<PAGE>

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

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 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
    Incorporated 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. May 1, 2000: 3,275,890


<PAGE>



                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index


                                                                         Page
PART I.  Financial Information

  Item 1.    Financial Statements

             Consolidated Statements of Operations
             Three Months ended March 31, 2000..............................3

             Consolidated Balance Sheets
             March 31, 2000 and December 31, 1999...........................5

             Consolidated Statements of Cash Flows
             Three Months Ended March 31, 2000..............................6

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


  Item 2.    Management's Discussion and Analysis
             of Financial Condition and Results of Operations..............12

  Item 3.    Quantitative and Qualitative Disclosure
             About Market Risk.............................................27


PART II. Other Information


  Item 6.    Exhibits and Reports on Item 8-K..............................28


SIGNATURES   ..............................................................30

<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
                                                                                         March 31,
                                                                                   2000             1999
                                                                             -----------------------------------
<S>                                                                                    <C>              <C>
Interest income:
  Interest and fees on loans                                                           $6,766           $6,094
  Interest on investment securities                                                     1,250              956
  Interest on federal funds sold                                                          143              178
                                                                             -----------------------------------
Total interest income                                                                   8,159            7,228

Interest expense:
  Interest on deposits                                                                  3,171            2,327
  Interest on subordinated notes                                                          ---              142
  Interest on other borrowings                                                             49              ---
                                                                             -----------------------------------
Total interest expense                                                                  3,220            2,469
                                                                             -----------------------------------

Net interest income                                                                     4,939            4,759
Provision for loan losses                                                                 100              300
                                                                             -----------------------------------

Net interest income after loan loss provision                                           4,839            4,459

Noninterest income:
  Service charges on deposit accounts                                                     277              255
  Merchant draft processing, net                                                          897              779
  Loan servicing income                                                                    40               16
  Net realized (loss)/gain on sale of
    investment securities available for sale                                               (1)              14
  Other income                                                                            198              261
                                                                             -----------------------------------
Total noninterest  income                                                               1,411            1,325

Noninterest expense:
  Salaries and employee benefits                                                        2,150            2,158
  Occupancy and equipment expense                                                         501              532
  Other                                                                                 1,207            1,115
                                                                             -----------------------------------
Total noninterest expense                                                               3,858            3,805
                                                                             -----------------------------------

  Income from continuing operations before income taxes
     and extraordinary item                                                             2,392            1,979
  Provision for income taxes                                                              972              768
                                                                             -----------------------------------

Income from continuing operations before extraordinary item                             1,420            1,211

Discontinued Operations:
  Income from discontinued operations
    (less applicable income taxes of $41)                                                 ---               83
                                                                             -----------------------------------

Income before extraordinary item                                                        1,420            1,294

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

Net income                                                                             $1,420           $1,018
                                                                             ===================================


</TABLE>



                                                  (Continued)



<PAGE>
<TABLE>
<CAPTION>


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


                                                                                     Three Months Ended
                                                                                         March 31,
                                                                                   2000             1999
                                                                             -----------------------------------
<S>                                                                                 <C>               <C>
Basic earnings per common share:
   Income from continuing operations before extraordinary item                          $0.44             $0.36
   Income from discontinued operations                                                   0.00              0.02
   Income before extraordinary item                                                      0.44              0.38
   Net income                                                                            0.44              0.30
  Weighted average shares                                                           3,252,000         3,372,000

Diluted earnings per common share and common equivalent share:
   Income from continuing operations before extraordinary item                          $0.43             $0.35
   Income from discontinued operations                                                   0.00              0.02
   Income before extraordinary item                                                      0.43              0.37
   Net income                                                                            0.43              0.29
  Weighted average shares                                                           3,269,000         3,463,000

See Notes to Consolidated Financial Statements.


                                                (Concluded)


</TABLE>


<PAGE>

<TABLE>
<CAPTION>

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

                                                                               March 31,               December 31,
                                                                                 2000                      1999
                                                                           ------------------       -------------------
                                                                               (unaudited)
<S>                                                                                 <C>                      <C>
Assets:
Cash and due from banks                                                              $15,780                  $19,058
Federal funds sold and repurchase agreements                                           6,545                    1,497
                                                                           ------------------       -------------------
  Cash and cash equivalents                                                           22,325                   20,555

Investment securities:
  Held to maturity (market value of $32,321 and $31,923)                              33,468                   32,967
  Available for sale, at market (amortized cost of $47,477 and $44,667)               46,361                   43,738
                                                                           ------------------       -------------------
    Total investment securities                                                       79,829                   76,705
Mortgage loans held for sale                                                             ---                      ---
Loans:
    Residential real estate mortgage                                                 132,047                  130,504
    Commercial real estate mortgage                                                   85,143                   79,476
    Commercial                                                                        58,908                   61,165
    Real estate construction                                                          42,435                   40,059
    Installment and other                                                              4,416                    4,624
    Less deferred loan fees                                                           (1,358)                  (1,383)
                                                                           ------------------       -------------------
        Total portfolio loans                                                        321,591                  314,445
    Less allowance for loan losses                                                    (7,980)                  (7,931)
                                                                           ------------------       -------------------
        Net loans                                                                    313,611                  306,514

Premises and equipment, net                                                            3,059                    3,045
Mortgage servicing rights                                                                 30                       32
Other real estate owned                                                                2,041                    2,363
Cash surrender value of life insurance                                                 3,226                    3,187
Other assets and interest receivable                                                  11,009                   10,645
                                                                           ------------------       -------------------
     Total assets                                                                   $435,130                 $423,046
                                                                           ==================       ===================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                                $79,272                  $77,753
  Interest-bearing transaction accounts                                              129,474                  124,357
  Time deposits $100,000 and over                                                     72,740                   69,294
  Other time deposits                                                                102,152                   98,105
                                                                           ------------------       -------------------
    Total deposits                                                                   383,638                  369,509

Other borrowings                                                                         845                    4,695
Subordinated notes                                                                       ---                      ---
Other liabilities and interest payable                                                11,522                   11,398
                                                                           ------------------       -------------------
     Total liabilities                                                               396,005                  385,602

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares; issued and
      outstanding: no shares                                                             ---                      ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 3,275,890 and 3,228,771 shares                          22,732                   22,033
  Retained earnings                                                                   17,040                   15,950
  Accumulated other comprehensive loss, net                                             (647)                    (539)

                                                                           ------------------       -------------------
     Total shareholders' equity                                                       39,125                   37,444
                                                                           ------------------       -------------------
     Total liabilities and shareholders' equity                                     $435,130                 $423,046
                                                                           ==================       ===================

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>


<TABLE>
<CAPTION>

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

                                                                            Three Months Ended
                                                                                 March 31,
                                                                         2000               1999
                                                                     -------------      --------------
<S>                                                                        <C>                <C>
Cash flows from operating activities:

  Net income                                                                $1,420             $1,018

Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization, net                                           254                349
  Net realized loss (gains) on securities available for sale                     1                (14)
  Loans originated for sale                                                    ---           (101,880)
  Proceeds from sale of loans held for sale                                    ---            108,230
  Gain on sale of loans and loan servicing                                     ---               (704)
  Provision for loan losses                                                    100                300
  Change in other assets and interest receivable                              (319)             3,255
  Change in other liabilities and interest payable                             125              7,371
  Other, net                                                                    14                 16
                                                                     -------------      --------------
  Total adjustments                                                            175             16,923

                                                                     -------------      --------------
  Net cash provided by operating activities                                  1,595             17,941
                                                                     -------------      --------------

Cash flows from investing activities:
  Net change in loans                                                       (7,665)           (15,304)
  Proceeds from sales of loans in portfolio                                    ---                ---
  Purchases of investment securities available for sale                     (3,943)            (5,017)
  Purchases of investment securities held to maturity                         (801)            (6,150)
  Proceeds from sales of investment securities available for sale            1,000                ---
  Maturities of investment securities available for sale                       129              3,015
  Maturities of investment securities held to maturity                         334                647
  Premises and equipment, net                                                 (268)              (289)
  Proceeds from sale of other real estate owned                                992                786

                                                                     -------------      --------------
    Net cash used in investment activities                                 (10,222)           (22,312)
                                                                     -------------      --------------

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                         1,519             11,787
  Change in interest bearing transaction accounts                            5,116             (2,976)
  Change in subordinated debt                                                  ---            (12,000)
  Change in time deposits                                                    7,494                423
  Change in other borrowings                                                (3,850)             8,476
  Issuance of stock                                                            448                 59
  Dividends paid                                                              (330)              (135)
                                                                     -------------      --------------
    Net cash provided by financing activities                               10,397              5,634
                                                                     -------------      --------------


Net change in cash and cash equivalents                                      1,770              1,263
Cash and cash equivalents at beginning of period                            20,555             42,187
                                                                     -------------      --------------


Cash and cash equivalents at end of period                                 $22,325            $43,450
                                                                     =============      ==============
</TABLE>


                                             (Continued)

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                   Three Months Ended
                                                                                       March 31,
                                                                               2000               1999
                                                                           --------------     --------------
<S>                                                                              <C>                 <C>
Supplemental Disclosures:

Cash paid during the period for:
  Interest expense                                                               3,054               2,910
  Income taxes                                                                   1,084                 ---

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                                  670                 232
  Dividend declared                                                                330                 135







See notes to Consolidated Financial Statements.
</TABLE>


                                              (Concluded)




<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"). 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 three  months  ended  March 31,  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 or other  contracts to issue
common stock were  exercised  or converted  into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.

<PAGE>

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

<TABLE>
<CAPTION>

                                                                             Three Months Ended
                                                                                  March 31,
                                                                       2000                       1999
                                                              -----------------------    -----------------------
                                                                Basic       Diluted        Basic       Diluted
                                                              ----------   ----------    ----------   ----------

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

 Income from continuing operations before extraordinary item     $1,420       $1,420        $1,211       $1,211
 Earnings per share from income from continuing operations before
   extraordinary item                                             $0.44        $0.43         $0.36        $0.35

 Income from discontinued operations, net of tax                   $---         $---           $83          $83
 Earnings per share from income from discontinued operations      $0.00        $0.00         $0.02        $0.02

 Income before extraordinary item                                $1,420       $1,420        $1,294       $1,294
 Earnings per share before extraordinary item                     $0.44        $0.43         $0.38        $0.37

 Net income                                                      $1,420       $1,420        $1,018       $1,018
 Net income per share                                             $0.44        $0.43         $0.30        $0.29

 Weighted average common shares outstanding                       3,252        3,269 (1)     3,372        3,463 (1)
                                                              ==========   ==========    ==========   ==========
</TABLE>

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



3.   Comprehensive Income

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

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             March 31,
                                                    -------------------------------
                                                        2000             1999
                                                    --------------   --------------
                                                            (in thousands)
<S>                                                        <C>              <C>
 Net income                                                $1,420           $1,018
 Other comprehensive income (net of tax):
   Change in unrealized holding losses
      on available for sale securities                       (108)
                                                                              (182)
   Reclassification adjustment
                                                              - -               (8)
                                                    --------------   --------------
 Total comprehensive income                                $1,312             $828
                                                    ==============   ==============
</TABLE>


4.   Common Stock Dividend

     On February  15,  2000 the Board of  Directors  declared a  quarterly  cash
dividend of 10 cents per share on the Company's  Common Stock.  The dividend was
paid on April 14, 2000 to shareholders of record on March 31, 2000.


<PAGE>

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  $2,128,000  for the three  months ended March 31,
1999.  There was no such revenue  recognized in 2000. As of March 31, 2000 there
are no assets and $42,000 in liabilities on the Company's  consolidated  balance
sheet related to the divested  operations.  The liability  balance is related to
potential repurchases of previously sold mortgage loans.


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 93,000
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.

<PAGE>

     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.


     Summary financial data by industry segment follows:


<TABLE>
<CAPTION>
                                                                For the quarter ended March 31, 2000
                                                               ---------------------------------------

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

<S>                                                                <C>          <C>         <C>
Total Interest Income                                                $8,159     $    ---      $8,159
Total Interest Expense                                                3,220          ---       3,220
Interest income/(expense) allocation                                   (295)         295         ---
                                                               ---------------------------------------
Net Interest Income                                                   4,644          295       4,939
Provision for Loan Losses                                               100          ---         100
Total other Operating Income                                            514          897       1,411
Total other Operating Expense                                         3,409          449       3,858
                                                               ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                             1,649          743       2,392
Provision for income taxes                                              670          302         972
                                                               ---------------------------------------
Income from continuing operations before extraordinary item            $979         $441      $1,420
                                                               =======================================

Total Average Assets                                               $405,445      $23,939    $429,384
                                                               =======================================
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                     For the quarter ended March 31, 1999
                                                    ---------------------------------------

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

<S>                                                     <C>           <C>         <C>
Total Interest Income                                     $7,228        $ ---       $7,228
Total Interest Expense                                     2,466            3        2,469
Interest income/(expense) allocation                       (137)          137          ---
                                                    ---------------------------------------
Net Interest Income                                        4,625          134        4,759
Provision for Loan Losses                                    300          ---          300
Total other Operating Income                                 546          779        1,325
Total other Operating Expense                              3,482          323        3,805
                                                    ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                  1,389          590        1,979
Provision for income taxes                                   542          226          768
                                                    ---------------------------------------
Income from continuing operations before                    $847         $364       $1,211
extraordinary item
                                                    =======================================

Total Average Assets                                    $339,825      $10,147     $349,972
                                                    =======================================

</TABLE>




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:

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

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

-    The health of the economy  declines  nationally or  regionally  which could
     reduce the demand for loans or reduce the value of real  estate  collateral
     securing most of the Company's loans.

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

-    Dividend restrictions.
<PAGE>

-    Regulatory discretion.

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

-    Asset/liability repricing risks and liquidity risks.

-    Changes in the securities markets.


     The Company  undertakes  no  obligation  to revise or publicly  release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to 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 March 31, 2000.  Significant  changes and trends in the Company's  results of
operations  for the three  months  ended  March 31,  2000,  compared to the same
period in 1999 are also discussed.


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  $2,128,000  for the three  months ended March 31,
1999. There was no revenue recognized for the three months ended March 31, 2000.

<PAGE>


     The Company reported income from continuing  operations of $1,420,000 ($.43
per diluted  share) for the three  months  ended  March 31, 2000 and  $1,211,000
($.35 per  diluted  share)  for the same  period in 1999.  The  Company  did not
recognize any income or loss associated with its discontinued  operations during
the first  quarter of 2000,  as compared to income of $83,000  ($.02 per diluted
share) during the first  quarter of 1999.  Net income was  $1,420,000  ($.43 per
diluted  share) for the quarter  ended March 31, 2000 and  $1,018,000  ($.29 per
diluted  share) for the same  period one year ago.  Net income  from  continuing
operations  for the first three months of 2000  increased  $209,000,  or 17%, as
compared  to the same  period in 1999.  This  increase  is due to an increase of
$180,000 in net interest income,  an increase of $86,000 in noninterest  income,
and a  decrease  in the  provision  for loan  losses  of  $200,000  offset by an
increase of $53,000 in noninterest expense.


Net Interest Income

     Net interest  income from continuing  operations  increased from $4,759,000
during the first  quarter of 1999 to  $4,939,000  in the first  quarter of 2000,
which represents an increase of $180,000 or 4%. While the Company's net interest
margin  decreased  to 4.96% for the three months ended March 31, 2000 from 5.51%
for the three  months  ended  March 31,  1999,  it was the  Company's  growth in
earning assets that fueled the increase in net interest income.  Average earning
assets from continuing operations,  which excludes mortgage loans held for sale,
increased  $50,752,000 from $349,972,000 for the quarter ended March 31, 1999 to
$400,724,000 for the quarter ended March 31, 2000.  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 three months of 2000, the yield on earning  assets  decreased
from  8.38%  to 8.19%  primarily  due to a  change  in the mix of the  Company's
earning assets. Average commercial and residential real estate loans, which bear
a yield lower than other portfolio loan types, increased $45,537,000. Yield paid
on interest bearing liabilities  increased as such yield was 4.28% for the three
months  ended  March 31,  2000 as  compared to 4.00% in the same period in 1999.

     Average earning assets from continuing operations,  which excludes mortgage
loans held for sale,  increased in the first quarter of 2000 to  $400,724,000 as
compared to $349,972,000 for the three months ended March 31, 1999. The increase
during the first three months of 2000 when  compared to 1999 is primarily due to
an increase in average portfolio loans of $41,129,000 and investment  securities
of  $14,197,000  partially  offset  by  a  decline  in  federal  funds  sold  of
$4,574,000.
<PAGE>

     Further  contributing  to the decline in the Company's net interest  margin
was a change in the  Company's  funding  mix.  Total  average  interest  bearing
liabilities  increased  from  $250,634,000  in the  first  quarter  of  1999  to
$302,437,000  for the same  period in 2000,  which  represents  an  increase  of
$51,803,000.  This  increase was coupled with a decrease in average  noninterest
bearing  transaction  accounts of  $11,993,000.  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
                                         March 31, 2000                              March 31, 1999
                              ----------------------------------------    ----------------------------------------

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

<S>                               <C>            <C>             <C>          <C>             <C>            <C>
Earning assets (1)                $400,724       $8,159          8.19         $349,972        $7,228         8.38
Interest-bearing liabilities       302,437        3,220          4.28          250,634         2,469         4.00
                                           -------------                               --------------
Net interest income                              $4,939                                       $4,759
                                           =============                               ==============
Net interest income to
  earning assets                                                 4.96                                        5.51

</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 months ended March 31, 2000 and 1999. Changes not solely  attributable
to rate or volume have been allocated to rate.

<TABLE>
<CAPTION>
                                                                Three months ended March 31, 2000
                                                                        over March 31, 1999
                                                         --------------------------------------------------
                                                             Volume            Rate             Total
                                                         --------------------------------------------------
                                                                           (in thousands)
<S>                                                                <C>             <C>                <C>
Increase (decrease) in interest income:
  Portfolio loans                                                   $933           ($261)             $672
  Investment securities                                              218              76               294
  Federal funds sold                                                 (57)             22               (35)
                                                         --------------------------------------------------
Total increase (decrease)                                          1,094            (163)              931
                                                         --------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                              (60)             38               (22)
  Time deposits                                                      780              86               866
  Other borrowings                                                   (27)            (66)              (93)
                                                         --------------------------------------------------
Total increase (decrease)                                            693              58               751
                                                         --------------------------------------------------

Increase in net interest income                                     $401           ($221)             $180
                                                         ==================================================

</TABLE>
<PAGE>

Provision for Loan Losses

     The provision for loan losses for the three months ended March 31, 2000 was
$100,000 as compared to $300,000 in the same quarter in the previous  year.  For
further discussion see Allowance for Loan Losses and Nonperforming Loans.


Noninterest Income and Expense and Income Taxes

     Noninterest Income

     The following table sets forth the components of the Company's  noninterest
income from continuing  operations for the three months ended March 31, 2000, as
compared to the same period in 1999.

<TABLE>
<CAPTION>

                                                Three Months Ended
                                                     March 31,
                                             --------------------------        $          %
                                                2000           1999         Change      Change
                                             -----------     ----------   -----------------------
                                              (dollars in thousands)

<S>                                              <C>            <C>               <C>      <C>
Service charges on deposit accounts                $277           $255            $22          9
Merchant draft processing, net                      897            779            118         15
Loan servicing income                                40             16             24        150
Gain (loss) on securities                            (1)            14            (15)      (107)
Other income                                        198            261            (63)       (24)
                                             -----------     ----------   ------------
Total noninterest income                         $1,411         $1,325            $86          6
                                             ===========     ==========   ============
</TABLE>


     Noninterest  income from continuing  operations  increased $86,000 or 6% to
$1,411,000  for the first quarter of 2000 when  compared to  $1,325,000  for the
same period in 1999.  Such  increase is primarily due to an increase in merchant
card net revenue of $118,000,  an increase in loan  servicing  income of $24,000
and an  increase  of  $22,000 in service  charges  on  deposit  accounts.  These
increases were partially offset by a decline of $63,000 in other income.




<PAGE>

     Noninterest Expense

     Noninterest expense from continuing  operations  increased by $53,000 or 1%
to $3,858,000  during the first  quarter of 2000 compared to $3,805,000  for the
first  quarter of 1999.  The  following  table sets forth the  components of the
Company's  noninterest  expense during the three months ended March 31, 2000, as
compared to the same period in 1999.


<TABLE>
<CAPTION>

                                         Three Months Ended
                                             March 31,               $         %
                                     ---------------------------
                                         2000          1999       Change     Change
                                     -------------  ------------ ---------------------
                                       (dollars in thousands)

<S>                                        <C>           <C>          <C>        <C>
Salaries and employee benefits             $2,150        $2,158       ($8)       (0)
Occupancy and equipment expense               501           532       (31)       (6)
Other                                       1,207         1,115        92         8
                                     -------------  ------------  ----------
Total noninterest expense                  $3,858        $3,805       $53         1
                                     =============  ============  ==========

</TABLE>


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 40.6% for the three months ended March 31, 2000,  compared to 38.5% for
the same period 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 93,000 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.


<PAGE>

     Summary financial data by industry segment as follows:

<TABLE>
<CAPTION>
                                                     For the quarter ended March 31, 2000
                                                    ---------------------------------------

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

<S>                                                     <C>           <C>         <C>
Total Interest Income                                     $8,159        $ ---       $8,159
Total Interest Expense                                     3,220          ---        3,220
Interest income/(expense) allocation                       (295)          295          ---
                                                    ---------------------------------------
Net Interest Income                                        4,644          295        4,939
Provision for Loan Losses                                    100          ---          100
Total other Operating Income                                 514          897        1,411
Total other Operating Expense                              3,409          449        3,858
                                                    ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                  1,649          743        2,392
Provision for income taxes                                   670          302          972
                                                    ---------------------------------------
Income from continuing operations before                    $979         $441       $1,420
extraordinary item
                                                    =======================================

Total Average Assets                                    $405,445      $23,939     $429,384
                                                    =======================================
</TABLE>

<TABLE>
<CAPTION>
                                                     For the quarter ended March 31, 1999
                                                    ---------------------------------------

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

<S>                                                     <C>           <C>         <C>
Total Interest Income                                     $7,228        $ ---       $7,228
Total Interest Expense                                     2,466            3        2,469
Interest income/(expense) allocation                       (137)          137          ---
                                                    ---------------------------------------
Net Interest Income                                        4,625          134        4,759
Provision for Loan Losses                                    300          ---          300
Total other Operating Income                                 546          779        1,325
Total other Operating Expense                              3,482          323        3,805
                                                    ---------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                  1,389          590        1,979
Provision for income taxes                                   542          226          768
                                                    ---------------------------------------
Income from continuing operations before                    $847         $364       $1,211
extraordinary item
                                                    =======================================

Total Average Assets                                    $339,825      $10,147     $349,972
                                                    =======================================
</TABLE>



<PAGE>

     Community Banking

     The Community  Banking  segment's income from continuing  operations before
income tax and extraordinary item increased for the quarter ended March 31, 2000
when  compared  to the same  period in the prior  year.  The  increase is due to
reduced  operating  expenses,  a lower  provision  for loan losses and growth in
earning  assets.  In the  first  quarter  of  2000,  segment  expenses  declined
primarily due to reduced overhead and administrative expenses. Additionally, the
Company  increased  its  permanent  loan  portfolio  through  renewed  marketing
efforts.  Total average  portfolio  loans amounted to  $313,405,000 in the first
quarter of 2000 and  $272,276,000 in the first quarter of 1999, which reflects a
15% increase.

     Bankcard

     The  Merchant  Card  segment  provides  Visa  and  Mastercard  credit  card
processing  and  settlement   services  for  roughly  93,000  merchants  located
throughout  the United  States.  Yearly  processing  volume is in excess of $1.6
billion.  The  Company's  merchant  card  services  customer  base is made up of
merchants  located  in its  primary  market  area and  merchants  who have  been
acquired by the Company through the use of independent sales  organizations,  or
ISO's.

     The Merchant Card processing segment has experienced three successive years
of revenue and earnings  growth due to an increase in the number of merchants it
services and an increase of independent  sales  organizations  (ISO's) to market
its  services.  In  December  1998  the  Company  renegotiated  the  terms  of a
processing  contract  with  an  ISO  who  represented  $1,736,000  or 66% of the
Company's 1998 merchant  draft net  processing  revenue and $1,412,000 or 45% of
such revenue in 1999. As a result of the  renegotiation  the ISO bought down its
processing rate in consideration for a payment of $2,600,000 to the Company. The
term of the  renegotiated  contract is for two years and requires the Company to
continue to process merchant card transaction  volume from this ISO's customers.
The  Company  has  amortized  such  payment  over the  life of the  renegotiated
contract into income.  During the first  quarter of 2000 and 1999,  $480,000 and
$410,000 of this  payment  was  recognized  as  revenue.  The amount of unearned
processing  revenue  was  $960,000  as of March 31,  2000.  The  balance of this
account will be amortized into income in 2000.

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

     The Company bears certain risks  associated  with its merchant  credit card
processing  business.  Due to a contractual  obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
is unable to pay charge-backs from cardholders.  As a result of this obligation,
NBR may  incur  losses  associated  with its  merchant  credit  card  processing
business.  Accordingly,  NBR has  established  a reserve to  provide  for losses
associated with charge-back losses.  Such reserve,  which totaled $1,044,000 and
$606,000 as of March 31, 2000 and 1999,  was estimated  based upon industry loss
data as a percentage of  transaction  volume  throughout  each year,  historical
losses incurred by the Company, and management's  assumptions regarding merchant
and ISO risk.  The provision for  charge-back  losses,  which is included in the
financial  statements as a reduction in merchant draft  processing  income,  was
$136,000  and  $147,000  for  the  quarters  ended  March  31,  2000  and  1999,
respectively.  While  charge  offs were  minimal,  the  increase  in the reserve
reflects  the growth in  transaction  volume,  increased  exposures  to internet
merchants,  and a new ISO  relationship  in which the Company assumes fraud risk
directly  rather  than  looking  first to the ISO.  For further  discussion  see
"Certain Important Considerations for Investors".


Investment Securities

     Total investment securities increased $3,124,000 or 4% to $79,829,000 as of
March 31,  2000 when  compared to  $76,705,000  as of December  31,  1999.  Such
increase is due to an effort to increase the overall yield in earning  assets of
the Company by decreasing  its overnight  federal fund  investment  position and
redirect  such  amounts  into the  higher  yielding  investment  portfolio.  The
Company's  average  federal fund  position was  $10,014,000  for the first three
months of 2000 as compared to $14,588,000 in 1999.

Loans

     Total loans  increased  $7,146,000 or 2% to  $321,591,000 at March 31, 2000
compared to  $314,445,000  at December 31, 1998. 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 $2,376,000 to $42,435,000 at March 31, 2000 as
compared to  $40,059,000  at December  31, 1999.  In  addition,  the Company has
emphasized the funding of permanent residential real estate loans and commercial
real estate  loans in the first three  months of 2000.  Residential  real estate
loans  increased  $1,543,000 to  $132,047,000  at March 31, 2000, as compared to
$130,504,000  at  December  31,  1999,  and  commercial  real  estate  has grown
$5,667,000 to $85,143,000 compared to $79,476,000.

<PAGE>

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

<TABLE>
<CAPTION>
                                                   March 31, 2000                        December 31, 1999
                                         ------------------------------------    ------------------------------------
                                               Amount              %                   Amount              %
                                         ------------------------------------    ------------------------------------
                                                (dollars in thousands)                  (dollars in thousands)
<S>                                              <C>                     <C>             <C>                     <C>
 Residential real estate mortgage                $132,047                 42             $130,504                 42
 Commercial real estate mortgage                   85,143                 26               79,476                 25
 Commercial                                        58,908                 18               61,165                 19
 Real estate construction                          42,435                 13               40,059                 13
 Installment and other                              4,416                  1                4,624                  1
 Less deferred loan fees                           (1,358)                 0               (1,383)                 0
                                         ------------------------------------    ------------------------------------
     Total portfolio loans                        321,591                100              314,445                100
                                                           ==================                      ==================
 Less allowance for loan losses                    (7,980)                                 (7,931)
                                         ------------------                      ------------------
     Net loans                                   $313,611                                $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.

     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.

<PAGE>


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

<TABLE>
<CAPTION>
                                                          Three months ended
                                                                 March 31,
                                                      ----------------------------
                                                         2000            1999
                                                      ------------   -------------
                                                        (dollars in thousands)
<S>                                                       <C>             <C>
Beginning allowance for loan losses                       $7,931          $8,041
Provision for loan losses                                    100             300
Charge-offs                                                  (67)           (257)
Recoveries                                                    16             158
                                                      ------------   -------------
Ending allowance for loan losses                          $7,980          $8,242
                                                      ============   =============


Net charge-offs to average
   loans (annualized)                                        .07%            .15%

</TABLE>

     The allowance for loan losses as a percentage of portfolio  loans decreased
from 2.62% at December 31, 1999 to 2.48% at March 31, 2000. This decrease is due
to several factors which include an improvement in the overall credit quality of
the Company's  loan  portfolio,  as evidence by the  reduction of  nonperforming
loans presented below, growth in the Company's loan portfolio and a reduction in
loan  charge-offs.  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 loan loss reserve  methodology,  such loans generally  receive a lower
loan loss reserve allocation as compared to commercial or construction loans.


Nonperforming Assets

     The following table summarizes the Company's nonperforming assets.

<TABLE>
<CAPTION>
                                                                March 31,           December 31,
                                                                  2000                 1999
                                                              --------------       --------------
                                                                    (dollars in thousands)
<S>                                                                  <C>                  <C>
Nonaccrual loans                                                     $2,534               $3,063
Restructured loans                                                      307                1,018
                                                              --------------       --------------
Total nonperforming loans                                             2,841                4,081
Other real estate owned                                               2,041                2,363
                                                              --------------       --------------
Total nonperforming assets                                           $4,882               $6,444
                                                              ==============       ==============



Nonperforming assets to total assets                                  1.12%                1.52%

</TABLE>

<PAGE>

     Nonperforming assets have decreased from $6,444,000 as of December 31, 1999
to $4,882,000 as of March 31, 2000. The decrease is  attributable  to a decrease
in restructured loans of $711,000, nonaccrual loans of $529,000 and a decline in
other real estate owned of $322,000.

     Nonperforming  loans  consist  of loans to 32  borrowers,  11 of which have
balances  in excess of  $100,000.  The two  largest  have  recorded  balances of
$472,000 and  $313,000.  Both  properties  are secured by real estate.  Based on
information currently available,  management believes that adequate reserves are
included in the  allowance  for loan losses to cover any loss  exposure that may
result from these loans.

     Other real estate  owned  consists of 7  properties.  Four  properties  are
residential, two are commercial buildings and the remaining is a motel. Based on
information  currently  available,  management  believes  that  reserves are not
required to cover any loss exposure that may result from these loans.

     Although  the volume of  nonperforming  assets  will  depend in part on the
future economic  environment,  there is one additional loan  relationship  which
totals approximately  $1,044,000 about which management has serious doubts as to
the ability of the  borrower to comply with the present  repayment  terms.  This
loan may become a nonperforming  asset based on the information  presently known
about possible credit problems of the borrower.

     At March 31, 2000,  the  Company's  total  recorded  investment in impaired
loans  (as  defined  by SFAS  114 and 118) was  $3,189,000  of which  $2,878,000
relates to the recorded  investment  for which there is a related  allowance for
loan losses of $548,000  determined  in  accordance  with these  statements  and
$311,000 relates to the amount of that recorded investment for which there is no
related allowance for loan losses determined in accordance with these standards.

     The average  recorded  investment  in the  impaired  loans during the three
months ended March 31, 2000 and 1999 was $3,356,000 and $10,029,000. The decline
in the average recorded  investment of impaired loans of $6,673,000 at March 31,
2000 compared to March 31, 1999 is a direct  result of the Company's  decline in
nonperforming  loans of  $5,186,000.  The  related  amount  of  interest  income
recognized  during the  periods  that such loans were  impaired  was $39,000 and
$123,000 for the three month periods ended March 31, 2000 and 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.   Such
representations  and warranties  include valid appraisal,  status of borrower or
fraud.  In the  first  three  months of 2000 the  Company  was not  required  to
repurchase  any such  loans.  The  Company  expects  that it may be  required to
repurchase loans in the future. The Company maintains a reserve for its estimate
of potential  losses  associated with the repurchase of previously sold mortgage
loans.  Such reserve  amounts to $42,000 as of March 31, 2000 and $142,000 as of
December  31,  1999.  The  decrease  in the  reserve  of  $100,000  relates to a
charge-off taken on one loan in the first quarter of 2000.

<PAGE>


Liquidity

     Redwood's  primary  source of  liquidity is  dividends  from its  financial
institution  subsidiary.  Redwood's  primary uses of liquidity has  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 Redwood at a
level which  management  believes to be consistent with the safety and soundness
of the  Company as a whole.  As of March 31,  2000,  Redwood  held  $721,000  in
deposits at NBR.

     In 1998,  Redwood reinstated a cash dividend to its common stock holders at
a quarterly rate of $.04 per share. In 1999 Redwood  increased this dividend 50%
to $.06 per share.  In the fourth quarter of 1999, the dividend  increased again
to $.10 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 early redeemed in the first quarter of
1999. Payment of these obligations is ultimately dependent on dividends from NBR
to Redwood.  Federal  regulatory  agencies  have the  authority  to prohibit the
payment of  dividends  by NBR to Redwood if a finding is made that such  payment
would   constitute   an  unsafe  or   unsound   practice,   or  if  NBR   became
undercapitalized.  If NBR is restricted from paying dividends,  Redwood could be
unable to pay dividends to its common shareholders. No assurance can be given as
to the ability of NBR to pay dividends to Redwood.

     During  the  first  three  months  of 2000,  NBR  declared  a  dividend  of
$1,500,000.  Management  believes  that as of  March  31,  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 three months ended
March 31, 2000 the Company  received cash of $175,000 from operating  activities
and  $10,397,000 in financing  activities  while using  $10,222,000 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.
<PAGE>

     Under the risk-based capital standard,  assets reported on an institution's
balance  sheet  and  certain  off-balance  sheet  items  are  assigned  to  risk
categories, each of which is assigned a risk weight. This standard characterizes
an  institution's  capital as being  "Tier 1" capital  (defined  as  principally
comprising  shareholders' equity and noncumulative preferred stock) and "Tier 2"
capital  (defined as  principally  comprising  the allowance for loan losses and
subordinated debt).

     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.

     The following  table  summarizes  the  consolidated  capital ratios and the
capital ratios of the principal  subsidiaries at March 31, 2000 and December 31,
1999.

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

<S>                                                                  <C>            <C>
         March 31, 2000
           Total capital to risk based assets                        13.44%         13.08%
           Tier 1 capital to risk based assets                       12.17          11.82
           Leverage ratio                                             9.04           8.76

         December 31, 1999
           Total capital to risk based assets                        13.01         13.20
           Tier 1 capital to risk based assets                       11.74         11.94
           Leverage ratio                                             8.66          8.86

</TABLE>

     NBR's capital  ratios  declined in the first quarter of 1999 due to an $8.0
million  dividend to Redwood  and the early  payoff of a $3.0  million  note due
Redwood.  Such payments  were  necessary to provide  funding of Redwood's  early
redemption of its $12.0 million subordinated debt.

     In the fourth quarter of 1999, the Company  announced the completion of its
initial stock  repurchase  program  authorized on October 27, 1998. Total shares
repurchased under this  authorization were 171,000 at an average price of $20.97
per share. In a separate action the Board of Directors authorized the repurchase
of an additional 150,000  outstanding  shares. This stock repurchase program was
completed the first week of May 2000,  at an average price of $18.38.  Under the
repurchase  program,  the Company purchases shares from time to time on the open
market or through privately negotiated transactions.

Year 2000

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


<PAGE>

Certain Important Considerations for Investors


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

     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
December  31,  1999  (the  most  recent  information  available  from  VISA) the
Company's total VISA transactions within these certain high-risk categories were
10.4% of VISA total processing  volume.  Other changes VISA announced  include a
requirement  that  weekly  VISA  volumes  be less  than  20% of an  institutions
tangible equity capital,  and a requirement that aggregate  charge-backs for the
previous  six  months  be less  than  5% of the  institution's  tangible  equity
capital. At December 31, 1999, (the most recent information available from VISA)
the  Company's  weekly  VISA volume was 54.4% of tangible  equity  capital,  and
aggregate charge-backs for the previous six months were 11.1% 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,
the Company  would seek a waiver from VISA.  However,  should VISA not grant the
Company a waiver,  the Company would need to restructure  the merchant  bankcard
unit, which could adversely affect merchant bankcard revenue.
<PAGE>

     Concentration of Lending Activities. Concentration of the Company's lending
activities in the real estate sector,  including  construction loans, could have
the effect of  intensifying  the impact on the Company of adverse changes in the
real  estate  market  in  the  Company's  lending  areas.  At  March  31,  2000,
approximately  81% of the Company's loans were secured by real estate,  of which
33% 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.

     Competition  from Other Financial  Institutions.  The Company  competes for
deposits and loans  principally with major commercial  banks,  other independent
banks,   savings  and  loan  associations,   savings  banks,   thrift  and  loan
associations,  credit unions, mortgage companies,  insurance companies and other
lending  institutions.   With  respect  to  deposits,   additional   significant
competition  arises from corporate and governmental debt securities,  as well as
money market  mutual  funds.  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.


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 March 31, 2000.

<PAGE>



                          PART II. - OTHER INFORMATION


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

1.      Exhibits.

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

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

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

             3.1           Articles of Incorporation of the Registrant.

            10.            Executive  Salary   Continuation   Agreement  between
                           Patrick W. Kilkenny and Redwood Empire Bancorp.

            10.1           Executive   Severance  Agreement  between  Patrick W.
                           Kilkenny and Redwood Empire Bancorp.

            10.2           Executive   Salary   Continuation  Agreement  between
                           James E. Beckwith and Redwood Empire Bancorp.

            10.3           Executive   Severance   Agreement  between  James  E.
                           Beckwith and Redwood Empire Bancorp.

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

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

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

            10.7           Dividend Reinvestment and Stock Purchase Plan on Form
                           S-3 dated April 28, 1993  (Registration No. 3361750),
                           and by this reference incorporated herein.
<PAGE>

            10.8           Lease, Dated  June 1, 1999, between  National Bank of
                           the Redwoods and Advanced Development & Investments.

            10.9           Asset Sale Agreement dated September 10, 1999 between
                           National  Bank of  the Redwoods and Valley  Financial
                           Acquisition, Inc.


2.      Reports on Form 8-K

        There  were  no  events  requiring  a Form 8-K  filing  during the first
        quarter ended March 31, 2000.





<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 and in the capacity indicated.





                             REDWOOD EMPIRE BANCORP
                                  (Registrant)




DATE:  5/12/00              BY:  /s/ James E. Beckwith
                                 James E. Beckwith
                                 Executive Vice President,
                                 Chief Operating Officer,
                                 Principal Financial Officer, and
                                 Principal Accounting Officer