictions.

     o    Regulatory discretion.

     o    Material  losses in the  Company's  merchant  credit  card  processing
          business from card holder fraud or merchant business failure.

     o    Changes in the securities markets.

     o    Asset/liability repricing risks and liquidity risks.

         The Company  undertakes no obligation to revise or publicly release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to "Certain  Important  Considerations for Investors" in
Item 1, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 and other information in this Report.






                                       4
<PAGE>



Item 1.      Business

         Redwood  Empire  Bancorp  ("Redwood,"  and with its  subsidiaries,  the
"Company") is a bank holding company  headquartered  in Santa Rosa,  California,
and operating in Northern California through one principal subsidiary,  National
Bank of the Redwoods,  a national bank ("NBR" or the "Bank"). A previously owned
subsidiary  of  the  Company,  Allied  Bank,  F.S.B.,  a  federal  savings  bank
("Allied") merged with its sister subsidiary, NBR, in March 1997.

         (a)    General Development of Business.

         Redwood  is a  California  corporation,  headquartered  in Santa  Rosa,
California.  Its  wholly-owned  subsidiary  is NBR,  a  national  bank which was
chartered in 1985. In addition, NBR has three wholly-owned  California chartered
subsidiaries,  Valley  Mortgage  Corporation,  Allied  Diversified  Credit,  and
Redwood  Merchant  Services,  Inc.,  which are currently  inactive.  Redwood was
created by NBR in August 1988, in order to become a bank holding company through
the  acquisition  of all of  NBR's  outstanding  shares.  That  transaction  was
consummated in January 1989.  Redwood acquired Allied in September 1990, through
a tax-free reorganization in which Redwood exchanged shares of its stock for all
of the outstanding shares of Allied. The acquisition of Allied was accounted for
as a pooling of interests for financial reporting purposes.

         On October 31, 1992,  Lake Savings and Loan  Association,  a one-branch
California  chartered savings and loan based in Lakeport,  California  ("Lake"),
was purchased for  approximately  $2,300,000 in cash, and merged into Allied. At
the time of its acquisition Lake had total assets of approximately  $41 million.
The acquisition was accounted for as a purchase.

         On  November  4,  1994,  Codding  Bank,  a  multiple-branch  California
chartered bank based in Rohnert Park, California ("Codding"),  was purchased for
$7,028,000 in cash,  including merger related expenses,  and merged into NBR. At
the merger date, the fair value of the assets acquired totaled approximately $42
million.

         In November  1996, the Board of Directors of the Company voted to merge
Allied into NBR. On February 3, 1997,  NBR received  approval from the Office of
the  Comptroller  of the  Currency  to merge  Allied  into NBR.  The  merger was
consummated  on  March  24,  1997.  The  combination  of  the  two  wholly-owned
subsidiaries of Redwood was structured as a merger  transaction  with NBR as the
survivor.  Allied ceased to exist as a federally  chartered savings  institution
upon the merger.

         In September 1999, the Company divested itself of its subprime mortgage
brokerage and mortgage banking units,  Valley  Financial and Allied  Diversified
Credit.  The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding,  Inc., whose shareholders include senior management of
Valley Financial and Allied  Diversified  Credit.  The Company has disclosed the
operations  of these  units as well as the  after  tax  loss on  disposition  as
discontinued operations.  Accordingly, historical financial information has been
recast  to  present  the  operating  results  of  Valley  Financial  and  Allied
Diversified Credit as discontinued operations.




                                       5
<PAGE>



        (b)      Financial Information About Industry Segments.

         Through  September  10, 1999,  the Company  operated in four  principal
industry  segments:  core community banking,  merchant card services,  sub prime
lending,  and  residential  mortgage  banking and brokerage.  The Company's core
community banking industry segment includes commercial,  commercial real estate,
construction,  and  permanent  residential  lending  along  with all  depository
activities.  The Company's merchant card services industry group provides credit
card  settlement  services for  approximately  49,000  merchants  throughout the
United States. The Company's sub prime lending unit, known as Allied Diversified
Credit and the Company's  residential  mortgage banking and brokerage arm, known
as Valley  Financial were divested on September 10, 1999. The  divestiture  took
the form of an asset sale and employee  transfer.  The Company has disclosed the
operations  of these  units as well as the  after  tax  loss on  disposition  as
discontinued operations. Accordingly, historical financial information regarding
segments has been restated. For further discussion see "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7.

         (c)    Narrative Description of Business.

         The  Company's   business  strategy  involves  two  principal  business
activities which are conducted through NBR:  community banking and merchant card
services.

         NBR provides its core community  banking  services  through five retail
branches  located in Sonoma  County,  California,  one retail branch  located in
Mendocino  County,  California,  and one retail  branch  located in Lake County,
California.   NBR  generally  extends  commercial  loans  to  professionals  and
businesses with annual revenues of less than $20 million.  Commercial  loans are
primarily for working  capital,  asset  acquisition  and commercial real estate.
NBR's targeted  commercial banking market area includes the California  counties
north of San  Francisco.  NBR is a  Preferred  Lender  under the Small  Business
Administration  ("SBA") Loan Guarantee Program.  NBR also originates  commercial
and residential construction loans for its portfolio.

         The  primary  sources  of  funds  for  the  Company's   commercial  and
residential lending programs are local deposits,  proceeds from loan sales, loan
payments,  and other borrowings.  The Company attracts  deposits  primarily from
local  businesses,  professionals  and retail  customers.  The Company's primary
deposit market areas include the counties of Sonoma, Mendocino and Lake. Sonoma,
Mendocino and Lake Counties have  benefited from the migration of population and
businesses into the area, as well as growth in established firms and industries.
These  counties have  generally  exceeded the growth in population  and economic
activity of  California  as a whole.  The Company  generally  does not  purchase
deposits  through deposit  brokers and had no brokered  deposits at December 31,
2000.  In addition to  deposits,  the Company may obtain  other  borrowed  funds
through its  membership  in the  Federal  Home Loan Bank of San  Francisco  (the
"FHLB") and its retention of treasury, tax and loan funds at the Federal Reserve
Bank of San Francisco.




                                       6
<PAGE>



         The Company  provides Visa and  Mastercard  credit card  processing and
settlement  services for approximately  49,000 merchants located  throughout the
United  States.  In 2000,  our  processing  volume  exceeded  $986,000,000.  The
Company's  merchant card services  customer base is made up of merchants located
in its primary  market area and  merchants who have been acquired by the Company
through the use of independent  sales  organizations  (individually an "ISO" and
collectively "ISO's").

         The  Company is  regulated  by various  government  agencies,  with the
primary  regulators  being the Board of Governors of the Federal  Reserve System
(the "FRB"),  the Office of the  Comptroller of the Currency (the "OCC") and the
Federal Deposit Insurance Corporation (the "FDIC").

         The Company and its subsidiaries had 147 full-time-equivalent employees
at  December  31,  2000.  Redwood's  headquarters  are located at 111 Santa Rosa
Avenue,  Santa Rosa,  California  95404-4905,  and its telephone number is (707)
573-4800.


Regulation and Supervision

The Effect of Government Policy on Banking

         The  earnings  and growth of the Company are affected not only by local
market area  factors and general  economic  conditions,  but also by  government
monetary and fiscal  policies.  For example,  the FRB  influences  the supply of
money  through its open market  operations  in U.S.  Government  securities  and
adjustments  to the  discount  rates  applicable  to  borrowings  by  depository
institutions and others. Such actions influence the growth of loans, investments
and  deposits  and also  affect  interest  rates  charged  on loans  and paid on
deposits.  The  nature  and impact of future  changes  in such  policies  on the
business and earnings of the Company  cannot be predicted.  Additionally,  state
and federal tax policies can impact banking organizations.

         As a  consequence  of the extensive  regulation  of commercial  banking
activities  in the United  States,  the business of the Company is  particularly
susceptible to being affected by the enactment of federal and state  legislation
which  may  have  the  effect  of  increasing  or  decreasing  the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other  financial  institutions.  Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.


Regulation and Supervision of Bank Holding Companies

         The  Company is a bank  holding  company  subject  to the Bank  Holding
Company Act of 1956,  as amended  ("BHCA").  The Company  reports to,  registers
with,  and is examined by the FRB. The FRB also has the authority to examine the
Company's subsidiaries.

         The FRB has significant  supervisory and regulatory  authority over the
Company and its  affiliates.  The FRB requires  the Company to maintain  certain
levels of capital.  See "Capital  Standards."  The FRB also has the authority to
take enforcement action against any bank holding


                                       7
<PAGE>


company that commits any unsafe or unsound  practice,  or violates certain laws,
regulations or conditions imposed in writing by the FRB.

         Under the BHCA, a company  generally  must obtain the prior approval of
the FRB before it exercises a  controlling  influence  over a bank,  or acquires
directly or indirectly,  more than 5% of the voting shares or substantially  all
of the assets of any bank or bank holding company. Thus, the Company is required
to  obtain  the  prior  approval  of the  FRB  before  it  acquires,  merges  or
consolidates  with any bank or bank  holding  company;  any  company  seeking to
acquire,  merge or consolidate with the Company also would be required to obtain
the prior approval of the FRB.

         The  Company  is  generally  prohibited  under the BHCA from  acquiring
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding  company and from engaging  directly or indirectly in
activities  other  than  banking,   managing  banks  or  providing  services  to
affiliates of the holding company.  However,  a bank holding  company,  with the
approval of the FRB,  may  engage,  or acquire  the voting  shares of  companies
engaged in activities  that the FRB has  determined to be so closely  related to
banking or managing or controlling banks as to be a proper incident  thereto.  A
bank  holding  company must  demonstrate  that the benefits to the public of the
proposed  activity will outweigh the possible  adverse  effects  associated with
such activity.

         A bank holding  company may acquire banks in states other than its home
state without regard to the permissibility of such acquisitions under state law,
but subject to any state  requirement  that the acquired bank has been organized
and operating for the minimum period of time and providing that the bank holding
company,  prior to or following the proposed acquisition,  controls no more than
10% of the total amount of deposits of insured  depository  institutions  in the
United  States  and no more  than 30% of such  deposits  in that  state (or such
lesser or greater  amount set by state law).  Banks may also merge  across state
lines, creating interstate branches.  Furthermore,  a bank may open new branches
in a state in which it does not already have banking operations,  if the laws of
such state permit such de novo branching.

         Under California law, (a)  out-of-state  banks that wish to establish a
California  branch office to conduct core banking business must first acquire by
merger or purchase a California  bank or  industrial  loan company  which is not
less than five years old; (b) California  state-chartered banks are empowered to
conduct  various  authorized  branch-like  activities on an agency basis through
affiliated and unaffiliated  insured  depository  institutions in California and
other states and (c) the California  Commissioner  of Financial  Institutions is
authorized to approve an interstate  acquisition or merger which would result in
a  deposit  concentration  exceeding  30% if the  Commissioner  finds  that  the
transaction is consistent  with public  convenience  and advantage.  However,  a
state bank chartered in a state other than  California may not enter  California
by purchasing a California branch office of a California bank or industrial loan
company  without  purchasing  the  entire  entity or by  establishing  a de novo
California bank.

         The FRB generally  prohibits a bank holding  company from  declaring or
paying a cash  dividend  which  would  impose  undue  pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding  company's  financial  position.  The
FRB's  policy is that a bank  holding  company  should not

                                       8
<PAGE>


continue its existing rate of cash  dividends on its common stock unless its net
income is  sufficient to fully fund each  dividend and its  prospective  rate of
earnings  retention appears consistent with its capital needs, asset quality and
overall financial condition. See the section entitled "Restrictions on Dividends
and Other  Distributions"  for  additional  restrictions  on the  ability on the
Company and the Bank to pay dividends.

         Transactions  between  the Company and the Bank are subject to a number
of other  restrictions.  FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of  the  services  rendered  (or,  if no  market  exists,  actual  costs  plus a
reasonable  profit).  Subject to  certain  limitations,  depository  institution
subsidiaries  of bank  holding  companies  may extend  credit to,  invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on  behalf  of, an  affiliate,  provided  that the  aggregate  of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution,  and the aggregate of such  transactions with all affiliates
may not exceed 20% of the  capital  stock and surplus of such  institution.  The
Company may only borrow from depository institution  subsidiaries if the loan is
secured by marketable  obligations with a value of a designated amount in excess
of the  loan.  Further,  the  Company  may not  sell a  low-quality  asset  to a
depository institution subsidiary.

         Comprehensive  amendments to Regulation Y became effective in 1997, and
are intended to improve the  competitiveness of bank holding companies by, among
other things:  (i) expanding the list of  permissible  nonbanking  activities in
which  well-run bank holding  companies  may engage  without prior FRB approval,
(ii)  streamlining the procedures for well-run bank holding  companies to obtain
approval to engage in other nonbanking  activities and (iii) eliminating most of
the  anti-tying  restrictions  imposed  upon bank  holding  companies  and their
nonbank  subsidiaries.  Amended Regulation Y also provides for a streamlined and
expedited  review process for bank acquisition  proposals  submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further  change in bank  control or in bank  directors  or
officers  after an earlier  approved  change.  These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank  holding  company  to  qualify  as  "well-run,"  both  it and  the  insured
depository  institutions that it controls must meet the  "well-capitalized"  and
"well-managed" criteria set forth in Regulation Y.

         To qualify as  "well-capitalized,"  the bank holding company must, on a
consolidated  basis:  (i) maintain a total  risk-based  capital  ratio of 10% or
greater;  (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater;  and
(iii) not be subject to any order by the FRB to meet a specified  capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital  adequacy  regulations of the applicable  bank regulator,
80%  of  the  total   risk-weighted   assets  held  by  its  insured  depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.

         To qualify as "well-managed": (i) each of the bank holding company, its
lead depository  institution and its depository  institutions holding 80% of the
total  risk-weighted  assets of all its  depository  institutions  at their most
recent  examination or review must have received a composite rating,  rating for
management and rating for compliance which were at least

                                       9
<PAGE>


satisfactory;  (ii) none of the bank holding company's  depository  institutions
may have received one of the two lowest composite ratings; and (iii) neither the
bank holding company nor any of its depository  institutions during the previous
12 months may have been subject to a formal enforcement order or action.


Bank Regulation and Supervision

         As a national  bank,  the Bank is regulated,  supervised  and regularly
examined  by the OCC.  Deposit  accounts  at the Bank  are  insured  by the Bank
Insurance Fund ("BIF") and the Savings Institution  Insurance Fund ("SAIF"),  as
administered  by the FDIC, to the maximum  amount  permitted by law. The Bank is
also  subject  to  applicable  provisions  of  California  law,  insofar as such
provisions  are not in conflict  with or preempted  by federal  banking law. The
Bank is a member of the Federal Reserve  System,  and is also subject to certain
regulations  of the  FRB  dealing  primarily  with  check  clearing  activities,
establishment   of   banking   reserves,    Truth-in-Lending   (Regulation   Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).

         The OCC  may  approve,  on a  case-by-case  basis,  the  entry  of bank
operating  subsidiaries  into  a  business  incidental  to  banking,   including
activities in which the parent bank is not permitted to engage.  A national bank
is permitted to engage in activities approved for a bank holding company through
a bank  operating  subsidiary,  such as acting  as an  investment  or  financial
advisor,  leasing personal property and providing financial advice to customers.
In  general,  these  activities  are  permitted  only  for  well-capitalized  or
adequately capitalized national banks.


Capital Standards

         The  federal  banking   agencies  have  risk-based   capital   adequacy
guidelines  intended to provide a measure of capital  adequacy that reflects the
degree of risk  associated  with a banking  organization's  operations  for both
transactions  reported on the balance sheet as assets and transactions,  such as
letters of credit and recourse  arrangements,  which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent  amounts of off balance sheet items are  multiplied by one of several
risk  adjustment  percentages,  which  range from 0% for assets  with low credit
risk,  such as certain  U.S.  government  securities,  to 100% for  assets  with
relatively higher credit risk, such as certain loans.

         In determining  the capital level the Company and the Bank are required
to  maintain,  the federal  banking  agencies do not,  in all  respects,  follow
generally accepted  accounting  principles ("GAAP") and have special rules which
have the  effect of  reducing  the  amount of capital  they will  recognize  for
purposes of determining the capital adequacy of the Bank.

         A banking  organization's  risk-based  capital  ratios are  obtained by
dividing  its  qualifying  capital  by its total  risk-adjusted  assets  and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1
                                       10
<PAGE>


capital  and  limited  amounts  of Tier 2 capital)  and Tier 1  capital.  Tier 1
capital consists of common stock,  retained  earnings,  noncumulative  perpetual
preferred  stock,  other  types  of  qualifying  preferred  stock  and  minority
interests in certain  subsidiaries,  less most other intangible assets and other
adjustments.  Net unrealized losses on available-for-sale equity securities with
readily  determinable fair value must be deducted in determining Tier 1 capital.
For Tier 1 capital purposes, deferred tax assets that can only be realized if an
institution  earns  sufficient  taxable  income in the future are limited to the
amount  that the  institution  is expected  to realize  within one year,  or ten
percent of Tier 1 capital,  whichever  is less.  Tier 2 capital may consist of a
limited  amount  of the  allowance  for  possible  loan and lease  losses,  term
preferred  stock and other types of  preferred  stock not  qualifying  as Tier 1
capital,  term  subordinated  debt  and  certain  other  instruments  with  some
characteristics  of equity.  The  inclusion  of  elements  of Tier 2 capital are
subject to certain other  requirements  and  limitations of the federal  banking
agencies.  The federal  banking  agencies  require a minimum ratio of qualifying
total capital to  risk-adjusted  assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off
balance sheet items of 4%.

         On October 1, 1998, the OCC adopted two rules governing minimum capital
levels that  OCC-supervised  banks must maintain against the risks to which they
are exposed.  The first rule makes risk-based  capital standards  consistent for
two types of credit enhancements (i.e.,  recourse arrangements and direct credit
substitutes)  and  requires  different  amounts of capital  for  different  risk
positions in asset securitization transactions.  The second rule permits limited
amounts of unrealized  gains on debt and equity  securities to be recognized for
risk-based  capital purposes as of September 1, 1998. The OCC rules also provide
that a qualifying  institution  that sells small  business loans and leases with
recourse  must hold  capital only  against the amount of recourse  retained.  In
general,  a qualifying  institution  is one that is  well-capitalized  under the
FDIC's prompt  corrective  action rules. The amount of recourse that can receive
the preferential  capital treatment cannot exceed 15% of the institution's total
risk-based capital.

         In  addition  to  the  risked-based  guidelines,  the  federal  banking
agencies  require banking  organizations  to maintain a minimum amount of Tier 1
capital to adjusted  average total assets,  referred to as the leverage  capital
ratio.  For a banking  organization  rated in the highest of the five categories
used to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets must be 3%. It is improbable,  however, that an institution with
a 3% leverage  ratio would  receive the highest  rating  since a strong  capital
position is a significant part of the regulators' rating. Bank holding companies
not rated in the highest  category must have a minimum leverage ratio of 4%. For
all banks not rated in the highest category,  the minimum leverage ratio must be
at least 100 to 200 basis  points  above the 3%  minimum.  Thus,  the  effective
minimum  leverage ratio, for all practical  purposes,  must be at least 4% or 5%
for banks.  In addition  to these  uniform  risk-based  capital  guidelines  and
leverage  ratios  that  apply  across  the  industry,  the  regulators  have the
discretion  to  set  individual   minimum  capital   requirements  for  specific
institutions at rates significantly above the minimum guidelines and ratios.

         The federal  banking  agencies  recently  amended  their  guidelines to
clarify  the  leverage  ratio  requirement  for banks to conform to that of bank
holding companies.  As of April 1, 1999, banks not rated in the highest category
must have a minimum  leverage  ratio of 4%.  The ratio for banks in the  highest
category will remain at 3%.

                                       11
<PAGE>


         As of December 31, 2000, the Bank's capital ratios exceeded  applicable
regulatory requirements. The following tables present the capital ratios for the
Company  and the Bank,  compared  to the  standards  for  well-capitalized  bank
holding companies and depository institutions,  as of December 31, 2000 (amounts
in thousands except percentage amounts).

<TABLE>
<CAPTION>
                                                                         The Company
                                                                                    Well              Minimum
                                                        Actual                  Capitalized           Capital
                                               Capital         Ratio                Ratio           Requirement

<S>                                           <C>              <C>                  <C>                 <C>
Leverage..................................... $34,414           7.72%                5.0%               4.00%
Tier 1 Risk-Based............................  34,414           9.99                 6.0                4.00
Total Risk-Based.............................  38,763          11.25                10.0                8.00

</TABLE>
<TABLE>
<CAPTION>
                                                                          The Bank
                                                                                    Well              Minimum
                                                        Actual                  Capitalized           Capital
                                               Capital         Ratio                Ratio           Requirement

<S>                                           <C>              <C>                  <C>                 <C>
Leverage..................................... $32,425           7.29%                5.0%               4.0%
Tier 1 Risk-Based............................  32,425           9.44                 6.0                4.0
Total Risk-Based.............................  36,761          10.70                10.0                8.0
</TABLE>


         The   federal   banking   agencies   must   take   into   consideration
concentrations of credit risk and risks from non-traditional activities, as well
as an institution's ability to manage those risks, when determining the adequacy
of an  institution's  capital.  This  evaluation  will  be made as a part of the
institution's  regular  safety and soundness  examination.  The federal  banking
agencies  must  also  consider  interest  rate  risk  (when  the  interest  rate
sensitivity  of an  institution's  assets does not match the  sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.


Prompt Corrective Action and Other Enforcement Mechanisms

         The  Federal  Deposit  Insurance  Corporation  Improvement  Act of 1991
("FDICIA") requires each federal banking agency to take prompt corrective action
to resolve the problems of insured  depository  institutions,  including but not
limited to those that fall below one or more prescribed  minimum capital ratios.
The law required each federal banking agency to promulgate  regulations defining
the following five categories in which an insured depository institution will be
placed,  based on the level of its capital ratios: well capitalized,  adequately
capitalized,  undercapitalized,  significantly  undercapitalized  and critically
undercapitalized.

         Under the prompt  corrective  action  provisions of FDICIA,  an insured
depository  institution generally will be classified in the following categories
based on the capital measures indicated below:


                                       12
<PAGE>


<TABLE>
        <S>                                     <C>
        "Well  capitalized"                     "Adequately  capitalized"
        Total risk-based capital of 10%;        Total risk-based  capital of 8%;
        Tier 1 risk-based capital of 6%; and    Tier 1 risk-based capital of 4%; and
        Leverage ratio of 5%.                   Leverage ratio of 4%.

        "Undercapitalized"                      "Significantly undercapitalized"
        Total risk-based capital less than 8%;  Total  risk-based capital less than 6%;
        Tier 1 risk-based capital less than     Tier 1 risk-based capital less than 3;
        4%; or                                  or
        Leverage ratio less than 4%.            Leverage ratio less than 3%.

        "Critically undercapitalized"
        Tangible equity to total assets equal
        to or less than 2%.
</TABLE>

         An institution  that,  based upon its capital levels,  is classified as
"well  capitalized,"  "adequately  capitalized"  or  "undercapitalized"  may  be
treated as though it were in the next lower capital  category if the appropriate
federal  banking agency,  after notice and  opportunity for hearing,  determines
that an unsafe or unsound  condition or an unsafe or unsound  practice  warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.

         In  addition  to  measures  taken  under the prompt  corrective  action
provisions,  commercial  banking  organizations  may  be  subject  to  potential
enforcement  actions  by the  federal  banking  agencies  for  unsafe or unsound
practices in conducting  their  businesses or for  violations of any law,  rule,
regulation  or any  condition  imposed in  writing by the agency or any  written
agreement with the agency.  Enforcement  actions may include the imposition of a
conservator or receiver,  the issuance of a  cease-and-desist  order that can be
judicially enforced,  the termination of insurance of deposits (in the case of a
depository  institution),  the imposition of civil money penalties, the issuance
of  directives  to  increase  capital,  the  issuance  of  formal  and  informal
agreements,   the   issuance  of  removal   and   prohibition   orders   against
institution-affiliated  parties  and the  enforcement  of such  actions  through
injunctions or restraining  orders based upon a judicial  determination that the
agency would be harmed if such equitable relief was not granted. Additionally, a
holding  company's  inability to serve as a source of strength to its subsidiary
banking organizations could serve as an additional basis for a regulatory action
against the holding company.


Safety and Soundness Standards

         FDICIA also implemented  certain specific  restrictions on transactions
and required  federal  banking  regulators to adopt overall safety and soundness
standards  for  depository   institutions  related  to  internal  control,  loan
underwriting  and  documentation  and asset growth.  Among other things,  FDICIA
limits the  interest  rates paid on deposits by  undercapitalized  institutions,
restricts  the use of brokered  deposits,  limits the  aggregate  extensions  of
credit by a depository institution to an executive officer, director,  principal
shareholder or related  interest,



                                       13
<PAGE>


and reduces deposit insurance coverage for deposits offered by  undercapitalized
institutions for deposits by certain employee benefits accounts.

         The federal banking agencies may require an institution to submit to an
acceptable  compliance  plan as well as the  flexibility  to pursue  other  more
appropriate or effective courses of action given the specific  circumstances and
severity of an institution's noncompliance with one or more standards.


Restrictions on Dividends and Other Distributions

         The  power  of  the  board  of  directors  of  an  insured   depository
institution  to declare a cash  dividend or other  distribution  with respect to
capital is subject to  statutory  and  regulatory  restrictions  which limit the
amount available for such  distribution  depending upon the earnings,  financial
condition  and  cash  needs  of the  institution,  as well as  general  business
conditions.   FDICIA  prohibits  insured  depository  institutions  from  paying
management fees to any controlling  persons or, with certain limited exceptions,
making capital distributions,  including dividends,  if, after such transaction,
the institution would be undercapitalized.

         The  federal  banking  agencies  also  have  authority  to  prohibit  a
depository  institution from engaging in business  practices that are considered
to be unsafe or unsound,  possibly  including  the payment of dividends or other
payments  under  certain  circumstances  even if such payments are not expressly
prohibited by statute.

         The payment of dividends by a national  bank is further  restricted  by
additional  provisions  of federal  law,  which  prohibit  a national  bank from
declaring  a dividend  on its shares of common  stock  unless its  surplus  fund
exceeds the amount of its common capital (total  outstanding common shares times
the par  value  per  share).  Additionally,  if  losses  have at any  time  been
sustained  equal to or exceeding a bank's  undivided  profits  then on hand,  no
dividend shall be paid.  Moreover,  even if a bank's surplus exceeded its common
capital and its undivided profits exceed its losses,  the approval of the OCC is
required for the payment of dividends if the total of all dividends  declared by
a national  bank in any calendar  year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding  years,
less any  required  transfers  to  surplus or a fund for the  retirement  of any
preferred  stock.  A  national  bank must  consider  other  business  factors in
determining  the payment of  dividends.  The payment of dividends by the Bank is
governed by the Bank's ability to maintain  minimum  required capital levels and
an  adequate  allowance  for loan  losses.  Regulators  also have  authority  to
prohibit a depository  institution from engaging in business practices which are
considered to be unsafe or unsound,  possibly  including payment of dividends or
other  payments  under  certain  circumstances  even  if  such  payment  are not
expressly prohibited by statute.



                                       14
<PAGE>


Premiums for Deposit Insurance and Assessments for Examinations

         FDICIA  established  several  mechanisms  to increase  funds to protect
deposits  insured  by the BIF and SAIF  administered  by the  FDIC.  The FDIC is
authorized  to borrow up to $30 billion from the United States  Treasury;  up to
90% of the fair market value of assets of  institutions  acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository  institutions that
are members of the BIF and SAIF. Any borrowings not repaid by asset sales are to
be repaid  through  insurance  premiums  assessed to member  institutions.  Such
premiums  must be  sufficient  to repay any  borrowed  funds within 15 years and
provide  insurance  fund  reserves  of $1.25 for each $100 of insured  deposits.
FDICIA also provides authority for special assessments against insured deposits.
No  assurance  can be given at this time as to what the future level of premiums
will be.


Community Reinvestment Act and Fair Lending

         The Bank is subject to certain fair lending  requirements and reporting
obligations   involving   home  mortgage   lending   operations   and  Community
Reinvestment  Act ("CRA")  activities.  The CRA  generally  requires the federal
banking  agencies to evaluate the record of a financial  institution  in meeting
the credit needs of their local  communities,  including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required  for a  violation  of certain  fair  lending  laws,  the federal
banking  agencies may take  compliance  with such laws and CRA into account when
regulating and supervising other activities.

Recently Enacted and Proposed Legislation

         On November 12, 1999,  President Clinton signed the  Gramm-Leach-Bliley
Act (GLBA) of 1999 into law. As of March 13, 2000, the GLBA:

          o    allows bank holding  companies  meeting  management,  capital and
               Community Reinvestment Act standards to engage in a substantially
               broader  range  of  nonbanking   activities   than  currently  is
               permissible, including insurance underwriting and making merchant
               banking investments in commercial and financial  companies;  if a
               bank  holding  company  elects  to  become  a  financial  holding
               company,  it may engage in certain financial  activities  without
               further approvals;

          o    allows insurers and other financial services companies to acquire
               banks;

          o    removes various restrictions that currently apply to bank holding
               company  ownership of  securities  firms and mutual fund advisory
               companies; and

          o    establishes the overall regulatory  structure  applicable to bank
               holding  companies  that also engage in insurance and  securities
               operations.

         This part of the Modernization Act became effective on March 13, 2000.


                                       15
<PAGE>


         Only financial holding companies can own insurance companies and engage
in merchant banking.

         The GLBA also modifies  other current  financial  laws,  including laws
related to financial privacy and community reinvestment.

         Additional  proposals to change the laws and regulations  governing the
banking and financial  services industry are frequently  introduced in Congress,
in the state legislatures and before the various bank regulatory  agencies.  The
likelihood and timing of any such changes and the impact such changes might have
on Redwood cannot be determined at this time.

         The Company  intends to comply with all  provisions of the GLBA and all
implementing  regulations  as they become  effective,  and National  Bank of the
Redwoods  intends to develop  appropriate  policies and  procedures  to meet its
responsibilities  in connection  with the privacy  provisions of Title V of that
Act.

Other Legislation

         California law provides that, subject to numerous exceptions,  a lender
acting in the  capacity of a lender shall not be liable under any state or local
statute,  regulation or ordinance,  other than the  California  Hazardous  Waste
Control Law, to undertake a cleanup, pay damages, penalties or fines, or forfeit
property  as a result  of the  release  of  hazardous  materials  at or from the
property.

          In  1997,   California   adopted  the   Environmental   Responsibility
Acceptance Act (Cal.  Civil Code Section Section  850-855) to facilitate (i) the
notification of government  agencies and potentially  responsible parties (e.g.,
for  cleanup) of the  existence of  contamination  and (ii) the cleanup or other
remediation of contamination  by the potentially  responsible  parties.  The Act
requires,  among other things, that owners of sites who have actual awareness of
a  release  of a  hazardous  material  that  exceeds  a  specified  notification
threshold to take all reasonable  steps to identify the potentially  responsible
parties  and to send a notice of  potential  liability  to the  parties  and the
appropriate oversight agency.

         As courts interpret various  provisions of this Act, the Company cannot
be certain of all the effects that this recently enacted legislation may have on
its business.

         Certain other pending legislative  proposals include bills to let banks
pay interest on business  checking  accounts,  to institute "know your customer"
policies,  to cap consumer  liability  for stolen debit cards and to give judges
the  authority to force  high-income  borrowers to repay their debts rather than
cancel them through bankruptcy.

Competition

         In the past, an independent  bank's principal  competitors for deposits
and loans have been other banks  (particularly  major  banks),  savings and loan
associations  and  credit  unions.  To a



                                       16
<PAGE>


lesser  extent,  competition  was also  provided  by thrift and loans,  mortgage
brokerage  companies  and  insurance  companies.  Other  institutions,  such  as
brokerage houses, mutual fund companies,  credit card companies, and even retail
establishments  have  offered new  investment  vehicles  which also compete with
banks for deposit  business.  The  direction  of federal  legislation  in recent
years,  especially  the GLBA,  favors  competition  between  different  types of
financial institutions. Using the financial holding company structure, insurance
companies  and  securities  firms may compete more  directly with banks and bank
holding companies.

Certain Important Considerations for Investors

         Merchant Credit Card  Processing.  The Company's  profitability  can be
negatively  impacted should one of the Company's  merchant credit card customers
be  unable  to pay  on  charge-backs  from  cardholders.  Due  to a  contractual
obligation between the Company and Visa and Mastercard,  NBR stands in the place
of the  merchant in the event that a merchant  is unable to pay on  charge-backs
from  cardholders.  Management has taken certain actions to decrease the risk of
merchant bankruptcy with its merchant bankcard business. These steps include the
discontinuance of accounts which the Bank perceives to have unacceptable  risks.
The  Company  utilizes  ISO's to acquire  merchant  credit card  customers.  The
Company's ability to maintain and grow net revenue from its merchant credit card
processing  operation  is  dependent  upon  maintaining  and adding to these ISO
relationships.

         Merchant  bankcard  processing  services are highly regulated by credit
card  associations  such as VISA.  In order to  participate  in the credit  card
programs,  the Company must comply with the credit card association's  rules and
regulations  that may  change  from time to time.  During  November  1999,  VISA
adopted  several rule changes to reduce  risks in  high-risk  merchant  bankcard
programs and these rule changes affect the Company's Merchant Bankcard business.
The rule  changes go into  effect on March 31,  2001.  These  changes  include a
requirement  that a processor's  reported  fraud ratios be no greater than three
times the  national  average.  At  December  31,  2000 (the most  recent  period
available  from  VISA)  the  Company's  overall  fraud  ratio was below the VISA
requirement.  Other VISA changes include the requirement  that total  processing
volume in certain high-risk  categories (as defined by VISA) be less than 20% of
total  processing  volume.  At December  31,  2000 (the most recent  information
available from VISA) the Company's total VISA transactions  within these certain
high-risk categories were 18% of its total VISA processing volume. Other changes
VISA announced  include a requirement  that weekly VISA volumes be less than 60%
of an  institution's  tangible equity capital,  and a requirement that aggregate
charge-backs  for the previous  six months be less than 5% of the  institution's
tangible  equity  capital.  At December 31, 2000,  (the most recent  information
available from VISA) the Company's weekly VISA volume was 26.3% of the Company's
tangible equity capital, and aggregate  charge-backs for the previous six months
were 6.9% of tangible equity capital.  Merchant bankcard  participants,  such as
the Company,  must comply with these new VISA rules by filing a compliance  plan
with VISA.  Such a plan has been filed by the Company and  accepted by VISA.  At
this  time the  Company  believes  that it will be in  compliance  with all rule
changes when they go into effect on March 31, 2001. Should the Company be unable
to comply with these rule changes,  VISA will require  collateral of one to four
times the short fall amount.



                                       17
<PAGE>

         Concentration  of Lending  Activities.  Concentration  of the Company's
lending  activities in the real estate  sector,  including  construction  loans,
could  have the  effect of  intensifying  the  impact on the  Company of adverse
changes in the real estate market in the Company's  lending  areas.  At December
31, 2000,  approximately 77% of the Company's loans were secured by real estate,
of which 39% were  secured by  commercial  real estate,  including  small office
buildings,  owner-user  office/warehouses,  mixed use residential and commercial
properties  and retail  properties.  Substantially  all of the  properties  that
secure the  Company's  present  loans are located  within  Northern  and Central
California.  The ability of the Company to  continue  to  originate  mortgage or
construction  loans may be  impaired  by adverse  changes  in local or  regional
economic  conditions,  adverse  changes in the real  estate  market,  increasing
interest  rates,  or acts of  nature  (including  earthquakes,  which  may cause
uninsured  damage  and  other  loss of value to real  estate  that  secures  the
Company's  loans).  Due  to  the  concentration  of the  Company's  real  estate
collateral,  such events could have a significant adverse impact on the value of
such collateral or the Company's earnings.

         Government  Regulation.  Redwood  and its  subsidiaries  are subject to
extensive federal and state  governmental  supervision,  regulation and control,
and  future  legislation  and  government  policy  could  adversely  affect  the
financial industry.  Although the full impact of such legislation and regulation
cannot be predicted,  future changes may alter the structure of and  competitive
relationship  among financial  institutions.  See "Regulation and  Supervision,"
above.

         Competition from Other Financial Institutions. The Company competes for
deposits and loans  principally with major commercial  banks,  other independent
banks,   savings  and  loan  associations,   savings  banks,   thrift  and  loan
associations,  credit unions,  mortgage companies,  insurance companies,  mutual
funds and other  lending  institutions.  With  respect to  deposits,  additional
significant  competition arises from corporate and governmental debt securities,
as well as money market mutual funds.  Several of the nation's  largest  savings
and loan  associations and commercial banks have a significant  number of branch
offices  in the  areas in which  the  Company  conducts  operations.  Among  the
advantages  possessed by the larger of these  institutions  are their ability to
make larger loans, finance extensive advertising campaigns, access international
money  markets and  generally  allocate  their  investment  assets to regions of
highest yield and demand.


                                       18
<PAGE>



Item 2.         Properties

         The Company owns two depository  branches and leases 7 other  locations
used in the normal course of business.  In addition,  the Company leases certain
equipment.  There are no  contingent  rental  payments  and the Company has four
sublease  arrangements.  Total  rental  expenses  under  all  leases,  including
premises, totaled $1,202,000, $1,449,000 and $2,210,000, in 2000, 1999 and 1998.
The  expiration  dates of the leases  vary,  with the first such lease  expiring
during 2001 and the last such lease expiring during 2009. The Company  maintains
insurance coverage on its premises, leaseholds and equipment, including business
interruption and record reconstruction coverage.


Item 3.         Legal Proceedings

         Certain  lawsuits and claims arising in the ordinary course of business
have been filed or are pending  against the Company or its  subsidiaries.  Based
upon  information  available  to the  Company,  its review of such  lawsuits and
claims and  consultation  with its counsel,  the Company  believes the liability
relating to these actions,  if any, would not have a material  adverse effect on
its consolidated financial statements.


Item 4.         Submission of Matters to A Vote of Securities Holders

         No  matters  were  submitted  to a vote of the  Company's  shareholders
during the fourth quarter of 2000.


                                     PART II


Item 5.         Market for the Registrant's Common Equity and Related
                Stockholder Matters

         As of November 2, 1998, Redwood's Common Stock has been publicly traded
on the NASDAQ  National  Market  under the symbol  "REBC".  Prior to November 2,
1998,  the Company  Common Stock traded on the American Stock Exchange under the
symbol  "REBC".  As of  December  31,  2000,  the Company  believes,  based upon
information  it  has  obtained  from  its  transfer   agent,   there  are  1,159
shareholders of record of Redwood's Common Stock.




                                       19
<PAGE>



         There are regulatory  limitations on cash dividends that may be paid by
Redwood as well as regulatory  limitations on cash dividends that may be paid by
NBR to Redwood which could limit  Redwood's  ability to pay  dividends.  Federal
regulatory  agencies  have the authority to prohibit the payment of dividends by
NBR if a finding is made that such payment would constitute an unsafe or unsound
practice,  or if NBR became  critically  undercapitalized.  See  "Regulation and
Supervision" in Item 1.


                                                        Redwood Empire Bancorp
                                                          Common Stock Prices
<TABLE>
<CAPTION>

                    Qtr 1       Qtr 2       Qtr 3       Qtr 4             Qtr 1       Qtr 2       Qtr 3       Qtr 4
                     1999        1999        1999        1999              2000        2000        2000        2000
                  ----------- ----------- ----------- -----------       ----------- ----------- ----------- -----------
<S>                 <C>         <C>         <C>         <C>               <C>         <C>         <C>         <C>
   High             $29.00      $27.25      $24.00      $23.94            $23.06      $20.00      $23.88      $22.13
   Low               17.00       21.88       17.75       17.75             14.25       14.25       18.00       19.13
   Close             24.75       23.88       18.63       19.13             14.31       18.00       21.13       20.38

   Dividends
    Declared           .04         .04         .06         .10               .10         .15         .15         .15

</TABLE>



                                       20
<PAGE>



Item 6.  Selected Financial Data

 Summary of Consolidated Financial Data and Performance Ratios
<TABLE>
<CAPTION>
                                                                                At or for the Year ended December 31,
                                                                         2000       1999       1998       1997        1996
                                                                            (dollars in thousands, except per share data)
<S>                                                                     <C>        <C>         <C>       <C>         <C>
Statements of Operations:
 Total interest income                                                   $35,163    $30,633     $30,557   $35,471     $40,308
 Net interest income                                                      20,844     19,687      18,058    19,656      21,605
 Provision for loan losses                                                   150        750       2,040     2,100       6,262
 Noninterest income                                                        6,106      5,197       5,625     4,304       6,916
 Income (loss) from continuing operations before extraordinary item        6,466      4,875       2,904     2,377      (4,270)
 Income (loss) from discontinued operations, net of tax *                    ---       (437)      2,187     1,064       2,784
 Extraordinary loss, net of tax                                              ---       (276)        ---       ---         ---
 Net income (loss)                                                         6,466      4,162       5,091     3,441      (1,486)
 Net income (loss) available to common stock shareholders                  6,466      4,162       4,979     2,992      (1,935)
 Balance Sheets:
 Total assets                                                           $453,439   $423,046    $422,299  $446,719    $499,466
 Total loans                                                             315,101    314,445     269,316   282,396     347,414
 Mortgage loans held for sale (Discontinued operations)                      ---        ---      32,620    16,929      29,487
 Allowance for loan losses                                                 7,674      7,931       8,041     7,645       7,040
 Total deposits                                                          405,333    369,509     364,720   391,421     436,450
 Shareholders'  equity                                                    35,459     37,444      38,640    33,243      29,732
 Performance Ratios:
 Return on average assets from continuing operations                       1.47%      1.20%       0.73%     0.54%       (.94%)
 Return on average common equity from continuing operations               17.75%     12.40%       8.09%     7.58%      13.43%
 Common dividend payout ratio                                             18.71%     19.46%       8.09%      ---         ---

 Average equity to average assets from continuing operations               8.30%      9.66%       9.09%     7.14%       6.98%
 Leverage ratio                                                            7.72%      8.66%       8.84%     7.10%       5.45%
 Tier 1 risk-based capital ratio                                           9.99%     11.74%      11.84%     9.72%       7.63%
 Total risk-based capital ratio                                           11.25%     13.01%      16.94%    14.64%      12.11%
 Net interest margin from continuing operations                            5.08%      5.30%       5.11%     4.93%       5.13%
 Noninterest expense from continuing operations to net
 Interest and other noninterest income from continuing operations         59.18%     64.97%      71.26%    74.72%     103.22%
 Average earning assets to average total assets from
    Continuing operations                                                 93.50%     91.20%      89.40%    91.05%      92.34%
 Nonperforming assets to total assets                                      0.43%      1.52%       2.11%     3.72%       2.64%
 Net loan charge-offs to average loans                                     0.12%      0.29%       0.62%     0.46%       1.22%
 Allowance for loan losses to total loans                                  2.44%      2.52%       2.99%     2.71%       2.03%
 Allowance for loan losses to nonperforming loans                        637.91%    194.34%     121.82%    78.60%      67.82%
 Share Data:
 Common shares outstanding (000)                                           2,858      3,229       3,369     2,785       2,749
 Book value per common share                                              $12.41     $11.60      $11.47     $9.87       $8.72
 Basic earnings (loss) per common share:
   Income (loss) from continuing operations before extraordinary item       2.12       1.45         .88       .70       (1.73)
   Income (loss) from discontinued operations                                ---       (.13)        .69       .38        1.02
   Income (loss) before extraordinary item                                  2.12       1.32        1.57      1.08        (.71)
   Net income (loss) available for common stock shareholders                2.12       1.24        1.57      1.08        (.71)
   Weighted average shares (000)                                           3,051      3,364       3,170     2,776       2,721
 Diluted earnings (loss) per common share:
   Income (loss) from continuing operations before extraordinary item      $2.08      $1.41        $.84      $.70      ($1.57)
   Income (loss) from discontinued operations                                ---       (.13)        .63       .32        1.02
   Income (loss) before extraordinary item                                  2.08       1.28        1.47      1.02        (.55)
   Net income (loss) available for common stock shareholders                2.08       1.20        1.47      1.02        (.55)
   Weighted average shares (000)                                           3,109      3,456       3,465     3,378       2,721
 Cash dividend per common share                                             $.55       $.24        $.12       ---         ---
</TABLE>

* See discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7.


                                       21
<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

Forward-Looking Information

         This Annual Report on Form 10-K includes  forward-looking  information,
which is subject to the "safe harbor"  created by Section 27A of the  Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements (which involve, among other things,
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve  certain  risks and  uncertainties  that could cause  actual  results to
differ materially from those in the forward-looking  statements.  Such risks and
uncertainties include, but are not limited to, the following factors:

          o    Competitive  pressure in the banking  industry and changes in the
               regulatory environment.

          o    Changes in the interest rate  environment  and volatility of rate
               sensitive loans and deposits.

          o    A decline in the health of the economy  nationally  or regionally
               which  could  reduce  the demand for loans or reduce the value of
               real estate collateral securing most of the Company's loans.

          o    Credit quality  deterioration that could cause an increase in the
               provision for loan losses.

          o    Dividend restriction.

          o    Regulatory discretion.

          o    Material losses in the Company's  merchant credit card processing
               business from card holder fraud or merchant business failure.

          o    Asset/liability matching risks and liquidity risks.

          o    Changes in the securities markets.

         The Company  undertakes no obligation to revise or publicly release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations,  please refer to "Certain Important Considerations for Investors" in
Item 1 and other information in this Report.



                                       22
<PAGE>



General

         On  September  10, 1999 the  Company  divested  itself of its  mortgage
brokerage and mortgage banking units,  Valley  Financial and Allied  Diversified
Credit.  The Company has disclosed the  operations of these units as well as the
after  tax  loss  on  disposition  as  discontinued   operations.   Accordingly,
historical  financial  information  has been  recast to  present  the  operating
results  of Valley  Financial  and  Allied  Diversified  Credit as  discontinued
operations.  Revenue from  discontinued  operations  was $4,369,000 for the year
ended  December  31, 1999,  as compared to  $10,863,000  for 1998.  There was no
revenue recognized from discontinued operations in 2000.

         The  Company  derives its income from two  principal  sources:  (1) net
interest income, which is the difference between the interest income it receives
on interest-earning  assets and the interest expense it pays on interest-bearing
liabilities;  (2) non interest income or fee income which includes,  fees earned
on deposit services,  fees earned from servicing loans for investors,  fees from
processing  services,  electronic-based  cash  management  services and merchant
credit card processing.

         The following analysis of the Company's financial condition and results
of operations  should be read in  conjunction  with the  Consolidated  Financial
Statements of Redwood Empire Bancorp and related notes thereto  included in this
Annual Report on Form 10-K.  Average  balances,  including such balances used in
calculating  financial and performance  ratios, are generally daily averages for
NBR,  which  management  believes are  representative  of the  operations of the
Company.



Results of Continuing Operations Before Extraordinary Item

         In 2000 the Company reported income from continuing  operations  before
extraordinary item of $6,466,000, or $2.08 diluted per share as compared to 1999
and 1998 net income from  continuing  operations  before  extraordinary  item of
$4,875,000,  or $1.41 diluted per share,  and  $2,904,000,  or $0.84 diluted per
share.

         Return on average assets for the year ended December 31, 2000 was 1.47%
as compared to 1.20% and .73% for the years  ended  December  31, 1999 and 1998.
Return on average common equity was 17.75% for the year ended December 31, 2000,
as compared to 12.40% and 8.09% for the years ended December 31, 1999 and 1998.

         The Company's results from continuing  operations in 2000 improved from
1999. Net interest income  increased  $1,157,000 in 2000. The provision for loan
losses  declined  by  $600,000  in 2000.  Other  income  increased  $909,000  to
$6,106,000 in 2000 as compared to $5,197,000 in 1999. Improvement was also shown
in  noninterest  expense,  which  decreased  $218,000 to  $15,948,000 in 2000 as
compared to $16,166,000 in 1999.



                                       23
<PAGE>

         The  Company's  results from  continuing  operations  in 1999  improved
significantly  from 1998. Net interest income increased  $1,629,000 in 1999. The
provision for loan losses  declined by $1,290,000 in 1999.  Improvement was also
shown in noninterest expense, which decreased $711,000 to $16,166,000 in 1999 as
compared to $16,877,000 in 1998. These  improvements  more than offset a decline
in noninterest income of $428,000.

         In the first  quarter of 1999 the  Company  recorded  an  extraordinary
charge of $276,000, net of tax. Such charge is comprised of the unamortized debt
issuance costs  associated  with the Company's  $12,000,000  subordinated  debt,
which was early  redeemed in the first  quarter of 1999. In the first quarter of
1999 Redwood  obtained  funding for the early  redemption  through an $8,000,000
dividend from NBR and the redemption of a $3,000,000 note from NBR.

         Net Interest  Income.  For 2000, the Company's net interest income from
continuing operations amounted to $20,844,000 as compared to $19,687,000 in 1999
and $18,058,000 in 1998. This represents an increase of $1,157,000 or 6% in 2000
and $1,629,000 or 9% in 1999. The increase in 2000 as compared to 1999 is due to
an increase in average earning assets from  $371,170,000 in 1999 to $410,541,000
in 2000,  which  offsets a decline in net interest  margin from 5.30% in 1999 to
5.08%  in  2000.  The  increase  in 1999  when  compared  to  1998 is  primarily
attributable to an increase in average earning assets from  $353,314,000 in 1998
to  $371,170,000 in 1999 and an improvement in net interest margin from 5.11% in
1998 to 5.30% in 1999.

         The following table presents for the years  indicated the  distribution
of consolidated average assets, liabilities and shareholders' equity, as well as
the total dollar amounts of interest  income from average earning assets and the
resultant  yields,  and the  dollar  amounts of  interest  expense  and  average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are  included in the  calculation  of the average  balances of loans,  and
interest  not  accrued  is  excluded.  Fee  income  included  in loan  income is
$966,000, $1,110,000 and $687,000 in 2000, 1999 and 1998.




                                       24
<PAGE>




<TABLE>
<CAPTION>

                                               2000                         1999                        1998
                                  ---------------------------- --------------------------- ---------------------------
                                   Average             Yield/   Average            Yield/   Average            Yield/
                                   Balance   Interest   Rate    Balance   Interest  Rate    Balance   Interest  Rate
                                  ---------------------------- --------------------------- ---------------------------
                                                                 (dollars in thousands)
<S>                                 <C>       <C>       <C>      <C>       <C>      <C>      <C>       <C>      <C>
Assets:
Portfolio loans                     $329,799  $29,769   9.03%    $293,352  $25,924  8.84%    $266,716  $25,183  9.44%
Investment securities                 74,880    5,035   6.72       68,579    4,239   6.18      67,562    4,334   6.41
Federal funds sold                     5,862      359   6.12        9,239      470   5.09      19,036    1,040   5.46
                                  --------------------         --------------------        --------------------
    Total earning assets             410,541   35,163   8.57      371,170   30,633   8.25     353,314   30,557   8.65
                                             ---------                    ---------                   ---------
Other non-earning assets              36,541                       43,983                      49,903
Less allowance for loan losses        (7,997)                      (8,188)                     (8,020)
                                  -----------                  -----------                 -----------
    Total average assets            $439,085                     $406,965                    $395,197
                                  ===========                  ===========                 ===========

Liabilities and Shareholders' Equity:
Interest-bearing transaction
  accounts                          $125,626    3,675   2.93     $133,371    3,774   2.83    $142,859    5,047   3.53
Time deposits                        180,130   10,294   5.71      137,113    7,030   5.13     117,270    6,345   5.41
Other borrowings                       5,333      350   6.56        1,383      142  10.27      12,000    1,107   9.23
                                  --------------------         --------------------        --------------------
  Total interest-bearing
    liabilities                      311,089   14,319   4.60      271,867   10,946   4.03     272,129   12,499   4.59
                                             ---------                    ---------                   ---------
Demand deposits                       80,923                       85,851                      82,074
Other non-interest bearing
  liabilities                         10,635                        9,931                       5,089
Shareholders' equity                  36,438                       39,316                      35,905
                                  -----------                  -----------                 -----------
 Total average liabilities and
     Shareholders' equity           $439,085                     $406,965                    $395,197
                                  ===========                  ===========                 ===========
Net interest spread                                     3.97                         4.22                        4.06
Net interest income and
  net interest margin                         $20,844   5.08%              $19,687    5.30%            $18,058  5.11%
                                             =========                    =========                   =========

</TABLE>

Note:  Investment securities are shown with the fair value adjustment included.



         The Company's  average earning assets for 2000 increased  approximately
11%, or $39,371,000,  to  $410,541,000,  as compared to  $371,170,000  for 1999.
Average earning assets increased  approximately  5%, or $17,856,000,  in 1999 as
compared to 1998.  The increase in average  earning  assets in 2000 is primarily
attributable to an increase in average portfolio loans of $36,447,000  partially
offset by a decrease  in federal  funds sold of  $3,377,000.  Components  of the
increase  in  portfolio  loans  include  increases  of  $18,721,000  in  average
outstanding  residential  mortgage loans and $12,821,000 in average  outstanding
commercial real estate loans.  In December 2000 the Company sold  $21,205,000 in
single family residential loans and securitized  another  $17,949,000 as part of
an asset repositioning strategy. The Company anticipates that the funds received
from  the  loan   sale  will  be  used  to  fund   growth  in  higher   yielding
relationship-based commercial and commercial real estate loans.

         The  increase  in  average  earning  assets  for  1999  was  due to the
Company's  efforts to increase its  concentration  in the commercial real estate
and construction loan portfolios.  Average portfolio loans increased $26,636,000
or 10% to $293,352,000 in 1999 from $266,716,000 in 1998.



                                       25
<PAGE>

         With the increase in average  earning assets in 2000  discussed  above,
the Company's funding levels also increased.  The average balance of higher cost
time  deposits  increased  $43,017,000  in  2000  compared  to  an  increase  of
$19,843,000 in 1999. The growth in time deposits in 1999 and 2000 is a result of
the Company's efforts to fund earning asset growth. Additionally, average demand
deposits  decreased  $4,928,000 in 2000 as compared to an increase of $3,777,000
in 1999 as a result of a decrease in balances  deposited by one of the Company's
large  customers.  Average  other  borrowings  increased  $4,032,000  in 2000 to
support loan growth.  Average other borrowings decreased $10,617,000 in 1999 due
to the Company's early redemption of its subordinated debt.

         The following  table sets forth changes in interest income and interest
expense  for  each  major   category  of  average   earning  asset  and  average
interest-bearing  liability, and the amount of change attributable to volume and
rate changes for the years indicated. Changes not solely attributable to rate or
volume have been allocated  proportionately  to the change due to volume and the
change due to rate.

<TABLE>
<CAPTION>
                                                          2000 over 1999                       1999 over 1998
                                                 ---------------------------------     --------------------------------
                                                   Volume      Rate      Total           Volume     Rate      Total
                                                 ---------------------------------     --------------------------------
                                                                            (in thousands)
<S>                                                  <C>         <C>       <C>            <C>       <C>        <C>
Increase (decrease) in interest income:
Portfolio loans (1), (2)                             $3,280       $565     $3,845          $2,417  ($1,676)       $741
Investment securities (3)                               407        389        796              65     (160)        (95)
Federal funds sold                                     (194)        83       (111)           (503)     (67)       (570)
                                                 ---------------------------------     --------------------------------
  Total increase (decrease)                           3,493      1,037      4,530           1,979   (1,903)         76
                                                 ---------------------------------     --------------------------------

Increase (decrease) in interest expense:
Interest-bearing transaction accounts                  (224)       125        (99)           (319)    (954)     (1,273)
Time deposits                                         2,391        873      3,264           1,031     (346)        685
Other borrowings                                        276        (68)       208          (1,078)     113        (965)
                                                 ---------------------------------     --------------------------------
  Total increase                                      2,443        930      3,373            (366)  (1,187)     (1,553)
                                                 ---------------------------------     --------------------------------
  Increase (decrease) in net interest income         $1,050       $107     $1,157          $2,345    ($716)     $1,629
                                                 =================================     ================================
</TABLE>

(1)  Does not include interest income which would have been earned on nonaccrual
     loans had such loans  performed in  accordance  with their terms.
(2)  Loan fees of  $966,000,  $1,110,000  and  $687,000 are included in interest
     income for 2000, 1999 and 1998.
(3)  The average  balance of  securities  classified  as available  for sale are
     presented  at  historical  amortized  cost  without the effects of the fair
     value adjustments.


         The net interest margin  decreased to 5.08% for the year ended December
31, 2000,  as compared to 5.30% and 5.11% for the years ended  December 31, 1999
and 1998.  The  decrease in net  interest  margin in 2000 was  primarily  due to
increased  liability  costs partially  offset by an increase in yield on earning
assets.  The yield on average earning assets increased to 8.57% in 2000 compared
to 8.25% in 1999 and  decreased  compared  to  8.65% in 1998.  The  increase  in
interest  income in 2000 is  primarily  due to the  increase of  $36,447,000  in
portfolio  loans and an increase of  $6,295,000 in  investment  securities.  The
decline in earning asset yield in 1999 is primarily  attributable  to the change
in the mix of earning  assets and a lower  interest  rate  environment  in 1999.
Average  commercial and residential real estate loans,  which bear a yield lower
than other portfolio loan types increased $34,786,000.



                                       26
<PAGE>

         The effective rates on average  interest-bearing  liabilities increased
to 4.60% for 2000 as compared to 4.03% for 1999 and 4.59% for 1998. The increase
in 2000 was primarily due to the  Company's  desire to attract  deposits to fund
loan growth and an increase in general  interest rates. The decrease in 1999 was
due to a  substantial  downward  repricing  of the  Company's  money  market and
certificate  of deposit  accounts  in the third and fourth  quarter of 1998 as a
result of a declining interest rate environment.

         Provision  for Loan Losses.  Annual  fluctuations  in the provision for
loan losses result from management's  regular  assessment of the adequacy of the
allowance  for loan losses.  The  provision for loan losses was $150,000 for the
year ended December 31, 2000 which represents a decrease of $600,000 or 80% from
1999.  In 1999,  the  provision  for loan losses of $750,000  represented  a 63%
decrease from $2,040,000 in 1998. This decrease in the provision for loan losses
in 2000 when  compared to 1999 and from 1999 when  compared to 1998 was due to a
decline in loan charge-offs and a decrease in nonperforming loans.

         Noninterest  Income.  Noninterest  income  from  continuing  operations
increased 17%, or $909,000,  to $6,106,000 as compared to $5,197,000,  for 1999.
The Company's  noninterest income from continuing  operations for 1999 decreased
by $428,000 or 8% from the  $5,625,000  it received  during 1998.  The following
table sets forth the sources of noninterest  income from  continuing  operations
for the years ended December 31, 2000, 1999 and 1998.

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                            2000            1999          1998
                                                         ------------------------------------------
                                                                       (in thousands)
<S>                                                         <C>             <C>           <C>
  Service charges on deposit accounts                       $1,077          $1,041        $1,072
  Merchant draft processing, net                             4,856           3,154         2,609
  Loan servicing income                                        272             129           562
  Net realized gains (losses) on
    securities available for sale                             (171)             19           225
  Loss on sale of loans                                       (584)            ---           ---
  Other income                                                 656             854         1,157
                                                         ------------    -----------   ------------
                                                            $6,106          $5,197        $5,625
                                                         ============    ===========   ============
</TABLE>


         Merchant draft  processing net revenue  increased in 2000 to $4,856,000
as compared to $3,154,000  in 1999 and  $2,609,000 in 1998. In 2000 and 1999 the
Company  benefited  from the  amortization  of a lump sum payment of  $2,600,000
received in December 1998. Such payment was a result of a renegotiated  merchant
card services  contract with an independent sales  organization.  As of December
31, 2000 the payment has been fully amortized. For the full years ended December
31, 2000, 1999 and 1998 the Company recorded  $1,440,000,  $910,000 and $250,000
as revenue  associated  with the payment.  In  Addition,  under the terms of the
renegotiated  contract the Company  received a contract  completion bonus in the
amount of  $528,000  during  2000.  To offset  the  decline  in future  merchant
bankcard  processing  revenues  brought about by the  completion of the contract
referenced  above,  the Company has been  building  its  overall  merchant  card
services business through direct marketing efforts and new ISO relationships.



                                       27
<PAGE>

         The Company  bears certain risks  associated  with its merchant  credit
card processing business.  Due to a contractual  obligation between NBR and Visa
and  MasterCard,  NBR  stands in the place of the  merchant  in the event that a
merchant is unable to pay  charge-backs  from  cardholders.  As a result of this
obligation,  NBR may incur  losses  associated  with its  merchant  credit  card
processing business.  Accordingly,  NBR has established a reserve to provide for
losses  associated  with  charge-back  losses.   Such  reserve,   which  totaled
$1,277,000  and $908,000 as of December 31, 2000 and 1999,  was estimated  based
upon industry loss data and  management's  assumptions  regarding  merchant risk
borne by NBR.  Factors that may effect NBR's merchant risk include the amount of
merchant risk borne by an ISO through its marketing agreement with the Bank.

         Loan  servicing  revenues  increased  to  $272,000  for the year  ended
December 31, 2000,  compared to $129,000 in 1999,  a decrease  from  $562,000 in
1998. The increase in 2000 was due to the Company's increased loan portfolio, as
compared to the decline in 1999, which was due to normal  prepayments  occurring
within the Company's loan servicing portfolio. Future loan servicing income will
be dependent on prepayments of loans held in the Company's servicing portfolio.

         In 2000,  $2,800,000  of callable  bonds  carried  within the Company's
investment  securities  portfolio  were  called  by their  issuers  compared  to
$500,000 in 1999.  As these  bonds were  purchased  at par,  the Company did not
recognize any gain or loss on the redemption of such securities in 2000. In 1999
the  Company  recorded  gains of  $5,000.  See  Note D of Notes to  Consolidated
Financial Statements.

         As part of its asset  repositioning  strategy,  the Company  recorded a
loss on sale of  residential  loans of $584,000  and loss on sale of  securities
available for sale of $171,000

         Noninterest  Expense.  Noninterest  expense  amounted to $15,948,000 in
2000, $16,166,000 in 1999 and $16,877,000 in 1998. This represents a decrease of
$218,000 or 1% in 2000 and a decrease of 711,000 or 4% in 1999 when  compared to
1998.

         Salaries and employee benefits expense for 2000 decreased $162,000,  or
2%, to $8,640,000,  as compared to $8,802,000 for 1999. This compared with about
a 2% increase during 1999 over the 1998 salaries and employee  benefits  expense
of  $8,638,000.  The  decrease  in  2000 is a  result  in the  reduction  in the
Company's  full-time  equivalent  staff  level.  The  increase in  salaries  and
employee  benefit  expense in 1999 is due to the emphasis  placed on growing the
Company's core banking  operations.  The Company's  full-time  equivalent  staff
levels adjusted for discontinued operations,  were 147, 162, and 174 at December
31, 2000, 1999, and 1998.

         Occupancy and equipment  expense was $2,040,000 in 2000,  $2,242,000 in
1999,  and  $2,743,000  in 1998.  In 2000 and 1999 the  decrease of $202,000 and
$501,000  as  compared  to the  prior  year was  attributable  to the  Company's
decreased  space  requirements  as a  result  of  the  relocation  of  operating
personnel.

          The  following  table  describes the  components of other  noninterest
expense for the years ended December 31, 2000, 1999 and 1998.


                                       28
<PAGE>


<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                     2000             1999          1998
                                                 -------------------------------------------
                                                               (in thousands)
<S>                                                     <C>            <C>           <C>
 Professional fees                                        $950         $1,231          $769
 Regulatory expense and insurance                          453            459           588
 Postage and office supplies                               463            489           506
 Shareholder expenses and director fees                    412            320           339
 Advertising                                               420            217           188
 Telephone                                                 351            339           360
 Electronic data processing                              1,274          1,234         1,284
 Net costs of other real estate owned                      132            195           956
 Other                                                     813            638           506
                                                 --------------    -----------   -----------
                                                        $5,268         $5,122        $5,496
                                                 ==============    ===========   ===========
</TABLE>


         Other noninterest  expenses were $5,268,000 during 2000, an increase of
$146,000, or 3%, when compared to 1999 expenses of $5,122,000. Other noninterest
expense decreased  $374,000 or 7% in 1999 when compared to 1998. The increase in
2000 was primarily due to an increase in advertising  cost  associated  with the
Company's emphasis on growing its core banking operations, partially offset by a
decline  in  professional  fees and OREO  expenses.  The  decline  in 1999  when
compared to 1998 is primarily  attributable to a decline of $761,000 in net OREO
expenses.

          Income Taxes. The Company's  effective tax rate varies with changes in
the relative amounts of its non-taxable income and nondeductible  expenses.  The
Company's  effective tax rate on continuing  operations was 40.4% in 2000, 38.8%
in 1999 and 39.1% in 1998.


Business Segments

         The Company operates in two principal industry segments: core community
banking and  merchant  card  services.  The  Company's  core  community  banking
industry segment includes commercial,  commercial real estate, construction, and
permanent  residential  lending  along  with  all  depository  activities.   The
Company's  merchant card services industry group provides credit card settlement
services for approximately 49,000 merchants throughout the United States.



                                       29
<PAGE>



Summary financial data by industry segment follows:

<TABLE>
<CAPTION>
                                                           For the Year Ended,
                                                              December 31,
                                      -------------------------------------------------------------
                                            2000                  1999                 1998
                                      ------------------    ------------------   ------------------
                                                             (in thousands)

<S>                                            <C>                   <C>                  <C>
Community Banking:
  Revenue                                       $20,960               $21,187              $20,563
  Expenses                                       14,089                15,503               17,789
                                      ------------------    ------------------   ------------------
     Income before income tax                    $6,871                $5,684               $2,774
                                      ==================    ==================   ==================

Average assets                                 $414,181              $385,025             $382,790
                                      ==================    ==================   ==================

Bankcard:
  Revenue                                        $5,990                $3,697               $3,120
  Expenses                                        2,009                 1,413                1,128
                                      ------------------    ------------------   ------------------
     Income before income tax                    $3,981                $2,284               $1,992
                                      ==================    ==================   ==================

Average assets                                  $24,904               $21,940              $12,407
                                      ==================    ==================   ==================

Total Company:
  Revenue                                       $26,950               $24,884              $23,683
  Expenses                                       16,098                16,916               18,917
                                      ------------------    ------------------   ------------------
     Income before income tax                   $10,852                $7,968               $4,766
                                      ==================    ==================   ==================

Average assets                                 $439,085              $406,965             $395,197
                                      ==================    ==================   ==================

</TABLE>


Community Banking

         The Community  Banking segment's income before income taxes amounted to
$6,871,000 in 2000 as compared to $5,684,000 in 1999 and $2,774,000 in 1998. The
Community Banking segment revenues decreased in 2000 as a result of a decline in
the net interest  margin due to an increase in high cost  certificate of deposit
accounts.  In 2000 and 1999 segment  expenses have  declined  primarily due to a
decrease in the provision for loan losses,  reduced OREO  disposition  costs and
administrative  expenses.  Additionally,  during 2000 the Company  increased its
loan portfolio through renewed marketing efforts.  Total average portfolio loans
were  $329,799,000  in 2000 up from  $293,352,000  in 1999, a 12%  increase.  In
December 2000 the Company sold  $21,205,000 in single family  residential  loans
and securitized another $17,949,000 as part of an asset repositioning  strategy.
The Company  anticipates that the funds received from the loan sale will be used
to fund growth in higher yielding,  relationship-based commercial and commercial
real estate loans.


                                       30
<PAGE>

Merchant Card Services

         The Merchant Card Services segment provides Visa and Mastercard  credit
card  processing  and  settlement  services  for  roughly  approximately  49,000
merchants  located  throughout  the United  States.  In 2000  processing  volume
amounted to $986,000,000.  The Company's merchant card services customer base is
made up of merchants  located in its primary  market area and merchants who have
been acquired by the Company through the use of ISO's.

         The Merchant Card Services  segment has  experienced  three  successive
years of  revenue  and  earnings  growth  due to an  increase  in the  number of
merchants  it  services  and an  increase  of ISO's to market its  services.  In
December 1998 the Company  renegotiated the terms of a processing  contract with
an ISO who  represented  $1,736,000 or 66% of the Company's  1998 merchant draft
net processing revenue,  $1,412,000 or 45% and $1,979,000 or 41% of such revenue
in 1999 and 2000, respectively. As a result of the renegotiation the ISO brought
down its  processing  rate in  consideration  for a payment of $2,600,000 to the
Company.  The Company  amortized  the payment over the life of the  renegotiated
contract. During 2000, 1999 and 1998, $1,440,000,  $910,000 and $250,000 of this
payment was recognized as revenue.  At December 31, 2000 such processing revenue
had been fully amortized.

         The Company was informed in July 2000 that the ISO discussed  above was
transferring  all of its remaining  customers  processed by the Company to a new
processor.  The effective date of this transfer was July 24, 2000. Subsequent to
this  transaction  date,  the  Company  has  continued  to  process  charge-back
transactions  originating  from merchant card sales activity  occurring prior to
the  final  transfer  date  through  the end of  2000.  Under  the  terms of the
renegotiated  contract the Company  received a contract  completion bonus in the
amount of  $528,000.  Since April 1999,  in an effort to offset the  anticipated
decline in future merchant bankcard  processing  revenues from the completion of
the contract discussed above, the Company has been building its overall merchant
card  services   business  through   additional  direct  marketing  efforts  and
developing new ISO relationships.

         The Company  bears certain risks  associated  with its merchant  credit
card processing business.  Due to a contractual  obligation between NBR and Visa
and  MasterCard,  NBR  stands in the place of the  merchant  in the event that a
merchant is unable to pay  charge-backs  from  cardholders.  As a result of this
obligation,  NBR may incur  losses  associated  with its  merchant  credit  card
processing business.  Accordingly,  NBR has established a reserve to provide for
losses  associated  with  charge-back  losses.   Such  reserve,   which  totaled
$1,277,000  and $908,000 as of December 31, 2000 and 1999,  was estimated  based
upon industry loss data as a percentage of transaction  volume  throughout  each
year,  historical losses incurred by the Company,  and management's  assumptions
regarding merchant and ISO risk. The provision for charge-back losses,  which is
included in the financial statements as a reduction in merchant draft processing
income,  was  $713,000,  $449,000  and  $322,000 in 2000,  1999 and 1998.  While
charge-off  levels were nominal from 1997 to 2000, the increase in the allowance
reflects the growth in proprietary merchant account volume,  increased exposures
to internet  merchants,  and a new ISO relationship in which the Company assumes
fraud risk directly rather than looking first to the ISO.



                                       31
<PAGE>

         The following  table  summarized the Company's  merchant card allowance
for charge-back losses:


<TABLE>
<CAPTION>
                                           For the Year Ended
                                              December 31,
                                    2000          1999         1998
                                -----------------------------------------
                                             (in thousands)

<S>                                    <C>            <C>           <C>
Beginning allowance                      $908         $459          $137
Provision for losses                      713          449           322
Charge-offs                              (344)         ---           ---
                                -----------------------------------------
Ending allowance                       $1,277         $908          $459
                                =========================================
</TABLE>


Discontinued Operations

         On  September  10, 1999 the  Company  divested  itself of its  mortgage
brokerage and mortgage banking units,  Valley  Financial and Allied  Diversified
Credit.  The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding,  Inc., whose shareholders include senior management of
Valley Financial and Allied Diversified  Credit. As a result of the divestiture,
the Company lost 95 employees of whom 63 were hired by Valley Financial Funding,
Inc.,  while 32 were  terminated  by the Company.  The Company has disclosed the
operations  of these  units as well as the  after  tax  loss on  disposition  as
discontinued operations.  Accordingly, historical financial information has been
recast  to  present  the  operating  results  of  Valley  Financial  and  Allied
Diversified  Credit as  discontinued  operations.  After tax income  (loss) from
discontinued  operations  for  1999  and 1998  was  ($437,000)  and  $2,187,000,
respectively.  Revenue from discontinued  operations was $4,369,000 for the year
ended December 31, 1999, as compared to $10,863,000  for 1998. In 2000 there was
no revenue recognized from discontinued operations. Due to the disposition,  the
Company no longer carries or funds a mortgage loans held for sale position. This
position was previously funded with other borrowings and time deposits.

Investment Portfolio

      The Company  classifies its  investment  securities as held to maturity or
available  for sale.  The  Company's  intent is to hold all  securities  held to
maturity until maturity and management believes that the Company has the ability
to do so.  Securities  available for sale may be sold to implement the Company's
asset/liability  management  strategies  and in  response to changes in interest
rates,  prepayment rates and similar factors. The following table summarizes the
maturities of the Company's  debt  securities at their  carrying value and their
weighted  average yields at December 31, 2000.  Yields on tax-exempt  securities
have been computed on a tax-equivalent basis.



                                       32
<PAGE>



<TABLE>
<CAPTION>

                                                            Available for Sale
                                        After One Through      After Five Through
                       Within One Year      Five Years              Ten Years         After Ten Years     Total
                     -----------------  -----------------   -------------------------------------------------------------
                      Amount     Yield  Amount   Yield          Amount    Yield       Amount    Yield    Amount   Yield
                     -----------------  -----------------   -------------------------------------------------------------
                                                           (dollars in thousands)
<S>                   <C>      <C>      <C>       <C>            <C>     <C>        <C>        <C>     <C>        <C>
U.S. Government
   obligations        $2,991   5.76%    $25,010   6.16%           $---    ---          $---     ---    $28,001    6.12%
 Mortgage-backed                                                   648   7.11%       18,016    6.97%    18,664    6.97
 Other securities                         5,967   6.63                                                   5,967    6.63
                     --------          ---------           ------------           ----------          ---------
   Total              $2,991   5.78%    $30,977   6.41%           $648   7.11%      $18,016    6.97%   $52,632    6.48%
                     ========          =========           ============           ==========          =========

</TABLE>


<TABLE>
<CAPTION>
                                                            Held to Maturity
                                        After One Through      After Five Through
                      Within One Year       Five Years               Ten Years       After Ten Years     Total
                     -----------------  -----------------   -------------------------------------------------------------
                      Amount    Yield     Amount   Yield        Amount    Yield      Amount    Yield     Amount   Yield
                     -----------------  -----------------   -------------------------------------------------------------
                                                           (dollars in thousands)
<S>                  <C>          <C>     <C>       <C>          <C>       <C>       <C>        <C>      <C>       <C>
U.S. Government
   obligations       $  ---       ---     $6,991    6.14%        $6,000    6.68%     $  ---     ---      $12,991   6.39%
 Mortgage-backed                                                                      11,953    6.54      11,953   6.54
 Other securities                            201    4.70          1,085    5.54        3,571    7.12       4,857   6.67
                     --------           ---------           ------------           ----------           ---------
   Total             $  ---       ---     $7,192    6.10%        $7,085    6.51%     $15,524    6.67%    $29,801   6.49%
                     ========           =========           ============           ==========           =========

</TABLE>


         The  following  table  summarizes  the  book  value  of  the  Company's
investment securities held on the dates indicated:

<TABLE>
<CAPTION>
                                                                          Available for Sale
                                                                              December 31,
                                                              2000               1999                1998
                                                       ----------------------------------------------------------
                                                                             (in thousands)
<S>                                                               <C>                 <C>                <C>
 U.S. Government obligations                                      $28,001             $36,098            $28,540
 Mortgage-backed securities                                        18,664                 858                ---
 Other securities                                                   5,967               6,782              1,998
 FHLB and FRB Stock                                                 2,777               2,647              4,105
                                                       ----------------------------------------------------------
   Total                                                          $55,409             $46,385            $34,643
                                                       ==========================================================

</TABLE>

<TABLE>
<CAPTION>
                                                                           Held to Maturity
                                                                             December 31,
                                                              2000               1999                1998
                                                       ----------------------------------------------------------
                                                                             (in thousands)
<S>                                                               <C>                 <C>                <C>
 U.S. Government obligations                                      $12,991             $12,989            $10,986
 Mortgage-backed securities                                        11,953              13,364             11,153
 Other securities                                                   4,857               3,967              3,628
                                                       ----------------------------------------------------------
   Total                                                          $29,801             $30,320            $25,767
                                                       ==========================================================
</TABLE>




                                       33
<PAGE>





Loan Portfolio

         The Company  concentrates  its lending  activities  in three  principal
areas:  real estate  mortgage loans  (residential  and commercial  loans),  real
estate  construction  loans and commercial  loans.  At December 31, 2000,  these
three categories  accounted for approximately  61%, 16% and 21% of the Company's
loan  portfolio.  The interest  rates  charged for the loans made by the Company
vary with the degree of risk, the size and maturity of the loans, the borrowers'
depository  relationships  with the Company and  prevailing  money  market rates
indicative of the Company's cost of funds.

         Concentration  of the Company's  lending  activities in the real estate
sector  could  have the  effect of  intensifying  the  impact on the  Company of
adverse  changes in the real estate market in the Company's  lending areas.  The
ability of the Company to continue to originate  mortgage  loans may be impaired
by adverse changes in local or regional economic conditions,  adverse changes in
the real estate market,  increasing interest rates, or acts of nature (including
earthquakes or floods,  which may cause uninsured damage and other loss of value
to real estate that secures the Company's  loans).  Due to the  concentration of
the  Company's  real estate  collateral,  such events  could have a  significant
adverse impact on the value of such collateral or the Company's earnings.

         The  following  table sets forth the  amounts of loans  outstanding  by
category  as of the  dates  indicated.  There  were no  concentrations  of loans
exceeding 10% of total loans which are not otherwise  disclosed as a category of
loans in the table below.


<TABLE>
<CAPTION>
                                                                    December 31,
                                        ------------------------------------------------------------------
                                            2000          1999         1998         1997         1996
                                        ------------------------------------------------------------------
                                                                 (in thousands)
<S>                                         <C>           <C>          <C>          <C>          <C>
Residential real estate mortgage             $98,914      $130,504      $97,194      $93,516     $115,631
 Commercial real estate mortgage              93,091        79,476       59,257       57,425       67,401
 Commercial                                   66,645        61,165       63,260       69,097       73,987
 Real estate construction                     49,460        40,059       46,905       55,031       84,908
 Installment and other                         7,900         4,624        5,095        9,200        8,284
 Less net deferred fees                         (909)       (1,383)      (2,395)      (1,873)      (2,797)
                                        ------------------------------------------------------------------
   Total loans                               315,101       314,445      269,316      282,396      347,414
 Less allowance for loan losses               (7,674)       (7,931)      (8,041)      (7,645)      (7,040)
                                        ------------------------------------------------------------------
   Net loans                                $307,427      $306,514     $261,275     $274,751     $340,374
                                        ==================================================================
</TABLE>


                                       34
<PAGE>

         Real Estate  Mortgage  Loans.  As of December 31, 2000,  the  Company's
residential  mortgage  loans  totaled  $98,914,000,  or 31%, of its total loans.
These loans were  predominantly  originated  in Sonoma and  Mendocino  Counties.
Total  residential  loans  decreased  $31,590,000  during 2000 as compared to an
increase of  $33,310,000  in 1999.  The decline in 2000 is due to the  Company's
sale of $21,205,000 in single family residential loans and the securitization of
another  $17,949,000  as part of an asset  repositioning  strategy.  The Company
anticipates  that the  funds  received  from the loan  sale will be used to fund
growth in higher  yielding  relationship-based  commercial and  commercial  real
estate  loans.  The  increase  in 1999 and 1998 were the  result of normal  loan
origination  activity.  As of December  31,  1999,  residential  mortgage  loans
totaled $130,504,000 or 42% of total loans. As of December 31, 1998, residential
mortgage loans totaled $97,194,000 or 36% as compared to December 31, 1997 total
of $93,516,000 or 33% of the total  portfolio.  Such loans declined  $22,115,000
during 1997 due to a curtailment  of  origination  activity.  As of December 31,
1996  residential  mortgage  loans  totaled  $115,631,000.  Such loans  declined
$34,509,000  during 1996 due to prepayments and continuing  restructuring of the
Company's  balance  sheet.  This  1996   restructuring  was  accomplished  by  a
$34,000,000 loan sale in the second quarter of 1996.

         At December 31, 2000, $38,306,000, or 39%, of the Company's residential
real estate mortgage loans were fixed-rate  mortgage loans having original terms
ranging  from one to  thirty  years.  Another  $35,689,000,  or 36% were held as
adjustable-rate  mortgages.  The balance of these  loans,  $24,919,000,  or 25%,
consisted of  multifamily  loans and loans on improved  single-family  lots. The
majority of the Company's  residential mortgage loans have been underwritten for
the  Company's  portfolio  and do not  necessarily  meet  standard  underwriting
criteria for sale in the secondary market. Approximately 79% of the total amount
outstanding had principal  balances that were less than $300,000.  The Company's
residential real estate mortgage loans  predominately have loan-to-value  ratios
of 80% or less,  using current loan balances and appraised values as of the time
of  origination.   The  Company's  general  policy  is  not  to  exceed  an  80%
loan-to-value  ratio on residential  mortgage loans without mortgage  insurance.
The Company  generally does not make portfolio loans on a negative  amortization
basis.

         As of December 31, 2000,  the Company had  outstanding  $93,091,000  in
commercial  mortgage loans,  which  constituted 30% of total loans.  These loans
were primarily secured by owner-occupied  commercial properties and have 5 to 15
year maturities based upon 25 to 30 year amortization  periods. The ratio of the
loan  principal  amount to appraised  values are  generally  75% or less,  using
appraised  values  at  the  time  of  loan   origination,   and  the  loans  are
predominantly for  owner-occupied  small office buildings or  office/warehouses.
The Company originates  commercial mortgage loans that are guaranteed by the SBA
up to 70% to 90% of the balance. The SBA guaranteed portion of such loans can be
sold into the secondary market with the unguaranteed principal balance retained.
The  aggregate  retained  unguaranteed  principal  balance  of such loans was $5
million at December 31, 2000.  Approximately 37% of the total amount outstanding
of  commercial  mortgage  loans  had  principal  balances  that  were  less than
$250,000.

                                       35
<PAGE>

           Real Estate  Construction  Loans. The Company's  primary market focus
emphasizes  individual  borrowers and small residential and commercial projects.
The economic viability of the project and the borrower's past development record
and  creditworthiness  are  primary  considerations  in  the  loan  underwriting
decision.  The Company had  $49,460,000  in  construction  loans  outstanding at
December  31,  2000,  comprising  16% of  its  total  loans.  These  loans  were
principally  located in  Northern  California.  This  represents  an increase of
$9,401,000  or 23% from  1999.  In 1999 and 1998  construction  loans  decreased
$6,846,000  or 15% and  $8,126,000  or 15% of total  loans  respectively.  As of
December  31,  2000,  approximately  $16 million of these loans  consisted of 49
single-family  individual-borrower  construction  loans, and the remaining loans
included 12 subdivision  projects, 15 land development projects and 7 commercial
projects.  At December 31, 2000,  the largest  single-family  construction  loan
commitment was  $3,845,000,  and the average  commitment was less than $504,000.
The largest commitment for a subdivision  project was $4,250,000 and the average
subdivision commitment was less than $1,154,000.  The average commercial project
involved a loan of approximately $1,270,000.

         Construction loans are funded on a line-item,  percentage of completion
basis.  As the  builder  completes  various  line  items  (foundation,  framing,
electrical,  etc.) of the project,  or portions of those line items, the work is
reviewed by one of several  independent  inspectors  hired by the Company.  Upon
approval from the inspector, the Company funds the draw request according to the
percentage  completion  of the line items that have been  approved.  The Company
rotates  inspectors during  construction to ensure  independent  review.  Actual
funding  checks must be signed by an officer of the  Company,  and that  officer
must also initial the line-item  worksheet used to support the draw request.  In
addition, Company personnel or agents routinely inspect the various construction
projects, all of which are located in the Company's lending area.

         Commercial  real estate  mortgage  and  construction  lending  contains
potential risks which are not inherent in other types of portfolio loans.  These
potential  risks include  declines in market values of underlying  real property
collateral  and, with respect to construction  lending,  delays or cost overruns
which could expose the Company to loss. In addition,  risks in  commercial  real
estate  lending  include  declines in  commercial  real estate  values,  general
economic  conditions  surrounding  the  commercial  real estate  properties  and
vacancy  rates.  A decline in the  general  economic  conditions  or real estate
values  within the  Company's  market  area could have a negative  impact on the
performance  of the  loan  portfolio  or value of the  collateral.  Because  the
Company lends primarily within its market area, the real property collateral for
its loans is  similarly  concentrated,  rather than  diversified  over a broader
geographic area. The Company could therefore be adversely  affected by a decline
in real  estate  values in its primary  market  area even if real estate  values
elsewhere in California remained stable or increased.

                                       36
<PAGE>

         Commercial  Loans.  Commercial  loans  consist  primarily of short-term
financing  for  businesses  and  professionals  located in Sonoma and  Mendocino
Counties. At December 31, 2000, these loans totaled $66,645,000,  or 21%, of the
Company's total loans. This represents an increase of $5,480,000 or 9% from 1999
due to the  Company's  marketing  efforts and a general  expansion of businesses
within the Company's market area. In 1999 commercial loans decreased  $2,095,000
or 3%  from  1998  due to  normal  loan  payoffs  and  the  competitive  banking
environment.  The commercial loans are diversified as to industries and types of
businesses, with no material industry concentrations.  Commercial loan borrowers
generally have deposit  relationships with the Company. The commercial loans can
be unsecured or secured by various  assets,  including  equipment,  receivables,
deposits and other  assets.  Commercial  loans may be secured by  commercial  or
residential  property;  however, they are not classified as mortgage loans since
these loans are not typically taken out for the purpose of acquiring real estate
and the loans are short-term.  In these cases, the mortgage  collateral is often
taken as additional collateral.  As of December 31, 2000, the size of individual
commercial  loans varied widely,  with 91% having  principal  balances less than
$350,000.  At December 31, 2000,  the Company had 9 commercial  borrowers  whose
aggregate individual liability exceeded $2,000,000.

          Loan Commitments.  In the normal course of business, there are various
commitments outstanding to extend credit that are not reflected in the financial
statements.  Annual review of the commercial credit lines and ongoing monitoring
of  outstanding  balances  reduces  the  risk  of  loss  associated  with  these
commitments.  As of December 31, 2000, the Company did not have any  outstanding
unfunded mortgage loan  commitments.  There were $51,011,000 in undisbursed loan
commitments and $139,000 in standby letters of credit.

         Maturity   Distribution.   The  following   table  shows  the  maturity
distribution  of the Company's  commercial  and real estate  construction  loans
outstanding  as of  December  31,  2000,  which,  based on  remaining  scheduled
repayments of principal, were due within the periods indicated.

<TABLE>
<CAPTION>
                                                            After One
                                                 Within      Through     After Five
                                                One Year    Five Years      Years        Total
                                              -----------------------------------------------------
                                                                 (in thousands)

<S>                                                <C>          <C>           <C>         <C>
Commercial                                         $22,528      $16,757       $27,360      $66,645
Real estate construction                            35,918        6,756         6,786       49,460
                                              -----------------------------------------------------
  Total                                            $58,446      $23,513       $34,146     $116,105
                                              =====================================================


Loans with fixed interest rates                    $22,273       $7,773        $3,342      $33,388
Loans with variable interest rates                  36,173       15,740        30,804       82,717
                                              -----------------------------------------------------
  Total                                            $58,446      $23,513       $34,146     $116,105
                                              =====================================================
</TABLE>

                                       37
<PAGE>


Deposit Structure

         The Company  primarily  attracts  deposits  from local  businesses  and
professionals,  as well as through retail certificates of deposits,  savings and
checking  accounts.  In addition to the Company's local depository  offices,  it
attracts  certificates  of  deposit,   primarily  from  financial   institutions
throughout  the nation,  by  publishing  rates in national  publications.  These
certificates  of deposit have often been set at interest rates at or above local
market retail deposit rates to attract deposits.  The national deposit market is
utilized to supplement the Company's  liquidity needs. There can be no assurance
that this funding practice will continue to provide deposits at attractive rates
or that applicable  federal  regulations will not limit the Company's ability to
attract  deposits in this manner.  The amount of such  deposits was $495,000 and
$793,000  as of  December  31, 2000 and 1999.  The  Company  generally  does not
purchase brokered deposits and had no brokered deposits at December 31, 2000.

         The  following  chart  sets  forth the  distribution  of the  Company's
average daily deposits for the periods indicated.


<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                     ------------------------------------------------------------------------
                                              2000                     1999                     1998
                                     ----------------------   ----------------------   ----------------------
                                        Amount      Rate         Amount      Rate         Amount      Rate
                                     ----------------------   ----------------------   ----------------------
                                                               (dollars in thousands)
<S>                                      <C>          <C>         <C>          <C>         <C>          <C>
 Transaction accounts:
   Savings & Money Market                $98,576      3.40%       $108,290     3.21%       $119,624     3.97%
   NOW                                    27,050      1.19          25,081     1.18         23,236      1.27
   Noninterest bearing                    80,923       ---          85,851      ---         82,074       ---
 Time deposits $100,000 and over          81,215      5.86          49,919     5.43         35,349      5.45
 Other time deposits                      98,915      5.60          87,194     4.96         81,920      5.39

</TABLE>

         The  Company's  time  deposits of  $100,000  or more had the  following
schedule of maturities at December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
<S>                                                      <C>
 Remaining Maturity:
   Three months or less                                  $35,715
   Over three months to six months                        25,442
   Over six months to 12 months                           27,306
   Over 12 months                                          4,577
                                              -------------------
     Total                                               $93,040
                                              ===================
</TABLE>

         Time  deposits  of $100,000 or more are  generally  from the  Company's
local  business and  professional  customer  base.  The potential  impact on the
Company's  liquidity  from the withdrawal of these deposits is considered in the
Company's asset and liability management  policies,  which attempt to anticipate
adequate  liquidity needs through its management of  investments,  federal funds
sold, or by generating additional deposits.



                                       38
<PAGE>


Other Borrowings

         NBR maintains a secured line of credit with the FHLB  collateralized by
approximately  $76,500,000 in residential mortgage loans. Available credit under
this  line at  December  31,  2000 was  $70,000,000.  Advances  can be made on a
long-term and  short-term  basis with a rolling  maturity  date. On occasion,  a
borrowing is made on a fixed maturity basis.  In such  instances,  maturities do
not extend beyond one year.  Redwood also maintains a $3,000,000  unsecured line
of credit with a major financial institution. As of December 31, 2000, there was
no  outstanding  balance under this line. In addition,  the Company  enters into
various short-term borrowing  agreements,  which include Treasury,  Tax and Loan
borrowings.  These borrowings have maturities of one day and are  collateralized
by investments or loans.

         The following  table  summarizes the balances  outstanding at year end,
the highest amount of borrowings  outstanding  for a month-end  during the year,
the average  balance of borrowings  and the weighted  average rate for the years
ended December 31, 2000, 1999 and 1998.


<TABLE>
<CAPTION>

                                                               2000                 1999                  1998
                                                          ----------------------------------------------------------

<S>                                                            <C>                  <C>                   <C>
 Balance, December 31                                           $3,528               $4,695                $1,371
 Average balance during the year                                 5,333                1,383                12,000
 Average interest rate during the year                            6.56%               10.27%                 9.23%
 Maximum month-end balance during the year                     $11,350              $17,785               $19,783
 Date of maximum month-end balance                             November             September              August
</TABLE>


Asset Quality

         The Company  attempts to minimize credit risk through its  underwriting
and credit review policies.  The Company conducts its own internal credit review
processes  and, in addition,  contracts  with an  independent  loan reviewer who
performs  monthly  reviews of new loans and  potential  problem  loans that fall
within predetermined  parameters.  The Board of Directors of NBR has an internal
asset review  committee which reviews the asset quality of new and problem loans
on a monthly basis and reports the findings to the full Board.  In  management's
opinion,  this  loan  review  system  facilitates  the early  identification  of
potential problem loans.

         The performance of the Company's loan portfolio is evaluated  regularly
by management.  The Company  places a loan on nonaccrual  status when one of the
following events occurs: (1) any installment of principal or interest is 90 days
or more past due (unless, in management's  opinion, the loan is well secured and
in the process of collection); (2) management determines the ultimate collection
of principal of or interest on a loan to be unlikely; or (3) the terms of a loan
have been  renegotiated to less than market rates due to a serious  weakening of
the borrower's financial condition.



                                       39
<PAGE>

         With respect to the  Company's  policy of placing loans 90 days or more
past due on nonaccrual status unless the loan is well secured and in the process
of collection, a loan is considered to be in the process of collection if, based
on a probable  specific  event,  it is expected  that the loan will be repaid or
brought  current.  Generally,  this collection  period would not exceed 30 days.
When a loan is placed on nonaccrual  status,  the Company's general policy is to
reverse  and  charge  against  current  income  previously  accrued  but  unpaid
interest.  Interest income on such loans is subsequently  recognized only to the
extent that cash is received  and future  collection  of  principal is deemed by
management to be probable.  Where the collectability of principal or interest on
a loan is  considered to be doubtful by  management,  it is placed on nonaccrual
status prior to becoming 90 days delinquent.

         Interest  income is recognized on impaired loans in a manner similar to
that of all loans. It is the Company's policy to place loans that are delinquent
90 days or more as to principal or interest on nonaccrual  status unless secured
and in the process of collection, and to reverse from current income accrued but
uncollected  interest.  Cash payments  subsequently received on nonaccrual loans
are  recognized  as income  only where the future  collection  of  principal  is
considered by management to be probable.

         At December 31, 2000 and 1999 the Company's  total recorded  investment
in  impaired  loans  was  $1,380,000  and  $4,430,000  of which  $1,085,000  and
$4,119,000  relates  to the  recorded  investment  for which  there is a related
allowance  for credit  losses of  $299,000  and  $1,121,000.  The amount of that
recorded  investment  for which there is no related  allowance for credit losses
was $295,000  and  $311,000 at December 31, 2000 and 1999.  At December 31, 2000
substantially  all of the impaired  loan balance was measured  based on the fair
value of the collateral,  with the remainder measured by estimated present value
cash flow.

          The average  recorded  investment  in impaired  loans during the years
ended  December  31,  2000,  1999  and  1998  was  $1,424,000,   $4,420,000  and
$10,377,000.  The related amount of interest income recognized during the period
that such loans were impaired was $54,000, $292,000 and $578,000.

         As of December 31, 2000 and 1999 there were $908,000 and  $3,063,000 of
loans on which the accrual of interest had been  discontinued.  Interest due but
excluded from interest income on loans placed on nonaccrual status was $280,000,
$362,000  and $341,000  for the years ended  December  31, 1999,  1998 and 1997.
Interest income received on nonaccrual loans was $129,000,  $205,000 and $51,000
for the years ended December 31, 2000, 1999 and 1998.




                                       40
<PAGE>



         The   following   table  sets   forth  the  amount  of  the   Company's
nonperforming assets as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                          ------------------------------------------------------------------
                                                             2000          1999         1998          1997          1996
                                                          ------------------------------------------------------------------
                                                                               (dollars in thousands)

<S>                                                           <C>           <C>          <C>          <C>           <C>
 Nonaccrual loans                                               $908        $3,063       $5,556        $7,883        $8,246
 Accruing loans past due 90 days or more                         ---           ---          ---           735         1,536
 Restructured loans (in compliance with modified terms)          295         1,018        1,045         1,109           599
                                                          ------------------------------------------------------------------
   Total nonperforming loans                                   1,203         4,081        6,601         9,727        10,381
 Other real estate owned                                         757         2,363        2,181         6,352         2,132
 Other assets owned                                              ---           ---          129           542           668
                                                          ------------------------------------------------------------------
   Total nonperforming assets                                 $1,960        $6,444       $8,911       $16,621       $13,181
                                                          ==================================================================

 Nonperforming loans to total loans                             0.38%         1.30%        2.45%         3.44%         2.99%
 Nonperforming assets to total assets                           0.43          1.52         2.11          3.72          2.64
 Allowance for loan losses to nonperforming assets            391.53        123.08        90.24         46.00         53.41
 Allowance for loan losses to nonperforming loans             637.91        194.34       121.82         78.60         67.82
</TABLE>


         Nonperforming loans totaled $1,203,000 at December 31, 2000, consisting
of $603,000  that were  secured by  residential  real estate with the  remaining
$600,000 either  unsecured or  collateralized  by various  business assets other
than real estate.

         Other  real  estate  owned  totaled  $757,000  at  December  31,  2000,
consisting of $222,000 in commercial  buildings and the remaining  $535,000 is a
motel.

         In  addition to the above  mentioned  assets,  as of December  31, 2000
management of the Company has  identified  four lending  relationships  which in
aggregate amount to approximately  $1,288,000 in potential  nonperforming loans,
as to which it has serious  doubts as to the ability of the  borrowers to comply
with the  present  repayment  terms and which may become  nonperforming  assets,
based on known information  about possible credit problems of the borrower.  Two
of these loans are residential and two are commercial properties.


                                       41
<PAGE>





         The  following  table  provides  certain   information  for  the  years
indicated  with respect to the  Company's  allowance  for loan losses as well as
charge-off and recovery activity.



<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                           ------------------------------------------------------------------------
                                              2000           1999           1998           1997           1996
                                           ------------------------------------------------------------------------
                                                                    (dollars in thousands)


<S>                                             <C>            <C>            <C>            <C>            <C>
 Balance at beginning of period                 $7,931         $8,041         $7,645         $7,040         $5,037
                                           ------------------------------------------------------------------------

 Charge-offs:
   Residential real estate mortgage                111             21            617            408            741
   Commercial real estate mortgage                 ---            612            355            124            244
   Commercial                                      461            769            794            784          2,517
   Real estate construction                         90            100            179            456            725
   Installment and other                            39             13             55            148            337
                                           ------------------------------------------------------------------------
 Total charge-offs                                 701          1,515          2,000          1,920          4,564
                                           ------------------------------------------------------------------------

 Recoveries:
   Residential real estate mortgage                 69             42             31             15              2
   Commercial real estate mortgage                  22             45             10            ---              5
   Commercial                                      169            498            279            295            252
   Real estate construction                          3             53              3            ---            ---
   Installment and other                            31             17             33            115             46
                                           ------------------------------------------------------------------------
 Total recoveries                                  294            655            356            425            305
                                           ------------------------------------------------------------------------

 Net charge-offs                                   407            860          1,644          1,495          4,259
                                           ------------------------------------------------------------------------

 Provision for loan losses                         150            750          2,040          2,100          6,262
                                           ------------------------------------------------------------------------

 Balance at end of period                       $7,674         $7,931         $8,041         $7,645         $7,040
                                           ========================================================================

 Net charge-offs during the period
   to average loans                               0.12%          0.29%          0.62%          0.46%          1.22%
 Allowance for loan losses to total loans         2.44           2.52           2.99           2.71           2.03
 Allowance for loan losses
   to nonperforming loans                       637.91         194.34         121.82          78.60          67.82
</TABLE>


         The  allowance  for loan  losses  is  established  through  charges  to
earnings in the form of the provision  for loan losses.  Loan losses are charged
to, and recoveries are credited to, the allowance for loan losses. The provision
for loan losses is determined  after  considering  various  factors such as loan
loss experience, current economic conditions, maturity of the portfolio, size of
the portfolio,  industry  concentrations,  borrower credit history, the existing
allowance  for loan  losses,  independent  loan  reviews,  current  charges  and
recoveries  to the  allowance  for loan losses,  and the overall  quality of the
portfolio,  as determined by management,  regulatory  agencies,  and independent
credit review consultants retained by the Company.



                                       42
<PAGE>

         The  adequacy of the  Company's  allowance  for loan losses is based on
specific and formula  allocations  to the  Company's  loan  portfolio.  Specific
allocations  of the allowance for loan losses are made to identified  problem or
potential  problem loans.  The specific  allocations  are increased or decreased
through management's reevaluation of the status of the particular problem loans.
Loans which do not receive a specific allocation receive an allowance allocation
based on a formula,  represented  by a  percentage  factor  based on  underlying
collateral,   type  of  loan,   historical   charge-offs  and  general  economic
conditions, which is applied against the general portfolio segments.

         It is the policy of management  to make  additions to the allowance for
loan losses so that it remains adequate to cover  anticipated  charge-offs,  and
management  believes  that the  allowance  at  December  31,  2000 is  adequate.
However,  the  determination  of the amount of the allowance is  judgmental  and
subject  to  economic  conditions  which  cannot be  predicted  with  certainty.
Accordingly,  the Company cannot predict whether  charge-offs of loans in excess
of the allowance may be required in future periods.

         The table below sets forth the  allocation  of the  allowance  for loan
losses by loan type as of the dates  specified.  The  allocation  of  individual
categories of loans includes  amounts  applicable to specifically  identified as
well as estimated losses inherent in that segment of the loan portfolio and will
necessarily change whenever management  determines that the risk characteristics
of the loan portfolio have changed.

         Management  believes  that any breakdown or allocation of the allowance
for loan losses into loan categories lends an appearance of exactness which does
not exist, in that the allowance is utilized as a single  unallocated  allowance
available for all loans and undisbursed commitments. The allocation below should
not be interpreted as an indication of the specific  amounts or loan  categories
in which future charge-offs will occur.

<TABLE>
<CAPTION>

                                                                        December 31,
                         -----------------------------------------------------------------------------------------------------
                                  2000                1999                  1998                1997                1996
                         -----------------------------------------------------------------------------------------------------
                          Allowance   % of    Allowance    % of     Allowance   % of    Allowance    % of   Allowance   % of
                          for Losses  Loans   for Losses   Loans    for Losses  Loans   for Losses   Loans  for Losses  Loans
                         -----------------------------------------------------------------------------------------------------
                                                                (dollars in thousands)


<S>                         <C>        <C>      <C>         <C>      <C>        <C>      <C>        <C>      <C>        <C>
 Residential real
   Estate mortgage          $1,195      32%     $2,258       42%     $1,725      36%     $2,061      34%     $1,522      34%
 Commercial real
   Estate mortgage           1,549      29         947       25       1,260      22         650      20         809      19
 Commercial                  2,187      21       2,088       19       2,514      23       1,640      24       1,753      21
 Real estate construction    1,416      16       1,064       13       1,691      17       1,821      19       2,076      24
 Installment and other         257       2         130        1         207       2         194       3         231       2
 Unallocated                 1,071     ---       1,444      ---         644     ---       1,279     ---         649     ---
                         ------------------  -------------------  ------------------  ------------------  ------------------
 Total                      $7,674     100%     $7,931      100%     $8,041     100%     $7,645     100%     $7,040     100%
                         ==================  ===================  ==================  ==================  ==================
</TABLE>


         From time to time the Company may be  required to  repurchase  mortgage
loans from  investors  depending  upon  representations  and  warranties  of the
purchase  agreement between the investor and the Company.  Such  representations
and  warranties  include  valid  appraisal,  status of borrower  and fraud.  The
Company  expects that it may be required to repurchase  loans in the future.  In
2000, 1999 and 1998 the Company was required by various  mortgage loan investors
to repurchase  2, 4 and 9  nonperforming  residential  mortgage  loans  totaling
$120,000,  $943,000  and  $542,000.  The  Company  maintains  a reserve  for its
estimate  of  potential  losses  associated  with the



                                       43
<PAGE>

potential repurchase of previously sold mortgage loans. Such reserve amounted to
$93,000, $142,000 and $172,000 as of December 31, 2000, 1999 and 1998.


Liquidity

         Redwood's primary source of liquidity is dividends from NBR.  Redwood's
primary uses of liquidity  are  associated  with  dividend  payments made to the
stockholders  and  operating  expenses.  It is the Company's  general  policy to
maintain  liquidity  levels  at  the  parent  which  management  believes  to be
consistent  with the  safety and  soundness  of the  Company  as a whole.  As of
December 31, 2000, Redwood held $1,648,000 in deposits at NBR. In addition,  the
Company  has a  $3,000,000  unsecured  line of  credit  with a  major  financial
institution,  which  bears an  interest  rate  equal to the prime  rate plus one
percent.  As of December 31, 2000 there was no  outstanding  balance  under this
line of credit.

         Payment  of  dividends  by  the  Company  is  ultimately  dependent  on
dividends from NBR to Redwood. Federal regulatory agencies have the authority to
prohibit  the payment of  dividends  by NBR to Redwood if a finding is made that
such payment would  constitute an unsafe or unsound  practice or if NBR would be
undercapitalized  as a  result.  If NBR is  restricted  from  paying  dividends,
Redwood might be unable to pay the above obligations.  No assurance can be given
as to the ability of NBR to pay dividends to Redwood. In 2000, 1999 and 1998 NBR
declared   dividends   payable  to  Redwood  of  $12,129,000,   $10,900,000  and
$1,200,000, respectively.

         Although  each entity  within the  consolidated  group  manages its own
liquidity,  the  Company's  consolidated  cash flows can be  divided  into three
distinct areas; operating,  investing and financing. For the year ended December
31, 2000 the  Company  received  $4,958,000  in cash flows from  operations  and
$25,305,000  in  financing   activities  while  using  $6,891,000  in  investing
activities.

         The  principal  sources of asset  liquidity  are  federal  funds  sold.
Secondary  sources  of  liquidity  are loan  repayments,  investment  securities
available for sale, maturing investment  securities held to maturity,  and loans
and investments that can be used as collateral for other borrowings. At December
31, 2000, the Company had  $22,328,000 in federal funds sold.  Total  investment
securities were $85,210,000, of which $51,513,000 were pledged.

         Liability-based  liquidity  includes  interest-bearing  and noninterest
bearing retail  deposits,  which are a relatively  stable source of funds,  time
deposits from financial institutions throughout the United States, federal funds
purchased,  and other  short-term  and long-term  borrowings,  some of which are
collateralized.  The Company  collateralized FHLB advances as NBR is a member of
the FHLB.  Management uses FHLB advances as part of its funding strategy because
the rates paid for those  advances are  generally in line with the rates paid on
time  certificates  of deposits.  FHLB  advances must be  collateralized  by the
pledging of qualified mortgage loans of NBR. At December 31, 2000, approximately
$76,500,000 of  residential  mortgage loans were pledged to secure any funds the
Company may borrow in the future.  NBR's FHLB  borrowing  limitation at December
31, 2000 was  $70,000,000.  At December 31, 2000, 1999 and 1998 NBR had paid off
all FHLB advances.  Management  believes that at December 31, 2000 the Company's
liquidity   position  was  adequate  for  the  operations  of  Redwood  and  its
subsidiaries for the foreseeable future.


                                       44
<PAGE>

Capital

         A strong capital base is essential to the Company's  continued  ability
to service  the needs of its  customers.  Capital  protects  depositors  and the
deposit  insurance fund from  potential  losses and is a source of funds for the
substantial  investments  necessary  for the Company to remain  competitive.  In
addition, adequate capital and earnings enable the Company to gain access to the
capital  markets  to  supplement  its  internal  growth of  capital.  Capital is
generated internally primarily through earnings retention.

         The Company  and NBR are each  required  to  maintain  minimum  capital
ratios defined by various federal government  regulatory  agencies.  The FRB and
the OCC have each established capital guidelines,  which include minimum capital
requirements.  The regulations  impose two sets of standards:  "risk-based"  and
"leverage".

         Under  the  risk-based   capital   standard,   assets  reported  on  an
institution's balance sheet and certain  off-balance-sheet items are assigned to
risk  categories,  each of  which  is  assigned  a risk  weight.  This  standard
characterizes  an  institution's  capital as being "Tier 1" capital  (defined as
principally comprising  shareholders' equity and noncumulative  preferred stock)
and "Tier 2" capital  (defined as principally  comprising the allowance for loan
losses and subordinated  debt). At December 31, 2000, 1999 and 1998, the Company
and its subsidiaries were required to maintain a total risk-based  capital ratio
of 8% and a Tier 1 capital ratio of at least 4%.

         Under the leverage  capital  standard,  an institution  must maintain a
specified  minimum  ratio of Tier 1 capital to total  assets,  with the  minimum
ratio ranging from 4% to 6% for other than the highest rated  institutions.  The
minimum  leverage  ratio for the Company and NBR is based on average  assets for
the quarter.

         NBR  maintains  insurance  on its  customer  deposits  with the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC manages the Bank Insurance Fund
("BIF"), which insures deposits of commercial banks such as NBR, and the Savings
Association   Insurance  Fund  ("SAIF"),   which  insures  deposits  of  savings
associations  such as  Allied.  FDICIA  mandated  that  the two  funds  maintain
reserves at 1.25% of their respective federally insured deposits.

         The table  below  shows the  capital  ratios for the Company and NBR at
December 31, 2000.


<TABLE>
<CAPTION>
                                                        Company           NBR
                                                    ----------------------------

<S>                                                      <C>           <C>
 Total capital to risk based assets                      11.25%        10.70%
 Tier 1 capital to risk based assets                      9.99%         9.44%
 Leverage ratio                                           7.72%         7.29%

</TABLE>


         Under  the  most  stringent  capital   requirement,   the  Company  has
approximately $11,194,000 in excess capital before it becomes under-capitalized.
Similarly, NBR has $9,278,000 in excess capital.


                                       45
<PAGE>




Common Stock Repurchase

         In November 1998,  the Board of Directors  authorized the repurchase of
up to 5% of the  outstanding  stock  of the  Company  or  171,000  shares.  This
repurchase  authorization was completed in November 1999. Upon completion of the
initial 5% repurchase the Company's Board of Directors  authorized an additional
5% and 10% share repurchase.

         During 2000 and 1999 the Company repurchased 428,875 and 191,500 shares
of its common stock for $8,283,000 and $4,182,000.  The average price paid under
the repurchase program was $19.31 in 2000 and $21.84 in 1999.

         In December  2000 and February  2001 the Board of Directors  authorized
the repurchase of up to 10% of the Company's total shares outstanding or 285,000
and 257,000 shares.  Under the repurchase program, the Company plans to purchase
shares  from  time to time on the open  market  and/or in  privately  negotiated
transactions.  The repurchase will be funded in part with proceeds received from
a $10,000,000 pooled trust preferred  securities  offering concluded on February
22, 2001.



Trust Preferred Securities

         In February 2001 the Company completed its $10,000,000 participation in
a pooled trust preferred securities offering. The financing, which qualifies for
tier 1  capital  treatment,  bears an  interest  rate of 10.2%  and is due in 30
years.  Debt  issuance  costs  amounted to  approximately  $300,000  and will be
amortized  over the life of the  offering.  The funds  are being  used for stock
repurchases and other corporate purposes.



Item 7A. Quantitative and Qualitative Disclosures about Market Risk


         As a financial  institution,  the Company's primary component of market
risk is interest rate volatility.  Fluctuation in interest rates will ultimately
impact both the level of income and expense  recorded on a large  portion of the
Bank's  assets and  liabilities  and the market  value of all  interest  earning
assets and interest bearing liabilities,  other than those which possess a short
term  to  maturity.  Since  virtually  all of  the  Company's  interest  bearing
liabilities and all of the Company's  interest earning assets are located at the
Bank,  virtually  all of the  Company's  interest rate risk exposure lies at the
Bank  level.  As  a  result,  all  significant  interest  rate  risk  management
procedures  are  performed  at the Bank  level.  Based  upon the  nature  of its
operations,  the Bank is not subject to foreign  currency  exchange or commodity
price risk. The Bank's real estate loan portfolio, concentrated primarily within
northern California,  is subject to risks associated with the local economy. The
Company does not own any trading assets. See "Asset Quality" in item 7.



                                       46
<PAGE>

         The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic  value of the Company while  maintaining
adequate liquidity and an exposure to interest rate risk deemed by management to
be acceptable.  Management believes an acceptable degree of exposure to interest
rate  risk  results  from the  management  of  assets  and  liabilities  through
maturities,  pricing and mix to attempt to neutralize  the  potential  impact of
changes in market interest  rates.  The Bank's  profitability  is dependent to a
large extent upon its net interest income,  which is the difference  between its
interest income on interest-earning  assets,  such as loans and securities,  and
its  interest  expense on  interest-bearing  liabilities,  such as deposits  and
borrowings. The Bank, like other financial institutions,  is subject to interest
rate risk to the degree that its  interest-earning  assets  reprice  differently
than its  interest-bearing  liabilities.  The Bank manages its mix of assets and
liabilities  with the goals of limiting  its  exposure  to  interest  rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.

         The Bank seeks to control its interest  rate risk  exposure in a manner
that will allow for  adequate  levels of earnings  and  capital  over a range of
possible  interest rate  environments.  The Bank has adopted formal policies and
practices to monitor and manage  interest  rate risk  exposure.  As part of this
effort,  the Bank measures risk in three ways:  repricing of earning  assets and
interest bearing  liabilities;  changes in net interest income for interest rate
shocks up and down 200 basis  points;  and changes in the market value of equity
for interest rate shocks up and down 200 basis points.

         The  following   table  sets  forth,  as  of  December  31,  2000,  the
distribution  of repricing  opportunities  for the Company's  earning assets and
interest-bearing  liabilities, the interest rate sensitivity gap, the cumulative
interest rate  sensitivity  gap, the interest rate  sensitivity gap ratio (i.e.,
earning  assets  divided by  interest-bearing  liabilities)  and the  cumulative
interest rate sensitivity gap ratio.


<TABLE>
<CAPTION>

                                                            After Three    After Six   After One
                                               Within        Months But    Months But  Year But
                                               Three         Within Six     Within     Within    After Five
                                               Months          Months      One year   Five Years    Years     Total
                                           -------------------------------------------------------------------------
                                                                    (dollars in thousands)
<S>                                            <C>             <C>       <C>          <C>       <C>        <C>
Earning assets:
Federal funds sold                              $22,328         $ ---       $ ---       $ ---      $ ---    $22,328
Investment securities                               988         1,003       6,670      38,169     38,380     85,210
Loans                                           143,374        52,425      16,619      49,252     53,431    315,101
                                           -------------------------------------------------------------------------
Total earning assets                            166,690        53,428      23,289      87,421     91,811    422,639
                                           -------------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts           127,341           ---         ---         ---        ---    127,341
Time deposits                                    71,582        48,813      56,038       9,832        ---    186,265
Other borrowings                                  3,528           ---         ---         ---        ---      3,528
                                           -------------------------------------------------------------------------
Total interest-bearing liabilities              202,451        48,813      56,038       9,832        ---    317,134
                                           -------------------------------------------------------------------------

Interest rate sensitivity gap                  ($35,761)       $4,615    ($32,749)    $77,589    $91,811   $105,505
                                           =========================================================================

Cumulative interest rate sensitivity gap       ($35,761)     ($31,146)   ($63,895)    $13,694   $105,505
                                           ==============================================================

Interest rate sensitivity gap ratio                 .82          1.09         .42        8.89        N/A

Cumulative interest rate sensitivity gap            .82           .88         .79        1.04       1.33
</TABLE>

                                       47
<PAGE>


         The Company's gap position is  substantially  dependent upon the volume
of loans held in the portfolio.  These loans generally have  maturities  greater
than five years;  however,  these loans have a repricing  frequency  of at least
quarterly and therefore  are  classified in the above table as repricing  within
three months. Additionally, interest-bearing transaction accounts, which consist
of money  market,  demand  and  savings  deposit  accounts,  are  classified  as
repricing  within  three  months.  Some of these  deposits  may be  repriced  at
management's option, and therefore a decision not to reprice such deposits could
significantly alter the Company's net interest margin.

         Management expects that, in a declining rate environment, the Company's
net interest  margin would be expected to decline,  and, in an  increasing  rate
environment,  the  Company's  net interest  margin  would tend to increase.  The
Company has experienced  greater  mortgage  lending  activity  through  mortgage
refinancing and financing new home purchases as rates declined, and may increase
its net interest  margins in an increasing rate  environment if more traditional
commercial  bank  lending  becomes a higher  percentage  of the overall  earning
assets mix. There can be no assurance,  however,  that under such  circumstances
the  Company  will  experience  the  described  relationships  to  declining  or
increasing interest rates.

         On a quarterly basis,  NBR management  prepares an analysis of interest
rate risk exposure.  Such analysis  calculates the change in net interest income
and the theoretical  market value of the Bank's equity given a change in general
interest rates of 200 basis points up and 200 basis points down. All changes are
measured in dollars and are  compared to projected  net interest  income and the
current  theoretical market value of the Bank's equity.  This theoretical market
value of the Bank's equity is calculated by  discounting  cash flows  associated
with the Company's assets and liabilities.  The following is a December 31, 2000
and 1999  summary of interest  rate risk  exposure as measured on a net interest
income  basis and a market  value of  equity  basis,  given a change in  general
interest rates of 200 basis points up and 200 basis points down.

<TABLE>
<CAPTION>

         2000
         ----                                 Change in Annual                       Change in
         Change in Interest Rate              Net Interest Income               Market Value of Equity

<S>             <C>                                 <C>                              <C>
                +200                                $274,000                         ($8,381,000)
                +100                                 185,000                          (4,116,000)
                -100                                (438,000)                          1,962,000
                -200                                (967,000)                          2,886,000
</TABLE>
<TABLE>
<CAPTION>

         1999
         ----
<S>             <C>                                 <C>                             <C>
                +200                                ($96,000)                       ($10,606,000)
                +100                                 (40,000)                         (5,486,000)
                -100                                 (20,000)                          5,176,000
                -200                                (569,000)                          6,478,000

</TABLE>

         The Company's  interest rate risk exposure to a rising rate environment
decreased  in 2000,  while  exposure  to a  falling  interest  rate  environment
increased in 2000.  This increase was  principally due to modest growth in fixed
rate commercial and residential real estate loans.



                                       48
<PAGE>

         The model utilized by management to create the report  presented  above
makes  various  estimates at each level of interest rate change  regarding  cash
flows from principal  repayments on loans and mortgage-backed  securities and/or
call activity on investment  securities.  In addition,  repricing  these earning
assets and matured  liabilities  can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically based on an
index;  (2)  an  asset,  such  as a  mortgage  loan,  may  amortize,  permitting
reinvestment  of cash flows at the  then-prevailing  interest  rates;  or (3) an
asset or liability  may mature,  at which time the proceeds can be reinvested at
current  market  rate.  Actual  results  could differ  significantly  from those
estimates  which  would  result in  significant  differences  in the  calculated
projected change.




                                       49
<PAGE>


Item 8.  Financial Statements and Supplementary Data

Financial Statements

         The  following  consolidated  financial  statements  of Redwood and its
subsidiaries  and the  report  of  independent  auditors  are  included  in this
section:


<TABLE>
<CAPTION>
                                                                                                             Page


<S>                                                                                                           <C>
         Reports of Independent Auditors......................................................................51
         Consolidated Financial Statements of Redwood Empire Bancorp and Subsidiaries
           Consolidated Statements of Operations for the years ended
                December 31, 2000, 1999 and 1998..............................................................53
           Consolidated Balance Sheets as of December 31, 2000 and 1999.......................................55
           Consolidated Statements of Shareholders' Equity for the years ended
                December 31, 2000, 1999 and 1998..............................................................56
           Consolidated Statements of Cash Flows for the years ended
                December 31, 2000, 1999 and 1998..............................................................57
           Notes to Consolidated Financial Statements.........................................................59

</TABLE>



                                       50
<PAGE>






REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Shareholders of
Redwood Empire Bancorp
Santa Rosa, California


         We have audited the accompanying  consolidated balance sheet of Redwood
Empire  Bancorp  and  subsidiaries  (Company)  as of  December  31, 2000 and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for year ended  December  31, 2000.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on these  financial  statements  based on our audit.  The  consolidated
financial  statements  of the Company as of December  31, 1999 and for the years
ended  December  31, 1999 and 1998 were audited by other  auditors  whose report
dated  January 24, 2000  expressed  an  unqualified  opinion on those  financial
statements.

         We conducted our audit in accordance with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the financial  position of Redwood
Empire Bancorp and subsidiaries as of December 31, 2000 and the results of their
operations  and  their  cash  flows  for the year  ended  December  31,  2000 in
conformity with generally accepted accounting principles.




                                        Crowe, Chizek and Company LLP
South Bend, Indiana
January 19, 2001, except for Note Y
as to which the date is March 9, 2001



                                       51
<PAGE>






INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of
Redwood Empire Bancorp
Santa Rosa, California


         We have audited the accompanying  consolidated balance sheet of Redwood
Empire  Bancorp  and  subsidiaries  as of  December  31,  1999  and the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
the years ended December 31, 1999 and 1998.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

        In our opinion,  such consolidated  financial statements present fairly,
in all material  respects,  the financial position of Redwood Empire Bancorp and
subsidiaries at December 31, 1999, and the results of their operations and their
cash flows for the years ended  December 31, 1999 and 1998, in  conformity  with
accounting principles generally accepted in the United States of America.




Deloitte & Touche  LLP
San Francisco, California
January 26, 2000




                                       52
<PAGE>



<TABLE>
<CAPTION>
                                          REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                           Consolidated Statements of Operations
                                      (in thousands, except share and per share data)

                                                                                         Year Ended December 31,
                                                                              ----------------------------------------------
                                                                                  2000           1999             1998
                                                                              -------------  --------------   --------------
<S>                                                                                <C>             <C>              <C>
Interest income:
  Interest and fees on loans                                                       $29,769         $25,924          $25,183
  Interest on investment securities                                                  5,035           4,239            4,334
  Interest on federal funds sold                                                       359             470            1,040
                                                                              -------------  --------------   --------------
Total interest income                                                               35,163          30,633           30,557

Interest expense:
  Interest on deposits                                                              13,969          10,736           11,392
  Interest on other borrowings                                                         350              68              ---
  Interest on subordinated notes                                                       ---             142            1,107
                                                                              -------------  --------------   --------------
Total interest expense                                                              14,319          10,946           12,499
                                                                              -------------  --------------   --------------

Net interest income                                                                 20,844          19,687           18,058
Provision for loan losses                                                              150             750            2,040
                                                                              -------------  --------------   --------------

Net interest income after provision for loan losses                                 20,694          18,937           16,018
                                                                              -------------  --------------   --------------

Noninterest income:
  Service charges on deposit accounts                                                1,077           1,041            1,072
  Merchant draft processing, net                                                     4,856           3,154            2,609
  Loan servicing income                                                                272             129              562
  Net realized gains (losses) on securities
    available for sale                                                                (171)             19              225
  Loss on sale of loans                                                               (584)            ---              ---
  Other income                                                                         656             854            1,157
                                                                              -------------  --------------   --------------
Total noninterest income                                                             6,106           5,197            5,625
                                                                              -------------  --------------   --------------

Noninterest expense:
  Salaries and employee benefits                                                     8,640           8,802            8,638
  Occupancy and equipment expense                                                    2,040           2,242            2,743
  Other                                                                              5,268           5,122            5,496
                                                                              -------------  --------------   --------------
Total noninterest expense                                                           15,948          16,166           16,877
                                                                              -------------  --------------   --------------

Income from continuing operations before income taxes and extraordinary item        10,852           7,968            4,766
Provision for income taxes                                                           4,386           3,093            1,862
                                                                              -------------  --------------   --------------

Income from continuing operations before extraordinary item                          6,466           4,875            2,904

Discontinued operations:
  Income (loss) from discontinued operations
   (less applicable income taxes (benefit) of $0, $(435) and $240)                     ---            (270)           2,187
  Loss on disposal of discontinued operations, net of tax benefit
   of $0, $(113) and $0                                                                ---            (167)             ---

                                                                              -------------  --------------   --------------
   Income (loss) from discontinued operations                                          ---            (437)           2,187
                                                                              -------------  --------------   --------------

Income before extraordinary item                                                     6,466           4,438            5,091

Extraordinary loss, net of income tax benefit of $0, $(183) and $0                     ---            (276)             ---
                                                                              -------------  --------------   --------------

Net income                                                                           6,466           4,162            5,091
Dividends on preferred stock                                                           ---             ---              112
                                                                              -------------  --------------   --------------
Net income available for common stock shareholders                                  $6,466          $4,162           $4,979
                                                                              =============  ==============   ==============
</TABLE>


                                 (Continued)



                                       53
<PAGE>




<TABLE>
<CAPTION>
                                         REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                          Consolidated  Statements of Operations
                                          (in thousands, except per share data)
                                                       (Continued)

                                                                                        Year Ended December 31,
                                                                                 2000            1999             1998
                                                                             --------------  --------------   -------------


<S>                                                                              <C>            <C>              <C>
Basic earnings (loss) per common share:
   Income from continuing operations before extraordinary item                       $2.12          $1.45             $.88
   Income (loss) from discontinued operations                                          ---           (.13)             .69
   Income before extraordinary item                                                   2.12           1.32             1.57
   Net income available for common stock shareholders                                 2.12           1.24             1.57
   Weighted average shares                                                       3,051,000      3,364,000        3,170,000

Diluted earnings (loss) per common share:
   Income from continuing operations before extraordinary item                       $2.08          $1.41             $.84
   Income (loss) from discontinued operations                                          ---           (.13)             .63
   Income before extraordinary item                                                   2.08           1.28             1.47
   Net income available for common stock shareholders                                 2.08           1.20             1.47
   Weighted average shares                                                       3,109,000      3,456,000        3,465,000

</TABLE>

                                                        (Concluded)



 See Notes to Consolidated Financial Statements.





                                       54
<PAGE>


<TABLE>
<CAPTION>
                                         REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                               Consolidated Balance Sheets
                                            (in thousands, except share data)


                                                                                        December 31,            December 31,
                                                                                            2000                    1999
                                                                                     -------------------     -------------------
<S>                                                                                            <C>                     <C>
Assets:
Cash and due from banks                                                                         $21,599                 $19,058
Federal funds sold                                                                               22,328                   1,497
                                                                                     -------------------     -------------------
  Cash and cash equivalents                                                                      43,927                  20,555

Investment securities:
  Held to maturity, at cost (fair value: 2000 - $29,657; 1999 - $29,276)                         29,801                  30,320
  Available for sale, at fair value (amortized cost: 2000 - $55,276; 1999 - $47,314)             55,409                  46,385

                                                                                     -------------------     -------------------
    Total investment securities                                                                  85,210                  76,705
Loans:
    Portfolio loans                                                                             315,101                 314,445
    Less allowance for loan losses                                                               (7,674)                 (7,931)
                                                                                     -------------------     -------------------
        Net loans                                                                               307,427                 306,514

Premises and equipment, net                                                                       2,489                   3,045
Mortgage servicing rights, net                                                                       25                      32
Other real estate owned                                                                             757                   2,363
Cash surrender value of life insurance                                                            3,275                   3,187
Other assets and interest receivable                                                             10,329                  10,645
                                                                                     -------------------     -------------------
          Total Assets                                                                         $453,439                $423,046
                                                                                     ===================     ===================

Liabilities and Shareholders' Equity:
Deposits:
  Noninterest bearing demand deposits                                                           $91,727                 $77,753
  Interest bearing transaction accounts                                                         127,341                 124,357
  Time deposits $100,000 and over                                                                93,040                  69,294
  Other time deposits                                                                            93,225                  98,105
                                                                                     -------------------     -------------------
    Total deposits                                                                              405,333                 369,509

Other borrowings                                                                                  3,528                   4,695
Other liabilities and interest payable                                                            9,119                  11,398
                                                                                     -------------------     -------------------
          Total Liabilities                                                                     417,980                 385,602
                                                                                     -------------------     -------------------

Shareholders' Equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
     issued and outstanding:  no shares                                                             ---                     ---
  Common stock, no par value; authorized 10,000,000 shares; issued
      and outstanding: 2000 - 2,858,154 shares, 1999 - 3,228,771 shares                          14,601                  22,033
  Retained earnings                                                                              20,781                  15,950
  Accumulated other comprehensive income (loss), net of tax                                          77                    (539)
                                                                                     -------------------     -------------------
          Total Shareholders' Equity                                                             35,459                  37,444
                                                                                     -------------------     -------------------

      Total Liabilities and Shareholders' Equity                                               $453,439                $423,046
                                                                                     ===================     ===================

See Notes to Consolidated Financial Statements.
</TABLE>








                                       55
<PAGE>


<TABLE>
<CAPTION>

                     REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               For the Years ended December 31, 2000, 1999 and 1998
                                   (in thousands)

                                                                                                     Accumulated
                                                                                                        Other
                                          Comprehensive      Preferred          Common     Retained  Comprehensive
                                              Income       Shares  Stock    Shares  Stock  Earnings  (Loss)Income,Net  Total
------------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>       <C>     <C>       <C>   <C>       <C>              <C>      <C>
Balances, January 1, 1998                                   575    $5,750    2,780 $19,656   $8,024           ($187)   $33,243
Comprehensive income:
  Net income                                     $5,091                                       5,091                      5,091
Other comprehensive income:
  Unrealized holding gains arising
    during period, net of tax of $152               208
  Less:  reclassification adjustment
    net of tax of $163                              218
                                          --------------
     Other comprehensive income                     426                                                         426        426
                                          --------------
     Comprehensive income                        $5,517
                                          ==============

Conversion of preferred stock to common                    (575)   (5,750)     498   5,686                                 (64)
Common stock repurchased                                                       (17)   (283)                               (283)
Stock options exercised, net of shares redeemed                                103     742                                 742
Cash dividends declared - preferred                                                            (112)                      (112)
Cash dividends declared - common ($0.12 per share)                                             (403)                      (403)

                                                        ----------------------------------------------------------------------
Balances, December 31, 1998                                 ---      ---     3,364  25,801   12,600             239     38,640
Comprehensive income:
  Net income                                     $4,162                                       4,162                      4,162
Other comprehensive income (loss):
  Unrealized holding losses arising
    during period, net of tax of $571              (789)
  Less:  reclassification adjustment
    net of tax of $8                                 11
                                          --------------
     Other comprehensive loss                      (778)                                                       (778)      (778)
                                          --------------
     Comprehensive income                        $3,384
                                          ==============
Common stock repurchased                                                      (191) (4,182)                             (4,182)
Stock options exercised, net of shares redeemed                                 56     414                                 414
Cash dividends declared - common ($0.24 per share)                                             (812)                      (812)

                                                        ----------------------------------------------------------------------
Balances, December 31, 1999                                 ---      ---     3,229  22,033   15,950            (539)    37,444
Comprehensive income:
  Net income                                     $6,466                                      6,466                      6,466
Other comprehensive income:
  Unrealized holding gains arising
    during period, net of tax of $377               514
  Less:  reclassification adjustment
    net of tax of $69                               102
                                          --------------
     Other comprehensive income                     616                                                         616       616
                                          --------------
     Comprehensive income                        $7,082
                                          ==============
Common stock repurchased                                                      (430) (8,283)                            (8,283)
Stock options exercised, net of tax                                             59     851                                851
effect
Cash dividends declared - common ($0.55 per share)                                          (1,635)                    (1,635)

                                                        ----------------------------------------------------------------------
Balances, December 31, 2000                                 ---    $ ---     2,858 $14,601 $20,781              $77   $35,459
                                                        ======================================================================



See Notes to Consolidated Financial Statements.
</TABLE>




                                       56
<PAGE>



<TABLE>
<CAPTION>
                                      REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                       Consolidated Statements of Cash Flows
                                                   (in thousands)


                                                                               Year ended December 31,
                                                                       2000              1999              1998
                                                                  ---------------   ---------------   ---------------
<S>                                                                      <C>              <C>               <C>
Cash flows from operating activities:
Net income                                                                $6,466            $4,162            $5,091
                                                                  ---------------   ---------------   ---------------
Adjustments  to  reconcile   net  income  to  net  cash
  provided  by  operating activities:
   Depreciation and amortization, net                                        (72)            1,347             1,731
   Deferred taxes                                                           (670)              (68)           (1,247)
   Net realized (gains) losses on securities available for sale              171               (19)             (225)
   Loans originated for sale                                                 ---          (251,468)         (479,351)
   Proceeds from sale of loans held for sale                                 ---           269,818           486,011
   Gain on sale of loans and loan servicing                                  ---            (1,293)           (5,095)
   Loss on sale of portfolio loans                                           584               ---               ---
   Provision for loan losses                                                 150               750             2,040
   Change in cash surrender value of life insurance                          (88)             (154)             (104)
   Change in other assets and interest receivable                            696             2,815            (2,346)
   Change in other liabilities and interest payable                       (2,279)            8,358            (2,492)
   Other, net                                                                ---               202                89
                                                                  ---------------   ---------------   ---------------
    Total adjustments                                                     (1,508)           30,288              (989)
                                                                  ---------------   ---------------   ---------------
  Net cash from operating activities                                       4,958            34,450             4,102
                                                                  ---------------   ---------------   ---------------

Cash flows from investing activities:
  Net change in loans                                                    (40,072)          (31,720)           (9,547)
  Proceeds from sale of loans in portfolio                                20,621               ---             1,666
  Purchases of investment securities available for sale                   (3,941)          (20,625)          (22,146)
  Purchases of investment securities held to maturity                       (906)           (6,938)          (13,133)
  Sales of investment securities available for sale                       10,890             1,987             1,995
  Maturities of investment securities available for sale                   3,011             4,013            26,913
  Maturities of investment securities held to maturity                     1,430             3,933            19,503
  Purchase of premises and equipment, net of retirements                    (351)             (704)           (1,611)
  Purchase of mortgage servicing rights                                      ---               ---               (12)
  Divestiture of mortgage banking operations                                 ---               520               ---
  Proceeds from sale of other real estate owned                            2,427             1,919             6,399
                                                                  ---------------   ---------------   ---------------
    Net cash from investing activities                                    (6,891)          (47,615)           10,027
                                                                  ---------------   ---------------   ---------------

Cash flows from financing activities:
  Net change in noninterest bearing transaction accounts                  13,974            (4,695)          (16,467)
  Net change in interest bearing transaction accounts                      2,984           (16,959)           (8,623)
  Net change in time deposits                                             18,866            26,443            (1,611)
  Net change in other borrowings                                          (1,167)            3,324              (970)
  Redemption of subordinated debt                                            ---           (12,000)              ---
  Repurchases of common stock                                             (8,283)           (4,182)             (283)
  Issuance of stock                                                          566               414               463
  Dividends paid                                                          (1,635)             (812)             (515)
                                                                  ---------------   ---------------   ---------------
    Net cash from financing activities                                    25,305            (8,467)          (28,006)
                                                                  ---------------   ---------------   ---------------
Net change in cash and cash equivalents                                   23,372           (21,632)          (13,877)
Cash and cash equivalents at beginning of period                          20,555            42,187            56,064
                                                                  ---------------   ---------------   ---------------

Cash and cash equivalents at end of period                               $43,927           $20,555           $42,187
                                                                  ===============   ===============   ===============
</TABLE>


                                           (Continued)

                                       57
<PAGE>

<TABLE>
<CAPTION>
                                      REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                       Consolidated Statements of Cash Flows
                                                   (in thousands)
                                                    (Continued)



                                                                               Year ended December 31,
                                                                       2000              1999              1998
                                                                  ---------------   ---------------    --------------
<S>                                                                       <C>               <C>               <C>
Supplemental Disclosures:

Cash paid during the period for:
  Income taxes                                                            $4,354            $1,811            $2,709
  Interest                                                                13,989            10,539            14,047

Noncash investing and financing activities:
  Transfer from loans to other real estate owned                             821               ---             2,900
  Transfer from mortgage loans held for sale to loans                        ---               ---             8,999
  Conversion of preferred stock to common                                    ---               ---             5,686
  Securitization of residential real estate loans, net                    17,949
</TABLE>

                                                    (Concluded)



See Notes to Consolidated Financial Statements.
















                                       58
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - DESCRIPTION OF BUSINESS

         Redwood  Empire  Bancorp  ("Redwood,"  and with its  subsidiaries,  the
"Company") is a financial  institution  holding company  headquartered  in Santa
Rosa,  California,  and  operating  in  Northern  California.  Its  wholly-owned
subsidiary is National Bank of the Redwoods  ("NBR"),  a national bank chartered
in 1985.  The  Company's  business  strategy  involves  two  principal  business
activities,  core community  banking services and merchant card services,  which
are conducted through NBR.

         NBR provides its core community  banking  services  through five retail
branches  located in Sonoma  County,  California,  one retail branch  located in
Mendocino  County,  California,  and one retail  branch  located in Lake County,
California.  Loan services at NBR are generally extended to professionals and to
businesses with annual revenues of less than $10 million.  Commercial  loans are
primarily for working  capital,  asset  acquisition  and commercial real estate.
NBR's targeted  commercial banking market area includes the California  counties
north of San Francisco.  NBR generates noninterest income through merchant draft
processing by virtue of its status as a Principal Member of Visa/MasterCard. NBR
is a Preferred  Lender  under the Small  Business  Administration  ("SBA")  Loan
Guarantee Program.  In addition,  NBR originates both commercial and residential
construction loans for its portfolio.

         In September 1999, the Company divested itself of its subprime mortgage
brokerage and mortgage banking units,  Valley  Financial and Allied  Diversified
Credit.  The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding,  Inc., whose shareholders include senior management of
Valley Financial and Allied  Diversified  Credit. As of December 31, 2000, there
are no assets and $93,000 in liabilities on the Company's  consolidated  balance
sheet related to the divested  operations.  The liability  balance is related to
potential  repurchases of previously sold mortgage loans. During the period from
October 1999 to December 1999, the Company  recorded  $128,000 of income related
to the divested  operations  and received  proceeds of  $13,324,000  during such
period from the sale of mortgage loans held for sale. During 2000 there has been
no revenue recorded from discontinued operations.  The Company has disclosed the
operations  of these  units as well as the  after  tax  loss on  disposition  as
discontinued operations.  Accordingly, historical financial information has been
recast  to  present  the  operating  results  of  Valley  Financial  and  Allied
Diversified  Credit  as  discontinued  operations.   Revenue  from  discontinued
operations  was  $4,369,000 for the year ended December 31, 1999, as compared to
$10,863,000 for 1998. There was no revenue from discontinued operations in 2000.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The  accounting  and  reporting  policies of the Company  conform  with
generally accepted accounting principles and general practice within the banking
industry.  The preparation of financial  statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements



                                       59
<PAGE>

and the reported  amounts of revenues and expenses during the reporting  period.
Actual results could differ from those estimates. The estimates of allowance for
loan losses,  allowance for merchant card charge-back  losses and fair values of
securities and other financial instruments are particularly subject to change. A
summary of the more significant policies follows:

Basis of Presentation

         The consolidated  financial  statements include the accounts of Redwood
Empire Bancorp and its wholly-owned  subsidiary,  National Bank of the Redwoods.
All material intercompany transactions and accounts have been eliminated.

         Certain  reclassifications  to the 1999 and 1998  financial  statements
were made to conform to the 2000 presentation.

         For  the  purpose  of the  statements  of cash  flows,  cash  and  cash
equivalents   have  been  defined  as  cash  on  hand,   demand   deposits  with
correspondent banks, cash items in transit and federal funds sold.

Investment Securities

         Securities  held  to  maturity  are  carried  at cost  adjusted  by the
accretion of discounts and amortization of premiums. The Company has the ability
and intent to hold these investment securities to maturity. Securities available
for sale  may be sold to  implement  the  Company's  asset/liability  management
strategies and in response to changes in interest  rates,  prepayment  rates and
similar factors.  Available for sale securities are recorded at market value and
unrealized  gains or losses,  net of income taxes,  are included in  accumulated
other  comprehensive  income or loss,  a  separate  component  of  shareholders'
equity. Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock
are restricted  equity  securities and are carried at cost. Gain or loss on sale
of  investment  securities  is  based  on the  specific  identification  method.
Interest  income  includes   amortization  of  purchased  premium  or  discount.
Securities  are  written  down to fair value when a decline in fair value is not
temporary.

Loans and the Allowance for Loan Losses

         Loans  are  stated  at the  principal  balance  outstanding  net of the
allowance for loan losses and net deferred loan fees or costs.  Loan fees net of
certain  related direct costs to originate loans are deferred and amortized over
the  contractual  life of the loan  using a method  approximating  the  interest
method.  Loan fees and direct costs related to the origination of loans held for
sale are  recognized  as a component  of gain or loss on sale of mortgage  loans
when the related loans are sold.

         The  allowance  for loan  losses is  maintained  at a level  considered
adequate for probable incurred credit losses that can be reasonably  anticipated
and is based on management's  quarterly  evaluation of the economic  climate and
other  factors  related to the  collectability  of loan  balances.  The  factors
considered by management  include growth and  composition of the loan portfolio,
overall  portfolio  quality,  review of specific problem loans,  historical loss
rates,  regulatory



                                       60
<PAGE>

reviews,  trends  and  concentrations  in  delinquencies  and  current  economic
conditions  that may affect the  borrower's  ability to pay. The actual  results
could differ significantly from management's  estimates.  The allowance for loan
losses is  increased by  provisions  charged to  operations  and reduced by loan
charge-offs  net of  recoveries.  A loan  charge-off is recorded when a loan has
been determined by management to be uncollectable.

         A loan is impaired when, based upon current  information and events, it
is probable  that NBR will be unable to collect all amounts due according to the
contractual  terms of the loan  agreement.  This  standard is  applicable to all
loans,  uncollateralized  as well  as  collateralized,  except  loans  that  are
measured at the lower of cost or fair value. Impairment is measured based on the
present value of expected future cash flows  discounted at the loan's  effective
interest  rate,  the loan's  observable  market price,  or the fair value of the
collateral if the loan is collateral dependent.

         Interest  income is recognized on impaired loans in a manner similar to
that of all loans. It is the Company's policy to place loans that are delinquent
90 days or more as to principal  or interest on  nonaccrual  status  unless well
secured and in the process of  collection,  and to reverse from  current  income
accrued  but  uncollected  interest.  Cash  payments  subsequently  received  on
nonaccrual  loans are  recognized as income only where the future  collection of
principal is considered by management to be probable.

         The Company  originates  loans to  customers  under a SBA program  that
generally  provides for SBA  guarantees of 70% to 85% of each loan.  The Company
may sell the  guaranteed  portion  of each loan to a third  party and retain the
unguaranteed  portion in its own portfolio.  A gain is recognized on these loans
through  collection  on sale of a  premium  over the  adjusted  carrying  value,
through  retention of an ongoing  rate  differential  less a normal  service fee
(excess  servicing fee) between the rate paid by the borrower to the Company and
the rate paid by the Company to the purchaser, or both.

         To calculate the gain or loss on the sale, the Company's  investment in
a SBA loan is allocated among the retained portion of the loan, excess servicing
retained  and the sold portion of the loan,  based on the  relative  fair market
value of each  portion.  The gain on the sold portion of the loan is  recognized
currently.  The  excess  servicing  fees  are  reflected  as an  asset  which is
amortized  over an  estimated  life using a method  approximating  the  interest
method; in the event future prepayments are significant and future expected cash
flows are inadequate to cover the unamortized excess servicing asset, additional
amortization would be recognized.


                                       61
<PAGE>


Other Real Estate Owned

         Property acquired by the Company through foreclosure is recorded at the
lower of estimated fair value less  estimated  selling costs (fair value) or the
carrying value of the related loan at the date of  foreclosure.  At the time the
property  is  acquired,  if the  fair  value  is  less  than  the  loan  amounts
outstanding,  any  difference is charged  against the allowance for loan losses.
After  acquisition,  valuations are periodically  performed and, if the carrying
value  of the  property  exceeds  the  fair  value,  a  valuation  allowance  is
established  by a charge to operations.  Subsequent  increases in the fair value
may reduce or eliminate this allowance.

         Operating  costs on  foreclosed  real estate are  expensed as incurred.
Costs  incurred  for  physical   improvements  to  foreclosed  real  estate  are
capitalized if the value is recoverable through future sale.

Mortgage Banking and Hedging Activities

         Prior to divesting Valley Financial and Allied Diversified  Credit, the
Company  sold  residential  mortgage  loans to a  variety  of  secondary  market
investors,  including Freddie Mac and Fannie Mae. Gains or losses on the sale of
mortgage loans were recognized based on the difference between the selling price
and the carrying value of the related mortgage loans sold.

         Mortgage  loans  held for sale  were  carried  at the  lower of cost or
market value as determined by outstanding commitments from investors, indicators
of value obtained by management from independent third parties, current investor
yield requirements calculated on an aggregate loan basis and the market value of
its hedging instruments.  Valuation adjustments were charged against the gain or
loss on sale of mortgage loans.

Off-Balance-Sheet Risk

         The Company is party to financial  instruments  with  off-balance-sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers  and to reduce its own  exposure to  fluctuations  in interest  rates.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit and interest rate risk in excess of the amount  recognized in the balance
sheet. The contract or notional amounts of those instruments  reflect the extent
of involvement the Company has in particular classes of financial instruments.

         The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the  contractual  notional amount of
those instruments.



                                       62
<PAGE>

         Loan  commitments are typically  contingent  upon the borrower  meeting
certain financial and other covenants, and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these  commitments are
expected  to expire  without  being  drawn upon,  the total  commitments  do not
necessarily  represent  future cash  requirements.  The Company  evaluates  each
potential  borrower  and  the  necessary  collateral  on  an  individual  basis.
Collateral  varies,  but  may  include  real  property,   bank  deposits,   debt
securities, equity securities, or business assets.

         Standby  letters of credit are conditional  commitments  written by the
Company to  guarantee  the  performance  of a customer to a third  party.  These
guarantees relate primarily to inventory  purchases by the Company's  commercial
customers, and such guarantees are typically short-term.  Credit risk is similar
to that  involved in extending  loan  commitments  to customers  and the Company
accordingly uses evaluation and collateral requirements similar to those of loan
commitments. Virtually all such commitments are collateralized.

Premises and Equipment

         Premises and  equipment  consist of building,  leasehold  improvements,
furniture and equipment and are stated at cost,  less  accumulated  depreciation
and amortization.  Depreciation is computed using the straight-line  method over
the estimated useful lives for financial  reporting  purposes and an accelerated
method for income tax reporting.  Leasehold  improvements are amortized over the
terms of the lease or their estimated useful lives, whichever is shorter.

Income Taxes

         The Company  accounts  for income  taxes  using an asset and  liability
approach, which requires the recognition of deferred tax assets and liabilities.
Future  tax  benefits  attributable  to  temporary  differences  are  recognized
currently to the extent that  realization  of such  benefits is more likely than
not.  These future tax benefits are measured by applying  currently  enacted tax
rates.  A valuation  allowance,  if needed,  reduces  deferred tax assets to the
amount expected to be realized.

Earnings per Common Share

         Basic  earnings per common share  excludes  dilution and is computed by
dividing income available to common shareholders by the weighted-average  number
of common shares  outstanding for the period.  Diluted earnings per common share
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.



                                       63
<PAGE>



        The following  table  reconciles the numerator and  denominator  used in
computing  both basic  earnings  (loss) per common  share and  diluted  earnings
(loss) per common share for the periods indicated:

<TABLE>
<CAPTION>
                                                                       Twelve Months Ended
                                                                          December 31,
                                            --------------------------------------------------------------------------
                                                    2000                     1999                      1998
                                            ---------------------   -----------------------   ------------------------
                                              Basic    Diluted (4)    Basic     Diluted (4)     Basic       Diluted (4)
                                            --------------------------------------------------------------------------
                                                               (in thousands except per share data)

<S>                                             <C>         <C>    <C>   <C>          <C>    <C>  <C>    <C>     <C>    <C>
 Earnings (loss) per common share:
 Income from continuing operations available
   to common shareholders before
   extraordinary item                           $6,466      $6,466       $4,875       $4,875      $2,792 (3)     $2,904
 Earnings per share from continuing
   operations before extraordinary item          $2.12       $2.08        $1.45        $1.41       $0.88          $0.84

 Income (loss) from discontinued operations        ---         ---        ($437)       ($437)     $2,187         $2,187
 Earnings (loss) per share from income
   (loss) of discontinued operations               ---         ---       ($0.13)      ($0.13)      $0.69          $0.63

 Income before extraordinary item               $6,466      $6,466       $4,438       $4,438      $4,979 (3)     $5,091
 Earnings per share before extraordinary item    $2.12       $2.08        $1.32        $1.28       $1.57          $1.47

 Net income                                     $6,466      $6,466       $4,162       $4,162      $4,979 (3)     $5,091
 Net income per share                            $2.12       $2.08        $1.24        $1.20       $1.57          $1.47

 Weighted average common shares
    outstanding                                  3,051       3,109 (1)    3,364        3,456 (1)   3,170          3,465 (2)
                                              ========= ===========   ========== ============   =========    ===========
</TABLE>

Notes to Earnings per Common Share table:

1)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 58 and 92.

2)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 128 and convertible perpetual preferred stock of
     167 for the year  ended  1998.  There is no effect of  perpetual  preferred
     stock in 1999 and 2000.

3)   Amounts are shown net of $112 in  dividends  on  preferred  stock for 1998.
     There were no preferred dividends paid in 1999 and 2000.

4)   Stock options for 60, 61 and 74 shares of common stock were not  considered
     in computing earnings per common share for 2000, 1999 and 1998 because they
     were not dilutive.


Stock-Based Compensation

         The Company  accounts for  stock-based  awards to  employees  using the
intrinsic value method. Accordingly, no compensation cost has been recognized on
stock options granted.  The Company presents the required pro forma  disclosures
of the effect of stock-based  compensation on net income and earnings per common
share using the fair value method.


                                       64
<PAGE>

Business Segments

         Internal financial  information is primarily reported and aggregated in
two lines of business, community banking and bankcard services.

Comprehensive Income

         Comprehensive income includes net income and other comprehensive income
or loss.  The  Company's  only source of other  comprehensive  income or loss is
derived   from   unrealized   gains   and   losses  on   investment   securities
available-for-sale.  Reclassification adjustments result from gains or losses on
investment securities  available-for-sale that were realized and included in net
income of the current period that also had been included in other  comprehensive
income or loss as unrealized holding gains or losses in the period in which they
arose. They are excluded from other comprehensive  income or loss of the current
period to avoid double counting.

Recently Issued Accounting Pronouncements

         Beginning  January 1, 2001, a new accounting  standard will require all
derivatives to be recorded at fair value.  Unless designated as hedges,  changes
in these  fair  values  will be  recorded  in the income  statement.  Fair value
changes  involving  hedges will  generally be recorded by  offsetting  gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this standard on January 1, 2001 did
not have a material  impact on the financial  condition or results of operations
of the Company.


NOTE C - CASH AND DUE FROM BANKS

         NBR is required  to maintain  average  reserve  and  clearing  balances
including cash on hand or on deposit with the Federal Reserve Bank. The required
reserve balance included in cash and due from banks was approximately $2,800,000
and  $2,922,000  at  December  31,  2000 and 1999.  These  balances  do not earn
interest.





                                       65
<PAGE>


NOTE D - INVESTMENT SECURITIES

An analysis of the investment securities portfolio follows:

<TABLE>
<CAPTION>
                                                                   Gross         Gross
                                                  Amortized     Unrealized     Unrealized       Fair
                                                    Cost           Gains         Losses        Value
                                               ----------------------------------------------------------
                                                                     (in thousands)
<S>                                                   <C>               <C>         <C>          <C>
 December 31, 2000:
 Available for sale:
   U.S. Government obligations                        $27,949           $130         ($78)       $28,001
   Mortgage-backed                                     18,593            163          (92)        18,664
   Other securities                                     5,957             33          (23)         5,967
                                               ----------------------------------------------------------
      Total debt securities                            52,499            326         (193)        52,632
   FRB and FHLB stock                                   2,777            ---           ---         2,777
                                               ----------------------------------------------------------
     Total available for sale                         $55,276           $326        ($193)       $55,409
                                               ==========================================================

 Held to maturity:
   U.S. Government obligations                        $12,991          $ ---         ($70)       $12,921
   Mortgage-backed                                     11,953              1         (124)        11,830
    Other securities                                    4,857             58           (9)         4,906
                                               ----------------------------------------------------------
     Total held to maturity                           $29,801            $59        ($203)       $29,657
                                               ==========================================================


 December 31, 1999:
 Available for sale:
   U.S. Government obligations                        $36,863             $1        ($766)       $36,098
   Mortgage-backed                                        863            ---           (5)           858
   Other securities                                     6,941            ---         (159)         6,782
                                               ----------------------------------------------------------
      Total debt securities                            44,667              1         (930)        43,738
    FRB and FHLB stock                                  2,647            ---           ---         2,647
                                               ----------------------------------------------------------
     Total held to maturity                           $47,314             $1        ($930)       $46,385
                                               ==========================================================

 Held to maturity:
   U.S. Government obligations                        $12,989          $ ---        ($450)       $12,539
   Mortgage-backed                                     13,364            ---         (563)        12,801
    Other securities                                    3,967              1          (32)         3,936
                                               ----------------------------------------------------------
     Total held to maturity                           $30,320             $1      ($1,045)       $29,276
                                               ==========================================================

</TABLE>



                                       66
<PAGE>


         Debt  securities by contractual  maturity at December 31, 2000 were due
as   follows.   Securities   not  due  at  single   maturity   date,   primarily
mortgage-backed securities are shown separately.


<TABLE>
<CAPTION>
                                                   Amortized                     Fair
                                                      Cost                      Value
                                             ---------------------       -------------------
                                                             (in thousands)
<S>                                                       <C>                       <C>
 Available for sale:
   One year or less                                        $3,005                    $2,992
   After one year through five years                       30,901                    30,976
   After five years through ten years                         ---                       ---
   After ten years                                            ---                       ---
   Mortgage-backed                                         18,593                    18,664
                                             ---------------------       -------------------
                                                          $52,499                   $52,632
                                             =====================       ===================

 Held to maturity:
   One year or less                                         $ ---                     $ ---
   After one year through five years                        7,192                     7,162
   After five years through ten years                       7,086                     7,070
   After ten years                                          3,570                     3,595
   Mortgage-backed                                         11,953                    11,830
                                             ---------------------       -------------------
                                                          $29,801                   $29,657
                                             =====================       ===================
</TABLE>

         Proceeds  from  sales  of  available  for  sale   investments  in  debt
securities  during  2000,  1999  and  1998  were  $10,890,000,  $1,987,000,  and
$1,995,000.  These sales resulted in the realization of gross losses of $171,000
for 2000,  gross  gains of $14,000 for 1999 and gross gains of $40,000 for 1998.
Gains on  redemption by issuers of debt  securities  were $5,000 and $185,000 in
1999, and 1998.  There was no gain or loss recognized on securities  redeemed by
issuers during 2000.

         Securities  carried at  approximately  $51,513,000  and  $29,835,000 at
December 31, 2000 and 1999 were pledged to secure  public  deposits,  bankruptcy
deposits, and treasury tax and loan borrowings.





                                       67
<PAGE>


NOTE E - MORTGAGE LOAN SERVICING

         The Company  services  mortgage  loans and  participating  interests in
mortgage  loans owned by investors.  The unpaid  principal  balances of mortgage
loans serviced for others are as follows:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                   2000                     1999
                                                            -------------------      -------------------
                                                                          (in thousands)
<S>                                                                  <C>                      <C>
        Mortgage loan portfolios serviced for:
          Freddie Mac                                                 $2,427                   $2,530
          Fannie Mae                                                   1,693                    2,348
          Other investors                                             22,318                   27,982
                                                            -------------------      -------------------
                                                                     $26,438                  $32,860
                                                            ===================      ===================

</TABLE>


NOTE F - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

         The Company primarily makes permanent and construction residential real
estate  loans in  California,  and loans to  individuals  and  small  businesses
primarily  in Sonoma  and  Mendocino  Counties,  California.  There are no major
industry segments in the loan portfolio. Outstanding loans by type were:

<TABLE>
<CAPTION>
                                                         December 31,
                                                  2000                 1999
                                             -------------------------------------
                                                        (in thousands)

<S>                                                <C>                   <C>
 Residential real estate mortgage                   $98,914              $130,504
 Commercial real estate mortgage                     93,091                79,476
 Commercial                                          66,645                61,165
 Real estate construction                            49,460                40,059
 Installment and other                                7,900                 4,624
 Less net deferred fees                                (909)               (1,383)
                                             ---------------      ----------------
   Total loans                                      315,101               314,445
 Less allowance for loan losses                      (7,674)               (7,931)
                                             ---------------      ----------------
   Net loans                                       $307,427              $306,514
                                             ===============      ================
</TABLE>




                                       68
<PAGE>


         Activity in the allowance for loan losses is summarized as follows:



<TABLE>
<CAPTION>
                                                       2000           1999          1998
                                                     ---------------------------------------
                                                                 (in thousands)
<S>                                                     <C>           <C>            <C>
         Balance, beginning of year                     $7,931        $8,041         $7,645
         Provision for loan losses                         150           750          2,040
         Loans charged off                                (701)       (1,515)        (2,000)
         Recoveries                                        294           655            356
                                                     ----------    -----------    ----------
         Balance, end of year                           $7,674        $7,931         $8,041
                                                     ==========    ===========    ==========
</TABLE>

         At December 31, 2000 and 1999 the Company's  total recorded  investment
in  impaired  loans  was  $1,380,000  and  $4,430,000  of which  $1,085,000  and
$4,119,000  relates  to the  recorded  investment  for which  there is a related
allowance for loan losses of $299,000 and  $1,121,000  and $295,000 and $311,000
relates to the amount of that recorded  investment for which there is no related
allowance  for loan  losses.  At December  31,  2000,  approximately  80% of the
impaired  loan balance was measured  based on the fair value of the  collateral,
with the remainder measured by estimated cash flow.

         The average  recorded  investment  in impaired  loans  during the years
ended  December  31,  2000,  1999  and  1998  was  $1,424,000,   $4,420,000  and
$10,377,000.  The related amount of interest income recognized on an accrual and
cash basis during the periods that such loans were impaired was $30,000, $44,000
and $376,000.

         As of December 31, 2000 and 1999 there were $908,000 and  $3,063,000 of
loans on  nonaccrual.  Interest due but excluded from  interest  income on these
nonaccrual loans was $72,000, $96,000, and $150,000 for the years ended December
31,  2000,  1999 and 1998.  Interest  income  recorded on  nonaccrual  loans was
$14,000,  $103,000 and $122,000 for the years ended December 31, 2000,  1999 and
1998.

         At December 31, 2000 and 1999,  the Company did not have any loans past
due 90 days or more as to interest or principal and still accruing interest.



                                       69
<PAGE>


     The Company  originates  SBA loans for sale to investors.  A summary of the
activity in SBA loans is as follows:


<TABLE>
<CAPTION>
                                                                               December 31,
                                                                  2000             1999            1998
                                                               --------------------------------------------
                                                                              (in thousands)
<S>                                                                 <C>             <C>             <C>
 SBA guaranteed portion of loans originated                          $ ---           $ ---           $ ---
 SBA loans sold                                                        ---             ---             ---
 Premium received at sale                                              ---             ---             ---
 SBA guaranteed portion of loans serviced for others                10,926          14,053          25,313
 SBA Loans, net of sold portion                                      7,402           6,900          10,330

</TABLE>

         From time to time the Company  extends  credit to  executive  officers,
directors  and  related  parties.  There were no such  balances  outstanding  at
December 31, 2000 and 1999.


NOTE G - PREMISES, EQUIPMENT AND LEASES

A summary of premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                             2000             1999
                                                          -----------------------------
                                                                 (in thousands)
<S>                                                         <C>               <C>
 Land                                                          $187             $293
 Building and leasehold improvements                          3,228            3,106
 Furniture and equipment                                      9,193            9,392
                                                          ------------     ------------
 Total premises and equipment                                12,608           12,791
 Less accumulated depreciation and amortization             (10,119)          (9,746)
                                                          ------------     ------------
 Premises and equipment, net                                 $2,489           $3,045
                                                          ============     ============
</TABLE>

         Depreciation  expense for the years ended December 31, 2000,  1999, and
1998 was $1,050,000, $1,347,000, and $1,731,000.

         The Company  leases  certain  premises and equipment used in the normal
course of business.  There are no contingent rental payments and the Company has
four  subleased  properties.  Total rental  expense under all leases,  including
premises, totaled $1,202,000, $1,449,000, and $2,210,000 in 2000, 1999 and 1998.
Minimum future lease  commitments  total  $5,331,000.  Lease  commitments are as
follows:  2001 -  $1,354,000;  2002 -  $1,480,000;  2003  -  $1,020,000,  2004 -
$773,000,  2005 - $208,000 and thereafter - $496,000.  Minimum  future  sublease
receivables are as follows: 2001 - $205,000;  2002 - $210,000;  2003 - $115,000;
2004 - $102,000; and 2005 - $26,000. All subleases expire in 2005.




                                       70
<PAGE>

NOTE H - DEPOSITS

         Interest  expense on time  certificates  of deposit of $100,000 or more
was $4,756,000, $2,641,000, and $3,246,000 during 2000, 1999 and 1998.

         At December 31, 2000 the scheduled maturities for all time deposits are
as follows:

<TABLE>
<CAPTION>
      Year ending
     December 31,                                (in thousands)
------------------------

<S>      <C>                                          <C>
         2001                                         $176,433
         2002                                            7,419
         2003                                              977
         2004                                              261
         2005                                            1,175
                                          ---------------------
                                                      $186,265
                                          =====================

</TABLE>

NOTE I - INCOME TAXES

         The  provision  (benefit) for income taxes  attributable  to continuing
operations consists of the following:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                               2000            1999            1998
                                            -------------------------------------------
                                                          (in thousands)
<S>                                             <C>             <C>             <C>
 Current:
   Federal                                      $3,999          $2,433          $2,283
   State                                         1,057             728             827
                                            -----------     -----------     -----------
                                                 5,056           3,161           3,109
                                            -----------     -----------     -----------
 Deferred:
   Federal                                        (513)             47            (975)
   State                                          (157)           (115)           (272)
                                            -----------     -----------     -----------
                                                  (670)            (68)         (1,247)
                                            -----------     -----------     -----------
                                                $4,386          $3,093          $1,862
                                            ===========     ===========     ===========
</TABLE>

         A  reconciliation  of the  statutory  income tax rate to the  effective
income tax rate  attributable  to  continuing  operations  of the  Company is as
follows:

<TABLE>
<CAPTION>

                                                           2000             1999             1998
                                                    ---------------------------------------------------

<S>                                                        <C>              <C>              <C>
 Income tax at federal statutory rate                      35.0%            35.0%            35.0%
 State franchise tax, net of federal benefit                5.4              7.3              7.3
 Other                                                      ---             (3.5)            (3.2)
                                                    ------------     ------------     ------------
                                                           40.4%            38.8%            39.1%
                                                    ============     ============     ============
</TABLE>



                                       71
<PAGE>


         Deferred  income taxes reflect the tax effect of temporary  differences
existing  between the financial  statement  basis and tax basis of the Company's
assets  and  liabilities.   Deferred  tax  benefits  attributable  to  temporary
differences  are  recognized to the extent that  realization of such benefits is
more likely than not.  The Company  believes it is more likely than not that the
net deferred  tax asset at December  31, 2000 will be utilized to reduce  future
taxable income.  Accordingly,  there is no valuation  allowance  associated with
deferred  tax assets at  December  31,  2000.  The tax  effect of the  principal
temporary  items creating the Company's net deferred tax asset included in other
assets and interest receivable are:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                2000                 1999
                                                          -----------------     ----------------
                                                                     (in thousands)
<S>                                                              <C>                   <C>
        Deferred tax assets:
          Allowance for loan losses                              $3,185                $3,202
          Restructuring costs                                       108                    87
          Accrued expenses not yet deductible                       676                   589
          Unrealized loss on securities
            available for sale                                      ---                   390
          Other real estate owned                                    14                   144
          Depreciation                                              509                   327
          Securities and loans marked to
            market for tax purposes                                  56                   ---
          State taxes                                                53                   ---
                                                          -----------------     ----------------
            Total deferred tax assets                             4,601                 4,739
                                                          -----------------     ----------------

        Deferred tax liabilities:
          Unrealized gain on securities
            available for sale                                       56                   ---
          Securities and loans marked to
            market for tax purposes                                 ---                   421
          State taxes                                               ---                    43
          FHLB stock dividends                                      266                   206
          Other, net                                                 17                    31
                                                          -----------------     ----------------
            Total deferred tax liabilities                          339                   701
                                                          -----------------     ----------------

        Net deferred tax asset                                   $4,262                $4,038
                                                          =================     ================
</TABLE>


NOTE J - OTHER BORROWINGS

         Other borrowings consist of the following:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                      2000            1999
                                                                   ----------------------------
                                                                            (in thousands)
<S>                                                                    <C>              <C>
 Treasury, tax and loan note                                           $3,378           $3,870
 Security repurchase agreement                                            150              ---
 Advances from UBOC                                                       ---              825
                                                                   -----------     ------------
                                                                       $3,528           $4,695
                                                                   ===========     ============

</TABLE>

                                       72
<PAGE>

Advances from the FHLB

      The Company has a line of credit for short-term  purposes with the Federal
Home Loan  Bank  (FHLB).  The  highest  month-end  balance  during  the year was
$15,000,000.  At December  31, 2000 and 1999,  the line of credit had been fully
paid off. All borrowings from the FHLB must be  collateralized,  and the Company
has  pledged  approximately  $76,500,000  of  residential  mortgage  loans as of
December 31, 2000, to the FHLB to secure any funds it may borrow.

Treasury, Tax and Loan Note

      The Company enters into various  short-term  borrowing  agreements,  which
include Treasury,  Tax and Loan borrowings.  These borrowings have maturities of
one day and are collateralized by investments or loans.

Advances from UBOC

      During  1999,  Redwood  entered  into  an  agreement  with  Union  Bank of
California (UBOC) to obtain an unsecured line of credit for short-term borrowing
purposes.  At  December  31, 2000 the line had been paid off, as compared to the
1999 outstanding  balance of $825,000.  The average balance of UBOC advances was
$883,000 and $35,000 for 2000 and 1999 at an average  interest rate of 9.14% and
9.37% respectively.  The highest month-end balance during 2000 was $2,971,000 as
compared to $825,000 in 1999.

NOTE K - OTHER NONINTEREST EXPENSES

         The major components of other expense are as follows:

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                     2000             1999          1998
                                                 -------------------------------------------
                                                               (in thousands)
<S>                                                     <C>            <C>           <C>
 Professional fees                                        $950         $1,231          $769
 Regulatory expense and insurance                          453            459           588
 Postage and office supplies                               463            489           506
 Shareholder expenses and director fees                    412            320           339
 Advertising                                               420            217           188
 Telephone                                                 351            339           360
 Electronic data processing                              1,274          1,234         1,284
 Net costs of other real estate owned                      132            195           956
 Other                                                     813            638           506
                                                 --------------    -----------   -----------
                                                        $5,268         $5,122        $5,496
                                                 ==============    ===========   ===========
</TABLE>




NOTE L - STOCK OPTIONS AND BENEFIT PLANS

         The  Company's  1991  stock  option  plan,  which was  amended in 1992,
provides for the granting of both incentive stock options and nonqualified stock
options to directors and key



                                       73
<PAGE>

employees.  Generally,  options  outstanding  under  the stock  option  plan are
granted at prices  equal to the market  value of the stock at the date of grant,
vest ratably over a four year service period and expire ten years  subsequent to
the award.

         Outstanding  common stock options at December 31, 2000, are exercisable
at various dates through 2006. The following table summarizes option activity:

<TABLE>
<CAPTION>
                                                                         Weighted Average
                                                       Number              Option Price
                                                      of Shares             per Share
                                                 -------------------------------------------
                                                   (in thousands)

<S>                                                        <C>              <C>
 Balance at January 1, 1998                                414               $9.71
   Options granted                                          74               20.50
   Options exercised, net of shares redeemed              (124)               9.14
   Options cancelled                                       (10)               9.94
                                                 -------------------------------------------
 Balance at December 31, 1998                              354               12.16
   Options granted                                           8               17.13
   Options exercised, net of shares redeemed               (82)              10.71
   Options cancelled                                        (7)              20.50
                                                 -------------------------------------------
 Balance at December 31, 1999                              273               12.53
   Options exercised                                       (59)               9.73
   Options cancelled                                        (1)              20.50
                                                 -------------------------------------------
 Balance at December 31, 2000                              213              $13.26
                                                 ===================
</TABLE>

         At December 31, 2000,  25,000  shares were  available for future grants
under the plan.

         Additional information regarding options outstanding as of December 31,
2000 is as follows:

<TABLE>
<CAPTION>
                                                Options Outstanding                 Options Exercisable
                                       -------------------------------------------------------------------------
                                         Weighted Avg.
      Range of                             Remaining
      Exercise             Number         Contractual       Weighted Avg.         Number        Weighted Avg.
       Prices           Outstanding        Life (yrs)      Exercise Price      Exercisable      Exercise Price
----------------------------------------------------------------------------------------------------------------
                       (in thousands)                                         (in thousands)
<S> <C>                        <C>             <C>                  <C>               <C>                <C>
    $6.00 - $7.99                5             1                    $7.54               5                $7.54
     8.00 -  9.99               91             3                     8.98              91                 8.98
    10.00 - 11.99               16             4                    10.75              16                10.75
    12.00 - 13.99               34             4                    13.02              30                13.01
    14.00 - 20.99               67             7                    20.10              32                20.29
                     ------------------                                     ------------------
                               213                                  13.22             174                11.88
                     ==================                                     ==================
</TABLE>


         Had  compensation  cost for the grants been  determined  based upon the
fair value method,  the Company's net income and earnings per common share would
have been adjusted to the pro forma amounts indicated below.


                                       74
<PAGE>

<TABLE>
<CAPTION>
                                                                             2000             1999           1998
                                                                       -----------------------------------------------
                                                                                   (dollars in thousands)

<S>                                                                         <C>              <C>              <C>
 Net income as reported:
 Income (loss) from continuing operations before extraordinary item         $6,466           $4,875           $2,904
 Income (loss) from discontinued operations                                    ---             (437)           2,187
 Income before extraordinary item                                            6,466            4,438            5,091
 Net income available for common shareholders                                6,466            4,162            4,979

 Net income pro forma:
 Income (loss) from continuing operations before extraordinary item          6,272            4,653            2,649
 Income (loss) from discontinued operations                                    ---             (437)           2,187
 Income before extraordinary item                                            6,272            4,216            4,836
 Net income available for common shareholders                                6,272            3,940            4,724

 Basic earnings (loss) per common share as reported:
 Income (loss) from continuing operations before extraordinary item          $2.12            $1.45             $.88
 Income (loss) from discontinued operations                                    ---             (.13)             .69
 Income before extraordinary item                                             2.12             1.32             1.57
 Net income available for common shareholders                                 2.12             1.24             1.57

 Basic earnings (loss) per common share pro forma:
 Income (loss) from continuing operations before extraordinary item          $2.06            $1.38             $.84
 Income (loss) from discontinued operations                                    ---            (0.13)            0.69
 Income before extraordinary item                                             2.06             1.25             1.53
 Net income available for common shareholders                                 2.06             1.17             1.49

 Diluted earnings (loss) per common share as reported:
 Income (loss) from continuing operations before extraordinary item          $2.08            $1.41             $.84
 Income (loss) from discontinued operations                                    ---             (.13)             .63
 Income before extraordinary item                                             2.08             1.28             1.47
 Net income available for common shareholders                                 2.08             1.20             1.47

 Diluted earnings (loss) per common share pro forma:
 Income (loss) from continuing operations before extraordinary item          $2.02            $1.35             $.77
 Income (loss) from discontinued operations                                    ---            (0.13)            0.63
 Income before extraordinary item                                             2.02             1.22             1.40
 Net income available for common shareholders                                 2.02             1.14             1.36

</TABLE>

         The fair value of the options granted during 1999 and 1998 is estimated
as  $60,000  and  $727,000,  on  the  date  of  grant  using  the  Black-Scholes
option-pricing  model with the following  assumptions:  annual dividend yield of
1.9% and .78%, volatility of 32.36% and 30.32%, risk-free interest rate of 6.41%
and 5.53%,  assumed  forfeiture  rate of zero, and an expected life of 10 years.
The weighted  average per share fair value of the 1999 and 1998 awards was $7.45
and $9.82. There were no awards during 2000.

                                       75
<PAGE>

         In 1991 the Company established a 401(K) savings plan for employees who
have at least one year of continuous  service.  The Company's  contributions are
based on a sliding scale where it matches 100% of the first $300  contributed by
the  employee,  75% of the next  $400,  50% of the next $800 and 25% of the next
$4,000 for a maximum contribution per employee of $2,000.  Company contributions
totaled $146,000, $138,000, and $212,000 in 2000, 1999 and 1998.

         In December 1993 the Company  established a  supplemental  benefit plan
(Plan) to  provide  death  benefits  and  supplemental  income  payments  during
retirement for selected  officers.  The Plan is a nonqualified  defined  benefit
plan and is unsecured.  Benefits  under the Plan are fixed for each  participant
and are payable over a specific period following the participant's retirement or
at such earlier date as  termination or death occurs.  Participants  vest in the
plan based on their years of service  subsequent  to being  covered by the Plan.
The  Company has  purchased  insurance  policies to provide for its  obligations
under the Plan in the event a  participant  dies prior to  retirement.  The cash
surrender  value of such  policies  was  $3,275,000  at  December  31,  2000 and
$3,187,000 at December 31, 1999. Under this Plan, the Company recognized expense
of  $64,000,  $54,000,  and  $110,000  in 2000,  1999 and  1998.  The  aggregate
projected benefit obligation of the Plan was approximately $230,000 and $206,000
at December 31, 2000 and 1999. A discount rate of 8.5% was used to determine the
aggregate projected benefit obligation for both years.


NOTE M - SUBORDINATED DEBT AND PREFERRED STOCK

         On February 22, 1999,  the Company  redeemed the entire  $12,000,000 of
its 8.5% subordinated  notes. As a result of the redemption the Company recorded
an  extraordinary  charge of $276,000 net of tax related to previously  deferred
debt  issuance  costs.  Such  charge was  recorded  by the  Company in the first
quarter of 1999.

         On  April  30,  1998 the  Company  called  all  575,000  shares  of its
outstanding  7.80%  Noncumulative  Convertible  Preferred  Stock at a redemption
price of $10.39  per  share.  As a result of this  action,  the  Company  issued
498,000  shares of the Company's  common stock in exchange for 573,000 shares of
preferred stock. The remaining 2,000 shares were redeemed with cash.





                                       76
<PAGE>


NOTE N - REGULATORY MATTERS

         One of the principal sources of cash for Redwood is dividends from NBR.
Total  dividends  which may be declared  by  subsidiary  financial  institutions
depend on the regulations  which govern them. In addition,  regulatory  agencies
can place dividend restrictions on the subsidiaries based on their evaluation of
the  financial  condition of the  subsidiaries.  No  restrictions  are currently
imposed by regulatory  agencies on the  subsidiaries  other than the limitations
found in the regulations which govern the respective  subsidiaries.  At December
31,  2000,  NBR could not pay  additional  dividends  to Redwood  without  prior
regulatory approval.

         NBR is subject to certain  restrictions  under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates.  In particular,
it is  prohibited  from lending to an  affiliated  company  unless the loans are
secured by specific types of  collateral.  Such secured loans and other advances
from the subsidiaries are limited to 10 percent of the subsidiary's  equity.  No
such loans or advances were outstanding during 2000 or 1999.

         Redwood and NBR are subject to various regulatory capital  requirements
administered  by the federal  banking  agencies.  In  addition to these  capital
guidelines,  the Federal Deposit Insurance  Corporation  Improvement Act of 1991
(FDICIA)  required  each  federal  banking  agency  to  implement  a  regulatory
framework for prompt corrective actions for insured depository institutions that
are not adequately  capitalized.  The Board of Governors of the Federal  Reserve
System,  FDIC, OCC and OTS have adopted such a system which became  effective on
December 19, 1992.  Failure to meet minimum  capital  requirements  can initiate
certain mandatory, and possibly additional discretionary,  actions by regulators
that,  if  undertaken,  could  have a direct  material  effect on the  Company's
financial  statements.  The  regulations  require the  Company to meet  specific
capital adequacy guidelines that involve quantitative  measures of the Company's
assets,  liabilities  and certain  off-balance-sheet  items as calculated  under
regulatory accounting practices. NBR's capital classification is also subject to
qualitative  judgments by the regulators about  components,  risk weightings and
other factors.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy  require  the Company to  maintain a minimum  leverage  ratio of Tier 1
capital (as defined in the  regulations)  to adjusted  assets (as defined),  and
minimum ratios of Tier 1 and total capital (as defined) to risk-weighted  assets
(as  defined).  As of December 31, 2000 and 1999,  the most recent  notification
from the  Office of the  Comptroller  of the  Currency  categorized  NBR as well
capitalized under the regulatory  framework for prompt corrective  action. To be
categorized as well  capitalized,  NBR must maintain  minimum total  risk-based,
Tier I risk-based,  and Tier I leverage ratios as set forth in the table.  There
are no conditions or events since that  notification  that  management  believes
have  changed  NBR's  category.  The  Company  is  also  considered  to be  well
capitalized as of December 31, 2000.



                                       77
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   To Be Categorized
                                                                                                        as Well
                                                                                                      Capitalized
                                                                               For Capital           Under Prompt
                                                         Actual             Adequacy Purposes      Corrective Action
                                                -----------------------------------------------------------------------
                                                   Amount       Ratio       Amount      Ratio      Amount      Ratio
                                                -----------------------------------------------------------------------
(dollars in thousands)
 At December 31, 2000:

<S>                                                <C>            <C>       <C>            <C>     <C>          <C>
   Company
     Leverage Capital (to Average Assets)          $34,414         7.72%    $17,827        4.00%   $22,284       5.00%
     Tier 1 Capital (to Risk-weighted Assets)       34,414         9.99      13,784        4.00     20,677       6.00
     Total Capital (to Risk-weighted Assets)        38,763        11.25      27,569        8.00     34,461      10.00

   NBR
     Leverage Capital (to Average Assets)          $32,425         7.29%    $17,801        4.00%   $22,251       5.00%
     Tier 1 Capital (to Risk-weighted Assets)       32,425         9.44      13,742        4.00     20,612       6.00
     Total Capital (to Risk-weighted Assets)        36,761        10.70      27,483        8.00     34,354      10.00


 At December 31, 1999:

   Company
     Leverage Capital (to Average Assets)          $36,885         8.66%    $17,031        4.00%   $21,289       5.00%
     Tier 1 Capital (to Risk-weighted Assets)       36,885        11.74      12,563        4.00     18,845       6.00
     Total Capital (to Risk-weighted Assets)        40,860        13.01      25,126        8.00     31,408      10.00

   NBR
     Leverage Capital (to Average Assets)          $37,401         8.86%    $16,882        4.00%   $21,102       5.00%
     Tier 1 Capital (to Risk-weighted Assets)       37,401        11.94      12,535        4.00     18,802       6.00
     Total Capital (to Risk-weighted Assets)        41,368        13.20      25,069        8.00     31,337      10.00

</TABLE>


         Management  believes that as of December 31, 2000,  the Company and NBR
meet  all  capital  requirements  to  which  they are  subject.  Under  the most
stringent  capital  requirement,  NBR has  approximately  $9,278,000  in  excess
capital before it becomes  "undercapitalized" under the regulatory framework for
prompt corrective action.

         The prompt corrective action regulations  impose  restrictions upon all
financial  institutions  to refrain  from certain  actions  which would cause an
institution to be classified as  "undercapitalized",  such as the declaration of
dividends or other  capital  distributions  or payment of  management  fees,  if
following the  distribution  or payment the  institution  would be classified as
"undercapitalized".  In addition, financial institutions which are classified as
"undercapitalized"   are  subject  to  certain   mandatory   and   discretionary
supervisory actions.





                                       78
<PAGE>


NOTE O - BUSINESS SEGMENTS

         From January 1, 1999 to September  10,  1999,  the Company  operated in
four  principal  industry  segments:  core  community  banking,   merchant  card
services, sub prime lending, and residential mortgage banking and brokerage. The
Company's  core  community   banking  industry   segment  includes   commercial,
commercial real estate,  construction,  and permanent  residential lending along
with all depository  activities.  The Company's  merchant card services industry
group  provides  credit  card  settlement  services  for  approximately   49,000
merchants  throughout the United  States.  The Company's sub prime lending unit,
known as Allied  Diversified  Credit,  and the  Company's  residential  mortgage
banking and brokerage arm, known as Valley Financial, were divested on September
10, 1999. The divestiture took the form of an asset sale and employee  transfer.
The Company has disclosed the operations of these units as well as the after tax
loss  on  disposition  as  discontinued  operations.   Accordingly,   historical
financial  information regarding changes due to overhead and interest allocation
for all segments has been restated.

         The condensed  income  statements  and average assets of the individual
segments  are set forth in the table  below.  The  information  in this table is
derived from the internal  management  reporting  system used by  management  to
measure  the  performance  of the  segments  and  the  Company.  The  management
reporting  system  assigns  balance  sheet and  income  statement  items to each
segment based on internal management accounting policies. Net interest income is
determined  by the Company's  internal  funds  transfer  pricing  system,  which
assigns a cost of funds or credit  for funds to assets or  liabilities  based on
their  type,  maturity  or  repricing  characteristics.  Noninterest  income and
expense directly attributable to a segment are assigned to that business.  Total
other operating expense includes indirect costs, such as overhead and operations
and  technology  expense,  which  are  allocated  to the  segments  based  on an
evaluation  of costs for  product or data  processing.  All  amounts  other than
allocations of interest and indirect  costs are derived from third parties.  The
provision for credit losses is allocated based on the required  reserves and the
net charge-offs for each respective segment. The Company allocates  depreciation
expense without allocating the related depreciable asset to that segment.



                                       79
<PAGE>



<TABLE>
<CAPTION>

                                                               For the year ended December 31, 2000
                                                             ------------------------------------------
                                                                           (in thousands)
                                                               Community                     Total
                                                                Banking       Bankcard      Company
                                                             ------------------------------------------

<S>                                                             <C>            <C>           <C>
Total interest income                                            $35,163       $   ---        $35,163
Total interest expense                                            14,298            21         14,319
Interest income (expense) allocation                              (1,155)        1,155            ---
                                                             ------------------------------------------
Net interest income                                               19,710         1,134         20,844
Provision for loan losses                                            150           ---            150
Total other operating income                                       1,250         4,856          6,106
Total other operating expense                                     13,939         2,009         15,948
                                                             ------------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                           6,871         3,981         10,852
Provision for income taxes                                         2,776         1,610          4,386
                                                             ------------------------------------------
Income from continuing operations before extraordinary item       $4,095        $2,371         $6,466
                                                             ==========================================

Total Average Assets                                            $414,181       $24,904       $439,085
                                                             ==========================================

</TABLE>


<TABLE>
<CAPTION>
                                                               For the year ended December 31, 1999
                                                             ------------------------------------------
                                                                           (in thousands)
                                                               Community                     Total
                                                                Banking       Bankcard      Company
                                                             ------------------------------------------

<S>                                                             <C>            <C>           <C>
Total interest income                                            $30,633       $   ---        $30,633
Total interest expense                                            10,943             3         10,946
Interest income (expense) allocation                                (546)          546            ---
                                                             ------------------------------------------
Net interest income                                               19,144           543         19,687
Provision for loan losses                                            750           ---            750
Total other operating income                                       2,043         3,154          5,197
Total other operating expense                                     14,753         1,413         16,166
                                                             ------------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                           5,684         2,284          7,968
Provision for income taxes                                         2,216           877          3,093
                                                             ------------------------------------------
Income from continuing operations before extraordinary item       $3,468        $1,407         $4,875
                                                             ==========================================

Total Average Assets                                            $385,025       $21,940       $406,965
                                                             ==========================================
</TABLE>





                                       80
<PAGE>


<TABLE>
<CAPTION>

                                                               For the year ended December 31, 1998
                                                             ------------------------------------------
                                                                           (in thousands)
                                                               Community                     Total
                                                                Banking       Bankcard      Company
                                                             ------------------------------------------

<S>                                                             <C>            <C>           <C>
Total interest income                                            $30,557        $  ---        $30,557
Total interest expense                                            12,467            32         12,499
Interest income (expense) allocation                                (543)          543            ---
                                                             ------------------------------------------
Net interest income                                               17,547           511         18,058
Provision for loan losses                                          2,040           ---          2,040
Total other operating income                                       3,016         2,609          5,625
Total other operating expense                                     15,749         1,128         16,877
                                                             ------------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                           2,774         1,992          4,766
Provision for income taxes                                         1,125           737          1,862
                                                             ------------------------------------------
Income from continuing operations before extraordinary item       $1,649        $1,255         $2,904
                                                             ==========================================

Total Average Assets                                            $382,790       $12,407       $395,197
                                                             ==========================================
</TABLE>


NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS

         The Company  discloses  the fair values of  financial  instruments  for
which it is practicable to estimate their value.  Although  management  uses its
best  judgment in assessing  fair values,  there are inherent  weaknesses in any
estimating  technique  that may be reflected in the fair values  disclosed.  The
fair  value  estimates  are made at a discrete  point in time based on  relevant
market data,  information  about the financial  instruments,  and other factors.
Estimates of fair value of financial  instruments  without  quoted market prices
are subjective in nature and involve various  assumptions and estimates that are
matters of judgment.  Changes in the assumptions used could significantly affect
these  estimates.  The fair values have not been adjusted to reflect  changes in
market  conditions for the period  subsequent to the valuation dates of December
31, 2000 and 1999, and therefore, estimates presented herein are not necessarily
indicative of amounts which could be realized in a current transaction.

         The following  estimates and assumptions were used on December 31, 2000
and 1999 to estimate the fair value of each class of financial  instruments  for
which it is practicable to estimate that value.

(a)  Cash and Cash Equivalents

         For cash and cash  equivalents,  the  carrying  amount is a  reasonable
estimate of fair value.

(b)  Investment Securities

         Fair value equals quoted market price, if available. If a quoted market
price is not available,  fair value is estimated  using quoted market prices for
similar securities.  For investments in unregistered  mortgage-backed securities
with recourse,  fair value was estimated based on the expected future cash flows
to  be  received  adjusted  for  prepayments,  foreclosures,



                                       81
<PAGE>

losses and other  significant  factors  impacting  fair value.  U.S.  Government
agency stock has no trading  market but is required as part of  membership,  and
therefore it is carried at cost.

(c)  Loans, net

         To  estimate  fair  value  of  loans  held  for  investment,  including
commercial loans, mortgages, construction and other loans, each loan category is
segmented by fixed and adjustable rate interest terms, by estimated credit risk,
by maturity, and by performing and nonperforming categories.

         The  fair  value  of  performing  loans  is  estimated  by  discounting
contractual  cash flows using the current  interest rates at which similar loans
would  be made  to  borrowers  with  similar  credit  ratings  and for the  same
remaining maturities. Assumptions regarding credit risk, cash flow, and discount
rates are judgmentally determined using available market information.

         The fair value of nonperforming loans and loans delinquent more than 30
days is  estimated  by  discounting  estimated  future cash flows using  current
interest  rates with an additional  risk  adjustment  reflecting  the individual
characteristics of the loans.

(d)  Interest Receivable

         For interest  receivable,  the carrying amount is a reasonable estimate
of fair value.

(e)  Mortgage Servicing Rights, net

         The fair value of mortgage  servicing  rights is estimated on a loan by
loan basis using market prices under comparable  servicing sale contracts,  when
available,  or using a cash flow model with current  assumptions with respect to
prepayments, servicing costs and other significant factors.

(f)      Deposits

         The fair value of deposits with no stated maturity, such as noninterest
bearing  demand  deposits,  savings and money market  accounts,  is equal to the
amount  payable on demand on December 31, 2000 and 1999.  The fair value of time
deposits,  is based on the  discounted  value of  contractual  cash  flows.  The
discount rate is based on rates  currently  offered for deposits of similar size
and remaining maturities.

(g)  Other Borrowings

         The discounted value of contractual cash flows at market interest rates
for debt with similar  terms and remaining  maturities  are used to estimate the
fair value of existing debt.



                                       82
<PAGE>

 (h)  Commitments to Fund Other Loans

         The fair value of  commitments  to fund  other  loans  represents  fees
currently  charged to enter  into  similar  agreements  with  similar  remaining
maturities.


         The estimated fair values of the Company's financial instruments are as
follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                2000                           1999
                                                   ------------------------------------------------------------
                                                     Carrying           Fair          Carrying          Fair
                                                      Amount            Value          Amount           Value
                                                   -------------    -------------   -------------    ------------
                                                                           (in thousands)
<S>                                                  <C>              <C>             <C>              <C>
 Assets:
   Cash and cash equivalents                          $43,927          $43,927         $20,555          $20,555
   Investment securities                               85,210           85,066          76,705           75,661
   Loans, net                                         307,427          306,401         306,514          307,377
   Interest receivable                                  3,198            3,198           2,792            2,792
   Mortgage servicing rights, net                          25              431              32              312

 Liabilities:
   Deposits                                          (405,333)        (406,212)       (369,509)        (369,549)
   Other borrowings                                    (3,528)          (3,532)         (4,695)          (4,695)

 Off-balance-sheet financial instruments:
   Commitments to fund other loans                        ---              527             ---              393
</TABLE>



NOTE Q - COMMITMENTS AND CONTINGENCIES

         Certain  lawsuits and claims arising in the ordinary course of business
have been filed or are pending  against the Company or its  subsidiaries.  Based
upon  information  available  to the  Company,  its review of such  lawsuits and
claims and  consultation  with its counsel,  the Company  believes the liability
relating to these actions,  if any, would not have a material  adverse effect on
its consolidated financial statements.



                                       83
<PAGE>

         A listing of financial  instruments  whose contract  amounts  represent
credit risk is as follows:




<TABLE>
<CAPTION>
                                                 December 31,
                                                    2000
                                        ------------------------------
                                             Fixed        Variable
                                             Rate           Rate
                                        ------------------------------
                                                (in thousands)

<S>                                             <C>           <C>
 Commitments to extend credit                   $9,307        $41,704
 Standby letters of credit                                        ---
                                                   139
</TABLE>


         Commitments  to make loans are generally made for periods of 60 days or
  less. The fixed rate loan  commitments  have interest rates ranging from 7.75%
  to 19.80% and maturities ranging from one month to 21 months.

         In 1999  there was  $38,285,000  in  commitments  to extend  credit and
$539,000 in standby letters of credit.


NOTE R - CONDENSED FINANCIAL INFORMATION OF
         REDWOOD EMPIRE BANCORP (PARENT ONLY)


<TABLE>
<CAPTION>
                                          CONDENSED BALANCE SHEETS

                                                                                   December 31,
                                                                            2000                1999
                                                                        ----------------------------------
                                                                                  (in thousands)
<S>                                                                         <C>                 <C>
          Assets
          Cash and cash equivalents                                          $1,648                $119
          Investment in NBR                                                  33,470              37,961
          Other assets                                                        1,056                 707
                                                                        --------------      --------------
            Total assets                                                    $36,174             $38,787
                                                                        ==============      ==============

          Liabilities and Shareholders' Equity
          Other liabilities                                                    $715              $1,343
          Shareholders' equity                                               35,459              37,444
                                                                        --------------      --------------
              Total liabilities and shareholders' equity                    $36,174             $38,787
                                                                        ==============      ==============
</TABLE>



                                       84
<PAGE>



<TABLE>
<CAPTION>

                                       CONDENSED STATEMENTS OF OPERATIONS

                                                                               Year Ended December 31,
                                                                        2000             1999           1998
                                                                     --------------------------------------------
                                                                                    (in thousands)
<S>                                                                    <C>              <C>             <C>
 Dividends from subsidiary                                             $12,129          $10,900         $1,200
 Interest income from subsidiary                                           ---               32            274
 Interest expense                                                           81              151          1,107
 Operating expenses                                                        828              741            486
                                                                     ------------     -----------    ------------
 Income (loss) before equity in undistributed income of subsidiary      11,220           10,040           (119)
 Equity in undistributed (excess distributed) income of subsidiary      (5,106)          (5,940)         4,713
                                                                     ------------     -----------    ------------
 Income before income taxes and extraordinary item                       6,114            4,100          4,594
 Extraordinary loss, net of tax                                            ---             (276)           ---
 Income tax benefit                                                       (352)            (338)          (497)
                                                                     ------------     -----------    ------------
 Net income                                                             $6,466           $4,162         $5,091
                                                                     ============     ===========    ============
</TABLE>


<TABLE>
<CAPTION>
                                       CONDENSED STATEMENTS OF CASH FLOWS

                                                                                              Year Ended December 31,
                                                                                       2000            1999           1998
                                                                                   -------------------------------------------
                                                                                                  (in thousands)
<S>                                                                                  <C>             <C>             <C>
 Cash flows from operating activities:
   Net income                                                                         $6,466          $4,162         $5,091
                                                                                   -----------    ------------     -----------
   Adjustments:
       Amortization and depreciation                                                       1               6             17
       Equity in (undistributed) excess distributed income of subsidiaries             5,106           5,940         (4,713)
       Change in other assets                                                            (64)          2,891           (113)
       Change in other liabilities                                                       197           1,365           (257)
                                                                                   -----------    ------------     -----------
         Total adjustments                                                             5,240          10,202         (5,066)
                                                                                   -----------    ------------     -----------
          Net cash from operating activities                                          11,706          14,364             25
                                                                                   -----------    ------------     -----------
 Cash flows from financing activities:
   Subordinated note redemption                                                          ---         (12,000)           ---
   Change in other borrowings                                                           (825)            ---            ---
   Stock issuance                                                                        566             414            463
   Stock repurchase                                                                   (8,283)         (4,182)          (283)
   Cash dividends                                                                     (1,635)           (812)          (515)
                                                                                   -----------    ------------     -----------
         Net cash from financing activities                                          (10,177)        (16,580)          (335)
                                                                                   -------------------------------------------
 Increase (decrease) in cash and cash equivalents                                      1,529          (2,216)          (310)
 Cash and cash equivalents at beginning of year                                          119           2,335          2,645
                                                                                   -----------    ------------     -----------
 Cash and cash equivalents at end of year                                             $1,648            $119         $2,335
                                                                                   ===========    ============     ===========
</TABLE>




                                       85
<PAGE>


NOTE S - QUARTERLY RESULTS

QUARTERLY STATEMENTS OF OPERATIONS DATA (UNAUDITED)

(dollars in thousands)


<TABLE>
<CAPTION>
                                                              Q1       Q2      Q3       Q4         Q1       Q2      Q3       Q4
                                                             1999     1999    1999     1999       2000     2000    2000     2000
                                                           ----------------------------------   ----------------------------------

<S>                                                         <C>      <C>     <C>      <C>        <C>      <C>     <C>      <C>
 Interest income                                            $7,228   $7,415  $7,686   $8,304     $8,159   $8,802  $9,027   $9,175
 Net interest income                                         4,759    4,837   4,973    5,118      4,939    5,275   5,277    5,353
 Provision for loan losses                                     300      200     200       50        100       50     ---      ---
 Other operating income from continuing operations           1,325    1,378   1,193    1,301      1,411    1,526   1,498    1,671
 Other operating expenses from continuing operations         3,805    4,151   4,200    4,010      3,858    4,005   3,928    4,157
                                                           ----------------------------------   ----------------------------------
 Income from continuing operations before
    income taxes and extraordinary item                      1,979    1,864   1,766    2,359      2,392    2,746   2,847    2,867
 Provision for income taxes                                    768      684     714      927        972    1,117   1,149    1,148
                                                           ----------------------------------   ----------------------------------
 Income from continuing operations before
    extraordinary item                                       1,211    1,180   1,052    1,432      1,420    1,629   1,698    1,719
 Income (loss) from discontinued operations, net of tax         83       38   (686)      128        ---      ---     ---      ---
                                                           ----------------------------------   ----------------------------------
  Income before extraordinary item                           1,294    1,218     366    1,560      1,420    1,629   1,698    1,719
 Extraordinary loss, net of tax                               (276)     ---     ---      ---        ---      ---     ---      ---
                                                           ----------------------------------   ----------------------------------
 Net income                                                 $1,018   $1,218    $366   $1,560     $1,420   $1,629  $1,698   $1,719
                                                           ==================================   ==================================


 Earnings per common share:
    Basic earnings (loss) per common share:
     Income from continuing operations before
       extraordinary item                                     $.36     $.35    $.31     $.43       $.44     $.52    $.58     $.60
     Income (loss) from discontinued operations                .02      .01    (.20)     .04        ---      ---     ---      ---
     Income before extraordinary item                          .38      .36     .11      .47        .44      .52     .58      .60
     Net income available for common stock
       shareholders                                            .30      .36     .11      .47        .44      .52     .58      .60

   Diluted earnings (loss) per common share:
     Income from continuing operations before
       extraordinary item                                     $.35     $.34    $.30     $.42       $.43     $.51    $.56     $.59
     Income (loss) from discontinued operations                .02      .01    (.20)     .04        ---      ---     ---      ---
     Income before extraordinary item                          .37      .35     .11      .45        .43      .51     .56      .59
     Net income available for common stock
       shareholders                                            .29      .35     .11      .45        .43      .51     .56      .59

 Common Stock Prices:
   High                                                     $29.00   $27.25  $24.00   $23.94     $23.06   $20.00  $23.88   $22.13
   Low                                                       17.00    21.88   17.75    17.75      14.25    14.25   18.00    19.13
   Close                                                     24.75    23.88   18.63    19.13      14.31    18.00   21.13    20.38
</TABLE>


         In the first  quarter of 1999 the  Company  recorded  an  extraordinary
charge of $276,000, net of tax. Such charge is comprised of the unamortized debt
issuance cost associated with the Company's $12,000,000 subordinated debt, which
was early redeemed.

         In the  third  quarter  of 1999  the  Company  divested  itself  of its
mortgage  brokerage  and mortgage  banking  units,  Valley  Financial and Allied
Diversified  Credit.  The Company has disclosed the operation of theses units as
discontinued operations.


                                       86
<PAGE>

NOTE Y - SUBSEQUENT EVENT

         In January and  February  2001 the Board of  Directors  authorized  the
repurchase of up to 10% of the  Company's  total shares  outstanding  or 285,000
shares in January 2001 and 257,000  shares in February  2001,  of which  426,200
shares  have been  repurchased  through  March 9,  2001.  Under  the  repurchase
program,  the  Company  plans to  purchase  shares from time to time on the open
market  and/or in privately  negotiated  transactions.  The  repurchase  will be
funded in part with proceeds received from a $10,000,000  pooled trust preferred
securities  offering  concluded  on February  22,  2001.  The  financing,  which
qualifies for tier 1 capital  treatment,  bears an interest rate of 10.2% and is
due in 30 years. Debt issuance costs amounted to approximately $300,000 and will
be amortized  over the life of the offering.  The funds are being used for stock
repurchases and other corporate purposes.


Item 9.      Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure

     The  information  required by this Item can be found in Redwood's  Form 8-K
filed on September 29, 2000, and is by this reference incorporated herein.


                                    PART III


Item 10.     Directors and Executive Officers of the Registrant

     The information required by this Item can be found in Redwood's most recent
Definitive  Proxy  Statement,   filed  pursuant  to  Regulation  14A  under  the
Securities  Exchange  Act  of  1934,  as  amended,  and  is  by  this  reference
incorporated herein.

Item 11.     Executive Compensation

     The information required by this Item can be found in Redwood's most recent
Definitive  Proxy  Statement,   filed  pursuant  to  Regulation  14A  under  the
Securities  Exchange  Act  of  1934,  as  amended,  and  is  by  this  reference
incorporated herein.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

     The information required by this Item can be found in Redwood's most recent
Definitive  Proxy  Statement,   filed  pursuant  to  Regulation  14A  under  the
Securities  Exchange  Act  of  1934,  as  amended,  and  is  by  this  reference
incorporated herein.



                                       87
<PAGE>

Item 13.     Certain Relationships and Related Transactions

        (a)      Transactions with Management and Others.

     During the year ended  December 31, 2000,  1999,  and 1998,  the  Company's
operating subsidiary, National Bank of the Redwoods, paid $15,091, $130,354, and
$174,577 pursuant to various construction  contracts with Colombini Construction
in  which  Colombini  Construction  acted  as  a  general  contractor.   Richard
Colombini,  who is a director of the Company, is also the President and majority
owner of Colombini  Construction.  The amounts  paid to  Colombini  Construction
included  subcontractor  costs. The construction  contracts  involved  leasehold
improvements  for  one  of the  Bank's  branches  and  two  operations  centers.
Substantially all of the contracts entered into with Colombini Construction were
granted based upon competitive bids.

         (b)      Certain Business Relationships.

     Except as disclosed elsewhere in this Item,  management is not aware of any
business relationships required to be disclosed hereunder.

         (c)      Indebtedness of Management.

     Some of the Company's  directors and executive officers and their immediate
families, as well as the companies with which they are associated, are customers
of or have had banking  transactions  with the Company in the ordinary course of
the Company's  business,  and the Company  expects to have banking  transactions
with such persons in the future.  In  management's  opinion,  all such loans and
commitments to lend were made in the ordinary course of business,  in compliance
with applicable laws, on substantially the same terms,  including interest rates
and  collateral,  as those  prevailing  for comparable  transactions  with other
persons of similar credit worthiness and, in the opinion of management,  did not
involve more than a normal risk of  collectability  or present other unfavorable
features.  The Company has a strong policy  regarding review of the adequacy and
fairness to the Company of loans to its directors and officers.  At December 31,
2000, there were no outstanding balances under extensions of credit to directors
and  executive  officers of the Company and companies  with which  directors are
associated.



                                       88
<PAGE>




                                     PART IV

Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)      1.       Financial Statements.

         The  following  consolidated  financial  statements  of Redwood and its
subsidiaries and independent auditors' reports are included in Part III (Item 8)
of this Form 10-K:


<TABLE>
<CAPTION>
                                                                                                        Page

 <S>                                                                                                      <C>
                  Reports of Independent Auditors.........................................................51
                  Consolidated Financial Statements of Redwood Empire Bancorp
                           and Subsidiaries
                    Consolidated Statements of Operations for the years ended
                           December 31, 2000, 1999 and 1998...............................................53
                    Consolidated Balance Sheets as of December 31, 2000 and 1999..........................55
                    Consolidated Statements of Shareholders' Equity for the years ended
                           December 31, 2000, 1999 and 1998...............................................56
                    Consolidated Statements of Cash Flows for the years ended
                            December 31, 2000, 1999 and 1998..............................................57
                  Notes to Consolidated Financial Statements..............................................59
</TABLE>



         2.       Financial Statement Schedules.

                  All  financial  statement  schedules  have  been  omitted,  as
                  inapplicable.


         3.       Exhibits.

                  The  following  documents  are  included  or  incorporated  by
                  reference in this Annual Report on Form 10-K.




                                       89
<PAGE>




         Exhibit
         Number                     Description


          3.1  Articles of Incorporation  of the Registrant,  filed as Exhibit 3
               to the  Registrant'  Registration  Statement  on Form  S-4  dated
               September 14, 1988, and by this references incorporated herein.

          3.2  Amended and Restated By-Laws of the Registrant,  filed as Exhibit
               3 to the  Registrants  1994 Annual Report on Form 10K and by this
               reference incorporated herein.

          4.   Indenture,  dated  February 22, 2001,  between  Redwood and State
               Street   Bank  and  Trust   Company  of   Connecticut,   National
               Association.

          4.1  Amended and Restated  Declaration  of Trust,  dated  February 22,
               2001,  by and  among  State  Street  Bank and  Trust  Company  of
               Connecticut, National Association, Redwood and the Administrators
               named therein.

          10.  Executive  Salary  Continuation   Agreement  between  Patrick  W.
               Kilkenny and Redwood  Empire  Bancorp,  filed as Exhibit 10.21 to
               the  Registrants  1996  Annual  Report  on  Form  10K and by this
               reference incorporated herein

          10.1 Executive  Severance  Agreement  between  Patrick W. Kilkenny and
               Redwood Empire Bancorp,  filed as Exhibit 10.1 to the Registrants
               1999 Annual Report on Form 10K and by this reference incorporated
               herein.

          10.2 Executive Salary Continuation Agreement between James E. Beckwith
               and  Redwood  Empire  Bancorp,  filed  as  Exhibit  10.22  to the
               Registrants  1996 Annual Report on Form 10K and by this reference
               incorporated herein

          10.3 Executive  Severance  Agreement  between  James E.  Beckwith  and
               Redwood Empire Bancorp,  filed as Exhibit 10.1 to the Registrants
               1999 Annual Report on Form 10K and by this reference incorporated
               herein.


          10.4 The  Registrant's  401(k) Profit  Sharing Plan,  filed as Exhibit
               28.1 to the Registrant's Registration Statement on Form S-8 dated
               June 12, 1990 (Registration No. 33-35377),  and by this reference
               incorporated herein.

          10.5 The  Registrant's  Amended and  Restated  1991 Stock Option Plan,
               filed as Exhibit 4.1 to the Registrant's  Registration  Statement
               on Form S-8 filed on July 8, 1992  (Registration  No.  33-49372),
               and by this reference incorporated herein.

          10.6 The  Registrant's  Executive Salary  Continuation  Plan, filed as
               Exhibit 10.9 to the Registrant's  Registration  Statement on Form
               S-2 dated December 13, 1993  (Registration No. 33-71324),  and by
               this reference incorporated herein.



                                       90
<PAGE>


          10.7 Dividend  Reinvestment  and Stock  Purchase Plan filed as Exhibit
               4.1  to a  Form  S-3  dated  April  28,  1993  (Registration  No.
               33-61750), and by this reference incorporated herein.

          10.8 Lease,  dated June 1, 1999, between National Bank of the Redwoods
               and Advanced Development & Investments,  filed as Exhibit 10.8 to
               the  Registrants  1999  Annual  Report  on  Form  10K and by this
               references incorporated herein.

          10.9 Placement  Agreement,  dated February 9, 2001,  between  Redwood,
               First  Tennessee  Capital  Markets  and Keefe,  Bruyette & Woods,
               Inc.

          10.10Subscription Agreement , dated February 22, 2001, between Redwood
               Statutory Trust I, Redwood and Preferred Term Securities II, Ltd.

          10.11Guarantee  Agreement,  dated  February 22,  2001,  by and between
               Redwood and State Street Bank and Trust  Company of  Connecticut,
               National Association.

          11.  Statement re Computation of Per Share Earnings.

          21.  Subsidiaries of the Registrant.

          23.1 Consent of Crowe, Chizek and Company LLP.

          23.2 Consent of Deloitte & Touche LLP.




         (b)      Exhibits.

                    The  exhibits  listed in Item  14(a)3  are  incorporated  by
                    reference or attached hereto.


         (c)      Excluded Financial Statements

                    Not applicable.



                                       91
<PAGE>



                                   SIGNATURES



         Pursuant to the  requirements  of Section 13 or 15(d) 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 EMPIRE BANCORP



By:        /S/ PATRICK W. KILKENNY                   Dated:  March 20, 2001
           Patrick W. Kilkenny
           President, Chief Executive Officer and Director
           (Principal Executive Officer)


And By:    /S/ JAMES E. BECKWITH                     Dated:  March 20, 2001
           James E. Beckwith
           Executive Vice President
           Chief Operating Officer
           Chief Financial Officer
           (Principal Financial Officer
           and Principal Accounting Officer)






                                       92
<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the date indicated.



/S/ RICHARD I. COLOMBINI                    Dated:  March 20, 2001
Richard I. Colombini, Director


/S/ MARGIE HANDLEY                          Dated:  March 20, 2001
Margie Handley, Director


/S/ DANA R. JOHNSON                         Dated:  March 20, 2001
Dana R. Johnson, Director


/S/ PATRICK W. KILKENNY                     Dated:  March 20, 2001
Patrick W. Kilkenny, Director


/S/ PATRICIA "PADI" SELWYN                  Dated:  March 20, 2001
Patricia "Padi" Selwyn, Director


S/ GREGORY J. SMITH                         Dated:  March 20, 2001
Gregory J. Smith, Director
Chairman of the Board


/S/ WILLIAM B. STEVENSON                    Dated:  March 20, 2001
William B. Stevenson, Director





                                       93
<PAGE>