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

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 2000

                                       or

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

For the transition period from ______ to ______

                         Commission file number: 0-19231

                             REDWOOD EMPIRE BANCORP
             (Exact name of Registrant as specified in its charter)

                  California                                     68-0166366
         (State or other jurisdiction of                        (IRS Employer
         Incorporation or organization)                      Identification No.)

         111 Santa Rosa Avenue, Santa Rosa, California           95404-4905
         (Address of principal executive offices)                (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No _

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date. November 1, 2000: 2,858,154


                        This page is page 1 of 34 pages.
<PAGE>




                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index


                                                                            Page
PART I.  Financial Information

  Item 1.    Financial Statements

             Consolidated Statements of Operations
             Three and Nine Months ended September 30, 2000 and 1999...........3

             Consolidated Balance Sheets
             September 30, 2000 and December 31, 1999..........................5

             Consolidated Statements of Cash Flows
             Nine Months Ended September 30, 2000 and 1999.....................6

             Notes to Consolidated Financial Statements........................8


  Item 2.    Management's Discussion and Analysis
             of Financial Condition and Results of Operations.................14

  Item 3.    Quantitative and Qualitative Disclosure
             About Market Risk................................................32


PART II. Other Information

  Item 6.    Exhibits and Reports on Item 8-K.................................33



SIGNATURES  ..................................................................34


                        This page is page 2 of 34 pages.

<PAGE>
PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements

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

                                                              Three Months Ended                Nine Months Ended
                                                                September 30,                     September 30,
                                                            2000              1999              2000         1999
                                                      -----------------------------------   ---------------------------
<S>                                                             <C>               <C>             <C>          <C>
Interest income:
  Interest and fees on loans                                    $7,766            $6,601          $21,964      $19,025
  Interest on investment securities                              1,213             1,048            3,753        3,011
  Interest on federal funds sold                                    48                37              271          293
                                                      -----------------------------------   ---------------------------
Total interest income                                            9,027             7,686           25,988       22,329

Interest expense:
  Interest on deposits                                           3,622             2,623           10,236        7,271
  Interest on subordinated notes                                   ---               ---              ---          142
  Interest on other borrowings                                     128                90              261          297
                                                      -----------------------------------   ---------------------------
Total interest expense                                           3,750             2,713           10,497        7,710
                                                      -----------------------------------   ---------------------------

Net interest income                                              5,277             4,973           15,491       14,619
Provision for loan losses                                          ---               200              150          700
                                                      -----------------------------------   ---------------------------

Net interest income after loan loss provision                    5,277             4,773           15,341       13,919

Noninterest income:
  Service charges on deposit accounts                              264               253              792          776
  Merchant draft processing, net                                 1,116               733            3,088        2,375
  Loan servicing income                                             67                14              187           79
  Net realized (losses)/gains on sale of
    investment securities available for sale                       (86)              ---             (124)          14
  Other income                                                     137               193              492          653
                                                      -----------------------------------    --------------------------
Total noninterest  income                                        1,498             1,193            4,435        3,897

Noninterest expense:
  Salaries and employee benefits                                 2,133             2,187            6,375        6,652
  Occupancy and equipment expense                                  498               598            1,508        1,713
  Other                                                          1,297             1,415            3,908        3,790
                                                      -----------------------------------    --------------------------
Total noninterest expense                                        3,928             4,200           11,791       12,155
                                                      -----------------------------------    --------------------------

  Income from continuing operations before income taxes
     and extraordinary item                                      2,847             1,766            7,985        5,661
  Provision for income taxes                                     1,149               714            3,238        2,187
                                                      -----------------------------------    --------------------------

Income from continuing operations before extraordinary
    item                                                         1,698             1,052            4,747        3,474

Discontinued Operations:
  Loss from discontinued operations
    (less applicable income taxes of ($356) and ($439))            ---              (519)             ---         (429)

  Loss on disposal of discontinued operations,
      net of tax of ($113)                                         ---              (167)             ---         (167)
                                                      -----------------------------------   ---------------------------
    Loss from discontinued operations                              ---              (686)             ---         (596)
                                                      -----------------------------------   ---------------------------

Income before extraordinary item                                 1,698               366            4,747        2,878

Extraordinary item                                                 ---               ---              ---         (459)
Income tax benefit                                                 ---               ---              ---          183
                                                      -----------------------------------   ---------------------------
Total extraordinary item, net of tax                               ---               ---              ---         (276)
                                                      -----------------------------------   ---------------------------

Net income                                                      $1,698              $366           $4,747       $2,602
                                                      ===================================   ===========================

Total comprehensive income                                      $2,010              $346           $4,968       $2,031
                                                      ===================================   ===========================
</TABLE>

                                               (Continued)

                        This page is page 3 of 34 pages.
<PAGE>

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


                                                                 Three Months Ended          Nine Months Ended
                                                                    September 30,              September 30,
                                                                  2000         1999          2000        1999
                                                               ------------------------   ------------------------
<S>                                                              <C>          <C>           <C>         <C>
Basic earnings per common share:
   Income from continuing operations before extraordinary item       $0.58        $0.31         $1.52       $1.03
   Loss from discontinued operations                                   ---       (0.20)           ---      (0.18)
   Income before extraordinary item                                   0.58         0.11          1.52        0.85
   Net income                                                         0.58         0.11          1.52        0.77
  Weighted average shares - basic                                2,940,000    3,390,000     3,117,000   3,385,000

Diluted earnings per common share and common equivalent share:
   Income from continuing operations before extraordinary item       $0.56        $0.30         $1.50       $1.00
   Loss from discontinued operations                                   ---       (0.20)           ---      (0.17)
   Income before extraordinary item                                   0.56         0.11          1.50        0.83
   Net income                                                         0.56         0.11          1.50        0.75
  Weighted average shares - diluted                              3,009,000   3,458,000      3,173,000   3,472,000

See Notes to Consolidated Financial Statements.

</TABLE>

                                                    (Concluded)


                        This page is page 4 of 34 pages.

<PAGE>


<TABLE>
<CAPTION>

                                        REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                              Consolidated Balance Sheets
                                                 (dollars in thousands)

                                                                             September 30,             December 31,
                                                                                 2000                      1999
                                                                           ------------------       -------------------
                                                                              (unaudited)
<S>                                                                                 <C>                      <C>
Assets:
Cash and due from banks                                                              $18,833                  $19,058
Federal funds sold and repurchase agreements                                              97                    1,497
                                                                           ------------------       -------------------
  Cash and cash equivalents                                                           18,930                   20,555

Investment securities:
  Held to maturity (fair value of $32,197 and $31,923)                                32,910                   32,967
  Available for sale, at fair value (amortized cost of $39,402 and $44,667)           38,853                   43,738
                                                                           ------------------       -------------------
    Total investment securities                                                       71,763                   76,705
Loans:
    Residential real estate mortgage                                                 136,827                  130,504
    Commercial real estate mortgage                                                   84,903                   79,476
    Commercial                                                                        64,958                   61,165
    Real estate construction                                                          46,185                   40,059
    Installment and other                                                              5,701                    4,624
    Less deferred loan fees                                                           (1,138)                  (1,383)
                                                                           ------------------       -------------------
        Total portfolio loans                                                        337,436                  314,445
    Less allowance for loan losses                                                    (8,064)                  (7,931)
                                                                           ------------------       -------------------
        Net loans                                                                    329,372                  306,514

Premises and equipment, net                                                            2,604                    3,045
Mortgage servicing rights, net                                                            27                       32
Other real estate owned                                                                  925                    2,363
Cash surrender value of life insurance                                                 3,305                    3,187
Other assets and interest receivable                                                   9,842                   10,645
                                                                           ------------------       -------------------
     Total assets                                                                   $436,768                 $423,046
                                                                           ==================       ===================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                                $81,103                   $77,753
  Interest-bearing transaction accounts                                              122,314                  124,357
  Time deposits $100,000 and over                                                     89,365                   69,294
  Other time deposits                                                                 97,797                   98,105
                                                                           ------------------       -------------------
    Total deposits                                                                   390,579                  369,509

Other short-term borrowings                                                            3,844                    4,695
Other liabilities and interest payable                                                 8,633                   11,398
                                                                           ------------------       -------------------
     Total liabilities                                                               403,056                  385,602

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
      none outstanding                                                                   ---                      ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 2,854,654 and 3,228,771 shares                          14,551                   22,033
  Retained earnings                                                                   19,479                   15,950
  Accumulated other comprehensive loss, net                                             (318)                    (539)
                                                                           ------------------       -------------------
     Total shareholders' equity                                                       33,712                   37,444
                                                                           ------------------       -------------------
     Total liabilities and shareholders' equity                                     $436,768                 $423,046
                                                                           ==================       ===================

See Notes to Consolidated Financial Statements.
</TABLE>

                        This page is page 5 of 34 pages.

<PAGE>



<TABLE>
<CAPTION>

                               REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                Consolidated Statements of Cash Flows
                                           (in thousands)
                                             (unaudited)

                                                                             Nine Months Ended
                                                                               September 30,
                                                                         2000               1999
                                                                     -------------      --------------
<S>                                                                        <C>                <C>
Cash flows from operating activities:

  Net income                                                                $4,747             $2,602

Adjustments  to  reconcile   net  income  to  net  cash  provided
  by operating activities:
  Depreciation and amortization, net                                           851              1,183
  Net realized loss (gains) on securities available for sale                   124                (14)
  Loans originated for sale                                                    ---           (250,853)
  Proceeds from sale of loans held for sale                                    ---            258,396
  Gain on sale of loans and loan servicing                                     ---             (1,307)
  Provision for loan losses                                                    150                700
  Change in other assets and interest receivable                               (55)             2,776
  Change in other liabilities and interest payable                          (2,878)             9,807
  Other, net                                                                   ---                215
                                                                      -------------     --------------
  Total adjustments                                                         (1,808)            20,903
                                                                      -------------     --------------

  Net cash provided by operating activities                                  2,939             23,505

Cash flows from investing activities:
  Net change in loans                                                      (23,068)           (31,846)
  Purchases of investment securities available for sale                     (3,943)           (19,698)
  Purchases of investment securities held to maturity                         (874)            (6,192)
  Proceeds from sales of investment securities available for sale            8,918                ---
  Maturities of investment securities available for sale                       162              5,987
  Maturities or calls of investment securities held to maturity              1,029              3,189
  Purchases of premises and equipment, net                                    (410)              (225)
  Purchase of mortgage servicing rights                                                            71
  Proceeds from sale of other real estate owned                              2,259              1,888
                                                                      -------------     --------------
    Net cash used in investing activities                                  (15,927)           (46,826)

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                         3,350             (5,343)
  Change in interest bearing transaction accounts                           (2,043)            (9,729)
  Repaymentof subordinated debt                                                ---            (12,000)
  Change in time deposits                                                   19,763             18,280
  Change in other short-term borrowings                                       (851)            16,414
  Issuance/(repurchase) of common stock                                     (7,752)              (969)
  Dividends paid                                                            (1,104)              (273)
                                                                      -------------     --------------
    Net cash provided by financing activities                               11,363              6,380
                                                                      -------------     --------------


Net change in cash and cash equivalents                                     (1,625)           (16,941)
Cash and cash equivalents at beginning of period                            20,555             42,187
                                                                      -------------     --------------


Cash and cash equivalents at end of period                                 $18,930            $25,246
                                                                      =============     ==============
</TABLE>


                                             (Continued)

                        This page is page 6 of 34 pages.

<PAGE>



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

                                                                                  Nine Months Ended
                                                                                    September 30,
                                                                               2000                    1999

                                                                           --------------      -------------
<S>                                                                            <C>                  <C>
Supplemental Disclosures:

Cash paid during the period for:
  Interest expense                                                             $11,514              $8,626
  Income taxes                                                                   3,279                 959

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                                  821               2,303
  Dividends declared                                                               440                 202
  Transfers from mortgage loans held for sale to portfolio loans                   ---               8,607






See notes to Consolidated Financial Statements.

</TABLE>

                                              (Concluded)



                        This page is page 7 of 34 pages.


<PAGE>

                     REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                   (Unaudited)


1.       Basis of Presentation

         The accompanying  unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes contained in
Redwood  Empire  Bancorp's  1999 Annual Report to  Shareholders.  The statements
include the accounts of Redwood Empire Bancorp  ("Redwood") and its wholly owned
subsidiary  National Bank of the Redwoods  ("NBR",  together  with Redwood,  the
"Company").  All significant  inter-company  balances and transactions have been
eliminated.  The  financial  information  contained in this report  reflects all
adjustments  which,  in the  opinion of  management,  are  necessary  for a fair
presentation of the results of the interim periods.  All such adjustments are of
a normal recurring nature. The results of operations and cash flows for the nine
months ended  September 30, 2000 are not  necessarily  indicative of the results
that may be expected for the year ending December 31, 2000.

         In September 1999 the Company successfully completed the divestiture of
its mortgage  brokerage and mortgage banking units,  Valley Financial and Allied
Diversified  Credit.  The Company has disclosed the operations of these units as
well  as  the  after-tax  loss  on  disposition  as   discontinued   operations.
Accordingly,  historical  financial  information  has been recast to present the
operating  results  of  Valley  Financial  and  Allied   Diversified  Credit  as
discontinued operations.

         Certain   reclassifications   were  made  to  prior  period   financial
statements to conform to current period presentations.

         For purposes of reporting cash flows, cash and cash equivalents include
cash on hand,  amounts  due  from  banks,  federal  funds  sold  and  repurchase
agreements with original  maturities of 90 days or less.  Federal funds sold and
repurchase agreements are generally for one day periods.


2.       Earnings per 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 were issued 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 Redwood.

                        This page is page 8 of 34 pages.

<PAGE>


         The  Company's  pertinent  earnings  per share data is as  follows  (in
thousands, except share and per share data):


<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                                                September 30,
                                                                      2000                        1999
                                                             ------------------------    ------------------------
                                                               Basic        Diluted        Basic        Diluted
                                                             ----------    ----------    ----------    ----------

 <S>                                                         <C>           <C>       <C> <C>           <C>       <C>
Earnings per common share:

 Income from continuing operations before extraordinary
   item                                                         $1,698        $1,698        $1,052        $1,052
 Earnings per share from income from continuing operations
   before extraordinary item                                     $0.58         $0.56         $0.31         $0.30

 Loss from discontinued operations                                $---          $---        ($686)        ($686)
 Loss per share from loss from discontinued operations           $0.00         $0.00       ($0.20)       ($0.20)

 Income before extraordinary item                               $1,698        $1,698          $366          $366
 Earnings per share from income before extraordinary item        $0.58         $0.56         $0.11         $0.11

 Net income                                                     $1,698        $1,698          $366          $366
 Net income per share                                            $0.58         $0.56         $0.11         $0.11

 Weighted average common shares outstanding                  2,940,000     3,009,000 (1) 3,390,000     3,458,000 (1)

</TABLE>

(1)The weighted average common shares  outstanding  include the dilutive effects
   of common stock options of 69 and 68.

<TABLE>
<CAPTION>
                                                                              Nine Months Ended
                                                                                September 30,
                                                                       2000                       1999
                                                              -----------------------    -----------------------
                                                                Basic       Diluted        Basic       Diluted
                                                              ----------   ----------    ----------   ----------

 <S>                                                          <C>          <C>       <C> <C>          <C>       <C>
Earnings per common share:

 Income from continuing operations before extraordinary item     $4,747       $4,747        $3,474       $3,474
 Earnings per share from income from continuing operations
   before extraordinary item                                      $1.52        $1.50         $1.03        $1.00

 Loss from discontinued operations                                 $---         $---        ($596)       ($596)
 Loss per share from loss from of discontinued operations          $---         $---       ($0.18)      ($0.17)

 Income before extraordinary item                                $4,747       $4,747        $2,878       $2,878
 Earnings per share from income before extraordinary item         $1.52        $1.50         $0.85        $0.83

 Net income                                                      $4,747       $4,747        $2,602       $2,602
 Net income per share                                             $1.52        $1.50         $0.77        $0.75

 Weighted average common shares outstanding                   3,117,000    3,173,000 (1) 3,385,000    3,472,000 (1)
</TABLE>

(1)The weighted average common shares  outstanding  include the dilutive effects
   of common stock options of 56 and 87.



                        This page is page 9 of 34 pages.

<PAGE>


3.       Comprehensive Income

         The Company's total comprehensive earnings presentation is as follows:


<TABLE>
<CAPTION>
                                                Three Months Ended                  Nine Months Ended
                                                 September 30,                      September 30,
                                              2000             1999              2000             1999
                                          --------------   --------------    -------------    --------------
                                                  (In thousands)                     (In thousands)

<S>                                              <C>                <C>             <C>              <C>
 Net income as reported                          $1,698             $366            $4,747           $2,602
 Other comprehensive income (net of tax):
   Change in unrealized holding gain (losses)
      on available for sale securities              262              (20)              149             (563)
   Reclassification adjustment                       50                -                72               (8)
                                          --------------   --------------    -------------    --------------
 Total comprehensive income                      $2,010             $346            $4,968           $2,031
                                          ==============   ==============    =============    ==============
</TABLE>

4.       Common Stock Cash Dividend

         On August 15, 2000 the Board of  Directors  declared a  quarterly  cash
dividend of 15 cents per share on the Company's  Common Stock.  The dividend was
paid on October 16, 2000 to shareholders of record on September 30, 2000.


5.       Divestiture of Mortgage Banking and Mortgage Brokerage Units

         On  September  10, 1999 the  Company  divested  itself of its  subprime
mortgage  brokerage and mortgage banking units,  Allied  Diversified  Credit and
Valley  Financial.  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. As a result of its divestiture the Company recorded an after-tax
loss of $167,000  which is primarily  comprised  of  termination  benefits.  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  recast to present the  operating  results of Valley
Financial and Allied Diversified Credit as discontinued operations. Revenue from
discontinued  operations  was  $575,000  and  $4,319,000  for the three and nine
months ended September 30, 1999. There was no such revenue recognized in 2000.


                        This page is page 10 of 34 pages.

<PAGE>


6.       Extraordinary Item

         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 $8.0 million
dividend  from NBR,  the  redemption  of a $3.0  million  note from NBR and $1.0
million from Redwood's general corporate funds.


7.       Business 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  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 45,000 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  to  reflect  only  those  segments  associated  with  continuing
operations.

         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 including  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 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.


                        This page is page 11 of 34 pages.
<PAGE>



         Summary financial data by industry segment follows:

<TABLE>
<CAPTION>
                                                                For the quarter ended September 30,
                                                                                2000
                                                               ---------------------------------------

                                                                Community                   Total
                                                                 Banking     Bankcard      Company
                                                               ---------------------------------------
                                                                           (in thousands)

<S>                                                                <C>           <C>        <C>
Total interest income                                                $9,027      $   ---      $9,027
Total interest expense                                                3,643          107       3,750
Interest income/(expense) allocation                                   (327)         327         ---
                                                               ---------------------------------------
Net interest income                                                   5,057          220       5,277
Provision for loan losses                                               ---          ---         ---
Total other operating income                                            382        1,116       1,498
Total other operating expense                                         3,398          530       3,928
                                                               ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                             2,041          806       2,847
Provision for income taxes                                              823          326       1,149
                                                               ---------------------------------------
Income from continuing operations before extraordinary item          $1,218         $480      $1,698
                                                               =======================================

Total Average Assets                                               $412,459      $24,976    $437,435
                                                               =======================================
</TABLE>


<TABLE>
<CAPTION>
                                                                For the quarter ended September 30,
                                                                                1999
                                                               ---------------------------------------

                                                                Community                   Total
                                                                 Banking     Bankcard      Company
                                                               ---------------------------------------
                                                                           (in thousands)

<S>                                                                <C>          <C>          <C>
Total interest income                                                $7,686       $ ---        $7,686
Total interest expense                                                2,713         ---         2,713
Interest income/(expense) allocation                                  (140)         140           ---
                                                               ---------------------------------------
Net interest income                                                   4,833         140         4,973
Provision for loan losses                                               200         ---           200
Total other operating income                                            460         733         1,193
Total other operating expense                                         3,846         354         4,200
                                                               ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                             1,247         519         1,766
Provision for income taxes                                              504         210           714
                                                               ---------------------------------------
Income from continuing operations before extraordinary item            $743        $309        $1,052
                                                               =======================================

Total Average Assets                                               $399,072     $10,003      $409,075
                                                               =======================================

</TABLE>





                        This page is page 12 of 34 pages.

<PAGE>


<TABLE>
<CAPTION>
                                                           For the nine months ended September 30,
                                                                             2000
                                                           ----------------------------------------

                                                            Community                    Total
                                                             Banking      Bankcard      Company
                                                           ----------------------------------------
                                                                       (in thousands)

<S>                                                            <C>           <C>          <C>
Total interest income                                           $25,988        $ ---       $25,988
Total interest expense                                           10,390          107        10,497
Interest income/(expense) allocation                              (909)          909           ---
                                                           ----------------------------------------
Net interest income                                              14,689          802        15,491
Provision for loan losses                                           150          ---           150
Total other operating income                                      1,347        3,088         4,435
Total other operating expense                                    10,334        1,457        11,791
                                                           ----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                          5,552        2,433         7,985
Provision for income taxes                                        2,250          988         3,238
                                                           ----------------------------------------
Income from continuing operations before extraordinary item      $3,302       $1,445        $4,747
                                                           ========================================

Total Average Assets                                           $411,540      $24,996      $436,536
                                                           ========================================
</TABLE>



<TABLE>
<CAPTION>
                                                           For the nine months ended September 30,
                                                                            1999
                                                           ----------------------------------------

                                                            Community                    Total
                                                             Banking      Bankcard      Company
                                                           ----------------------------------------
                                                                       (in thousands)

<S>                                                            <C>           <C>          <C>
Total interest income                                           $22,329        $ ---       $22,329
Total interest expense                                            7,707            3         7,710
Interest income/(expense) allocation                              (415)          415           ---
                                                           ----------------------------------------
Net interest income                                              14,207          412        14,619
Provision for loan losses                                           700          ---           700
Total other operating income                                      1,522        2,375         3,897
Total other operating expense                                    11,130        1,025        12,155
                                                           ----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                          3,899        1,762         5,661
Provision for income taxes                                        1,515          672         2,187
                                                           ----------------------------------------
Income from continuing operations before extraordinary item      $2,384       $1,090        $3,474
                                                           ========================================

Total Average Assets                                           $390,300      $10,127      $400,427
                                                           ========================================
</TABLE>



                        This page is page 13 of 34 pages.

<PAGE>



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

Forward-Looking Information

         This Quarterly Report on Form 10-Q includes forward-looking information
which is subject to the "safe harbor"  created by the Securities Act of 1933 and
Securities  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:

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

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

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

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

   o  Dividend restrictions.

   o  Regulatory discretion.

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

   o  Asset/liability repricing risks and liquidity risks.

   o  Changes in the securities markets.


         The Company  undertakes no obligation to revise or publicly release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 and Certain Important Considerations for Investors.

         The  following  sections  discuss  significant  changes  and  trends in
financial  condition,  capital  resources  and  liquidity  of the  Company  from
December 31, 1999 to September 30, 2000.  Significant  changes and trends in the
Company's  results of operations  for the three and nine months ended  September
30, 2000, compared to the same period in 1999 are also discussed.

                        This page is page 14 of 34 pages.


<PAGE>

Summary of Financial Results

         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  $575,000  and  $4,319,000  for the three and nine
months ended  September 30, 1999.  There was no such revenue  recognized for the
three and nine months ended September 30, 2000.

         The Company  reported income from  continuing  operations of $1,698,000
($.56 per  diluted  share) for the three  months  ended  September  30, 2000 and
$1,052,000 ($.30 per diluted share) for the same period in 1999. This equates to
a 61% increase in income from continuing operations.  This increase is due to an
increase  of  $304,000  in net  interest  income,  an  increase  of  $305,000 in
noninterest  income, a decrease in the provision for loan losses of $200,000 and
a decrease of $272,000 in noninterest expense. The Company did not recognize any
income or loss associated with its discontinued  operations during the three and
nine month period ended  September  30, 2000,  as compared to a loss of $686,000
(($.20) per diluted  share) and $596,000  (($.17 per diluted share) for the same
period in 1999.  Net  income was  $1,698,000  ($.56 per  diluted  share) for the
quarter ended  September 30, 2000 and $366,000  ($.11 per diluted share) for the
same period in 1999. Income from continuing operations for the first nine months
of 2000 increased  $1,273,000,  or 37%, to $4,747,000  ($1.50 per diluted share)
from  $3,474,000  ($1.00 per  diluted  share) as  compared to the same period in
1999.  Net income for the nine months ended  September  30, 2000 was  $4,747,000
($1.50 per diluted share) as compared to $2,602,000 ($.75 per diluted share), an
increase of  $2,145,000  or 82%. This increase is due to an increase of $872,000
in net  interest  income,  an  increase of $538,000  in  noninterest  income,  a
decrease in the provision for loan losses of $550,000 and a decrease of $364,000
in noninterest expense.


Net Interest Income

         Net  interest   income  from  continuing   operations   increased  from
$4,973,000  for the third quarter of 1999 to $5,277,000 for the third quarter of
2000,  which  represents  an increase of $304,000 or 6%. While the Company's net
interest margin decreased to 5.15% for the three months ended September 30, 2000
from 5.32% for the three months ended  September 30, 1999, the growth in earning
assets more than made up for the decline in margin  resulting  in an increase in
net interest income.  Average earning assets from continuing  operations,  which
excludes  mortgage  loans  held  for  sale,  increased  $35,814,000  or 10% from
$373,806,000  for the quarter ended September 30, 1999 to  $409,620,000  for the
quarter ended September 30, 2000.



                        This page is page 15 of 34 pages.

<PAGE>

         Net interest income from continuing operations of $15,491,000 increased
$872,000 or 6% for the nine months ended September 30, 2000 when compared to the
same period one year ago. Such increase is due to an increase in average earning
assets from continuing operations,  which excludes mortgage loans held for sale,
of  $44,926,000  or 12% to  $408,197,000  from  $363,271,000.  The Company's net
interest  margin  declined to 5.07% for the nine months ended September 30, 2000
from 5.37% for the nine months  ended  September  30,  1999.  Factors  that will
affect the Company's interest margin include the earning asset mix,  competitive
factors  affecting  loan and  deposit  pricing  and  retention  and the  general
interest rate environment.

         For the first nine  months of 2000,  the yield on earning  assets  from
continuing  operations,  which excludes mortgage loans held for sale,  increased
from 8.20% to 8.50%.  This  increase is primarily  due to an increase in general
interest  rates as  evidenced  by an  increase  in the prime  rate from 8.25% at
September 30, 1999 to 9.5% at September 30, 2000. Yield paid on interest bearing
liabilities  increased to 4.53% for the nine months ended  September 30, 2000 as
compared to 3.92% for the same period in 1999.

         Average  earning  assets from  continuing  operations,  which  excludes
mortgage loans held for sale,  increased during the first nine months of 2000 to
$408,197,000 as compared to $363,271,000 for the nine months ended September 30,
1999. The increase in average  earning  assets of  $44,926,000  during the first
nine  months of 2000 when  compared to 1999 is  primarily  due to an increase in
average portfolio loans of $36,551,000 and investment securities of $10,293,000,
partially offset by a decrease in federal funds sold of $1,918,000.

         Further  contributing  to the  decrease in the  Company's  net interest
margin was a change in the Company's funding mix. Total average interest bearing
liabilities  increased from $262,160,000 during the first nine months of 1999 to
$309,352,000  for the same period in 2000,  an increase of  $47,192,000  or 18%.
This  increase  was  coupled  with a  decrease  in average  noninterest  bearing
transaction  accounts  of  $9,021,000.  This  decrease  in  noninterest  bearing
transaction  accounts is a result of a decrease in balances  deposited by one of
the Company's large customers.

         The following is an analysis of the net interest margin:

<TABLE>
<CAPTION>
                                        Three months ended                         Three months ended
                                       September 30, 2000                          September 30, 1999
                              ----------------------------------------    ----------------------------------------

                                Average                       %             Average                       %
(dollars in thousands)          Balance      Interest    Yield/Rate         Balance      Interest     Yield/Rate
                              ----------------------------------------    ----------------------------------------

<S>                               <C>            <C>            <C>           <C>             <C>            <C>
Earning assets (1)                $409,620       $9,027         8.81%         $373,806        $7,686         8.22%
Interest-bearing liabilities       312,222        3,750         4.80           270,357         2,713         4.01
                                           -------------                               --------------
Net interest income                              $5,277                                       $4,973
                                           =============                               ==============
Net interest income to
  earning assets                                                5.15%                                        5.32%
</TABLE>


                        This page is page 16 of 34 pages.

<PAGE>


<TABLE>
<CAPTION>
                                        Nine months ended                            Nine months ended
                                       September 30, 2000                           September 30, 1999

                             ----------------------------------------     ----------------------------------------
                                Average                      %              Average                       %
(dollars in thousands)          Balance      Interest    Yield/Rate         Balance      Interest    Yield/Rate
                             ----------------------------------------     ----------------------------------------

<S>                               <C>           <C>            <C>            <C>           <C>            <C>
Earning assets (1)                $408,197      $25,988        8.50%          $363,271      $22,329        8.20%
Interest-bearing liabilities       309,352       10,497         4.53           262,160        7,710         3.92
                                           -------------                               -------------
Net interest income                             $15,491                                     $14,619
                                           =============                               =============
Net interest income to
  earning assets                                               5.07%                                       5.37%
</TABLE>

(1)      Nonaccrual loans are included in the calculation of the average balance
         of earning assets, and interest not accrued is excluded.


         The following  table sets forth changes in interest income and interest
expense for each major category of interest-earning  asset and  interest-bearing
liability,  and the amount of change attributable to volume and rate changes for
the three and nine months ended September 30, 2000 and 1999.  Changes not solely
attributable to rate or volume have been allocated proportionately to the change
due to volume and the change due to rate.


<TABLE>
<CAPTION>
                                                           Three months ended September 30, 2000 compared
                                                           to the three months ended September 30, 1999
                                                         --------------------------------------------------
                                                             Volume            Rate             Total
                                                         --------------------------------------------------
                                                                           (in thousands)
<S>                                                               <C>            <C>                <C>
Increase (decrease) in interest income:
  Portfolio loans                                                 $2,804         ($1,639)           $1,165
  Investment securities                                              324            (159)              165
  Federal funds sold                                                  (9)             20                11
                                                         --------------------------------------------------
Total increase (decrease)                                          3,119          (1,778)            1,341
                                                         --------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                             (242)            239                (3)
  Time deposits                                                    2,840          (1,838)            1,002
  Other borrowings                                                     1              37                38
                                                         --------------------------------------------------
Total increase (decrease)                                          2,600          (1,563)            1,037
                                                         --------------------------------------------------

Increase (decrease) in net interest income                          $519           ($215)             $304
                                                         ==================================================
</TABLE>







                        This page is page 17 of 34 pages.

<PAGE>


<TABLE>
<CAPTION>
                                                              Nine months ended September 30, 2000 compared
                                                                to the nine months ended September 30, 1999
                                                              Volume            Rate            Total
                                                         ---------------------------------------------------
                                                                           (in thousands)
<S>                                                                <C>              <C>              <C>
Increase (decrease) in interest income:
  Portfolio loans                                                  $3,269            ($330)          $2,939
  Investment securities                                               661               81              742
  Federal funds sold                                                 (105)              83              (22)
                                                         ---------------------------------------------------
Total increase (decrease)                                           3,825             (166)           3,659
                                                         ---------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                              (240)             213              (27)
  Time deposits                                                     3,308             (316)           2,992
  Other borrowings                                                   (312)             134             (178)
                                                         ---------------------------------------------------
Total increase                                                      2,756               31            2,787
                                                         ---------------------------------------------------

Increase (decrease) in net interest income                         $1,069            ($197)            $872
                                                         ===================================================
</TABLE>

Provision for Loan Losses

         There was no provision for loan losses for the quarter ended  September
30, 2000 as compared to $200,000 in the same quarter in the previous  year.  For
the nine months ended September 30, 2000 the provision  decreased  $550,000 from
$700,000 in 1999 to $150,000 in 2000.  For further  discussion see Allowance for
Loan Losses and Nonperforming Assets.


Noninterest Income and Expense

         Noninterest Income

         The  following  tables  set  forth  the  components  of  the  Company's
noninterest  income  from  continuing  operations  for the three and nine months
ended September 30, 2000, as compared to the same period in 1999.


<TABLE>
<CAPTION>
                                                Three Months Ended
                                                   September 30,
                                             --------------------------       $           %
                                                2000           1999         Change      Change
                                             -----------    -----------   -----------------------
                                              (dollars in thousands)

<S>                                              <C>            <C>              <C>        <C>
Service charges on deposit accounts                $264           $253            $11         4%
Merchant draft processing, net                    1,116            733            383        52
Loan servicing income                                67             14             53       379
Gain (loss) on sale of securities                   (86)           ---            (86)      ---
Other income                                        137            193            (56)      (29)
                                             -----------    -----------   ------------
Total noninterest income                         $1,498         $1,193           $305        26%
                                             ===========    ===========   ============
</TABLE>



                        This page is page 18 of 34 pages.

<PAGE>



<TABLE>
<CAPTION>
                                                  Nine Months Ended
                                                    September 30,
                                             --------------------------       $           %
                                                2000           1999         Change      Change
                                             -----------    -----------   -----------------------
                                              (dollars in thousands)

<S>                                              <C>            <C>             <C>        <C>
Service charges on deposit accounts                $792           $776           $16          2%
Merchant draft processing, net                    3,088          2,375           713         30
Loan servicing income                               187             79           108        137
Gain (loss) on sale of securities                  (124)            14          (138)      (986)
Other income                                        492            653          (161)       (25)
                                             -----------    -----------   ------------
Total noninterest income                         $4,435         $3,897          $538         14%
                                             ===========    ===========   ============
</TABLE>



         Noninterest income from continuing operations increased $305,000 or 26%
to $1,498,000  for the third quarter of 2000 when compared to $1,193,000 for the
same period in 1999.  Such  increase is primarily due to an increase in merchant
card net  revenue  of  $383,000  and an  increase  in loan  servicing  income of
$53,000. These increases were partially offset by an increase of $86,000 in loss
on securities and decline of $56,000 in other income.

         Noninterest income from continuing operations increased $538,000 or 14%
to  $4,435,000  for the nine months ended  September  30, 2000 when  compared to
$3,897,000  for the same period in 1999.  The  increase of $538,000 is primarily
attributable to an increase of $713,000 in merchant draft processing  income and
an increase of $108,000 in loan  servicing  income.  The increase in noninterest
income from  continuing  operations  of $305,000  and $538,000 for the three and
nine months  ended  September  30, 2000 as compared to the same periods one year
ago is primarily due to an increase in merchant card net revenue of $383,000 and
$713,000.  This  revenue  growth is a result  of an  increase  in the  number of
merchants the Company services.



         Noninterest Expense

         The  following  tables  set  forth  the  components  of  the  Company's
noninterest  expense during the three and nine months ended  September 30, 2000,
as compared to the same period in 1999.

<TABLE>
<CAPTION>
                                          Three Months Ended
                                            September 30,
                                     -----------------------------       $          %
                                         2000            1999          Change     Change
                                     -------------   -------------   ----------------------
                                        (dollars in thousands)

<S>                                        <C>             <C>           <C>         <C>
Salaries and employee benefits             $2,133          $2,187         ($54)       (2%)
Occupancy and equipment expense               498             598         (100)      (17)
Other                                       1,297           1,415         (118)       (8)
                                     -------------   -------------   -----------
Total noninterest expense                  $3,928          $4,200        ($272)       (6%)
                                     =============   =============   ===========
</TABLE>

                        This page is page 19 of 34 pages.

<PAGE>



<TABLE>
<CAPTION>
                                          Nine Months Ended
                                            September 30,
                                     -----------------------------       $          %
                                         2000            1999          Change     Change
                                     -------------   -------------   ----------------------
                                        (dollars in thousands)

<S>                                       <C>             <C>             <C>        <C>
Salaries and employee benefits             $6,375          $6,652         ($277)      (4%)
Occupancy and equipment expense             1,508           1,713          (205)     (12)
Other                                       3,908           3,790           118        3
                                     -------------   -------------   -----------
Total noninterest expense                 $11,791         $12,155         ($364)      (3%)
                                     =============   =============   ===========
</TABLE>

          Noninterest expense from continuing  operations  decreased by $272,000
or 6% to $3,928,000  during the third quarter of 2000 compared to $4,200,000 for
the third  quarter  of 1999.  For the nine  months  ended  September  30,  2000,
noninterest   expense  from  continuing   operations   decreased  $364,000  from
$11,791,000 to $12,155000. The decrease in noninterest expense for the three and
nine month  periods  ending  September  30, 2000 as compared to the same periods
ending September 30, 1999 is attributable to a decrease in salaries and employee
benefits and occupancy expense.  Such decrease is a direct result of the decline
in the number of people  employed by the Company as well as a reduction in space
and equipment requirements.  At September 30, 2000 the Company had 150 full time
equivalent employees compared to 166 one year ago.

Income Taxes

         The  Company's  effective  tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible  expenses. The effective tax
rate was 40.4% and 40.6% for the three and nine months ended September 30, 2000,
compared to 40.4% and 38.6% for the same periods in 1999.


Business Segments

         Through  September  10, 1999,  the Company  operated in four  principal
product and service lines: core community banking,  merchant card services,  sub
prime lending,  and residential  mortgage  banking and brokerage.  The Company's
core community  banking  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 45,000 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  discontinued  operations.  Accordingly,  historical  financial
information  regarding segments has been restated to reflect only those segments
associated with continuing operations.


                        This page is page 20 of 34 pages.

<PAGE>



         Summary financial data by industry segment are as follows:

<TABLE>
<CAPTION>
                                                           For the quarter ended September 30, 2000
                                                           ---------------------------------------

                                                            Community                   Total
                                                             Banking     Bankcard      Company
                                                           ---------------------------------------
                                                                       (in thousands)

<S>                                                            <C>          <C>          <C>
Total interest income                                            $9,027       $ ---        $9,027
Total interest expense                                            3,643         107         3,750
Interest income/(expense) allocation                               (327)        327           ---
                                                           ---------------------------------------
Net interest income                                               5,057         220         5,277
Provision for loan losses                                           ---         ---           ---
Total other operating income                                        382       1,116         1,498
Total other operating expense                                     3,398         530         3,928
                                                           ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                         2,041         806         2,847
Provision for income taxes                                          823         326         1,149
                                                           ---------------------------------------
Income from continuing operations before extraordinary item      $1,218        $480        $1,698
                                                           =======================================

Total Average Assets                                           $412,459     $24,976      $437,435
                                                           =======================================
</TABLE>



<TABLE>
<CAPTION>
                                                           For the quarter ended September 30, 1999
                                                           ---------------------------------------

                                                            Community                   Total
                                                             Banking     Bankcard      Company
                                                           ---------------------------------------
                                                                       (in thousands)

<S>                                                            <C>          <C>          <C>
Total interest income                                            $7,686       $ ---        $7,686
Total interest expense                                            2,713         ---         2,713
Interest income/(expense) allocation                              (140)         140           ---
                                                           ---------------------------------------
Net interest income                                               4,833         140         4,973
Provision for loan losses                                           200         ---           200
Total other operating income                                        460         733         1,193
Total other operating expense                                     3,846         354         4,200
                                                           ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                         1,247         519         1,766
Provision for income taxes                                          504         210           714
                                                           ---------------------------------------
Income from continuing operations before extraordinary item        $743        $309        $1,052
                                                           =======================================

Total Average Assets                                           $399,072     $10,003      $409,075
                                                           =======================================
</TABLE>


                        This page is page 21 of 34 pages.

<PAGE>



<TABLE>
<CAPTION>
                                                           For the nine months ended September 30,
                                                                             2000
                                                           ----------------------------------------

                                                            Community                    Total
                                                             Banking      Bankcard      Company
                                                           ----------------------------------------
                                                                       (in thousands)

<S>                                                            <C>           <C>          <C>
Total interest income                                           $25,988        $ ---       $25,988
Total interest expense                                           10,390          107        10,497
Interest income/(expense) allocation                               (909)         909           ---
                                                           ----------------------------------------
Net interest income                                              14,689          802        15,491
Provision for loan losses                                           150          ---           150
Total other operating income                                      1,347        3,088         4,435
Total other operating expense                                    10,334        1,457        11,791
                                                           ----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                          5,552        2,433         7,985
Provision for income taxes                                        2,250          988         3,238
                                                           ----------------------------------------
Income from continuing operations before extraordinary item      $3,302       $1,445        $4,747
                                                           ========================================

Total Average Assets                                           $411,540      $24,996      $436,536
                                                           ========================================
</TABLE>




<TABLE>
<CAPTION>
                                                           For the nine months ended September 30,
                                                                             1999
                                                           ----------------------------------------

                                                            Community                    Total
                                                             Banking      Bankcard      Company
                                                           ----------------------------------------
                                                                       (in thousands)

<S>                                                            <C>           <C>          <C>
Total interest income                                           $22,329        $ ---       $22,329
Total interest expense                                            7,707            3         7,710
Interest income/(expense) allocation                               (415)         415           ---
                                                           ----------------------------------------
Net interest income                                              14,207          412        14,619
Provision for loan losses                                           700          ---           700
Total other operating income                                      1,522        2,375         3,897
Total other operating expense                                    11,130        1,025        12,155
                                                           ----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                          3,899        1,762         5,661
Provision for income taxes                                        1,515          672         2,187
                                                           ----------------------------------------
Income from continuing operations before extraordinary item      $2,384       $1,090        $3,474
                                                           ========================================

Total Average Assets                                           $390,300      $10,127      $400,427
                                                           ========================================
</TABLE>



                        This page is page 22 of 34 pages.

<PAGE>


         Community Banking

         The  Community  Banking  segment's  income from  continuing  operations
before  income tax and  extraordinary  item  increased  for the quarter and nine
months ended  September 30, 2000 when compared to the same periods in 1999.  The
increase is due to reduced operating expenses, a lower provision for loan losses
and growth in earning  assets.  For the quarter and nine months ended  September
30,  2000,  segment  expenses  declined  primarily  due to reduced  overhead and
administrative expenses.  Additionally, the Company increased its loan portfolio
through  renewed   marketing   efforts.   Total  average  portfolio  loans  were
$334,068,000  in the third  quarter  of 2000 up from  $303,137,000  in the third
quarter of 1999, a 10%  increase.  Average  portfolio  loans for the nine months
ended September 30, 2000 was $326,120,000 as compared to $289,569,000 in 1999, a
13% increase.

         Bankcard

         The Merchant  Card segment  provides  Visa and  Mastercard  credit card
processing  and  settlement   services  for  roughly  45,000  merchants  located
throughout  the United  States.  Yearly  processing  volume is in excess of $1.4
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 of a
processing  contract  with  an  ISO  who  represented  $1,736,000  or 66% of the
Company's 1998 merchant draft net processing revenue,  $1,412,000 or 45% of such
revenue in 1999 and  $1,205,000 or 39% of such revenue for the nine months ended
September  30, 2000.  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 the three and nine months ended September 30, 2000,
$360,000 and  $1,212,000 of this payment was  recognized as revenue  compared to
$180,000  and  $781,000  for the same  periods in 1999.  The amount of  unearned
processing  revenue  was  $240,000  as of  September  30,  2000,  which  will be
amortized into income in the fourth quarter of 2000.

                        This page is page 23 of 34 pages.

<PAGE>

         The Company was informed in July, 2000 that the ISO discussed above was
transferring  all of its remaining  customers  processed by the Company to a new
processor.  The effective date of this transfer was July 24, 2000. Subsequent to
this  transaction  date,  the  Company  will  continue  to  process  charge-back
transactions  originating  from merchant card sales activity  occurring prior to
the  final  transfer  date  through  the end of  2000.  Under  the  terms of the
renegotiated  contract the Company is to receive a contract  completion bonus in
the amount of $500,000.  Such bonus is expected to be recorded as revenue in the
fourth quarter of 2000. Since April 1999, in an effort to offset the anticipated
decline in future merchant bankcard  processing  revenues from the completion of
the contract discussed above, the Company has been building its overall merchant
card  processing  business  through  additional  direct  marketing  efforts  and
developing new ISO relationships.

         The Company  bears certain risks  associated  with its merchant  credit
card processing business.  Due to a contractual  obligation between NBR and Visa
and  MasterCard,  NBR  stands in the place of the  merchant  in the event that a
merchant is unable to pay  charge-backs  from  cardholders.  As a result of this
obligation,  NBR may incur  losses  associated  with its  merchant  credit  card
processing  business.  Accordingly,  NBR has established an allowance to provide
for losses  associated  with  charge-back  losses.  Such allowance 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 is included in the financial  statements as a reduction in merchant draft
processing income. While charge offs were $296,000 for the three and nine months
ended  September 30 2000,  the increase in the allowance  reflects the growth in
proprietary merchant account volume,  increased exposures to internet merchants,
and a new ISO  relationship  in which the Company  assumes  fraud risk  directly
rather than  looking  first to the ISO.  For  further  discussion  see  "Certain
Important Considerations for Investors".

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

<TABLE>
<CAPTION>
                             Three months ended         Nine months ended
                               September 30,              September 30,
                              2000        1999           2000        1999
                          ----------------------------------------------------
                                            (in thousands)

<S>                            <C>            <C>         <C>            <C>
Beginning allowance            $1,145         $693          $908         $458
Provision for losses              417          101           654          336
Charge-offs                      (296)         ---          (296)         ---
                          -------------------------  -------------------------
Ending allowance               $1,266         $794        $1,266         $794
                          =========================  =========================
</TABLE>


Investment Securities

         Total investment securities declined to $71,763,000 as of September 30,
2000  compared to  $76,705,000  as of  December  31,  1999.  This  decrease  was
attributable to Management  selling $9,042,000 in low yielding  securities,  and
the redeployment of the proceeds from such sale into portfolio loans.

                        This page is page 24 of 34 pages.

<PAGE>


Loans

         Total loans  increased  $22,991,000 or 7% to  $337,436,000 at September
30, 2000  compared  to  $314,445,000  at  December  31,  1999.  The  increase in
portfolio loans is primarily attributable to the Company's marketing efforts and
a general  expansion of businesses within the Company's market area. Real estate
construction  loans have  increased  $6,126,000 to  $46,185,000 at September 30,
2000 as compared to $40,059,000 at December 31, 1999. Commercial loans increased
$3,793,000 to  $64,958,000  at September 30, 2000 as compared to  $61,165,000 at
December 31, 1999.  Within the residential real estate mortgage  portfolio,  the
Company has emphasized the funding of multi-family  permanent  residential  real
estate loans in the first six months of 2000. Multi-family permanent residential
real estate loans increased $20,014,000 from $884,000 as of December 31, 1999 to
$520,898,000  at September  30, 2000.  In addition,  commercial  real estate has
grown $5,427,000 to $84,903,000 compared to $79,476,000 at December 31, 1999.

         The following table summarizes the composition of the loan portfolio at
September 30, 2000 and December 31, 1999.

<TABLE>
<CAPTION>
                                                 September 30, 2000                      December 31, 1999
                                         ------------------------------------    ------------------------------------
                                               Amount              %                   Amount              %
                                         ------------------------------------    ------------------------------------
                                                (dollars in thousands)                  (dollars in thousands)
<S>                                            <C>                  <C>                 <C>                 <C>
Residential real estate mortgage                $136,827             40%                $130,504             42%
Commercial real estate mortgage                   84,903             25                   79,476             25
Commercial                                        64,958             19                   61,165             19
Real estate construction                          46,185             14                   40,059             13
Installment and other                              5,701              2                    4,624              1
Less deferred loan fees                           (1,138)             0                   (1,383)             0
                                         ------------------------------------    ------------------------------------
    Total portfolio loans                        337,436            100%                 314,445            100%
                                                           ==================                      ==================
Less allowance for loan losses                    (8,064)                                 (7,931)
                                         ------------------                      ------------------
     Net loans                                   $329,372                                $306,514
                                         ==================                      ==================
</TABLE>


Allowance for Loan Losses

         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.

                        This page is page 25 of 34 pages.

<PAGE>

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

         The following table summarizes the Company's allowance for loan losses:


<TABLE>
<CAPTION>
                                                          Three months ended            Nine months ended
                                                            September 30,                 September 30,
                                                      ---------------------------  ---------------------------
                                                          2000           1999          2000            1999
                                                      ------------   ------------  ------------    -----------
                                                                     (dollars in thousands)
<S>                                                       <C>             <C>         <C>           <C>
Beginning allowance for loan losses                       $8,099          $8,001      $7,931         $8,041
Provision for loan losses                                      0             200         150            700
Charge-offs                                                 (118)           (399)       (265)        (1,312)
Recoveries                                                    83             161         248            534
                                                      ------------   ------------  ------------    -----------
Ending allowance for loan losses                          $8,064          $7,963      $8,064         $7,963
                                                      ============   ============  ============    ===========


Net charge-offs to average
   loans (annualized)                                       0.04%           0.31%       0.01%          0.36%
</TABLE>


         The  allowance  for loan  losses as a  percentage  of  portfolio  loans
decreased  from 2.52% at December 31, 1999 to 2.39% at September 30, 2000.  This
decrease is due to several  factors which include an  improvement in the overall
credit quality of the Company's loan portfolio, reflected in a reduction in loan
charge-offs,  the reduction of  nonperforming  loans and growth in the Company's
loan  portfolio.  The  growth  in the  Company's  loan  portfolio  is  primarily
comprised of commercial and residential  real estate loans that generally bear a
lower credit risk than construction or commercial loans. Accordingly,  under the
Company's allowance for loan losses methodology,  such loans generally receive a
lower loan loss allowance  allocation as compared to commercial or  construction
loans.




                        This page is page 26 of 34 pages.

<PAGE>


Nonperforming Assets

         The following table summarizes the Company's nonperforming assets.
<TABLE>
<CAPTION>
                                                              September 30,         December 31,
                                                                  2000                 1999
                                                              --------------       --------------
                                                                    (dollars in thousands)
<S>                                                                  <C>                  <C>
Nonaccrual loans                                                     $1,136               $3,063
Restructured loans                                                      300                1,018
                                                              --------------       --------------
Total nonperforming loans                                             1,436                4,081
Other real estate owned                                                 925                2,363
                                                              --------------       --------------
Total nonperforming assets                                           $2,361               $6,444
                                                              ==============       ==============



Nonperforming assets to total assets                                  0.54%                1.52%
</TABLE>



         Nonperforming  assets have decreased from $6,444,000 as of December 31,
1999 to $2,361,000 as of September 30, 2000. The decrease is  attributable  to a
decrease in restructured  loans of $718,000,  a decrease in nonaccrual  loans of
$1,927,000 and a decline in other real estate owned of $1,438,000.

         Nonperforming  loans as of  September  30, 2000  consist of loans to 23
borrowers, 6 of which have balances in excess of $100,000. The two largest loans
have recorded balances of $305,000 and $180,000.  Both loans are secured by real
estate.  Based on  information  currently  available,  management  believes that
adequate  allocations are included in the allowance for loan losses to cover any
loss exposure that may result from these loans.

         Other real  estate  owned as of  September  30,  2000  consists of four
properties.  Two properties are residential,  one is a commercial  buildings and
the remaining is a motel. Based on information  currently available,  management
believes  that no allowance for losses is required as property  values  mitigate
any loss exposure.

         Although the volume of future  nonperforming assets will depend in part
on the future economic environment,  there are six additional loan relationships
which total approximately  $701,000 about which management has serious doubts as
to the ability of the borrower to comply with the present repayment terms. These
loans may become nonperforming  assets based on the information  presently known
about possible credit problems of the borrowers.

         At September  30, 2000,  the  Company's  total  recorded  investment in
impaired  loans  (as  defined  by SFAS  114 and  118)  was  $1,613,000  of which
$1,313000  relates  to the  recorded  investment  for  which  there is a related
allowance for loan losses of $328,000.  The remaining $300,000 did not require a
valuation allowance.

                        This page is page 27 of 34 pages.

<PAGE>


         The average  recorded  investment in the impaired loans during the nine
months ended  September 30, 2000 and 1999 was  $1,653,000  and  $5,218,000.  The
decline in the average  recorded  investment of impaired loans of $3,565,000 for
the nine months  ended  September  30, 2000  compared to  September  30, 1999 is
primarily  a  result  of  the  Company's  decline  in  nonperforming   loans  of
$2,645,000.  The related amount of interest income recognized during the periods
that such loans were  impaired  was  $13,000  and $49,000 for the three and nine
month  periods  ended  September 30, 2000 and $65,000 and $217,000 for the three
and nine months ended September 30, 1999.

         From time to time the Company may be  required to  repurchase  mortgage
loans from mortgage loan investors depending upon representations and warranties
of the purchase agreement between the investor and the Company.  The Company may
also be required to reimburse a mortgage loan investor for losses  incurred as a
result of liquidating  collateral  which had secured a mortgage loan sold by the
Company. Such representations and warranties include valid appraisal,  status of
borrower or fraud.  In the first nine months of 2000 the Company was required to
repurchase two such loans.  The Company  maintains an allowance for its estimate
of potential  losses  associated with the repurchase of previously sold mortgage
loans. Such allowance  amounted to $96,000 as of September 30, 2000 and $142,000
as of  December  31,  1999.  The  Company  expects  that it may be  required  to
repurchase loans in the future.  During the nine months ended September 30, 2000
the Company made payments of $164,000 to reimburse investors for losses incurred
on the  liquidation of collateral  supporting a loan sold by the Company to such
investor.  Such  payment was charged  against  the  allowance.  There we no such
payments made during the third quarter ended September 30, 2000.

Liquidity

         Redwood's  primary  source of liquidity is dividends from its financial
institution  subsidiary.  Redwood's  primary uses of liquidity have historically
been  associated  with cash  payments  made to the  subordinated  debt  holders,
dividend payments made to the preferred stock holders, and operating expenses of
the parent.  It is Redwood's general policy to retain liquidity at a level which
management  believes  to be  consistent  with the  safety and  soundness  of the
Company as a whole.  As of  September  30,  2000,  Redwood  held  $2,165,000  in
deposits at NBR.

          In the second quarter of 1998,  Redwood  reinstated a cash dividend to
its common  stock  holders at a quarterly  rate of $.04 per share.  In the third
quarter of 1999 Redwood increased this dividend by 50% to $.06 per share. In the
fourth quarter of 1999,  the dividend was increased to $.10 per share.  Further,
in the second  quarter 2000 the dividend was increased to $.15 per share.  Prior
to March 1999 Redwood was required to make monthly  payments of interest at 8.5%
on  $12,000,000 of  subordinated  debentures  issued in 1993.  The  subordinated
debentures were redeemed early in the first quarter of 1999.  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  dividends  to its  common
shareholders.  No  assurance  can  be  given  as to  the  ability  of NBR to pay
dividends to Redwood.

                        This page is page 28 of 34 pages.

<PAGE>

         During  the first nine  months of 2000,  NBR  declared  a  dividend  of
$12,129,000 to Redwood.  Management  believes that as of September 30, 2000, the
Company's  liquidity position was adequate for the operations of Redwood and its
subsidiary for the foreseeable future.

         Although each entity within the  consolidated  Company  manages its own
liquidity,  the  Company's  consolidated  cash flow can be  divided  into  three
distinct areas:  operating,  investing and financing.  For the nine months ended
September  30, 2000 the  Company  received  cash of  $2,939,000  from  operating
activities and $11,363,000 in financing  activities  while using  $15,927,000 in
investing activities.


Capital Resources

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

         The Company and NBR are  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 three sets of standards:  a "risk-based",
"leverage" and "tangible" capital standard.

         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 limited to 1.25% of risk-weighted assets and subordinated debt subject to
certain limitations).

         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%. The leverage ratio for the Company and NBR is based
on average assets for the quarter.

                        This page is page 29 of 34 pages.

<PAGE>


         The following table summarizes the consolidated  capital ratios and the
capital  ratios of the  principal  subsidiary at September 30, 2000 and December
31, 1999.


<TABLE>
<CAPTION>
                                               September 30, 2000                          December 31, 1999
                                 -----------------------------------------------  -------------------------------------
                                                     Well-          Minimum                     Well-       Minimum
                                     Actual       Capitalized      Requirement      Actual   Capitalized  Requirement
                                 --------------------------------------------------------------------------------------
<S>                                     <C>            <C>             <C>             <C>        <C>          <C>
Company
   Leverage                              7.57%          5.00%          4.00%            8.66%      5.00%       4.00%
   Tier 1 risk-based                     9.79           6.00           4.00            11.74       6.00        4.00
   Total risk-based                     11.05          10.00           8.00            13.01      10.00        8.00

 NBR
   Leverage                              7.00%          5.00%          4.00%            8.86%      5.00%       4.00%
   Tier 1 risk-based                     9.06           6.00           4.00            11.94       6.00        4.00
   Total risk-based                     10.33          10.00           8.00            13.20      10.00        8.00
</TABLE>


         Since  the  fourth  quarter  of 1998 the  Company  has  been an  active
acquirer of its own common  stock.  Since  inception,  and under three  separate
Board  approved  common  stock  repurchase   authorizations,   the  Company  has
repurchased 636,875 shares at an average cost of $20.04. In the third quarter of
2000, the Company repurchased 158,700 shares at an average cost of $22.25. Under
the repurchase  program the Company  repurchased shares from time to time on the
open market or through privately negotiated transactions. On September 25, 2000,
the  Company  announced  its  Board of  Directors  did not  approve  a new share
repurchase  authorization.  In  making  its  decision  the  Company's  Board  of
Directors cited capital  retention to support future earning asset growth as its
principal reason to terminate the program.



Certain Important Considerations for Investors


         Merchant Credit Card  Processing.  The Company's  profitability  can be
negatively  impacted should any of the Company's  merchant credit card customers
be  unable  to pay  on  charge-backs  from  cardholders.  Due  to a  contractual
obligation between the Company and Visa and Mastercard,  NBR stands in the place
of the  merchant in the event that a merchant  is unable to pay on  charge-backs
from  cardholders.  Management has taken certain actions to decrease the risk of
merchant bankruptcy with its merchant bankcard business. These steps include the
discontinuance  of high-risk  accounts.  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.




                        This page is page 30 of 34 pages.

<PAGE>

         Merchant  bankcard  processing  services are highly regulated by credit
card  associations  such as VISA.  In order to  participate  in the credit  card
programs,  the Company must comply with the credit card association's  rules and
regulations  that may  change  from time to time.  During  November  1999,  VISA
adopted  several rule changes to reduce  risks in  high-risk  merchant  bankcard
programs and these rule changes affect the Company's Merchant Bankcard business.
The rule  changes go into  effect on March 31,  2001.  These  changes  include a
requirement  that a processor's  reported  fraud ratios be no greater than three
times the  national  average.  At  December  31,  1999 (the most  recent  period
available  from  VISA)  the  Company's  overall  fraud  ratio was below the VISA
requirement.  Other VISA changes include the requirement  that total  processing
volume in certain high-risk  categories (as defined by VISA) be less than 20% of
total processing volume. At June 30, 2000 (the most recent information available
from VISA) the Company's total VISA transactions  within these certain high-risk
categories  were 10.3% of VISA  total  processing  volume.  Other  changes  VISA
announced  include a requirement that weekly VISA volumes be less than 60% of an
institution's   tangible  equity  capital,  and  a  requirement  that  aggregate
charge-backs  for the previous  six months be less than 5% of the  institution's
tangible  equity  capital.  At June  30,  2000,  (the  most  recent  information
available  from VISA) the  Company's  weekly  VISA  volume was 31.4% of tangible
equity  capital,  and  aggregate  charge-backs  for the previous six months were
13.2% of tangible equity capital.  Merchant bankcard  participants,  such as the
Company,  must comply with these new VISA rules by filing a compliance plan with
VISA. Such plan has been filed by the Company and accepted by VISA. At this time
the Company  believes that it will be in  compliance  with all rule changes when
they go into  effect on March 31,  2001.  Should the Company be unable to comply
with these rule changes,  VISA will require  collateral of one to four times the
short fall amount.

         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 September
30, 2000,  approximately 79% 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.

                        This page is page 31 of 34 pages.

<PAGE>

         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 or savings and loan
associations,  credit unions,  mortgage companies,  insurance companies,  mutual
funds and other  lending  institutions.  With  respect to  deposits,  additional
significant  competition arises from corporate and governmental debt securities,
as well as  money  market  mutual  funds.  The  Company  also  depends,  for its
origination  of mortgage  loans,  on  independent  mortgage  brokers who are not
contractually  obligated  to do  business  with the  Company  and are  regularly
solicited by the Company's competitors.  Aggressive policies of such competitors
have in the past resulted,  and may in the future  result,  in a decrease in the
Company's  volume  of  mortgage  loan  originations  and/or  a  decrease  in the
profitability  of such  originations,  especially  during  periods of  declining
mortgage loan origination  volumes.  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.

         Recent  Accounting   Pronouncements.   SFAS  No.  133,  Accounting  for
Derivative  Instruments  and  Hedging  Activities,  as amended by SFAS No.  138,
requires  derivative  instruments be carried at fair value on the balance sheet.
The  statement  continues to allow  derivative  instruments  to be used to hedge
various  risks and sets forth  specific  criteria to be used to  determine  when
hedge accounting can be used. The statement also provides for offsetting changes
in fair  value or cash  flows of both the  derivative  and the  hedged  asset or
liability to be recognized in earnings in the same period;  however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be  recognized  in earnings and cannot be deferred.  For  derivative
instruments  not accounted for as hedges,  changes in fair value are required to
be recognized in earnings.  The adoption of this statement on January 1, 2001 is
not expected to have a material effect on the consolidated financial statements.

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

         There were no  significant  changes to the  Company's  market risk from
December 31, 1999 to September 30, 2000.







                        This page is page 32 of 34 pages.

<PAGE>



                          PART II. - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.

(a)  Exhibits.

     The following  documents are included or  incorporated by reference in Form
     10-Q.


         Exhibit Number                              Description
         --------------                              -----------

           27.                  Financial Data Schedule for the period ended
                                September 30, 2000.


(b)  Reports on Form 8-K

     1.   Form 8-K filing dated September 29, 2000 announcing the termination of
          the  appointment of Deloitte & Touche LLP and the engagement of Crowe,
          Chizek and Company LLP as the Company's principal accountants.

     2.   Form 8-K filing  dated  September  27,  2000  announcing  no new share
          repurchase  authorization  and the successful  launch of the Company's
          internet banking product.

     3.   Form 8-K filing dated September 5, 2000  announcing  completion of the
          Company's 10% share repurchase program.












                        This page is page 33 of 34 pages.

<PAGE>



                                   SIGNATURES



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





                             REDWOOD EMPIRE BANCORP




DATE: 11/8/00              BY: /s/ James E. Beckwith
      -------                  ----------------------------
                               James E. Beckwith
                               Executive Vice President,
                               Chief Operating Officer,
                               Principal Financial Officer, and
                               Principal Accounting Officer














                        This page is page 34 of 34 pages.