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                                 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 (FEE REQUIRED)

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR

    [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission file number: 0-19231

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

                             REDWOOD EMPIRE BANCORP

             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                                           <C>
                 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)
</TABLE>

       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 1, 2000 (based on the closing sale price of the Common
Stock) was $44,365,629.

    As of March 1, 2000 there were 3,275,890 shares outstanding of the
Registrant's common stock.

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                         --------
<S>        <C>                                                           <C>
                                     PART I

Forward-Looking Information............................................      3
Item 1.    Business....................................................      3
Item 2.    Properties..................................................     13
Item 3.    Legal Proceedings...........................................     13
Item 4.    Submission of Matters to a Vote of Securities Holders.......     13

                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related
             Stockholder Matters.......................................     14
Item 6.    Selected Financial Data.....................................     14
Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................     16
Item 7a.   Quantitative and Qualitative Disclosures about Market
             Risk......................................................     33
Item 8.    Financial Statements and Supplementary Data.................     36
Item 9.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure..................................     66

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant..........     67
Item 11.   Executive Compensation......................................     67
Item 12.   Security Ownership of Certain Beneficial Owners and
             Management................................................     67
Item 13.   Certain Relationships and Related Transactions..............     67

                                     PART IV

Item 14.   Exhibits, Financial Statements, Financial Statements
             Schedules and Reports on Form 8-K.........................     68
</TABLE>

                                       2
<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 the Securities Act of 1933 and
Securities Exchange Act of 1934. These forward-looking statements (which involve
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:

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

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

    - Declines 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.

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

    - Losses in the Company's merchant credit card processing business.

    - Changes in the securities markets.

    - Asset/Liability matching 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.

ITEM 1. 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 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 and 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,

                                       3
<PAGE>
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 March 24, 1997. The combination of the two wholly-owned subsidiaries
of Redwood was structured as a merger transaction wherein Allied has merged into
NBR with NBR as the survivor. As a result of the merger NBR assumed all of
Allied's rights and obligations. 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.

    (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 67,000 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 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 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 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,
1999. In addition to deposits, the Company may obtain other borrowed funds
through its membership in the Federal Home

                                       4
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Loan Bank of San Francisco (the "FHLB") and its retention of treasury, tax and
loan funds at the Federal Reserve Bank of San Francisco.

    The Company provides Visa and Mastercard credit card processing and
settlement services for roughly 67,000 merchants located throughout the United
States. Yearly processing volume is in excess of $1.6 billion. 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, or 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 162 full-time-equivalent employees at
December 31, 1999. 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
may be examined by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any examination by the FRB are payable by
the Company.

    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 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

                                       5
<PAGE>
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 an
existing five year old California bank or industrial loan company by merger or
purchase; (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 Commissioner 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 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

                                       6
<PAGE>
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 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.

                                       7
<PAGE>
    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 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%.

    As of December 31, 1999, 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

                                       8
<PAGE>
well-capitalized bank holding companies and depository institutions, as of
December 31, 1999 (amounts in thousands except percentage amounts).

<TABLE>
<CAPTION>
                                                              THE COMPANY
                                                   ---------------------------------
                                                         ACTUAL            MINIMUM
                                                   -------------------     CAPITAL
                                                   CAPITAL     RATIO     REQUIREMENT
                                                   --------   --------   -----------
<S>                                                <C>        <C>        <C>
Leverage.........................................  $36,885      8.66%        4.0%
Tier 1 Risk-Based................................   36,885     11.74         4.0
Total Risk-Based.................................   40,860     13.01         8.0
</TABLE>

<TABLE>
<CAPTION>
                                                           THE BANK
                                        -----------------------------------------------
                                              ACTUAL             WELL         MINIMUM
                                        -------------------   CAPITALIZED     CAPITAL
                                        CAPITAL     RATIO        RATIO      REQUIREMENT
                                        --------   --------   -----------   -----------
<S>                                     <C>        <C>        <C>           <C>
Leverage..............................  $37,401      8.86%        5.0%          4.0%
Tier 1 Risk-Based.....................   37,401     11.94         6.0           4.0
Total Risk-Based......................   41,368     13.20        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:

<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 4%; or  Tier 1 risk-based capital less than
                                            3%; 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

                                       9
<PAGE>
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, 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

                                       10
<PAGE>
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.

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 DEVELOPMENTS

    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, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:

    - allow 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 files a certification, effective in 30 days,
      and thereafter may engage in certain financial activities without further
      approvals;

    - allow insurers and other financial services companies to acquire banks;

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

    - establish 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.

    On January 19, 2000, the FRB adopted an interim rule allowing bank holding
companies to submit certifications by February 15 to become financial holding
companies on March 13, 2000. The FRB also provided regulations on procedures
which would be used against financial holding companies which have depository
institutions which fall out of compliance with the management or capital
criteria. Only financial holding companies can own insurance companies and
engage in merchant banking.

    On January 14, 2000, the OCC proposed rules to allow national banks to form
subsidiaries to engage in financial activities allowed for financial holding
companies. Electing national banks must meet the same management and capital
standards as financial holding companies but may not engage in insurance

                                       11
<PAGE>
underwriting, real estate development or merchant banking. Sections 23A and 23B
of the Federal Reserve Act will apply to financial subsidiaries and the capital
invested by a bank in its financial subsidiaries will be eliminated from the
bank's capital in measuring all capital ratios. These rules may be used by
national banks effective March 13, 2000.

    The Modernization Act 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 Gramm-Leach-Bliley
Act 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.

    The Company cannot be certain of the effect of the foregoing recently
enacted legislation 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 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 favors competition between
different types of financial institutions and to foster new entrants into the
financial services market, and it is anticipated that this trend will continue.

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

                                       12
<PAGE>
merchant in the event that a merchant is unable to pay on charge-backs from
cardholders. 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.

    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, 1999,
approximately 80% of the Company's loans were secured by real estate, of which
32% 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 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.

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 three
sublease arrangements. Total rental expenses under all leases, including
premises, totaled $1,449,000, $2,210,000 and $2,095,000, in 1999, 1998 and 1997.
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 1999.

                                       13
<PAGE>
                                    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
"REB". As of December 31, 1999, there were 428 shareholders of record of
Redwood's Common Stock.

    In June of 1998 Redwood began quarterly cash dividends of $0.04 per
outstanding share. Such dividend increased to $0.06 per outstanding share in
September 1999 then to $0.10 per outstanding share in January 2000. Redwood did
not pay dividends during the two year period ended December 31, 1997. 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".

                             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        1998       1998       1998       1998
                                 --------   --------   --------   --------    --------   --------   --------   --------
<S>                              <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
High...........................   $29.00     $27.25     $24.00     $23.94      $20.50     $21.88     $21.25     $17.50
Low............................    17.00      21.88      17.75      17.75       16.63      17.75      14.13      13.00
Close..........................    24.75      23.88      18.63      19.13       18.88      20.75      16.38      17.06
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF CONSOLIDATED FINANCIAL DATA AND PERFORMANCE RATIOS

<TABLE>
<CAPTION>
                                                    AT OR FOR THE YEAR ENDED DECEMBER 31,
                                      ------------------------------------------------------------------
                                        1999          1998          1997           1996          1995
                                      --------      --------      ---------      --------      ---------
                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>           <C>           <C>            <C>           <C>
STATEMENTS OF OPERATIONS:
Total interest income...............  $ 30,633      $ 30,557      $  35,471      $ 40,308      $  42,436
Net interest income.................    19,687        18,058         19,656        21,605         18,879
Provision for loan losses...........       750         2,040          2,100         6,262          1,590
Noninterest income..................     5,197         5,625          4,304         6,916          6,380
Income from continuing operations
  before extraordinary item.........     4,875         2,904          2,377        (4,270)         1,456
Discontinued operations, net of
  tax...............................      (437)        2,187          1,064         2,784          1,857
Extraordinary item, net of tax......      (276)           --             --            --             --
Net income (loss)...................     4,162         5,091          3,441        (1,486)         3,313
Net income (loss) available to
  common equity.....................     4,162         4,979          2,992        (1,935)         2,977

BALANCE SHEETS:
Total assets........................  $423,046      $422,299      $ 446,719      $499,466      $ 557,910
Total loans.........................   314,445       269,316        282,396       347,414        368,223
Mortgage loans held for sale
  (Discontinued operations).........        --        32,620         16,929        29,487         62,620
Allowance for loan losses...........     7,931         8,041          7,645         7,040          5,037
Total deposits......................   369,509       364,720        391,421       436,450        458,393
Shareholders' equity................    37,444        38,640         33,243        29,732         31,585
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                    AT OR FOR THE YEAR ENDED DECEMBER 31,
                                      ------------------------------------------------------------------
                                        1999          1998          1997           1996          1995
                                      --------      --------      ---------      --------      ---------
                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>           <C>           <C>            <C>           <C>
PERFORMANCE RATIOS:
Return on average assets from
  continuing operations.............      1.20%         0.73%           .54%         (.94)%          .29%
Return on average common equity from
  continuing operations.............     12.40%         8.09%          7.58%        13.43%          4.88%
Common dividend payout ratio........     19.46%         8.09%           N/A           N/A            N/A
Average equity to average assets
  from continuing operations........      9.66%         9.09%          7.14%         6.98%          5.86%
Leverage ratio......................      8.66%         8.84%          7.10%         5.45%          5.14%
Tier 1 risk-based capital ratio.....     11.74%        11.84%          9.72%         7.63%          7.24%
Total risk-based capital ratio......     13.01%        16.94%         14.64%        12.11%         11.68%
Net interest margin from continuing
  operations........................      5.30%         5.11%          4.93%         5.13%          4.01%
Noninterest expense from continuing
  operations to net interest and
  other noninterest income from
  continuing operations.............     64.97%        71.26%         74.72%       103.22%         83.79%
Average earning assets to average
  total assets from continuing
  operations........................     91.20%        89.40%         91.05%        92.34%         92.59%
Nonperforming assets to total
  assets............................      1.52%         2.11%          3.72%         2.64%          1.28%
Net loan charge-offs to average
  loans.............................      0.29%         0.62%          0.46%         1.22%          0.60%
Allowance for loan losses to total
  loans.............................      2.52%         2.99%          2.71%         2.03%          1.37%
Allowance for loan losses to
  nonperforming loans...............    194.34%       121.82%         78.60%        67.82%        101.88%

SHARE DATA:
Common shares outstanding (000).....     3,229         3,369          2,785         2,749          2,679
Book value per common share.........  $  11.60      $  11.47      $    9.87      $   8.72      $    9.64
Basic earnings (loss) per share:
  Income from continuing operations
  before extraordinary item.........      1.45           .88            .70         (1.73)           .41
  Income (loss) from discontinued
  operations........................      (.13)          .69            .38          1.02            .70
  Income before extraordinary
  item..............................      1.32          1.57           1.08          (.71)          1.11
  Net income available for common
  stock shareholders................      1.24          1.57           1.08          (.71)          1.11
  Weighted average shares...........     3,364         3,170          2,776         2,721          2,671
Diluted earnings (loss) per share:
  Income from continuing operations
  before extraordinary item.........      1.41           .84            .70         (1.57)           .46
  Income (loss) from discontinued
  operations........................      (.13)          .63            .32          1.02            .58
  Income before extraordinary
  item..............................      1.28          1.47           1.02          (.55)          1.04
  Net income available for common
  stock shareholders................      1.20          1.47           1.02          (.55)          1.04
  Weighted average shares...........     3,456         3,465          3,378         2,721          3,179
Cash dividend per common share......      .240          .120             --            --             --
</TABLE>

                                       15
<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 the Securities Act of 1933 and
Securities Exchange Act of 1934. These forward-looking statements (which involve
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:

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

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

    - Declines 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.

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

    - Dividend restriction.

    - Regulatory discretion.

    - Losses in the Company's merchant credit card processing business.

    - Asset/liability matching risks and liquidity risks.

    - 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.

GENERAL

    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 ninety-five employees of which sixty-three were transferred to
Valley Financial Funding, Inc., while thirty-two 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. Revenue from
discontinued operations was $4,369,000 for the year ended December 31, 1999, as
compared to $10,863,000 and $6,702,000 for 1998 and 1997.

    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, income from SBA lending, 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.

                                       16
<PAGE>
RESULTS OF CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM

    In 1999 the Company reported income from continuing operations before
extraordinary item of $4,875,000, or $1.41 diluted per share as compared to 1998
and 1997 net income from continuing operations before extraordinary item of
$2,904,000, or $0.84 diluted per share, and $2,377,000, or $0.70 diluted per
share, respectively.

    Return on average assets for the year ended December 31, 1999 was 1.20% as
compared to .73% and .54% for the years ended December 31, 1998 and 1997. Return
on average common equity was 12.40% for the year ended December 31, 1999, as
compared to 8.09% and 7.58% for the years ended December 31, 1998 and 1997.

    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.

    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.

    Results from continuing operations in 1998 improved when compared to 1997.
Net interest income decreased by $1,598,000 in 1998 which was offset by an
increase of $1,321,000 in noninterest income and a decline of $1,027,000 in
noninterest expense.

    NET INTEREST INCOME.  For 1999, the Company's net interest income from
continuing operations amounted to $19,687,000 as compared to $18,058,000 in 1998
and $19,656,000 in 1997. This represents an increase of $1,629,000 or 9% in 1999
and a decrease of $1,598,000 or 8% in 1998. The increase in 1999 when compared
to 1998 is due to an increase in 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 decrease in 1998 when compared to 1997 is primarily
attributable to a decline in earning assets from $398,856,000 in 1997 to
$353,314,000 in 1998 offset by an increase in net interest margin from 4.93% in
1997 to 5.11% in 1998.

    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

                                       17
<PAGE>
of the average balances of loans, and interest not accrued is excluded. Fee
income included in loan income is $1,110,000, $687,000 and $928,000 in 1999,
1998 and 1997.

<TABLE>
<CAPTION>
                                              1999                             1998                             1997
                                 ------------------------------   ------------------------------   ------------------------------
                                 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................  $293,352   $25,924      8.84%    $266,716   $25,183      9.44%    $322,122   $30,448      9.45%
Investment securities..........    68,579     4,239      6.18       67,562     4,334      6.41       54,034     3,702      6.85
Federal funds sold.............     9,239       470      5.09       19,036     1,040      5.46       22,700     1,321      5.82
                                 --------   -------               --------   -------               --------   -------
  Total earning assets.........   371,170    30,633      8.25      353,314    30,557      8.65      398,856    35,471      8.89
                                            -------                          -------                          -------
Other non-earning assets.......    43,983                           49,903                           45,901
Less allowance for loan
  losses.......................    (8,188)                          (8,020)                          (6,690)
                                 --------                         --------                         --------
  Total average assets.........  $406,965                         $395,197                         $438,067
                                 ========                         ========                         ========

LIABILITIES AND SHAREHOLDERS'
  EQUITY:
Interest-bearing transaciton
  accounts.....................  $133,371     3,774      2.83     $142,859     5,047      3.53     $152,803     6,080      3.98
Time deposits..................   137,113     7,030      5.13      117,270     6,345      5.41      155,588     8,628      5.55
Subordinated debt..............     1,383       142     10.27       12,000     1,107      9.23       12,000     1,107      9.23
                                 --------   -------               --------   -------               --------   -------
  Total interest-bearing
    liabilities................   271,867    10,946      4.03      272,129    12,499      4.59      320,391    15,815      4.94
                                            -------                          -------                          -------
Demand deposits................    85,851                           82,074                           77,382
Other non-interest bearing
  liabilities..................     9,931                            5,089                            9,008
Shareholders' equity...........    39,316                           35,905                           31,286
                                 --------                         --------                         --------
  Total average liabilities and
    shareholders' equity.......  $406,965                         $395,197                         $438,067
                                 ========                         ========                         ========
Net interest spread............                          4.22                             4.06                             3.95
Net interest income and net
  interest margin..............             $19,687      5.30%               $18,058      5.11%               $19,656      4.93%
                                            =======                          =======                          =======
</TABLE>

    The Company's average earning assets for 1999 increased approximately 5%, or
$17,856,000, to $371,170,000, as compared to $353,314,000 for 1998. Average
earning assets decreased $45,542,000 or 11% in 1998 as compared to 1997. The
increase in earning assets in 1999 is primarily attributable to a increase in
average portfolio loans of $26,636,000 partially offset by a decrease in federal
funds sold of $9,797,000. Components of the increase in portfolio loans include
increases of $16,196,000 in average outstanding residential mortgage loans and
$12,020,000 in average outstanding commercial real estate loans.

    The decrease in average earning assets for 1998 was due to the Company's
efforts to reduce its concentration in construction loans and the
refinance-driven reduction of its residential loan portfolio. Average portfolio
loans decreased $55,406,000 or 17% to $266,716,000 in 1998 from $322,122,000 in
1997.

    With the increase in earning assets in 1999 discussed above, the Company's
funding levels also increased. The average balance of higher cost time deposits
increased $19,843,000 in 1999 compared to a decrease of $38,318,000 in 1998. The
growth in time deposits in 1999 is a result of the Company's marketing efforts
to fund earning asset growth. Additionally, average demand deposits grew
$3,777,000 in 1999 and $4,692,000 in 1998 as the Company was successful in
obtaining low cost transactional accounts. Average other borrowings decreased
$10,617,000 in 1999 due to the Company's early redemption of its subordinated
debt. Average other borrowings remained unchanged at $12,000,000 in 1998
compared to 1997.

    The following table sets forth changes in interest income and interest
expense for each major category of earning asset and interest-bearing liability,
and the amount of change attributable to volume and rate

                                       18
<PAGE>
changes for the years indicated. Changes not solely attributable to rate or
volume have been allocated to rate.

<TABLE>
<CAPTION>
                                                    1999 OVER 1998                   1998 OVER 1997
                                            ------------------------------   ------------------------------
                                             VOLUME      RATE      TOTAL      VOLUME      RATE      TOTAL
                                            --------   --------   --------   --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>
Increase (decrease) in interest income:
Portfolio loans (1), (2)..................   $2,514    $(1,773)   $   741    $(5,236)    $ (29)    $(5,265)
Investment securities (3).................       65       (160)       (95)       927      (295)        632
Federal funds sold........................     (535)       (35)      (570)      (213)      (68)       (281)
                                             ------    -------    -------    -------     -----     -------
  Total increase (decrease)...............    2,044     (1,968)        76     (4,522)     (392)     (4,914)
                                             ------    -------    -------    -------     -----     -------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts.....     (335)      (938)    (1,273)      (396)     (637)     (1,033)
Time deposits.............................    1,074       (389)       685     (2,127)     (156)     (2,283)
Other borrowings..........................        0       (965)      (965)         0         0           0
                                             ------    -------    -------    -------     -----     -------
  Total increase..........................      739     (2,292)    (1,553)    (2,523)     (793)     (3,316)
                                             ------    -------    -------    -------     -----     -------
Increase (decrease) in net interest
  income..................................   $1,305    $   324    $ 1,629    $(1,999)    $ 401     $(1,598)
                                             ======    =======    =======    =======     =====     =======
</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 $1,110,000, $687,000 and $928,000 are included in interest
    income for 1999, 1998 and 1997.

(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 increased to 5.30% for the year ended December 31,
1999, as compared to 5.11% and 4.93% for the years ended December 31, 1998 and
1997. The increase in net interest margin in 1999 was primarily due to decreased
liability costs slightly offset by a decline in yield on earning assets. The
yield on earning assets decreased to 8.25% in 1999 compared to 8.65% in 1998 and
8.89% in 1997. The decline in earning asset yields in 1999 is primarily due to
the change in the mix of earning assets. Average commercial and residential real
estate loans, which bear a yield lower than other portfolio loan types increased
$34,786,000. The decline in earning asset yield in 1998 is primarily
attributable to an overall decline in general interest rates as evidenced by a
drop in the prime rate from 8.50% at December 1997 to 7.75% at December 1998.

    The effective rates on interest-bearing liabilities decreased to 4.03% for
1999 as compared to 4.59% for 1998 and 4.94% for 1997. The decrease in 1999 and
1998 was primarily 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.

    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 $750,000 for the
year ended December 31, 1999 which represents a decrease of $1,290,000 or 63%
from 1998. In 1998, the provision for loan losses of $2,040,000 represented a 3%
decrease from $2,100,000 in 1997. This decrease in the provision for loan losses
in 1999 when compared to 1998 was due to a decline in loan charge-offs and a
decrease in nonperforming loans.

                                       19
<PAGE>
    NONINTEREST INCOME.  Noninterest income from continuing operations decreased
8%, or $428,000, to $5,197,000 as compared to $5,625,000, for 1998. The
Company's noninterest income from continuing operations for 1998 increased by
$1,321,000 or 31% from the $4,304,000 it received during 1997. The following
table sets forth the sources of noninterest income from continuing operations
for the years ended December 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
                                                        1999       1998       1997
                                                      --------   --------   --------
                                                              (IN THOUSANDS)
<S>                                                   <C>        <C>        <C>
Service charges on deposit accounts.................   $1,041     $1,072     $1,146
Merchant draft processing, net......................    3,154      2,609      1,585
Loan servicing income...............................      129        562        831
Net realized gains on sale of investment securities
  available for sale................................       19        225         23
Other income........................................      854      1,157        719
                                                       ------     ------     ------
                                                       $5,197     $5,625     $4,304
                                                       ======     ======     ======
</TABLE>

    Merchant draft processing net revenue increased in 1999 to $3,154,000 as
compared to $2,609,000 in 1998 and $1,585,000 in 1997. The two primary reasons
for the 1998 and 1999 increase are due to an increase in the number of merchants
serviced due to an increase of independent sales organizations (ISO's) to market
the Bank's services and growth in the number of merchants obtained directly from
the Company's marketing efforts.

    In December 1998, the Company renegotiated the terms of a processing
contract with an independent sales organization who represented $1,736,000 or
66% of the Company's 1998 merchant draft net processing revenue. In summary, as
a result of the renegotiation, the ISO bought down its processing rate in
consideration for a payment of $2,600,000 to the Company. The term of the
renegotiated contract is for two years and requires the Company to continue to
process merchant card transaction volume from this ISO's customers. The Company
has and will continue to amortize such payment over the life of the renegotiated
contract into income. During 1999 and 1998, $910,000 and $250,000 of this
payment was recognized as revenue. The amount of unearned processing revenue was
$1,440,000 as of December 31, 1999. The Company expects to build its overall
merchant card processing business in an effort to offset any potential decline
in future revenues.

    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 $908,000 and
$459,000 as of December 31, 1999 and 1998, 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 decreased to $129,000 for the year ended December
31, 1999, compared to $562,000 and $831,000 in 1998 and 1997. The decline in
1999 and 1998 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. Future loan
servicing income is not expected to be material to the Company's operations.

    In 1999, $500,000 of callable bonds carried within the Company's investment
securities portfolio were called by their issuers compared to $32,700,000 in
1998. As several of these bonds were purchased at a discount the Company
recorded a gain on the redemption of $5,000 in 1999 and $199,000 in 1998.

                                       20
<PAGE>
Securities sale and call activity was minimal in 1997. See Note D of Notes to
Consolidated Financial Statements.

    NONINTEREST EXPENSE.  Noninterest expense amounted to $16,166,000 in 1999,
$16,877,000 in 1998 and $17,904,000 in 1997. This represents a decrease of
$711,000 or 4% in 1999 and a decrease of 1,027,000 or 6% in 1998 when compared
to 1997.

    Salary and employee benefits expense for 1999 increased $164,000, or 2%, to
$8,802,000, as compared to $8,638,000 for 1998. This compared with a 4% decrease
during 1998 over the 1997 salary and employee benefits expense of $9,021,000.
The increase in salary and benefit expense in 1999 is due to the emphasis placed
on growing the Company's core banking operations. The decrease in 1998 was due
to increased efficiencies as a result of cost savings associated with the merger
of Allied and NBR. The Company's full-time equivalent staff levels, adjusted for
discontinued operations, were 162, 174, and 155 at December 31, 1999, 1998, and
1997, respectively.

    Occupancy and equipment expense was $2,242,000 in 1999, $2,743,000 in 1998,
and $2,719,000 in 1997. In 1999 the decrease of $501,000 was attributable to the
Company's decreased space requirements as a result of the relocation of
operating personnel. In 1998 occupancy and equipment costs increased $24,000
over 1997.

    The following table describes the components of other noninterest expense
for the years ended December 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
                                                        1999       1998       1997
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
                                                              (IN THOUSANDS)
Professional fees...................................   $1,231     $  769     $1,130
Regulatory expense and insurance....................      459        588        541
Postage and office supplies.........................      489        506        702
Shareholder expenses and Director fees..............      320        339        381
Advertising.........................................      217        188        241
Telephone...........................................      339        360        552
Electronic data processing..........................    1,234      1,284      1,268
Net costs of other real estate owned................      195        956        568
Other...............................................      638        506      1,067
                                                       ------     ------     ------
                                                       $5,122     $5,496     $6,450
                                                       ======     ======     ======
</TABLE>

    Noninterest expenses were $5,122,000 during 1999, a decrease of $374,000, or
7%, when compared to 1998 expenses of $5,496,000. Noninterest expense decreased
$954,000 or 15% in 1998 when compared to 1997. The decline in 1999 is primarily
attributable to a decline of $761,000 in net OREO expenses. The decline in 1998
when compared to 1997 is a result of the Company's cost control efforts.

    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 38.8% in 1999, 39.1%
in 1998 and 39.9% in 1997.

BUSINESS SEGMENTS

    Through September 10, 1999 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 67,000 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

                                       21
<PAGE>
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 to reflect
only those segments associated with continuing operations.

    Information related to the internal allocation of interest expense and
overhead to segments presented in previous periods has been restated to present
such amounts consistent with standards for accounting for discontinued
operations. These standards do not allow the allocation of general corporate
overhead to discontinued operations and generally require that the allocation of
interest to discontinued operations be based on the marginal interest expense
that would not have been incurred were it not for the discontinued operations.

    Summary financial data by industry segment follows:

<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED
                                                       DECEMBER 31,
                                             --------------------------------
                                               1999        1998        1997
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
                                                      (IN THOUSANDS)
Community Banking:
  Revenue..................................  $ 21,187    $ 20,563    $ 21,865
  Expenses.................................    15,503      17,789      18,714
                                             --------    --------    --------
    Income before income tax...............  $  5,684    $  2,774    $  3,151
                                             ========    ========    ========
Average assets.............................  $385,025    $382,790    $428,983
                                             ========    ========    ========
Bankcard:
  Revenue..................................  $  3,697    $  3,120    $  2,095
  Expenses.................................     1,413       1,128       1,290
                                             --------    --------    --------
    Income before income tax...............  $  2,284    $  1,992    $    805
                                             ========    ========    ========
Average assets.............................  $ 21,940    $ 12,407    $  9,084
                                             ========    ========    ========
Total Company:
  Revenue..................................  $ 24,884    $ 23,683    $ 23,960
  Expenses.................................    16,916      18,917      20,004
                                             --------    --------    --------
    Income before income tax...............  $  7,968    $  4,766    $  3,956
                                             ========    ========    ========
Average assets.............................  $406,965    $395,197    $438,067
                                             ========    ========    ========
</TABLE>

COMMUNITY BANKING

    The Community Banking segment revenues increased in 1999 as a result of an
improvement in the net interest margin and growth in earning assets. In 1999
segment expenses have declined primarily due to a decrease in the provision for
loan losses, reduced OREO disposition costs and administrative expenses. In 1998
segment revenue declined due to a drop in earning assets. 1998 segment expenses
dropped due to cost control measures.

BANKCARD

    The Merchant Card processing segment provides Visa and Mastercard credit
card processing and settlement services for roughly 67,000 merchants located
throughout the United States. Yearly processing volume is in excess of $1.6
billion. 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, or
ISO's.

    The Merchant Card processing 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 independent sales organizations (ISO's) to market
its services. In December 1998 the Company renegotiated the terms

                                       22
<PAGE>
of a processing contract with an ISO who represented $1,736,000 or 66% of the
Company's 1998 merchant draft net processing revenue and $1,412,000 or 45% of
such revenue in 1999. As a result of the renegotiation the ISO bought down its
processing rate in consideration for a payment of $2,600,000 to the Company. The
term of the renegotiated contract is for two years and requires the Company to
continue to process merchant card transaction volume from this ISO's customers.
The Company has amortized such payment over the life of the renegotiated
contract into income. During 1999 and 1998, $910,000 and $250,000 of this
payment was recognized as revenue. The amount of unearned processing revenue was
$1,440,000 as of December 31, 1999. The balance of this amount will be amortized
into income in 2000.

    The Company expects to build its overall merchant card processing business
through direct marketing efforts and new ISO's in an effort to offset any
potential decline in future revenues that may result in periods following the
term of the buydown.

    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 $908,000 and
$459,000 as of December 31, 1999 and 1998, 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
$449,000, $288,000 and $56,000 in 1999, 1998 and 1997, respectively. While
charge-off levels were nominal from 1997 to 1999, the increase in the reserve
reflects the growth in transaction 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.

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 ninety-five employees of whom sixty-three were transferred to
Valley Financial Funding, Inc., while thirty-two 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 from discontinued operations at December 31, 1999, 1998 and 1997 was
($437,000), $2,187,000 and $1,064,000, respectively. Revenue from discontinued
operations was $4,369,000 for the year ended December 31, 1999, as compared to
$10,863,000 and $6,702,000 for 1998 and 1997. Due to the disposition, the
Company is no longer required to carry or fund a mortgage loan 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

                                       23
<PAGE>
carrying value and their weighted average yields at December 31, 1999. Yields on
tax-exempt securities have been computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
                                                 AVAILABLE FOR SALE
                           ---------------------------------------------------------------
                                                      AFTER ONE            AFTER FIVE
                               WITHIN ONE           THROUGH FIVE           THROUGH TEN
                                  YEAR                  YEARS                 YEARS
                           -------------------   -------------------   -------------------
                            AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD
                           --------   --------   --------   --------   --------   --------
                                               (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>
U.S. Government and
  agencies...............   $2,000      5.78%    $31,202      5.92%     $2,896      5.93%
Other bonds and mortgage
  backed securities......       --        --       6,782      6.53%        858      7.17%
                            ------               -------                ------
  Total..................   $2,000      5.78%    $37,984      6.03%     $3,754      6.20%
                            ======               =======                ======

<CAPTION>
                                      AVAILABLE FOR SALE
                           -----------------------------------------

                                AFTER TEN
                                  YEARS                 TOTAL
                           -------------------   -------------------
                            AMOUNT     YIELD      AMOUNT     YIELD
                           --------   --------   --------   --------
                                    (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>        <C>        <C>
U.S. Government and
  agencies...............       --        --     $36,098      5.92%
Other bonds and mortgage
  backed securities......       --        --       7,640      6.60%
                           -------               -------
  Total..................  $    --        --     $43,738      6.04%
                           =======               =======
</TABLE>
<TABLE>
<CAPTION>
                                                  HELD TO MATURITY
                           ---------------------------------------------------------------
                                                      AFTER ONE            AFTER FIVE
                               WITHIN ONE           THROUGH FIVE           THROUGH TEN
                                  YEAR                  YEARS                 YEARS
                           -------------------   -------------------   -------------------
                            AMOUNT     YIELD      AMOUNT     YIELD      AMOUNT     YIELD
                           --------   --------   --------   --------   --------   --------
                                               (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>        <C>        <C>        <C>        <C>
U.S. Government and
  agencies...............   $   --        --     $ 6,000      6.17%     $6,989      6.58%
Other bonds and mortgage
  backed securities......       36      3.80%         --        --         202      4.70%
                            ------               -------                ------
  Total..................   $   36      3.80%    $ 6,000      6.17%     $7,191      6.53%
                            ======               =======                ======

<CAPTION>
                                       HELD TO MATURITY
                           -----------------------------------------

                                AFTER TEN
                                  YEARS                 TOTAL
                           -------------------   -------------------
                            AMOUNT     YIELD      AMOUNT     YIELD
                           --------   --------   --------   --------
                                    (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>        <C>        <C>
U.S. Government and
  agencies...............       --        --     $12,989      6.39%
Other bonds and mortgage
  backed securities......   17,093      6.84%     17,331      6.81%
                           -------               -------
  Total..................  $17,093      6.84%    $30,320      6.63%
                           =======               =======
</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,
                                                  1999        1998        1997
                                                --------   ----------   --------
                                                         (IN THOUSANDS)
<S>                                             <C>        <C>          <C>
U.S. Government and agencies..................  $36,098     $30,538     $41,907
Other bonds and mortgage-backed securities....    7,640          --          --
                                                -------     -------     -------
  Total.......................................  $43,738     $30,538     $41,907
                                                =======     =======     =======

<CAPTION>
                                                        HELD TO MATURITY
                                                --------------------------------
                                                          DECEMBER 31,
                                                  1999        1998        1997
                                                --------   ----------   --------
                                                         (IN THOUSANDS)
<S>                                             <C>        <C>          <C>
U.S. Government and agencies..................  $12,989     $10,986     $18,360
Other bonds and mortgage-backed securities....   17,331      14,781       8,401
FHLB and FRB Stock............................    2,647       4,105       3,897
                                                -------     -------     -------
  Total.......................................  $32,967     $29,872     $30,658
                                                =======     =======     =======
</TABLE>

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, 1999, these three
categories accounted for approximately 67%, 13% and 19%, respectively, 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

                                       24
<PAGE>
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,
                                            ----------------------------------------------------
                                              1999       1998       1997       1996       1995
                                            --------   --------   --------   --------   --------
                                                               (IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>
Residential real estate mortgage..........  $130,504   $ 97,194   $ 93,516   $115,631   $160,767
Commercial real estate mortgage...........    79,476     59,257     57,425     67,401     55,667
Commercial................................    61,165     63,260     69,097     73,987     79,723
Real estate construction..................    40,059     46,905     55,031     84,908     62,432
Installment and other.....................     4,624      5,095      9,200      8,284     12,669
Less deferred fees........................    (1,383)    (2,395)    (1,873)    (2,797)    (3,035)
                                            --------   --------   --------   --------   --------
  Total loans.............................   314,445    269,316    282,396    347,414    368,223
Less allowance for loan losses............    (7,931)    (8,041)    (7,645)    (7,040)    (5,037)
                                            --------   --------   --------   --------   --------
Net loans.................................  $306,514   $261,275   $274,751   $340,374   $363,186
                                            ========   ========   ========   ========   ========
</TABLE>

    REAL ESTATE MORTGAGE LOANS.  As of December 31, 1999, the Company's
residential mortgage loans totaled $130,504,000, or 42%, of its total loans.
These loans were predominantly originated in Sonoma and Mendocino Counties.
Total residential loans increased $33,310,000 during 1999 and $3,678,000 in 1998
as a result of normal origination activity. As of December 31, 1998, residential
mortgage loans totaled $97,194,000 or 36% of total loans. As of December 31,
1997 residential mortgage loans totaled $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. In
1995, total residential mortgage loans decreased $54,800,000. The decrease in
residential real estate loans is due primarily to loan sales of $35.9 million
during the second quarter of 1995. The sale was executed to restructure the
Company's balance sheet and consequently improve the Company's capital ratios
and reduce its interest rate risk. In addition, in the third quarter of 1995,
the Company swapped $22.1 million of adjustable rate loans with Fannie Mae for a
mortgage-backed security, which had a coupon rate of 7.295%, and was scheduled
to mature in 2025. This security, which was classified as available for sale,
was sold prior to December 31, 1995, with settlement due from broker in January
1996.

    At December 31, 1999, $67,662,000, or 52%, of the Company's residential real
estate mortgage loans were fixed-rate mortgage loans having original terms
ranging from one to thirty years. Another $57,757,000, or 44%, were held as
adjustable-rate mortgages. The balance of these loans, $5,085,000, or 4%,
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 82% 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, 1999, the Company had outstanding $79,476,000 in
commercial mortgage loans, which constituted 25% 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

                                       25
<PAGE>
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, 1999. Approximately 47% of the total amount outstanding of
commercial mortgage loans had principal balances that were less than $250,000.

    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 $40,059,000 in construction loans outstanding at
December 31, 1999, comprising 13% of its total loans. These loans were
principally located in Northern California. This represents a decrease of
$6,846,000 or 15% from 1998. In 1998 construction loans decreased $8,126,000 or
15% from 1997. As of December 31, 1999, approximately $24 million of these loans
consisted of 76 single-family individual-borrower construction loans, and the
remaining loans included 13 subdivision projects, 5 land development projects
and 7 commercial projects. At December 31, 1999, the largest single-family
construction loan commitment was $1,015,000, and the average commitment was less
than $375,000. The largest commitment for a subdivision project was $2,538,000
and the average subdivision commitment was less than $979,000. The average
commercial project involved a loan of approximately $1,383,000.

    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.

    COMMERCIAL LOANS.  Commercial loans consist primarily of short-term
financing for businesses and professionals located in Sonoma and Mendocino
Counties. At December 31, 1999, these loans totaled $61,165,000, or 19%, of the
Company's total loans. This represents a decrease of $2,095,000 or 3% from 1999
due to normal loan payoffs and the competitive banking environment. In 1998
commercial loans decreased $5,837,000 or 8% from 1997. 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, 1999, the size of individual commercial loans varied widely, with
93% having principal balances less than $350,000. At December 31, 1999, the
Company had 3 commercial borrowers whose aggregate individual liability exceeded
$2,000,000.

                                       26
<PAGE>
    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, 1999, the Company had outstanding $41,000 in
unfunded mortgage loan commitments, $38,244,000 in undisbursed loan commitments
and $539,000 in standby letters of credit. The Company's undisbursed commercial
loan commitments represent primarily business lines of credit. The undisbursed
construction commitments represented undisbursed funding on construction
projects in process. The mortgage loan commitments represented approved but
unfunded mortgage loans with the Company's mortgage banking business.

    MATURITY DISTRIBUTION.  The following table shows the maturity distribution
of the Company's commercial and real estate construction loans outstanding as of
December 31, 1999, 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............................................  $19,235     $17,236       $24,694    $ 61,165
Real estate construction..............................   40,034          25            --      40,059
                                                        -------     -------       -------    --------
  Total...............................................  $59,269     $17,261       $24,694    $101,224
                                                        =======     =======       =======    ========
Loans with fixed interest rates.......................  $24,231     $ 5,972       $ 2,455    $ 32,658
Loans with variable interest rates....................   35,198      11,289        22,079      68,566
                                                        -------     -------       -------    --------
  Total...............................................  $59,429     $17,261       $24,534    $101,224
                                                        =======     =======       =======    ========
</TABLE>

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 attracted at interest rates at or above
local market retail deposit rates. 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 $793,000 and $993,000
as of December 31, 1999 and 1998. The Company generally does not purchase
brokered deposits and had no brokered deposits at December 31, 1999.

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

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------------------
                                                     1999                  1998                  1997
                                              -------------------   -------------------   -------------------
                                               AMOUNT      RATE      AMOUNT      RATE      AMOUNT      RATE
                                              --------   --------   --------   --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>
Transaction accounts:
  Savings & Money Market....................  $108,290     3.21%    $119,624     3.97%    $130,999     4.40%
  NOW.......................................    25,081     1.18       23,236     1.27       21,804     1.47
  Noninterest bearing.......................    85,851       --       82,074       --       77,382       --
Time deposits $100,000 and over.............    49,919     5.43       35,349     5.45       27,586     6.55
Other time deposits.........................    87,194     4.96       81,920     5.39      128,002     5.33
</TABLE>

                                       27
<PAGE>
    The Company's time deposits of $100,000 or more had the following schedule
of maturities at December 31, 1999:

<TABLE>
<CAPTION>
                                                                  AMOUNT
                                                              --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
Remaining Maturity:
  Three months or less......................................     $17,135
  Over three months to six months...........................      18,516
  Over six months to 12 months..............................      28,820
  Over 12 months............................................       4,823
                                                                 -------
    Total...................................................     $69,294
                                                                 =======
</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.

OTHER BORROWINGS

    NBR maintains a secured line of credit with the FHLB collateralized by
approximately $111,832,000 in residential mortgage loans. Available credit under
this line at December 31, 1999 was $91,000,000. 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 unsecrued line
of credit with a major financial institution. As of December 31, 1999, $825,000
was outstanding under this line and represents the highest amount outstanding
during the year. 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, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                  1999        1998       1997
                                               ----------   --------   --------
<S>                                            <C>          <C>        <C>
Balance, December 31.........................      $4,695     $1,371     $2,341
Average balance during the year..............      $6,983     $6,413     $4,265
Average interest rate during the year........        5.24%      5.62%      5.91%
Maximum month-end balance during the year....     $17,785    $19,783     $6,560
Date of maximum month-end balance............   September     August    January
</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 meet
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: any installment of principal or interest is 90 days or
more past due (unless, in management's opinion, the loan is well secured

                                       28
<PAGE>
and in the process of collection); management determines the ultimate collection
of principal of or interest on a loan to be unlikely; or the terms of a loan
have been renegotiated to less than market rates due to a serious weakening of
the borrower's financial condition.

    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 collectibility of the principal of 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, 1999 and 1998 the Company's total recorded investment in
impaired loans was $4,430,000 and $10,293,000 of which $4,119,000 and $8,573,000
relates to the recorded investment for which there is a related allowance for
credit losses of $1,121,000 and $1,543,000. The amount of that recorded
investment for which there is no related allowance for credit losses was
$311,000 and $1,720,000 at December 31, 1999 and 1998. At December 31, 1999
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, 1999, 1998 and 1997 was $4,420,000, $10,377,000 and $10,949,000.
The related amount of interest income recognized during the period that such
loans were impaired was $292,000, $578,000 and $558,000.

    As of December 31, 1999 and 1998 there were $3,063,000 and $5,556,000 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 $362,000,
$341,000 and $469,000 for the years ended December 31, 1999, 1998 and 1997.
Interest income received on nonaccrual loans was $205,000, $51,000 and $84,000
for the years ended December 31, 1999, 1998 and 1997.

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

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                   ----------------------------------------------------
                                                     1999       1998       1997       1996       1995
                                                   --------   --------   --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                <C>        <C>        <C>        <C>        <C>
Nonaccrual loans.................................   $3,063     $5,556    $ 7,883    $ 8,246    $ 4,201
Accruing loans past due 90 days or more..........       --         --        735      1,536         92
Restructured loans (in compliance with modified
  terms).........................................    1,018      1,045      1,109        599        651
                                                    ------     ------    -------    -------    -------
  Total nonperforming loans......................    4,081      6,601      9,727     10,381      4,944
Other real estate owned..........................    2,363      2,181      6,352      2,132        963
Other assets owned...............................       --        129        542        668      1,249
                                                    ------     ------    -------    -------    -------
  Total nonperforming assets.....................   $6,444     $8,911    $16,621    $13,181    $ 7,156
                                                    ======     ======    =======    =======    =======
Nonperforming loans to total loans...............     1.30%      2.45%      3.44%      2.99%      1.34%
Nonperforming assets to total assets.............     1.52       2.11       3.72       2.64       1.28
Allowance for loan losses to nonperforming
  assets.........................................   123.08      90.24      46.00      53.41      70.39
Allowance for loan losses to nonperforming
  loans..........................................     1.94       1.22       0.79       0.68       1.02
</TABLE>

                                       29
<PAGE>
    Nonperforming loans totaled $4,081,000 at December 31, 1999, consisting of
$1,363,000 that were secured by residential real estate with the remaining
$2,718,000 either unsecured or collateralized by various business assets other
than real estate.

    Other real estate owned totaled $2,363,000 at December 31, 1999, consisting
of $2,018,000 in construction, commercial buildings and land development and
$345,000 in residential properties.

    In addition to the above mentioned assets, as of December 31, 1999
management of the Company has identified two lending relationships which in
aggregate amount to approximately $931,000 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.

    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,
                                                      ----------------------------------------------------
                                                        1999       1998       1997       1996       1995
                                                      --------   --------   --------   --------   --------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                                   <C>        <C>        <C>        <C>        <C>
Balance at beginning of period......................   $8,041     $7,645     $7,040     $5,037     $5,787
                                                       ------     ------     ------     ------     ------
Charge-offs:
  Residential real estate mortgage..................       21        617        408        741        304
  Commercial real estate mortgage...................      612        355        124        244         14
  Commercial........................................      769        794        784      2,517      1,985
  Real estate construction..........................      100        179        456        725         --
  Installment and other.............................       13         55        148        337        147
                                                       ------     ------     ------     ------     ------
Total charge-offs...................................    1,515      2,000      1,920      4,564      2,450
                                                       ------     ------     ------     ------     ------
Recoveries:
  Residential real estate mortgage..................       42         31         15          2         25
  Commercial real estate mortgage...................       45         10         --          5         --
  Commercial........................................      498        279        295        252         84
  Real estate construction..........................       53          3         --         --         --
  Installment and other.............................       17         33        115         46          1
                                                       ------     ------     ------     ------     ------
Total recoveries....................................      655        356        425        305        110
                                                       ------     ------     ------     ------     ------
Net charge-offs.....................................      860      1,644      1,495      4,259      2,340
                                                       ------     ------     ------     ------     ------
Provision for loan losses...........................      750      2,040      2,100      6,262      1,590
                                                       ------     ------     ------     ------     ------
Balance at end of period............................   $7,931     $8,041     $7,645     $7,040     $5,037
                                                       ======     ======     ======     ======     ======
Net charge-offs during the period to average
  loans.............................................      .29%       .62%       .46%      1.22%       .60%
Allowance for loan losses to total loans............     2.52       2.99       2.71       2.03       1.37
Allowance for loan losses to nonperforming loans....   194.34     121.82      78.60      67.82     101.88
</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.

    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

                                       30
<PAGE>
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, 1999 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 provision for loan losses reflects an accrual sufficient to cover
projected probable charge-offs and the maintenance of the allowance at a level
deemed adequate to absorb potential future losses.

    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
unidentified 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 may occur:
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                           ----------------------------------------------------------------------------------
                                   1999                    1998                    1997               1996
                           ---------------------   ---------------------   ---------------------   ----------
                           ALLOWANCE      % OF     ALLOWANCE      % OF     ALLOWANCE      % OF     ALLOWANCE
                           FOR LOSSES    LOANS     FOR LOSSES    LOANS     FOR LOSSES    LOANS     FOR LOSSES
                           ----------   --------   ----------   --------   ----------   --------   ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                        <C>          <C>        <C>          <C>        <C>          <C>        <C>
Residential real estate
  mortgage...............    $2,257        42%       $1,725        36%       $2,061        34%       $1,522
Commercial real estate
  mortgage...............       947        25         1,260        22           650        20           809
Commercial...............     2,088        19         2,514        23         1,640        24         1,753
Real estate
  construction...........     1,064        13         1,691        17         1,821        19         2,076
Installment and other....       130         1           207         2           194         3           231
Unallocated..............     1,444        --           644        --         1,279        --           649
                             ------       ---        ------       ---        ------       ---        ------
Total....................    $7,931       100%       $8,041       100%       $7,645       100%       $7,040
                             ======       ===        ======       ===        ======       ===        ======

<CAPTION>
                                     DECEMBER 31,
                           --------------------------------
                             1996             1995
                           --------   ---------------------
                             % OF     ALLOWANCE      % OF
                            LOANS     FOR LOSSES    LOANS
                           --------   ----------   --------
                                (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>          <C>
Residential real estate
  mortgage...............     34%       $1,922        44%
Commercial real estate
  mortgage...............     19           664        15
Commercial...............     21         1,082        21
Real estate
  construction...........     24         1,210        17
Installment and other....      2           118         3
Unallocated..............     --            41        --
                             ---        ------       ---
Total....................    100%       $5,037       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 or fraud. The Company
expects that it may be required to repurchase loans in the future. In 1999, 1998
and 1997 the Company was required by various mortgage loan investors to
repurchase 4, 9 and 26 non performing residential mortgage loans totaling
$943,000, $542,000 and $3,459,000, respectively. The Company maintains a reserve
for its estimate of potential losses associated with the potential repurchase of
previously sold mortgage loans. Such reserve amounts to $142,000 and $172,000 as
of December 31, 1999 and 1998.

YEAR 2000

    The Company's mission critical systems successfully responded to the century
date change. Accordingly, the Company's core banking systems, including the
applications software for its deposit, loan and merchant card processing
computer systems, as well as the electronic funds transfers system with the
Federal Reserve, are fully operational and accurately processing customer
information and transactions. The Company will continue to monitor its systems
and those of its vendors and suppliers over the coming months.

                                       31
<PAGE>
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
retain liquidity at the parent at a level which management believes to be
consistent with the safety and soundness of the Company as a whole. As of
December 31, 1999, Redwood held $119,000 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, 1999 $825,000 was outstanding under this line of
credit.

    In 1998, Redwood reinstated a cash dividend to its common stock holders at a
quarterly rate of $.04 per share. In 1999, Redwood increased this dividend 50%
to $0.06 per share. In the fourth quarter of 1999, the dividend increased again
to $0.10 per share. 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 became
undercapitalized. If NBR is restricted from paying dividends, Redwood could be
unable to pay the above obligations. No assurance can be given as to the ability
of NBR to pay dividends to Redwood. In 1999, 1998 and 1997 NBR declared
dividends of $10,900,000, $1,200,000 and $860,000.

    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, 1999 the Company received $35,331,000 in cash flows from operations while
using $47,670,000 and $9,292,000 in investing and financing activities,
respectively.

    The principal sources of asset liquidity are federal funds sold. Secondary
sources of liquidity are loan repayments, investments available for sale,
maturing investments, and investments that can be used as collateral for other
borrowings. At December 31, 1999, the Company had $1,497,000 in federal funds
sold. Total investments were $76,705,000, of which $29,835,000 were pledged.

    Time deposits from other financial institutions totaled $793,000 or .2% of
total deposits, at December 31, 1999, a decrease of $200,000 from the $993,000
recorded at December 31, 1998, which amounted to .3% of total deposits at that
time. These deposits are used to supplement liquidity when the Company
determines that deposits from local sources would be more expensive. The Company
is able to retain such deposits at favorable rates when desired.

    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, 1999 approximately
$111,832,000 of residential mortgage loans were pledged to secure any funds the
Company may borrow. NBR's FHLB borrowing limitation at December 31, 1999 was
$91,000,000. At December 31, 1999 and December 31, 1998, NBR had paid off all
FHLB advances, as compared to advances outstanding of $1,800,000 at December 31,
1997. Management believes that at December 31, 1999 the Company's liquidity
position was adequate for the operations of Redwood and its subsidiaries for the
foreseeable future.

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.

                                       32
<PAGE>
    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, 1999, 1998 and 1997, the Company and its
subsidiaries were required to maintain a total risk-based capital ratio of 8%,
including 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, 1999.

<TABLE>
<CAPTION>
                                                              COMPANY      NBR
                                                              --------   --------
<S>                                                           <C>        <C>
Total capital to risk based assets..........................   13.01%     13.20%
Tier 1 capital to risk based assets.........................   11.74%     11.94%
Leverage ratio..............................................    8.66%      8.86%
</TABLE>

    Under the most stringent capital requirement, the Company has approximately
$19,854,000 in excess capital before it becomes under-capitalized. Similarly,
NBR has $20,519,000 in excess capital.

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% share
repurchase.

    During 1999 and 1998 the Company repurchased 191,500 and 16,500 shares of
its common stock for $4,181,938 and $282,750 respectively. The average price
paid under the repurchase program was $21.84 in 1999 and $17.14 in 1998.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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

                                       33
<PAGE>
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".

    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, 1999, 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....................  $  1,497     $     --     $     --     $    --      $     --    $  1,497
Investment securities and other.......     9,493        6,839       12,160      26,514        21,699      76,705
Loans.................................   110,364       28,307       20,141      72,030        83,603     314,445
                                        --------     --------     --------     -------      --------    --------
Total earning assets..................   121,354       35,146       32,301      98,544       105,302     392,647
                                        --------     --------     --------     -------      --------    --------
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction
  accounts............................    20,726       20,726       20,726      62,179            --     124,357
Time deposits.........................    39,702       46,850       69,536      11,311            --     167,399
Other borrowings......................     4,695           --           --          --            --       4,695
                                        --------     --------     --------     -------      --------    --------
Total interest-bearing liabilities....    65,123       67,576       90,262      73,490            --     296,451
                                        --------     --------     --------     -------      --------    --------
Interest rate sensitivity gap.........  $ 56,231     $(32,430)    $(57,961)    $25,054      $105,302    $ 96,196
                                        ========     ========     ========     =======      ========    ========
Cumulative interest rate sensitivity
  gap.................................  $ 56,231     $ 23,801     $(34,160)    $(9,106)     $ 96,196
                                        ========     ========     ========     =======      ========
Interest rate sensitivity gap ratio...      1.86          .52          .36        1.34           N/A
Cumulative interest rate sensitivity
  gap ratio...........................      1.86         1.18          .85         .97          1.33
</TABLE>

    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

                                       34
<PAGE>
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
refinancings 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 monthly 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, 1999
and 1998 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>
                                           CHANGE IN ANNUAL           CHANGE IN
CHANGE IN INTEREST RATE                   NET INTEREST INCOME   MARKET VALUE OF EQUITY
-----------------------                   -------------------   ----------------------
<S>                                       <C>                   <C>
1999
+ 200...................................      $   (96,000)           $(10,606,000)
+ 100...................................          (40,000)             (5,486,000)
-100....................................          (20,000)              5,176,000
-200....................................         (569,000)              6,478,000

1998
+ 200...................................      $   557,000            $ (6,920,000)
+ 100...................................          270,000              (3,788,000)
-100....................................       (1,585,000)              3,563,000
-200....................................       (3,943,000)              6,455,000
</TABLE>

    The Company's interest rate risk exposure to a rising rate environment
increased in 1999. This increase was principally due to modest growth in fixed
rate commercial and residential real estate loans.

    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.

                                       35
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

    The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included in the Annual Report of
Redwood to its shareholders for the years ended December 31, 1999, 1998 and
1997.

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Independent Auditors' Report................................      37
Consolidated Financial Statements of Redwood Empire Bancorp
  Consolidated Statements of Operations for the years ended
    December 31, 1999, 1998 and 1997........................      38
  Consolidated Balance Sheets as of December 31, 1999 and
    1998....................................................      39
  Consolidated Statements of Shareholders' Equity for the
    years ended December 31, 1999, 1998 and 1997............      40
  Consolidated Statements of Cash Flows for the years ended
    December 31, 1999, 1998 and 1997........................      41
  Notes to Consolidated Financial Statements................      42
</TABLE>

                                       36
<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 sheets of Redwood
Empire Bancorp and subsidiaries (Company) as of December 31, 1999 and 1998 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 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 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 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

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

                                       37
<PAGE>
                    REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                              ------------------------------------
                                                                 1999         1998         1997
                                                              ----------   ----------   ----------
<S>                                                           <C>          <C>          <C>
Interest income:
  Interest and fees on loans................................  $   25,924   $   25,183   $   30,448
  Interest on investment securities.........................       4,239        4,334        3,709
  Interest on federal funds sold............................         470        1,040        1,314
                                                              ----------   ----------   ----------
Total interest income.......................................      30,633       30,557       35,471
Interest expense:
  Interest on deposits......................................      10,736       11,392       14,708
  Interest on other borrowings..............................          68           --           --
  Interest on subordinated notes............................         142        1,107        1,107
                                                              ----------   ----------   ----------
Total interest expense......................................      10,946       12,499       15,815
                                                              ----------   ----------   ----------
Net interest income.........................................      19,687       18,058       19,656
Provision for loan losses...................................         750        2,040        2,100
                                                              ----------   ----------   ----------
Net interest income after provision for loan losses.........      18,937       16,018       17,556
                                                              ----------   ----------   ----------
Noninterest income:
  Service charges on deposit accounts.......................       1,041        1,072        1,146
  Merchant draft processing, net............................       3,154        2,609        1,585
  Loan servicing income.....................................         129          562          831
  Net realized gains on sale of investment securities held
    for sale and redemption of investment securities........          19          225           23
  Other income..............................................         854        1,157          719
                                                              ----------   ----------   ----------
  Total noninterest income..................................       5,197        5,625        4,304
Noninterest expense:
  Salaries and employee benefits............................       8,802        8,638        9,021
  Occupancy and equipment expense...........................       2,242        2,743        2,719
  Restructuring credit......................................          --           --         (286)
  Other.....................................................       5,122        5,496        6,450
                                                              ----------   ----------   ----------
Total noninterest expense...................................      16,166       16,877       17,904
                                                              ----------   ----------   ----------
Income from continuing operations before income taxes and
  extraordinary item........................................       7,968        4,766        3,956
Provision for income taxes..................................       3,093        1,862        1,579
                                                              ----------   ----------   ----------
Income from continuing operations before extraordinary
  item......................................................       4,875        2,904        2,377
                                                              ----------   ----------   ----------
Discontinued operations:
  Income (loss) from discontinued operations (less
    applicable income taxes (benefit) of $(435), $240 and
    $687)...................................................        (270)       2,187        1,064
  Loss on disposal of discontinued operations, net of tax
    benefit of ($113).......................................        (167)
                                                              ----------   ----------   ----------
  Income (loss) from discontinued operations................        (437)       2,187        1,064
                                                              ----------   ----------   ----------
Income before extraordinary item............................       4,438        5,091        3,441
Extraordinary item..........................................         459           --           --
Income tax benefit..........................................        (183)          --           --
                                                              ----------   ----------   ----------
Total extraordinary item, net of tax........................         276           --           --
                                                              ----------   ----------   ----------
Net income..................................................       4,162        5,091        3,441
Dividends on preferred stock................................          --          112          449
                                                              ----------   ----------   ----------
Net income available for common stock shareholders..........  $    4,162   $    4,979   $    2,992
                                                              ==========   ==========   ==========
Basic earnings per common shares:
  Income from continuing operations before extraordinary
    item....................................................  $     1.45   $      .88   $      .70
  Income (loss) from discontinued operations................        (.13)         .69          .38
  Income before extraordinary item..........................        1.32         1.57         1.08
  Net income available for common stock shareholders........        1.24         1.57         1.08
  Weighted average shares...................................   3,364,000    3,170,000    2,776,000
Diluted earnings per common share and common equivalent
  share:
  Income from continuing operations before extraordinary
    item....................................................  $     1.41   $      .84   $      .70
  Income (loss) from discontinued operations................        (.13)         .63          .32
  Income before extraordinary item..........................        1.28         1.47         1.02
  Net income available for common stock shareholders........        1.20         1.47         1.02
  Weighted average shares...................................   3,456,000    3,465,000    3,378,000
</TABLE>

See Notes to Consolidated Financial Statements.

                                       38
<PAGE>
                    REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
Assets:
Cash and due from banks.....................................    $ 19,058       $ 15,982
Federal funds sold..........................................       1,497         26,205
                                                                --------       --------
  Cash and cash equivalents.................................      20,555         42,187
Investment securities:
  Held to maturity, at cost (market value: 1999--$31,923;
    1998--$30,014)..........................................      32,967         29,872
  Available for sale, at market (amortized cost:
    1999--$44,667; 1998--$30,127)...........................      43,738         30,538
                                                                --------       --------
    Total investment securities.............................      76,705         60,410
Mortgage loans held for sale................................          --         32,620
Loans:
  Portfolio loans...........................................     314,445        269,316
  Less allowance for loan losses............................      (7,931)        (8,041)
                                                                --------       --------
    Net loans...............................................     306,514        261,275
Premises and equipment, net.................................       3,045          4,082
Mortgage servicing rights, net..............................          32            305
Other real estate owned.....................................       2,363          2,181
Cash surrender value of life insurance......................       3,187          3,033
Other assets and interest receivable........................      10,645         16,206
                                                                --------       --------
      Total Assets..........................................    $423,046       $422,299
                                                                ========       ========
Liabilities and Shareholders' Equity:
Deposits:
  Noninterest bearing demand deposits.......................    $ 77,753       $ 82,448
  Interest bearing transaction accounts.....................     124,357        141,316
  Time deposits $100,000 and over...........................      69,294         62,600
  Other time deposits.......................................      98,105         78,356
                                                                --------       --------
    Total deposits..........................................     369,509        364,720
Other borrowings............................................       4,695          1,371
Other liabilities and interest payable......................      11,398          5,568
Subordinated notes..........................................          --         12,000
                                                                --------       --------
      Total Liabilities.....................................     385,602        383,659
                                                                --------       --------
Commitments and contingencies...............................          --             --
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: 1999--3,228,771 shares,
    1998--3,363,565 shares..................................      22,033         25,801
  Retained earnings.........................................      15,950         12,600
  Accumulated other comprehensive (loss) income, net of
    tax.....................................................        (539)           239
                                                                --------       --------
      Total Shareholders' Equity............................      37,444         38,640
                                                                --------       --------
    Total Liabilities and Shareholders' Equity..............    $423,046       $422,299
                                                                ========       ========
</TABLE>

See Notes to Consolidated Financial Statements.

                                       39
<PAGE>
                    REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                         ACCUMULATED
                                                                                                            OTHER
                                                                                                        COMPREHENSIVE
                                COMPREHENSIVE         PREFERRED              COMMON          RETAINED   (LOSS) INCOME,
                                    INCOME        SHARES     STOCK      SHARES     STOCK     EARNINGS        NET          TOTAL
                                --------------   --------   --------   --------   --------   --------   --------------   --------
<S>                             <C>              <C>        <C>        <C>        <C>        <C>        <C>              <C>
Balances, January 1, 1997.....                      575     $ 5,750     2,744     $19,281    $ 5,032        $(331)       $29,732
Comprehensive income:
  Net income..................      $3,441                                                     3,441                       3,441
Other comprehensive income:
  Unrealized holding gains
    arising during period, net
    of tax of $80.............         117
  Less: reclassification
    adjustment net of tax of
    $17.......................          27
                                    ------
    Other comprehensive
      income..................         144                                                                    144            144
                                    ------
    Comprehensive income......      $3,585
                                    ======

Stock options exercised.......                                             36         375                                    375
Cash dividends
  declared--preferred.........                                                                  (449)                       (449)
                                                   ----     -------     -----     -------    -------        -----        -------
Balances, December 31, 1997...                      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.......                                            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:
  Unrealized holding losses
    arising during period, net
    of tax of $571............        (789)
    Less: reclassification
      adjustment net of tax of
      $8......................          11
                                    ------
    Other comprehensive
      income..................        (778)                                                                  (778)          (778)
                                    ------
    Comprehensive income......      $3,384
                                    ======
Common stock repurchased......                                           (191)     (4,182)                                (4,182)
Stock options exercised.......                                             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
                                                   ====     =======     =====     =======    =======        =====        =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                       40
<PAGE>
                    REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1999        1998        1997
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
Net income..................................................  $   4,162   $   5,091   $   3,441
                                                              ---------   ---------   ---------
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization, net........................      1,347       1,731       1,430
  Deferred taxes............................................        (68)     (1,247)      1,382
  Net realized gains on securities available for sale.......        (19)       (225)        (23)
  Loans originated for sale.................................   (251,468)   (479,351)   (182,096)
  Proceeds from sale of loans held for sale.................    269,818     486,011     228,890
  Gain on sale of loans and loan servicing..................     (1,293)     (5,095)     (3,601)
  Provision for loan losses.................................        750       2,040       2,100
  Change in cash surrender value of life insurance..........       (154)       (104)       (628)
  Change in other assets and interest receivable............      2,815      (2,346)      7,135
  Change in other liabilities and interest payable..........      8,358      (2,492)     (3,334)
  Noncash restructuring (credit) charge.....................         --          --        (286)
  Other, net................................................        202          89          95
                                                              ---------   ---------   ---------
  Total adjustments.........................................     30,288        (989)     51,064
                                                              ---------   ---------   ---------
    Net cash provided by operating activities...............     34,450       4,102      54,505
                                                              ---------   ---------   ---------
Cash flows from investing activities:
  Net increase in loans.....................................    (31,720)     (9,547)     26,073
  Proceeds from sale of loans in portfolio..................         --       1,666       2,043
  Purchases of investment securities available for sale.....    (20,625)    (22,146)    (23,845)
  Purchases of investment securities held to maturity.......     (6,938)    (13,133)    (17,056)
  Sales of investment securities available for sale.........      1,987       1,995       7,031
  Maturities of investment securities available for sale....      4,013      26,913      13,974
  Maturities of investment securities held to maturity......      3,933      19,503         513
  Purchase of premises and equipment, net of retirements....       (704)     (1,611)     (1,469)
  (Purchase) sale of mortgage servicing rights..............         --         (12)       (330)
  Divestiture of mortgage banking operations................        520          --          --
  Change in interest bearing deposits due from financial
    institutions............................................         --          --         315
  Proceeds from sale of other real estate owned.............      1,919       6,399       1,982
                                                              ---------   ---------   ---------
    Net cash provided by (used in) investing activities.....    (47,615)     10,027       9,231
                                                              ---------   ---------   ---------
Cash flows from financing activities:
  Change in noninterest bearing transaction accounts........     (4,695)    (16,467)     27,101
  Change in interest bearing transaction accounts...........    (16,959)     (8,623)     (6,514)
  Change in time deposits...................................     26,443      (1,611)    (65,616)
  Change in other borrowings................................      3,324        (970)     (7,966)
  Redemption of subordinated debt...........................    (12,000)         --          --
  Issuance of stock.........................................     (3,768)        180         299
  Dividends paid............................................       (812)       (515)       (449)
                                                              ---------   ---------   ---------
    Net cash used in financing activities...................     (8,467)    (28,006)    (53,145)
                                                              ---------   ---------   ---------
Net change in cash and cash equivalents.....................    (21,632)    (13,877)     10,591
Cash and cash equivalents at beginning of period............     42,187      56,064      45,473
                                                              ---------   ---------   ---------
Cash and cash equivalents at end of period..................  $  20,555   $  42,187   $  56,064
                                                              =========   =========   =========
Supplemental Disclosures:
Cash paid during the period for:
  Income taxes..............................................  $   1,811   $   2,709   $   2,454
  Interest..................................................     10,539      14,047      18,571
Noncash investing and financing activities:
  Transfer from loans to other real estate owned............         --       2,900       6,436
  Transfer from mortgage loans held for sale to loans.......         --       8,999       1,377
  Conversion of preferred stock to common...................         --       5,686          --
</TABLE>

See Notes to Consolidated Financial Statements.

                                       41
<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. A
previously wholly-owned subsidiary, Allied Bank, F.S.B., ("Allied"), a Federal
Savings Bank, was merged with its sister subsidiary, NBR, in March, 1997. 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 commerical 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, 1999, there
are no assets and $142,000 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 has recorded $128,000 of income
related to the divested operations and has received proceeds of $13,324,000 from
the sale of mortgage loans held for sale. 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 and $6,702,000 for 1998 and 1997.

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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. 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 1998 and 1997 financial statements were
made to conform to the 1999 presentation.

                                       42
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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, a separate component of shareholders' equity. Gain or loss on sale of
investment securities is based on the specific identification method.

LOANS AND THE ALLOWANCE FOR LOAN LOSSES

    Loans are stated at the principal balance outstanding net of allowance for
loan losses and deferred loan fees. 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
to provide for 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 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. Management measures all loans
individually for impairment as part of the Company's normal internal asset
review process.

    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.

    The Company originates loans to customers under an SBA program that
generally provides for SBA guarantees of 70% to 85% of each loan. The Company
may sell and retain 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.

                                       43
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    To calculate the gain or loss on the sale, the Company's investment in an
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.

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 the 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 are recognized based on the difference between the selling price
and the carrying value of the related mortgage loans sold.

    Mortgage loans held for sale are 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 are 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 statement of financial
position. 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.

    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

                                       44
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 at tax
rates in effect when these balances are utilized. 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.

EARNINGS PER COMMON SHARE

    Basic earnings per 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 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.

                                       45
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    The following table reconciles the numerator and denominator used in
computing both basic earnings (loss) per share and diluted earnings (loss) per
share for the periods indicated:

<TABLE>
<CAPTION>
                                                         TWELVE MONTHS ENDED DECEMBER 31,
                                          ---------------------------------------------------------------
                                                 1999                  1998                  1997
                                          -------------------   -------------------   -------------------
                                           BASIC     DILUTED     BASIC     DILUTED     BASIC     DILUTED
                                          --------   --------   --------   --------   --------   --------
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>
EARNINGS PER COMMON SHARE:
Income from continuing operations
  available to common shareholders
  before extraordinary item............    $4,875     $4,875     $2,792(3)  $2,904     $1,928(3)  $2,377
Earnings per share from continuing
  operations before extraordinary
  item.................................    $ 1.45     $ 1.41     $ 0.88     $ 0.84     $ 0.70     $ 0.70
Income (loss) from discontinued
  operations                               $ (437)    $ (437)    $2,187     $2,187     $1,064     $1,064
Earnings per share from income (loss)
  of discontinued operations...........    $(0.13)    $(0.13)    $ 0.69     $ 0.63     $ 0.38     $ 0.32
Income before extraordinary item.......    $4,438     $4,438     $4,979(3)  $5,091     $2,992(3)  $3,441
Earnings per share before extraordinary
  item.................................    $ 1.32     $ 1.28     $ 1.57     $ 1.47     $ 1.08     $ 1.02
Net income.............................    $4,162     $4,162     $4,979(3)  $5,091     $2,992(3)  $3,441
Net income per share...................    $ 1.24     $ 1.20     $ 1.57     $ 1.47     $ 1.08     $ 1.02
Weighted average common shares
  outstanding..........................     3,364      3,456(1)   3,170      3,465(2)   2,776      3,378(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 92.

(2) The weighted average common shares outstanding include the dilutive effects
    of common stock options of 128 and 104 and convertible perpetual preferred
    stock of 166 and 499 for the years ended 1998 and 1997. There is no effect
    of perpetual preferred stock in 1999.

(3) Amounts are shown net of $112 and $449 in dividends on preferred stock for
    1998 and 1997. There were no preferred dividends paid in 1999.

STOCK-BASED COMPENSATION

    The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. 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 share using the fair value method in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.

BUSINESS SEGMENTS

    On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.

                                       46
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. As amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENTS NO. 133, the statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company is in the process of
determining the impact of SFAS No. 133 on the Company's consolidated financial
statements.

NOTE C--CASH AND DUE FROM BANKS

    The Company's subsidiaries are required to maintain average reserve balances
with the Federal Reserve Bank. The required reserve balance included in cash and
due from banks was approximately $2,922,000 and $3,183,000 at December 31, 1999
and 1998.

NOTE D--INVESTMENT SECURITIES

    An analysis of the investment securities portfolio follows:

<TABLE>
<CAPTION>
                                                     GROSS        GROSS
                                       AMORTIZED   UNREALIZED   UNREALIZED    MARKET
                                         COST        GAINS        LOSSES      VALUE
                                       ---------   ----------   ----------   --------
                                                       (IN THOUSANDS)
<S>                                    <C>         <C>          <C>          <C>
December 31, 1999:
Available for sale:
  U.S. Government obligations........   $36,863       $  1        $  766     $36,098
  Mortgage-backed and other
  securities.........................     7,804         --           164       7,640
                                        -------       ----        ------     -------
    Total available for sale.........   $44,667       $  1        $  930     $43,738
                                        =======       ====        ======     =======
Held to maturity:
  U.S. Government obligations........   $12,989       $ --        $  450     $12,539
  Mortgage-backed and other
  securities.........................    17,331          1           595      16,737
                                        -------       ----        ------     -------
    Total debt securities............    30,320          1         1,045      29,276
  FRB and FHLB stock.................     2,647         --            --       2,647
                                        -------       ----        ------     -------
    Total held to maturity...........   $32,967       $  1        $1,045     $31,923
                                        =======       ====        ======     =======
</TABLE>

                                       47
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
                                                     GROSS        GROSS
                                       AMORTIZED   UNREALIZED   UNREALIZED    MARKET
                                         COST        GAINS        LOSSES      VALUE
                                       ---------   ----------   ----------   --------
                                                       (IN THOUSANDS)
<S>                                    <C>         <C>          <C>          <C>
December 31, 1998:
Available for sale:
  U.S. Government obligations........   $30,127       $411        $   --     $30,538
                                        =======       ====        ======     =======

Held to maturity:
  U.S. Government obligations........   $10,986       $ 63        $    6     $11,043
  Mortgage-backed and other
  securities.........................    14,781         94             9      14,866
                                        -------       ----        ------     -------
    Total debt securities............    25,767        157            15      25,909
  FRB and FHLB stock.................     4,105         --            --       4,105
                                        -------       ----        ------     -------
    Total held to maturity...........   $29,872       $157        $   15     $30,014
                                        =======       ====        ======     =======
</TABLE>

    Debt securities by contractual maturity at December 31, 1999, were due as
follows:

<TABLE>
<CAPTION>
                                                           AMORTIZED    MARKET
                                                             COST       VALUE
                                                           ---------   --------
                                                              (IN THOUSANDS)
<S>                                                        <C>         <C>
Held to maturity:
  One year or less.......................................   $    36    $    36
  After one year through five years......................     6,000      5,871
  After five years through ten years.....................     7,191      6,872
  After ten years........................................    17,093     16,497
                                                            -------    -------
                                                            $30,320    $29,276
                                                            =======    =======
Available for sale:
  One year or less.......................................   $ 2,000    $ 2,000
  After one year through five years......................    38,787     37,984
  After five years through ten years.....................     3,880      3,754
  After ten years........................................        --         --
                                                            -------    -------
                                                            $44,667    $43,738
                                                            =======    =======
</TABLE>

    Proceeds from sales of available for sale investments in debt securities
during 1999, 1998 and 1997 were $1,987,000, $1,995,000, and $7,031,000. These
sales resulted in the realization of gross gains of $14,000 for 1999, gross
gains of $40,000 for 1998, gross gains of $30,000 and gross losses of $12,000
for 1997. Gains on redemption by issuers of debt securities amounted to $5,000,
$185,000 and $5,000 in 1999, 1998 and 1997.

    During 1996 the Company transferred $17,193,000 in investment securities
carried as available for sale into the held to maturity category. At the date of
transfer the unrealized holding loss of $300,000 continued to be reported as a
component of accumulated other comprehensive income, a separate component of
equity. Amortization or reduction through redemption of the securities by the
issuer of the unrealized loss and amortization of the equity component offset
each other with no effect on the results of operation. The balance of the
unrealized loss included in accumulated other comprehensive income was reduced
to zero

                                       48
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--INVESTMENT SECURITIES (CONTINUED)
as of December 31, 1998 as all transferred securities were redeemed. The balance
of such unrealized loss was $242,000 as of December 31, 1997.

    Securities carried at approximately $29,835,000 and $19,545,000 at December
31, 1999 and 1998 were pledged to secure public deposits, bankruptcy deposits,
and treasury tax and loan borrowings.

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,
                                                           -------------------
                                                             1999       1998
                                                           --------   --------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Mortgage loan portfolios serviced for:
  Freddie Mac............................................  $ 2,530    $  3,919
  Fannie Mae.............................................    2,348       3,633
  Other investors........................................   27,982     124,173
                                                           -------    --------
                                                           $32,860    $131,725
                                                           =======    ========
</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,
                                                          -------------------
                                                            1999       1998
                                                          --------   --------
                                                            (IN THOUSANDS)
<S>                                                       <C>        <C>
Residential real estate mortgage........................  $130,504   $ 97,194
Commercial real estate mortgage.........................    79,476     59,257
Commercial..............................................    61,165     63,260
Real estate construction................................    40,059     46,905
Installment and other...................................     4,624      5,095
Less deferred fees......................................    (1,383)    (2,395)
                                                          --------   --------
  Total loans...........................................   314,445    269,316
Less allowance for loan losses..........................    (7,931)    (8,041)
                                                          --------   --------
  Net loans.............................................  $306,514   $261,275
                                                          ========   ========
</TABLE>

                                       49
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE F--LOANS AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)

    A summary of the transactions in the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                                      1999       1998       1997
                                                    --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>
Balance, beginning of year........................  $ 8,041    $ 7,645    $ 7,040
Provision for loan losses.........................      750      2,040      2,100
Loans charged off.................................   (1,515)    (2,000)    (1,920)
Recoveries........................................      655        356        425
                                                    -------    -------    -------
Balance, end of year..............................  $ 7,931    $ 8,041    $ 7,645
                                                    =======    =======    =======
</TABLE>

    At December 31, 1999 and 1998 the Company's total recorded investment in
impaired loans was $4,430,000 and $10,293,000 of which $4,119,000 and $8,573,000
relates to the recorded investment for which there is a related allowance for
loan losses of $1,121,000 and $1,543,000 determined in accordance with these
statements and $311,000 and $1,720,000 relates to the amount of that recorded
investment for which there is no related allowance for loan losses determined in
accordance with these statements. At December 31, 1999, 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, 1999, 1998 and 1997 was $4,420,000, $10,377,000 and $10,949,000.
The related amount of interest income recognized during the periods that such
loans were impaired was $292,000, $578,000 and $558,000.

    As of December 31, 1999 and 1998 there were $3,063,000 and $5,556,000 of
loans on nonaccrual. Interest due but excluded from interest income on these
nonaccrual loans was $362,000, $341,000, and $469,000 for the years ended
December 31, 1999, 1998 and 1997. Interest income received on nonaccrual loans
was $205,000, $51,000, and $84,000 for the years ended December 31, 1999, 1998
and 1997.

    At December 31, 1999 and 1998, the Company did not have any loans past due
90 days or more in interest or principal and still accruing interest.

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

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                   ------------------------------
                                                     1999       1998       1997
                                                   --------   --------   --------
                                                           (IN THOUSANDS)
<S>                                                <C>        <C>        <C>
SBA guaranteed portion of loans originated.......  $    --    $    --    $ 2,882
SBA loans sold...................................       --         --      2,579
Premium received at sale.........................       --         --        243
SBA guaranteed portion of loans serviced for
  others.........................................   14,053     25,313     32,950
SBA Loans, net of sold portion...................    6,900     10,330     12,960
</TABLE>

    From time to time the Company extends credit to executive officers,
directors and related parties. No preference is given to these individuals as
these transactions are made in the ordinary course of business at the Company's
normal credit terms, including interest rates and collateralization. There were
no such balances outstanding at December 31, 1999 and 1998.

                                       50
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE G--PREMISES, EQUIPMENT AND LEASES

    A summary of premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              1999       1998
                                                            --------   --------
                                                              (IN THOUSANDS)
<S>                                                         <C>        <C>
Land......................................................  $   293    $   187
Building and leasehold improvements.......................    3,106      3,219
Furniture and equipment...................................    9,392     12,478
                                                            -------    -------
Total premises and equipment..............................   12,791     15,884
Less accumulated depreciation and amortization............    9,746     11,802
                                                            -------    -------
Premises and equipment, net...............................  $ 3,045    $ 4,082
                                                            =======    =======
</TABLE>

    Depreciation expense for the years ended December 31, 1999, 1998, and 1997
was $1,347,000, $1,731,000, and $1,430,000.

    The Company leases certain premises and equipment used in the normal course
of business. There are no contingent rental payments and the Company has three
subleased properties. Total rental expense under all leases, including premises,
totaled $1,449,000, $2,210,000, and $2,095,000 in 1999, 1998 and 1997. Minimum
future lease commitments are as follows: 2000--$1,591,000; 2001--$1,484,000;
2002--$1,499,000, 2003--$962,000, 2004--$686,000 and thereafter--$503,000.
Minimum future sublease receivables are as follows: 2000--$195,000;
2001--$196,000; 2002--$187,000; 2003--$90,000; and 2004--$77,000. All subleases
expire in 2004.

    NBR leases 22,000 square feet of an office building for its main office.
Prior to June 1997, a partnership, of which a director of the Company is a
minority partner, owned the office building. Total lease payments made to the
partnership for the year ended December 31, 1997 were $440,000. There were no
payments made to the partnership in 1998 and 1999.

NOTE H--DEPOSITS

    Interest expense on time certificates of deposit of $100,000 or more was
$2,641,000, $3,246,000, and $2,520,000 during 1999, 1998 and 1997, respectively.

    At December 31, 1999 the scheduled maturities for all time deposits are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------                                                  (IN THOUSANDS)
<S>                                                           <C>
2000........................................................     $156,088
2001........................................................        5,183
2002........................................................        4,152
2003........................................................        1,586
2004........................................................          390
                                                                 --------
                                                                 $167,399
                                                                 ========
</TABLE>

                                       51
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I--INCOME TAXES

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                     ------------------------------
                                                       1999       1998       1997
                                                     --------   --------   --------
                                                             (IN THOUSANDS)
<S>                                                  <C>        <C>        <C>
Current:
  Federal..........................................   $2,433    $ 2,282     $  123
  State............................................      728        827         74
                                                      ------    -------     ------
                                                       3,161      3,109        197
                                                      ------    -------     ------
Deferred:
  Federal..........................................       47       (975)     1,108
  State............................................     (115)      (272)       274
                                                      ------    -------     ------
                                                         (68)    (1,247)     1,382
                                                      ------    -------     ------
                                                      $3,093    $ 1,862     $1,579
                                                      ======    =======     ======
</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>
                                                              1999       1998       1997
                                                            --------   --------   --------
<S>                                                         <C>        <C>        <C>
Income tax at federal statutory rate......................    35.0%      35.0%      35.0%
State franchise tax, net of federal benefit...............     7.3        7.3        7.0
Other.....................................................    (3.5)      (3.2)      (2.1)
                                                              ----       ----       ----
                                                              38.8%      39.1%      39.9%
                                                              ====       ====       ====
</TABLE>

    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, 1999 will be utilized to reduce future
taxable income. Accordingly, there is no valuation allowance associated with

                                       52
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I--INCOME TAXES (CONTINUED)
deferred tax assets at December 31, 1999. 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,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
  Allowance for loan losses.................................   $3,202     $3,239
  Restructuring costs.......................................       87        319
  Accrued expenses not yet deductible.......................      589        400
  Unrealized loss on securities available for sale..........      390         --
  Other real estate owned...................................      144        114
  Depreciation..............................................      327         38
  Securities and loans marked to market for tax purposes....       --        183
  State taxes...............................................       --         69
                                                               ------     ------
    Total deferred tax assets...............................    4,739      4,362
                                                               ------     ------
Deferred tax liabilities:
  Deferred loan fees........................................       --        237
  Unrealized gain on securities available for sale..........       --        173
  Securities and loans marked to market for tax purposes....      421         --
  State taxes...............................................       43         --
  FHLB stock dividends......................................      206        292
  Premium on loan sales.....................................       --         13
  Mortgage servicing rights.................................       --         75
  Other, net................................................       31        165
                                                               ------     ------
    Total deferred tax liabilities..........................      701        955
                                                               ------     ------
  Net deferred tax asset....................................   $4,038     $3,407
                                                               ======     ======
</TABLE>

NOTE J--OTHER BORROWINGS

    Other borrowings consist of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Treasury, tax and loan note.................................   $3,870     $1,371
Advances from UBOC..........................................      825         --
                                                               ------     ------
                                                               $4,695     $1,371
                                                               ======     ======
</TABLE>

ADVANCES FROM THE FHLB

    The Company has a line of credit for short-term purposes with the Federal
Home Loan Bank (FHLB). During the year ended December 31, 1999 the average
balance of FHLB advances was $4,293,000, the highest month-end balance during
the year was $15,000,000 at an average interest rate of 5.31%. During 1998, the
average balance of FHLB advances was $1,318,000 at an average interest rate of
6.03%. The highest month-end balance during the year was $1,966,000. At December
31, 1999 and 1998, the line of credit had been fully paid off. All borrowings
from the FHLB must be collateralized, and the

                                       53
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J--OTHER BORROWINGS (CONTINUED)
Company has pledged approximately $111,832,000 of residential mortgage loans as
of December 31, 1999, 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, the Company 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, 1999 the line of credit had an outstanding balance of
$825,000, an interest rate of 9.50% and a maturity date of December 31, 2000.
The average balance of UBOC advances was $35,000 for 1999 at an average interest
rate of 9.37%. The highest month-end balance during the year was $825,000.

NOTE K--OTHER NONINTEREST EXPENSES

    The major components of other expense are as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
                                                        1999       1998       1997
                                                      --------   --------   --------
                                                              (IN THOUSANDS)
<S>                                                   <C>        <C>        <C>
Professional fees...................................   $1,231     $  769     $1,130
Regulatory expense and insurance....................      459        588        541
Postage and office supplies.........................      489        506        702
Shareholder expenses and Director fees..............      320        339        381
Advertising.........................................      217        188        241
Telephone...........................................      339        360        552
Electronic data processing..........................    1,234      1,284      1,268
Net costs of other real estate owned................      195        956        568
Other...............................................      638        506      1,067
                                                       ------     ------     ------
                                                       $5,122     $5,496     $6,450
                                                       ======     ======     ======
</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 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.

                                       54
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L--STOCK OPTIONS AND BENEFIT PLANS (CONTINUED)
    Outstanding common stock options at December 31, 1999, are exercisable at
various dates through 2006. The following table summarizes option activity:

<TABLE>
<CAPTION>
                                                                 WEIGHTED AVERAGE
                                                     NUMBER OF     OPTION PRICE
                                                      SHARES        PER SHARE
                                                     ---------   ----------------
<S>                                                  <C>         <C>
Balance at January 1, 1997.........................   431,500         $ 9.33
  Options granted..................................    30,000          13.13
  Options exercised................................   (36,600)          8.14
  Options cancelled................................   (10,900)          9.39
                                                     --------
Balance at December 31, 1997.......................   414,000           9.71
  Options granted..................................    74,000          20.50
  Options exercised................................  (124,000)          9.14
  Options cancelled................................   (10,000)          9.94
                                                     --------
Balance at December 31, 1998.......................   354,000          12.16
  Options granted..................................     8,000          17.13
  Options exercised................................   (82,000)         10.71
  Options cancelled................................    (7,000)         20.50
                                                     --------
Balance at December 31, 1999.......................   273,000         $12.50
                                                     ========
</TABLE>

    At December 31, 1999 23,600 shares were available for future grants under
the plan.

    Additional information regarding options outstanding as of December 31, 1999
is as follows:

<TABLE>
<CAPTION>
                                                        OPTIONS OUTSTANDING
                                                 ---------------------------------
                                                 WEIGHTED AVG.                                OPTIONS EXERCISABLE
                                                   REMAINING                            -------------------------------
          RANGE OF                NUMBER          CONTRACTUAL       WEIGHTED AVG.         NUMBER         WEIGHTED AVG.
       EXERCISE PRICES          OUTSTANDING       LIFE (YRS)        EXERCISE PRICE      EXERCISABLE      EXERCISE PRICE
       ---------------          -----------      -------------      --------------      -----------      --------------
<S>                             <C>              <C>                <C>                 <C>              <C>
$ 6.00 - $ 7.99..............      11,000               1               $7.54              11,000            $ 7.54
  8.00 -   9.99..............     128,000               4                8.90             117,000              8.81
 10.00 -  11.99..............      21,000               5               10.75              17,000             10.75
 12.00 -  13.99..............      44,000               5               13.02              34,000             12.99
 14.00 -  20.99..............      69,000               9               20.11              15,000             20.50
                                  -------                                                 -------
                                  273,000                                                 194,000
                                  =======                                                 =======
</TABLE>

                                       55
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L--STOCK OPTIONS AND BENEFIT PLANS (CONTINUED)
    Had compensation cost for the grants been determined based upon the fair
value method, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                              1999         1998         1997
                                           ----------   ----------   ----------
<S>                                        <C>          <C>          <C>
Net Income:
  As reported............................  $4,162,000   $5,091,000   $3,441,000
  Pro forma..............................   3,940,000    4,836,000    3,313,000

Basic earnings per share:
  As reported............................        1.24         1.57         1.08
  Pro forma..............................        1.17         1.49         1.03

Diluted earnings per share:
  As reported............................        1.20         1.47         1.02
  Pro forma..............................        1.14         1.41          .98
</TABLE>

    The fair value of the options granted during 1999, 1998, and 1997, is
estimated as $60,000, $727,000, and $225,000, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend at
the current rate, volatility of 32.36%, 30.32%, and 29.5%, risk-free interest
rate of 6.41%, 5.53%, and 6.65%, assumed forfeiture rate of zero, and an
expected life of 10 years. The weighted average per share fair value of the
1999, 1998, and 1997 awards was $7.45, $9.82, and $7.48, respectively.

    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
$138,000, $212,000, and $179,000 in 1999, 1998 and 1997.

    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 $3,187,000 at December 31, 1999. Under this plan, the Company
recognized expense of $54,000, $110,000, and $142,000 in 1999, 1998 and 1997.
The aggregate projected benefit obligation of the Plan was approximately
$206,000 and $163,000 at December 31, 1999 and 1998. 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 $288,000 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

                                       56
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M--SUBORDINATED DEBT AND PREFERRED STOCK (CONTINUED)
Company issued 497,865 shares of the Company's common stock in exchange for
573,290 shares of preferred stock. The remaining shares were redeemed with cash.

NOTE N--REGULATORY MATTERS

    One of the principal sources of cash for Redwood are 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, 1999, NBR could pay additional dividends to Redwood of approximately
$2,151,000 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 1999 or 1998.

    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, 1999 and 1998, 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.

                                       57
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N--REGULATORY MATTERS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                   TO BE
                                                                                                CATEGORIZED
                                                                                                  AS WELL
                                                                          FOR CAPITAL           CAPITALIZED
                                                                           ADEQUACY            UNDER PROMPT
                                                      ACTUAL               PURPOSES          CORRECTIVE ACTION
                                                -------------------   -------------------   -------------------
                                                 AMOUNT     RATIO      AMOUNT     RATIO      AMOUNT     RATIO
                                                --------   --------   --------   --------   --------   --------
<S>                                             <C>        <C>        <C>        <C>        <C>        <C>
(dollars in thousands)
At December 31, 1999:

COMPANY
  Leverage Capital (to Average Assets)........  $36,885      8.66%    $17,031      4.00%        n/a       n/a
  Tier 1 Capital (to Risk-weighted Assets)....   36,885     11.74      12,563      4.00         n/a       n/a
  Total Capital (to Risk-weighted Assets).....   40,860     13.01      25,126      8.00         n/a       n/a

NBR
  Leverage Capital (to Average Assets)........   37,401      8.86      16,885      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

At December 31, 1998:

COMPANY
  Leverage Capital (to Average Assets)........  $37,072      8.84%    $16,769      4.00%        n/a       n/a
  Tier 1 Capital (to Risk-weighted Assets)....   37,072     11.84      12,522      4.00         n/a       n/a
  Total Capital (to Risk-weighted Assets).....   53,036     16.94      25,044      8.00         n/a       n/a

NBR
  Leverage Capital (to Average Assets)........   43,110     10.31      16,726      4.00%     20,907      5.00%
  Tier 1 Capital (to Risk-weighted Assets)....   43,110     13.75      12,539      4.00      18,808      6.00
  Total Capital (to Risk-weighted Assets).....   50,079     15.98      25,077      8.00      31,347     10.00
</TABLE>

    Management believes that as of December 31, 1999, the Company and NBR meet
all capital requirements to which they are subject. Under the most stringent
capital requirement, NBR has approximately $16,299,000 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.

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 67,000 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

                                       58
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O--BUSINESS SEGMENTS (CONTINUED)
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, operations
and technology expense, 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.

    Information related to the interest allocation and indirect costs presented
for 1998 and 1997 has been restated to allow for the Company's revision to the
internal funds transfer pricing methodology and overhead allocation.

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31, 1999
                                                              -------------------------------------
                                                               COMMUNITY                   TOTAL
                                                                BANKING      BANKCARD     COMPANY
                                                              -----------   ----------   ----------
                                                                         (IN THOUSANDS)
<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            0
                                                                --------      -------     --------
Net interest income.........................................      19,144          543       19,687
Provision for loan losses...................................         750            0          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>

                                       59
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O--BUSINESS SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31, 1998
                                                              -------------------------------------
                                                               COMMUNITY                   TOTAL
                                                                BANKING      BANKCARD     COMPANY
                                                              -----------   ----------   ----------
                                                                         (IN THOUSANDS)
<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            0
                                                                --------      -------     --------
Net interest income.........................................      17,547          511       18,058
Provision for loan losses...................................       2,040            0        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>

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31, 1997
                                                              -------------------------------------
                                                               COMMUNITY                   TOTAL
                                                                BANKING      BANKCARD     COMPANY
                                                              -----------   ----------   ----------
                                                                         (IN THOUSANDS)
<S>                                                           <C>           <C>          <C>
Total interest income.......................................    $ 35,471      $    --     $ 35,471
Total interest expense......................................      15,789           26       15,815
Interest income (expense) allocation........................        (536)         536            0
                                                                --------      -------     --------
Net interest income.........................................      19,146          510       19,656
Provision for loan losses...................................       2,100            0        2,100
Total other operating income................................       2,719        1,585        4,304
Total other operating expense...............................      16,614        1,290       17,904
                                                                --------      -------     --------
Income from continuing operations before income taxes and
  extraordinary item........................................       3,151          805        3,956
Provision for income taxes..................................       1,269          310        1,579
                                                                --------      -------     --------
Income from continuing operations before extraordinary
  item......................................................    $  1,882      $   495     $  2,377
                                                                ========      =======     ========
Total Average Assets........................................    $428,983      $ 9,084     $438,067
                                                                ========      =======     ========
</TABLE>

NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Company disclose the fair value of financial instruments for
which it is practicable to estimate that value. Although management uses its
best judgment in assessing fair value, 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 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. Fair value has not been adjusted to reflect changes in market
conditions for the period subsequent to the valuation dates of December 31, 1999
and 1998 and therefore

                                       60
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, 1999 and
1998 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) INVESTMENTS

    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, 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 HELD FOR SALE

    For uncommitted residential mortgages held for sale, fair value is estimated
using indications of value obtained by management from independent third parties
or quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. Committed residential mortgage loans held
for sale are valued based on actual commitment prices. Fair value of certain
loans held for sale include the value of premiums associated with the sale of
the related servicing rights in the instance that a commitment exists for the
sale of such servicing at a predetermined rate.

(D) LOANS RECEIVABLE

    To estimate fair value of loans held for investment, including commercial
loans, mortgages and construction 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.

(E) INTEREST RECEIVABLE

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

(F) MORTGAGE SERVICING RIGHTS

    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.

                                       61
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(G) DEPOSIT LIABILITIES

    Under SFAS No. 107, 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, 1999 and 1998. 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.

(H) OTHER BORROWINGS AND SUBORDINATED NOTES

    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.

(I) COMMITMENTS TO FUND MORTGAGE LOANS

    The fair value of commitments to fund fixed-rate mortgage loans represents
the estimated gain (loss) to the Company of fully funding its commitments at
current interest rates and selling the underlying loans in the secondary market.

(J) 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.

(K) FORWARD CONTRACTS TO SELL MBS

    The fair value of forward contracts to sell MBS represents the difference
between current rates for similar quantities and delivery dates of
mortgage-backed securities as compared to the contractual rates.

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

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                       -----------------------------------------
                                                              1999                  1998
                                                       -------------------   -------------------
                                                       CARRYING     FAIR     CARRYING     FAIR
                                                        AMOUNT     VALUE      AMOUNT     VALUE
                                                       --------   --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                                    <C>        <C>        <C>        <C>
ASSETS:
  Cash and cash equivalents..........................  $20,555    $ 20,555   $ 42,187   $ 42,187
  Investments........................................   76,705      75,661     60,410     60,552
  Loans held for sale................................       --          --     32,620     32,633
  Portfolio loans, net...............................  306,514     307,377    261,275    271,730
  Interest receivable................................    2,792       2,792      2,996       2996
  Mortgage servicing rights..........................       32         312        305      1,351

LIABILITIES:
  Deposits...........................................  369,509     342,092    364,720    351,625
  Other borrowings...................................    4,695       4,695      1,371      1,429
  Subordinated notes.................................       --          --     12,000     12,000

OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
  Commitments to fund mortgage loans.................                   --                   112
  Commitments to fund other loans....................                  393                   284
  Forward contracts to sell MBS......................                   --                   (38)
</TABLE>

                                       62
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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

<TABLE>
<CAPTION>
                                                              CONTRACT OR NOTIONAL AMOUNT
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
Financial instruments whose contract amounts represent
  credit risk:
      Commitments to extend credit..........................  $38,285,000    $63,620,000
      Standby letters of credit.............................      539,000        557,000
</TABLE>

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

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
ASSETS
Cash........................................................  $   119    $ 2,335
Investment in subsidiaries..................................   37,961     47,678
Capitalized debt issuance costs.............................       --        473
Other assets................................................      707        132
                                                              -------    -------
  Total assets..............................................  $38,787    $50,618
                                                              =======    =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................  $ 1,343    $   (22)
Subordinated notes..........................................       --     12,000
                                                              -------    -------
  Total liabilities.........................................    1,343     11,978
                                                              -------    -------
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:
  1999--3,228,771 shares; 1998--3,363,565 shares............   22,033     25,801
Retained earnings...........................................   15,950     12,600
Accumulated other comprehensive (loss) income, net               (539)       239
                                                              -------    -------
  Shareholders' equity......................................   37,444     38,640
                                                              -------    -------
  Total liabilities and shareholders' equity................  $38,787    $50,618
                                                              =======    =======
</TABLE>

                                       63
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Operating income:
  Management service fees...................................  $    --     $   --     $  186
  Dividends from subsidiaries...............................   10,900      1,200        860
  Interest income from subsidiaries.........................       32        274        274
                                                              -------     ------     ------
    Total operating income..................................   10,932      1,474      1,320
                                                              -------     ------     ------
Expenses:
  Interest expense..........................................      151      1,107      1,107
  Operating expenses........................................      741        486        732
                                                              -------     ------     ------
    Total expenses..........................................      892      1,593      1,839
                                                              -------     ------     ------
(Loss) income before undistributed income of subsidiaries...   10,040       (119)      (519)
Equity in undistributed (distributed) income of
  subsidiaries..............................................   (5,940)     4,713      3,378
                                                              -------     ------     ------
Income before income taxes and extraordinary item...........    4,100      4,594      2,859
Extraordinary item..........................................     (276)        --         --
Income tax benefit..........................................     (338)      (497)      (582)
                                                              -------     ------     ------
Net income..................................................  $ 4,162     $5,091     $3,441
                                                              =======     ======     ======
</TABLE>

                                       64
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income................................................  $  4,162   $ 5,091    $ 3,441
                                                              --------   -------    -------
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Amortization and depreciation...........................         6        17         26
    Equity in undistributed (distributed) income of
      subsidiaries..........................................     5,940    (4,713)    (3,378)
    Change in other assets..................................     2,891      (113)       745
    Change in other liabilities.............................     1,365      (257)      (216)
                                                              --------   -------    -------
      Total adjustments.....................................    10,202    (5,066)    (2,823)
                                                              --------   -------    -------
      Net cash provided by operating activities.............    14,364        25        618
                                                              --------   -------    -------
Cash flows used in financing activities:
  Subordinated note redemption..............................   (12,000)       --         --
  Stock issuance............................................       414       180        298
  Stock repurchase..........................................    (4,182)       --         --
  Cash dividends............................................      (812)     (515)      (449)
                                                              --------   -------    -------
    Net cash provided by (used in) financing activities.....   (16,580)     (335)      (151)
                                                              --------   -------    -------
Increase (decrease) in cash.................................    (2,216)     (310)       467
Cash at beginning of year...................................     2,335     2,645      2,178
                                                              --------   -------    -------
Cash at end of year.........................................  $    119   $ 2,335    $ 2,645
                                                              ========   =======    =======
</TABLE>

                                       65
<PAGE>
QUARTERLY RESULTS

UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(dollars in thousands)

<TABLE>
<CAPTION>
                                               Q1         Q2         Q3         Q4         Q1         Q2         Q3         Q4
                                              1998       1998       1998       1998       1999       1999       1999       1999
                                            --------   --------   --------   --------   --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net interest income.......................   $4,422     $4,430     $4,715     $4,491     $4,759     $4,837     $4,973     $5,118
Provision for credit losses...............      510        510        510        510        300        200        200         50
Other operating income from continuing
  operations..............................    1,347      1,237      1,395      1,646      1,325      1,378      1,193      1,301
Other operating expenses from continuing
  operations..............................    4,020      4,171      4,044      4,642      3,805      4,151      4,200      4,010
                                             ------     ------     ------     ------     ------     ------     ------     ------
Income from continuing operations before
  income taxes and extraordinary item.....    1,239        986      1,556        985      1,979      1,864      1,766      2,359
Provision for income taxes................      484        385        608        385        768        684        714        927
Income from continuing operations before
  extraordinary item......................      755        601        948        600      1,211      1,180      1,052      1,432
Income (loss) from discontinued
  operations, net of tax..................      352        610        387        838         83         38       (686)       128
Extraordinary item, net of tax............       --         --         --         --        276         --         --         --
                                             ------     ------     ------     ------     ------     ------     ------     ------
Net income................................   $1,107     $1,211     $1,335     $1,438     $1,018     $1,218     $  366     $1,560
                                             ======     ======     ======     ======     ======     ======     ======     ======
Net income available for common stock
  shareholders............................   $  995     $1,211     $1,335     $1,438     $1,018     $1,218     $  366     $1,560
                                             ======     ======     ======     ======     ======     ======     ======     ======
Per share:
  Basic earnings per share:
    Income from continuing operations
      before extraordinary item...........   $  .23     $  .19     $  .28     $  .18     $  .36     $  .35     $  .31     $  .43
    Income (loss) from discontinued
      operations..........................      .09        .19        .11        .25        .02        .01       (.20)       .04
    Income before extraordinary item......      .36        .39        .40        .43        .38        .36        .11        .47
    Net income available for common stock
      shareholders........................      .36        .39        .40        .43        .30        .36        .11        .47
Diluted earnings per share:
    Income from continuing operations
      before extraordinary item...........   $  .22     $  .17     $  .27     $  .17     $  .35     $  .34     $  .30     $  .42
    Income (loss) from discontinued
      operations..........................      .10        .18        .11        .24        .02        .01       (.20)       .04
    Income before extraordinary item......      .32        .35        .38        .41        .37        .35        .11        .46
    Net income available for common stock
      shareholders........................      .32        .35        .38        .41        .29        .35        .11        .46
Common Stock Prices:
  High....................................   $20.50     $21.88     $21.25     $17.50     $29.00     $27.25     $24.00     $23.94
  Low.....................................    16.63      17.75      14.13      13.00      17.00      21.88      17.75      17.75
  Close...................................    18.88      20.75      16.38      17.06      24.75      23.88      18.63      19.13
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    None.

                                       66
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    (a)  TRANSACTIONS WITH MANAGEMENT AND OTHERS.

    During the year ended December 31, 1999, 1998, and 1997, the Company's
operating subsidiary, National Bank of the Redwoods, paid $130,354, $174,577,
and $496,557 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.

    NBR leases 22,000 square feet of an office building for its main office.
Prior to June 1997, a partnership of which Richard Colombini is a minority
partner, owned the building. Total lease payments made to the partnership for
the year ended December 31, 1997 was $440,000.

    (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 collectibility 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,
1999, there were no outstanding balances under extensions of credit to directors
and executive officers of the Company and companies with which directors are
associated.

                                       67
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

    1.  The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included for the years ended
December 31, 1999, 1998 and 1997 are included in Item 8.

      Independent Auditors' Report
       Consolidated Financial Statements of Redwood Empire Bancorp

          Consolidated Statements of Operations
           Consolidated Balance Sheets
           Consolidated Statements of Shareholders' Equity
           Consolidated Statements of Cash Flows
           Notes to Consolidated Financial Statements

    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.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    DESCRIPTION
-------   -----------
<C>       <S>
   3.     Amended and restated By-Laws of the Registrant, filed as
          Exhibit 3 to the Registrant's 1994 Annual Report on Form
          10-K and by this reference incorporated herein.
   3.1    Articles of Incorporation of the Registrant.
  10.     Executive Salary Continuation Agreement between Patrick W.
          Kilkenny and Redwood Empire Bancorp.
  10.1    Executive Severance Agreement between Patrick W. Kilkenny
          and Redwood Empire Bancorp.
  10.2    Executive Salary Continuation Agreement between James E.
          Beckwith and Redwood Empire Bancorp.
  10.3    Executive Severance Agreement between James E. Beckwith and
          Redwood Empire Bancorp.
  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.
  10.7    Dividend Reinvestment and Stock Purchase Plan on Form S-3
          dated April 28, 1993 (Registration No. 3361750), and by this
          reference incorporated herein.
  10.8    Lease, Dated June 1, 1999, between National Bank of the
          Redwoods and Advanced Development & Investments.
  10.9    Asset Sale Agreement dated September 10, 1999 between
          National Bank of the Redwoods and Valley Financial
          Acquisition, Inc.
  11.     Statement re Computation of Per Share Earnings.
  12.1    Statement re Computation of Ratio of Earnings to Fixed
          Charges.
  12.2    Statement re Computation of Ratio of Earnings to Fixed
          Charges and Preferred Dividends.
  21.     Subsidiaries of the Registrant.
</TABLE>

                                       68
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    DESCRIPTION
-------   -----------
<C>       <S>
  23.     Consent of Deloitte & Touche LLP.
  27.     Financial Data Schedule
</TABLE>

(b) REPORTS ON FORM 8-K.

    On November 3, 1999 the Company filed a Form 8-K reporting third quarter
1999 financial results.

    On December 2, 1999 the Company filed a Form 8-K in which it declared an
    increase of quarterly cash dividend on its Common stock and announced
    completion of an initial share repurchase and authorization of a new share
    repurchase.

(c) EXHIBITS.

    See Item 14(a)3 and the Index to Exhibits.

(d) EXCLUDED FINANCIAL STATEMENTS

    Not applicable.

                                       69
<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.

<TABLE>
<S>       <C>                                                    <C>        <C>
REDWOOD EMPIRE BANCORP

By:       /S/ PATRICK W. KILKENNY                                 Dated:    March 21, 2000
          -------------------------------------------
          Patrick W. Kilkenny
          PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
          (PRINCIPAL EXECUTIVE OFFICER)

And By:   /S/ JAMES E. BECKWITH                                   Dated:    March 21, 2000
          -------------------------------------------
          James E. Beckwith
          EXECUTIVE VICE PRESIDENT
          CHIEF OPERATING OFFICER
          CHIEF FINANCIAL OFFICER
          (PRINCIPAL FINANCIAL OFFICER
          AND PRINCIPAL ACCOUNTING OFFICER)
</TABLE>

                                       70
<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.

<TABLE>
<S>                                                          <C>
/S/ RICHARD I. COLOMBINI
-------------------------------------------                  Dated: March 21, 2000
Richard I. Colombini, DIRECTOR

/S/ ROBERT D. COOK
-------------------------------------------                  Dated: March 21, 2000
Robert D. Cook, DIRECTOR

/S/ MARGIE HANDLEY
-------------------------------------------                  Dated: March 21, 2000
Margie Handley, DIRECTOR

/S/ DANA R. JOHNSON
-------------------------------------------                  Dated: March 21, 2000
Dana R. Johnson, DIRECTOR

/S/ PATRICK W. KILKENNY
-------------------------------------------                  Dated: March 21, 2000
Patrick W. Kilkenny, DIRECTOR

/S/ PATRICIA PADI SELWYN
-------------------------------------------                  Dated: March 21, 2000
Patricia "Padi" Selwyn, DIRECTOR

/S/ GREGORY J. SMITH
-------------------------------------------                  Dated: March 21, 2000
Gregory J. Smith, DIRECTOR

/S/ WILLIAM B. STEVENSON
-------------------------------------------                  Dated: March 21, 2000
William B. Stevenson, DIRECTOR

/S/ TOM D. WHITAKER
-------------------------------------------                  Dated: March 21, 2000
Tom D. Whitaker, DIRECTOR AND CHAIRMAN OF THE BOARD
</TABLE>

                                       71