================================================================================
                                  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 31,1999

                                       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 5, 1999: 3,405,057



<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, 1999 and 1998........................3

             Consolidated Balance Sheets
             March 31, 1999 and December 31, 1998..............................4

             Consolidated Statements of Cash Flows
             Three Months Ended March 31, 1999 and 1998........................5

             Notes to Consolidated Financial Statements........................7


  Item 2.    Management's Discussion and Analysis
             of Financial Condition and Results of Operations.................11


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


PART II. Other Information

  Item 4.    Exhibits and Reports on Item 8-K.................................31



SIGNATURES   .................................................................33


<PAGE>



PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements


                            REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                             Consolidated Statements of Operations
                          (dollars in thousands except per share data)
                                          (unaudited)
<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                              March 31,
                                                                          1999         1998
                                                                      ---------------------------
<S>                                                                   <C>               <C>   
Interest income:

  Interest and fees on  loans                                             $6,609        $6,854
  Interest on investment securities                                          956         1,126
  Interest on federal funds sold                                             178           326
                                                                      ---------------------------
Total interest income                                                      7,743         8,306

Interest expense:
  Interest on deposits                                                     2,721         3,381
  Interest on subordinated notes                                             142           277
  Interest on other borrowings                                                53            74
                                                                      ---------------------------
Total interest expense                                                     2,916         3,732
                                                                      ---------------------------

Net interest income                                                        4,827         4,574
Provision for loan losses                                                    300           510
                                                                      ---------------------------

Net interest income after loan loss provision                              4,527         4,064
                                                                      ---------------------------

Noninterest income:
  Service charges on deposit accounts                                        255           274
  Merchant draft processing, net                                             779           441
  Loan servicing income                                                       66           179
  Net realized gain on sale of
    investment securities available for sale                                  14           105
  Gain on sale of loans and loan servicing                                   704           947
  Mortgage loan brokerage revenue, net                                     1,202         1,084
  Other income                                                               366           297
                                                                      ---------------------------
Total noninterest  income                                                  3,386         3,327

Noninterest expense:
  Salaries and employee benefits                                           3,420         3,003
  Occupancy and equipment expense                                            803           809
  Other                                                                    1,587         1,837
                                                                      ---------------------------
Total noninterest expense                                                  5,810         5,649
                                                                      ---------------------------

  Income before income taxes and extraordinary item                        2,103         1,742
  Provision for income taxes                                                 809           635
                                                                      ---------------------------

Income before extraordinary item                                           1,294         1,107

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

Net income                                                                 1,018         1,107
Dividends on preferred stock                                                 ---           112
                                                                      ===========================
Net income available for common stock shareholders                        $1,018          $995
                                                                      ===========================

Earnings per common share and common equivalent share:
   Basic earnings per share before extraordinary item                       $.38          $.36
   Basic earnings per share                                                  .30           .36
   Diluted earnings per share before extraordinary item                      .37           .32
   Dilute earnings per share                                                 .29           .32


See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>

                     REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                          March 31,              December 31,
                                                                            1999                     1998
                                                                      ------------------       ------------------
<S>                                                                   <C>                      <C>    
Assets:
Cash and due from banks                                                         $30,306                  $15,982
Federal funds sold and repos                                                     13,144                   26,205
                                                                      ------------------       ------------------
  Cash and cash equivalents                                                      43,450                   42,187

Investment securities:
  Held to maturity (market value of $35,254 and $30,014)                         35,353                    29,872
  Available for sale, at market                                                  32,233                    30,538
                                                                      ------------------       ------------------
    Total investment securities                                                  67,586                    60,410
Mortgage loans held for sale                                                     26,270                    32,620
Loans:
    Residential real estate mortgage                                            110,376                    97,194
    Commercial real estate mortgage                                              69,218                    59,257
    Commercial                                                                   60,085                    63,260
    Real estate construction                                                     43,782                    46,905
    Installment and other                                                         3,516                     5,095
    Less deferred loan fees                                                     (1,696)                    (2,395)
                                                                      ------------------       ------------------
        Total portfolio loans                                                   285,281                   269,316
    Less allowance for loan losses                                              (8,242)                    (8,041)
                                                                      ------------------       ------------------
        Net loans                                                               277,039                   261,275

Premises and equipment, net                                                       4,022                     4,082
Mortgage servicing rights                                                           245                       305
Other real estate owned                                                           1,611                     2,181
Cash surrender value of life insurance                                            3,077                     3,033
Other assets and interest receivable                                             10,338                    16,206
                                                                      ==================       ==================
     Total assets                                                              $433,638                  $422,299
                                                                      ==================       ==================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                           $94,235                   $82,448
  Interest-bearing transaction accounts                                         138,340                   141,316
  Time deposits $100,000 and over                                                63,763                    62,600
  Other time deposits                                                            77,616                    78,356
                                                                      ------------------       ------------------
    Total deposits                                                              373,954                   364,720

Other borrowings                                                                  9,847                     1,371
Subordinated notes                                                                  ---                    12,000
Other liabilities and interest payable                                           10,293                     5,568
                                                                      ------------------       ------------------
     Total liabilities                                                          394,094                   383,659

Shareholders' equity:
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding 3,379,656 and 3,363,565 shares                      26,012                    25,801
  Retained earnings                                                              13,483                    12,600
  Accumulated other comprehensive income, net                                        49                       239

                                                                      ------------------       ------------------
     Total shareholders' equity                                                  39,544                    38,640
                                                                      ------------------       ------------------

     Total liabilities and shareholders' equity                                $433,638                  $422,299
                                                                      ==================       ==================

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>





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

                                                                            Three Months Ended
                                                                                 March 31,
                                                                            1999               1998
                                                                    --------------     --------------
<S>                                                                        <C>                <C>
Cash flows from operating activities:

  Net income                                                                $1,018             $1,107

Adjustments  to  reconcile   net  income  to  net  cash  
  provided  by  operating activities:
  Depreciation and amortization, net                                           349                207
  Net realized gains on securities available for sale                          (14)              (105)
  Loans originated for sale                                               (101,880)           (92,263)
  Proceeds from sale of loans held for sale                                108,230             87,930
  Gain on sale of loans and loan servicing                                    (704)              (947)
  Provision for loan losses                                                    300                510
  Change in other assets and interest receivable                             3,255               (140)
  Change in other liabilities and interest payable                           7,371               (488)
  Other, net                                                                    16                248
                                                                     --------------     --------------
  Total adjustments                                                         16,923             (5,048)
                                                                     --------------     --------------

  Net cash provided by (used in) operating activities                       17,941             (3,941)
                                                                     --------------     --------------

Cash flows from investing activities:
  Net change in loans                                                      (15,304)            12,995
  Proceeds from sales of loans in portfolio                                    ---                172
  Purchases of investment securities available for sale                     (5,017)           (11,081)
  Purchases of investment securities held to maturity                       (6,150)            (4,022)
  Sales of investment securities available for sale                            ---              2,955
  Maturities of investment securities available for sale                     3,015             10,900
  Maturities of investment securities held to maturity                         647             11,229
  Premises and equipment, net                                                 (289)              (582)
  Purchase of mortgage servicing rights                                        ---                 (2)
  Proceeds from sale of other real estate owned                                786              1,071

                                                                     --------------     --------------
    Net cash provided by (used in) investment activities                   (22,312)            23,635
                                                                     --------------     --------------

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                        11,787             (6,324)
  Change in interest bearing transaction accounts                           (2,976)             5,302
  Change in subordinated debt                                              (12,000)               ---
  Change in time deposits                                                      423             (5,386)
  Change in borrowings                                                       8,476              3,285
  Issuance of stock                                                             59                 52
  Dividends paid                                                              (135)              (112)
                                                                     --------------     --------------
    Net cash provided by (used) in financing activities                      5,634             (3,183)
                                                                     --------------     --------------


Net change in cash and cash equivalents                                      1,263             16,511
Cash and cash equivalents at beginning of period                            42,187             56,058
                                                                     --------------     --------------


Cash and cash equivalents at end of period                                 $43,450            $72,569
                                                                     ==============     ==============
</TABLE>




<PAGE>





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

                                                                                  Three Months Ended
                                                                                      March 31,
                                                                               1999                1998
                                                                           --------------      -------------
<S>                                                                              <C>                 <C>  
Supplemental Disclosures:

Cash paid during the period for:

  Interest expense                                                               2,910               5,261

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                                  232                 726
  Transfer from mortgage loans held for sale to loans                              ---                 216
  Dividend declared                                                                135
</TABLE>










<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  1998 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,  1999 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 1999.

     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.  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:
<TABLE>
<CAPTION>

                                                                     Three Months Ended,
                                                                          March 31
                                                                  1999                         1998
                                                   -------------------------    -------------------------
                                                     Basic         Diluted        Basic         Diluted
                                                   ----------     ----------    ----------     ----------
<S>                                                <C>            <C>           <C>            <C>   
Earnings per share before extraordinary item:
Income before extraordinary item                     $1,294         $1,294        $1,107         $1,107
Less: Preferred stock dividend                          ---            ---           112            112
                                                   ----------     ----------    ----------     ----------
Income before extraordinary item available to        
common stock shareholders                            $1,294         $1,294          $995           $995
                                                   ==========     ==========    ==========     ==========

Weighted average common shares outstanding            3,372          3,463         2,793          3,445
                                                   ==========     ==========    ==========     ==========

Earnings per share before extraordinary item          $0.38          $0.37         $0.36          $0.32
                                                   ==========     ==========    ==========     ==========

Earnings per share:
Net income                                           $1,018         $1,018        $1,107         $1,107
Less: Preferred stock dividend                          ---            ---           112            112
                                                   ----------     ----------    ----------     ----------
Net income available to common stock                 $1,018         $1,018          $995           $995
shareholders
                                                   ==========     ==========    ==========     ==========

Weighted average common shares outstanding            3,372          3,463         2,793          3,445
                                                   ==========     ==========    ==========     ==========

Earnings per share                                    $0.30          $0.29         $0.36          $0.32
                                                   ==========     ==========    ==========     ==========
</TABLE>



3.   Comprehensive Income

     The Company's total comprehensive earnings presentation is as follows:
<TABLE>
<CAPTION>

                                                                     Three Months Ended
                                                                         March 31,
                                                                  1999                 1998
                                                             ---------------       -------------

         <S>                                                 <C>                   <C>   
         Net income as reported                                    $1,018              $1,107
         Other comprehensive income (net of tax):
           Change in unrealized holding gain (losses)
              on available for sale securities                       (182)                 44
           Reclassification adjustment                                 (8)                (25)
                                                             ===============       =============
         Total comprehensive income                                  $828              $1,126
                                                             ===============       =============
</TABLE>




<PAGE>



4.   Common Stock Dividend

     On February  16,  1999 the Board of  Directors  declared a  quarterly  cash
dividend of 4 cents per share on the  Company's  Common  Stock.  The dividend is
payable on April 15, 1998 to shareholders of record on March 31, 1999.


5.   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 and the redemption of a $3.0 million note from NBR.


6.   Business Segments

     During the three month periods  ended March 31, 1999 and 1998,  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  industry  segment  includes
commercial,  commercial  real estate,  construction,  and permanent  residential
lending  along with all  depository  activities.  The  Company's  merchant  card
services  industry group  provides  credit card  settlement  services for 30,000
merchants  throughout the United  States.  The Company's sub prime lending unit,
known as Allied  Diversified  Credit,  provides sub prime  residential loans for
homeowners located principally in Northern California. The Company's residential
mortgage  banking and brokerage  arm,  known as Valley  Financial,  includes the
origination  and  brokerage  of "A  paper"  loans,  and  servicing  of loans for
investors.

<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 includes  indirect costs,  such as overhead,  operations
and technology expense,  are allocated to the segments based on an evaluation of
costs for product or data  processing.  All amounts  other than  allocations  of
interest and indirect  costs are derived from third  parties.  The provision for
credit  losses  is  allocated  based  on  the  required  reserves  and  the  net
charge-offs for each respective segment.

<TABLE>
<CAPTION>
                                                      For the three months ended March 31, 1999
                                            ------------------------------------------------------------
                                                                                 Mortgage
                                             Community                          Banking and    Total
                                              Banking    Sub Prime   Bankcard    Brokerage    Company
                                            ------------------------------------------------------------
                                                                   (in thousands)

<S>                                               <C>          <C>          <C>       <C>         <C>  
Total Interest Income                             7,228         121           0         394       7,743
Total Interest Expense                            2,903           5           3           5       2,916
Interest income/(expense) allocation                439        (131)        137        (445)          0
                                            ------------------------------------------------------------
Net Interest Income                               4,764         (15)        134         (56)      4,827
Provision for Loan Losses                           294           6           0           0         300
Total other Operating Income                        547         100         779       1,960       3,386
Total other Operating Expense                     3,039         329         323       2,119       5,810
                                            ------------------------------------------------------------
Income before income taxes                        1,978        (250)        590        (215)      2,103
Provision for income taxes                          767         (99)        226         (85)        809
                                            ------------------------------------------------------------
Income before extraordinary item                  1,211        (151)        364        (130)      1,294
                                            ============================================================

Total Average Assets                            378,005       3,205      10,147      32,527     423,884
                                            ============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                      For the three months ended March 31, 1998
                                            ------------------------------------------------------------
                                                                                 Mortgage
                                             Community                          Banking and    Total
                                              Banking    Sub Prime   Bankcard    Brokerage    Company
                                            ------------------------------------------------------------
                                                                   (in thousands)

<S>                                             <C>           <C>         <C>        <C>        <C>  
Total Interest Income                             7,745         130           0         431       8,306
Total Interest Expense                            3,708           8           8           8       3,732
Interest income/(expense) allocation                327         (85)        125        (367)          0
                                            ------------------------------------------------------------
Net Interest Income                               4,364          37         117          56       4,574
Provision for Loan Losses                           504           6           0           0         510
Total other Operating Income                        906         291         441       1,689       3,327
Total other Operating Expense                     3,459         587         245       1,358       5,649
                                            ------------------------------------------------------------
Income before income taxes                        1,307        (265)        313         387       1,742
Provision for income taxes                          475         (97)        114         143         635
                                            ------------------------------------------------------------
Income before extraordinary item                    832        (168)        199         244       1,107
                                            ============================================================
Total Average Assets                            388,383       5,517       9,482      22,262     425,644
                                            ============================================================
</TABLE>

<PAGE>

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

Forward-Looking Information

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

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

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

     o 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.

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

     o Risks associated with the Year 2000 which could cause  disruptions in the
       Company's operations or increase expenses.

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

     o Asset/liability matching risks and liquidity risks.

     o Changes in the securities markets.

     The Company  undertakes  no  obligation  to revise or publicly  release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 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, 1998
to March 31, 1999, and significant  changes and trends in the Company's  results
of  operations  for the three months ended March 31, 1999,  compared to the same
period in 1998.

<PAGE>

Summary of Financial Results

     The Company reported income before extraordinary item of $1,294,000 or $.37
per diluted share and net income of $1,018,000 or $.29 per diluted share for the
three months ended March 31, 1999, as compared to  $1,107,000  ($.32 per diluted
share)  for the same  period in 1998.  The  extraordinary  item  relates  to the
unamortized  debt  issuance  costs,  net of tax,  associated  with the Company's
$12,000,000  subordinated  debt.  Such debt was redeemed in the first quarter of
1999. The increase in income before  extraordinary item for the first quarter in
1999 when  compared  to the same  period one year ago is due to an  increase  of
$253,000 in net interest income,  an increase of $59,000 in non interest income,
and an increase of $161,000 in non interest expense.


Net Interest Income

     Net interest income  increased from $4,574,000  during the first quarter of
1998 to $4,827,000 in the first quarter of 1999 which  represents an increase of
$253,000  or 5.50%.  Such  increase is  primarily  due to an increase in the net
interest margin from 4.73% to 5.00%.

     Yield on earning assets  decreased  from 8.58% to 8.02%  primarily due to a
decrease in general  interest  rates as evidenced by a decline in the prime rate
from 8.50% in 1998 to 7.75% in 1999. Yield paid on interest bearing  liabilities
also  declined as such yield  amounted to 4.91% in the first  quarter of 1998 as
compared to 4.07% in the same period in 1999.  This decline is attributable to a
decline in the general  interest rate  environment  and the  Company's  downward
repricing of the rates paid on money market accounts in mid 1998.

     Average earning assets declined  slightly in the first quarter of 1999 when
compared to the same period one year ago.  Average  earning  assets  amounted to
$386,226,000  during the three month  period ended March 31, 1999 as compared to
$387,101,000  in 1998.  The decline in average  earning  assets during the first
three  months of 1999 when  compared  to 1998 is  primarily  due to a decline in
federal funds sold  partially  offset by an increase in average  mortgage  loans
held for sale.

     Further  contributing  to the  improvement  in the  Company's  net interest
margin was a change in the Company's funding mix. Total average interest bearing
liabilities  declined  from  $303,867,000  in  the  first  quarter  of  1998  to
$286,888,000  in the  same  period  in 1999  which  represents  an  decrease  of
$16,979,000.  This  decrease  was  partially  offset by an  increase  in average
noninterest bearing transaction accounts of $7,373,000.


<PAGE>

     The following is an analysis of the net interest margin:

<TABLE>
<CAPTION>
                                         Three months ended                         Three months ended
                                         March 31, 1999                              March 31, 1998

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

<S>                               <C>            <C>             <C>          <C>             <C>            <C> 
Earning assets (1)                $386,226       $7,743          8.02         $387,101        $8,306         8.58
Interest-bearing liabilities       286,888        2,916          4.07          303,867         3,732         4.91
                                           -------------                               --------------
Net interest income                              $4,827                                       $4,574
                                           =============                               ==============
Net interest income to
  earning assets                                                 5.00                                        4.73
</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, 1999 and 1998. Changes not solely  attributable
to rate or volume have been allocated to rate.
<TABLE>
<CAPTION>
                                                                Three months ended March 31, 1999
                                                                         over March 31, 1998

                                                             Volume            Rate             Total
                                                         ---------------------------------------------------
                                                                           (in thousands)
<S>                                                                 <C>             <C>              <C>
Increase (decrease) in interest income:
  Portfolio loans                                                    $50            ($248)           ($198)
  Mortgage loans held for sale                                       169             (216)             (47)
  Investment securities                                              (63)            (107)            (170)
  Federal funds sold                                                (112)             (36)            (148)
                                                         ---------------------------------------------------
Total increase (decrease)                                             44             (607)            (563)
                                                         ---------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                             (142)            (382)            (524)
  Time deposits                                                        9             (145)            (136)
  Other borrowings                                                   (79)             (77)            (156)
                                                         ---------------------------------------------------
Total increase (decrease)                                           (212)            (604)            (816)
                                                         ---------------------------------------------------

Increase in net interest income                                     $256              ($3)            $253
                                                         ===================================================
</TABLE>


<PAGE>



Provision for Loan Losses

     The  provision  for loan losses for the three  months  ended March 31, 1999
amounted to $300,000 as compared to $510,000 in the same quarter in the previous
year. For further discussion see Allowance for Loan Losses.


Other Operating Income and Expense and Income Taxes

     Other Operating Income

     The  following  table  sets forth the  components  of the  Company's  other
operating  income for the three months ended March 31, 1999,  as compared to the
same period in 1998.

<TABLE>
<CAPTION>

                                                Three Months Ended
                                                      March 31,
                                             ---------------------------
(dollars in thousands)                          1999            1998
                                             -----------     -----------

<S>                                              <C>             <C>
Service charges on deposit accounts                 255             274
Merchant draft processing, net                      779             441
Loan servicing income                                66             179
Gain (loss) on securities                            14             105
Gain on sale of loans and servicing                 704             947
Mortgage brokerage revenue, net                   1,202           1,084
Other income                                        366             297
                                             -----------     -----------
Total other operating income                     $3,386          $3,327
                                             ===========     ===========
</TABLE>


     Other operating income increased  $59,000 or 2% to $3,386,000 for the first
quarter of 1999 when  compared to $3,327,000  for the same period in 1998.  Such
increase is  primarily  due to an increase  of  $118,000  in net  mortgage  loan
brokerage  revenue,  an increase of $338,000 in merchant card net revenue offset
by a decrease of $243,000 in gain on sale of loans and  servicing.  Gain on sale
revenue is derived  from the sale of both sub prime  mortgage  loans the Company
originates and "A" paper mortgage loans originated within the Company's mortgage
loan division, Valley Financial.


<PAGE>



     Other Operating Expense

     Other operating  expense  increased by $161,000 or 3% to $5,810,000  during
the first quarter of 1999 compared to $5,649,000  for the first quarter of 1998,
primarily due to an increase in salaries and benefits to  accommodate a build up
in mortgage brokerage and mortgage banking infrastructure.


     The  following  table  sets forth the  components  of the  Company's  other
operating  expense  during the three months ended March 31, 1999, as compared to
the same period in 1998.


<TABLE>
<CAPTION>

                                                    Three Months Ended
                                                           March 31,
                                                --------------------------
(dollars in thousands)                              1999          1998
                                                -------------  -----------

<S>                                                   <C>          <C>   
Salaries and employee benefits                        $3,420       $3,003
Occupancy and equipment expense                          803          809
Other                                                  1,587        1,837
                                                -------------  -----------
Total other operating expense                         $5,810       $5,649
                                                =============  ===========
</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 rate
was 38.5% for the three months  ended March 31, 1999,  compared to 36.5% for the
same period in 1998.




<PAGE>



Business Segments

Summary financial data by industry segment as follows:

<TABLE>
<CAPTION>

                                       For the Three Months
                                               Ended
                                             March 31,
                                          (in thousands)
                                       ----------------------
                                         1999        1998
                                      -----------  ----------


Community Banking:
<S>                                        <C>         <C>  
   Revenue                                 5,311       5,270
   Expenses                                3,333       3,963
                                      -----------  ----------
     Income (loss) before income tax       1,978       1,307
                                      ===========  ==========


Sub Prime:
   Revenue                                    85         328
   Expenses                                  335         593
                                      -----------  ----------
     Income (loss) before income tax        (250)       (265)
                                      ===========  ==========


Bankcard:
   Revenue                                   913         558
   Expenses                                  323         245
                                      -----------  ----------
     Income (loss) before income tax         590         313
                                      ===========  ==========


Mortgage Banking and Brokerage:
   Revenue                                 1,904       1,745
   Expenses                                2,119       1,358
                                      -----------  ----------
     Income (loss) before income tax        (215)        387
                                      ===========  ==========


Total Company:
   Revenue                                 8,213       7,901
   Expenses                                6,110       6,159
                                      -----------  ----------
     Income (loss) before income tax       2,103       1,742
                                      ==========   ==========
</TABLE>


     Community Banking

     The  Community  Banking  segment  income before income tax increased in the
first  quarter of 1999 when  compared to the same period in the prior year.  The
increase  is due to an  improvement  in the  net  interest  margin  and  reduced
overhead,  principally  OREO  disposition  costs  and  administrative  expenses.
Additionally  the Company  expects to  moderately  increase  all  categories  of
permanent  loans  within  the  group  through  renewed   marketing  efforts  and
development of new distribution channels.

<PAGE>

     Sub Prime Lending

     In the first quarter of 1999 the Company's sub prime lending  segment which
is known as Allied  Diversified  Credit,  or "ADC" recorded an operating loss of
$250,000  compared  to an  operating  loss of  $252,000  in 1998.  The sub prime
mortgage  banking  business has  undergone  substantial  changes in the last two
years as increased  competition,  narrowing  margins,  and  deterioration of the
secondary marketing environment has caused several well publicized  bankruptcies
of major sub  prime  conduits.  In  response  to these  conditions  the  Company
significantly downsized it's sub prime operations in the fourth quarter of 1998.
The Company is currently evaluating all aspects of this business line.

     Bankcard

     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 increased reliance on independent sales organizations (ISO's) to
market its  services.  First quarter of 1999 revenue was up $338,000 or 77% over
the same period in 1998. 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. In summary, as a result of
the renegotiation the ISO bought down its processing rate in consideration for a
payment of $2,600,000 to the Company.  The term of the renegotiated  contract is
for two years and  requires  the Company to continue  to process  merchant  card
transaction  volume from this ISO's  customers.  The Company will  amortize such
payment over the life of the  renegotiated  contract  into  income.  The Company
expects to build its overall  merchant card processing  business in an effort to
offset  any  potential  decline  in future  revenues  that may result in periods
following the term of the buydown.

     Mortgage Banking and Brokerage

     The Residential  Mortgage Banking and Brokerage  segment of the company has
operated  under the name "Valley  Financial"  since the  beginning of 1997.  The
segment  performance  in the first  quarter  of 1999 was  hindered  by a rise in
mortgage loan  interest  rates.  This segment is highly  sensitive to changes in
mortgage interest rates and local economic conditions.


Investment Securities

     Total investment  securities  increased $7,176,000 or 12% to $67,586,000 as
of March 31, 1999 when  compared to  $60,410,000  as of December 31, 1998.  Such
increase is due to an effort to increase the overall yield in earning  assets of
the Company by  decreasing  it's  overnight  fed fund  investment  position  and
redeploying  such amounts into the higher  yielding  investment  portfolio.  The
Company's  average  federal fund  position  amounted to  $8,435,000 in the first
quarter of 1999 as compared to $22,264,000 in 1998.



<PAGE>



Loans

     Total loans  increased  $15,965,000 or 6% to $285,281,000 at March 31, 1999
compared to  $269,316,000  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.  In addition,  the
Company has  emphasized the funding of permanent  residential  real estate loans
and commercial real estate loans in the first quarter of 1999.

     The following  table  summarizes  the  composition of the loan portfolio at
March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
                                                   March 31, 1999                        December 31, 1998
                                         ------------------------------------    ------------------------------------
 (dollars in thousands)                             Amount                 %                Amount                 %
                                         ------------------------------------    ------------------------------------

<S>                                               <C>                    <C>             <C>                     <C>
 Residential real estate mortgage                 $110,376                40%             $97,194                 36%
 Commercial real estate mortgage                    69,218                24               59,257                 22
 Commercial                                         60,085                21               63,260                 23
 Real estate construction                           43,782                15               46,905                 18
 Installment and other                               3,516                 1                5,095                  2
 Less deferred loan fees                            (1,696)               (1)              (2,395)                (1)
                                         ------------------------------------    ------------------------------------
     Total portfolio loans                         285,281               100%             269,316                100%
                                                           ==================                      ==================
 Less allowance for loan losses                    (8,242)                                 (8,041)
                                         -----------------                      ------------------
     Net loans                                    $277,039                               $261,275
                                         ==================                     ==================
</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
                                                ---------------------------
(dollars in thousands)                             1999           1998
                                                -----------   -------------

<S>                                                 <C>             <C>   
Beginning allowance for loan losses                 $8,041          $7,645
Provision for loan losses                              300             510
Charge-offs                                           (257)           (537)
Recoveries                                             158              31
                                                -----------   -------------
Ending allowance for loan losses                    $8,242          $7,649
                                                ===========   =============


Net charge-offs to average
   loans (annualized)                                  .13%            .68%
</TABLE>


     The allowance for loan losses as a percentage of portfolio  loans decreased
from 2.99% at December 31, 1998 to 2.89% at March 31, 1999. The decrease in this
percentage  is  due  to a  $15,965,000  increase  in the  Company's  total  loan
portfolio.


Nonperforming Assets

     The following table summarizes the Company's nonperforming assets.
<TABLE>
<CAPTION>
                                                                March 31,            December 31,
(dollars in thousands)                                            1999                  1998
                                                              --------------       ---------------
<S>                                                                  <C>                   <C>   
Nonaccrual loans                                                     $6,831                $5,556
Accruing loans past due 90 days or more                                 151                   ---
Restructured loans                                                    1,045                 1,045
                                                              --------------       ---------------
Total nonperforming loans                                             8,027                 6,601
Other real estate owned                                               1,611                 2,181
Other assets owned                                                       82                   129
                                                              --------------       ---------------
Total nonperforming assets                                           $9,720                $8,911
                                                              ==============       ===============



Nonperforming assets to total assets                                   2.24%                 2.11%
</TABLE>

<PAGE>

     Nonperforming assets have increased from $8,911,000 as of December 31, 1998
to  $9,720,000  as of March 31, 1999.  The  principal  reasons for this decrease
relate to an increase in  nonaccrual  loans of  $1,275,000,  a decrease in other
real estate owned of $570,000 and an increase in accruing loans past due 90 days
or more of $151,000.

     Nonperforming  loans  consist  of loans to 34  borrowers,  19 of which have
balances  in excess of  $100,000.  The two  largest  have  recorded  balances of
$1,127,000  and  $827,000,  both  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 ten  properties.  Five  properties are
residential,  two construction  lots and the remaining are undeveloped acres and
commercial  buildings . Other assets owned included  contract  receivable rights
and repossessed personal property carried at $82,000.

     Although  the volume of  nonperforming  assets  will  depend in part on the
future economic  environment,  there are also six loan relationships which total
approximately  $2,226,000  about which  management  has serious doubts as to the
ability of the  borrowers to comply with the present  repayment  terms and which
may become nonperforming  assets based on the information  presently known about
possible credit problems of the borrower.

     In the first three  months of 1999 the  Company was  required by a mortgage
loan  investor  to  repurchase  a  residential  mortgage  loan in the  amount of
$69,000.  From time to time the Company may be required to  repurchase  mortgage
loans from  investors  depending  upon  representations  and  warranties  of the
purchase  agreement between the investor and the Company.  Such  representations
and  warranties  include  valid  appraisal,  status of borrower,  first  payment
default  or  fraud.  Primarily  these  repurchases  involve  loans  which are in
default.  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 $163,000 as of March 31, 1999 and $172,000 as of December 31, 1998.

     At March 31, 1999 the Company's total recorded investment in impaired loans
(as defined by SFAS 114 and 118) was $10,226,000 of which $9,739,000  relates to
the recorded investment for which there is a related allowance for credit losses
of  $1,558,000  determined  in  accordance  with these  statements  and $487,000
relates to the amount of that recorded  investment for which there is no related
allowance for credit losses determined in accordance with these standards.

     The average  recorded  investment  in the  impaired  loans during the three
months  ended  March 31,  1999 and 1998 was  $10,029,000  and  $11,608,000.  The
related amount of interest income  recognized during the periods that such loans
were  impaired was $123,000 and $118,000 for the three month periods ended March
31, 1999 and 1998. No interest income was recognized  using a cash-basis  method
of accounting during the period that the loans were impaired.

<PAGE>

Liquidity

     Redwood's  primary  source of  liquidity is  dividends  from its  financial
institution subsidiary.  Redwood's primary uses of liquidity are 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, 1999, Redwood held $1,335,000 in deposits at
NBR.

     Prior to April 30, 1998  Redwood  paid  quarterly  dividends of 7.8% on its
preferred stock of $5,750,000. On April 30, 1998 Redwood converted its preferred
stock into common,  thus  eliminating  the preferred  dividend.  On May 19, 1998
Redwood  reinstated its quarterly  common  dividend at a rate of $.04 per share.
Redwood  also is  required  to make  monthly  payments  of  interest  at 8.5% on
$12,000,000  of  subordinated  debentures  issued  in  1993.  Payment  of  these
obligations is dependent on dividends from NBR. 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  shareholders.  No
assurance can be given as to the ability of NBR to pay dividends to Redwood.

     During the first three months of 1999, NBR declared  dividends of $300,000.
Management believes that at March 31, 1999, 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, 1999 the Company received  $17,941,000 and investing  activities while
using  $5,634,000 in financing  activities  and  $22,312,000  in cash flows from
operating.


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, 1999 and December 31,
1998.

<TABLE>
<CAPTION>
                                                                  Company         NBR
                                                               -------------- -------------
         <S>                                                         <C>           <C>   
         March 31, 1999
           Total capital to risk based assets                        13.25%        12.64%
           Tier 1 capital to risk based assets                       11.98         11.37
           Leverage ratio                                             9.12          8.60

         December 31, 1998
           Total capital to risk based assets                        16.94         15.98
           Tier 1 capital to risk based assets                       11.84         13.75
           Leverage ratio                                             8.84         10.31
</TABLE>

     NBR's capital ratios declined in the first payoff 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.

Year  2000. 

     The "Year 2000 Problem" relates to the fact that many computer programs and
equipment  utilizing  microprocessors  only use two digits to  represent a year,
such as "99" to  represent  "1999,"  which  means  that in the  year  2000  such
programs/processors  could incorrectly treat the year 2000 as the year 1900. The
Company's  business is highly dependent on technology and data processing.  As a
result,  Bank  management  and the  Board  of  Directors  have  made  Year  2000
compliance a high  priority.  The issue must be recognized as a business  issue,
rather than simply a computer issue, because of the way its effects could ripple
through the economy. The Company could be affected either directly or indirectly
by the Year  2000  issue.  This  could  happen if any of its  critical  computer
systems or equipment containing embedded logic fail, if the local infrastructure
(power, communication system, or water system) fails, if its significant vendors
or  third-party  processors  are  adversely  impacted,  or if its  borrowers  or
depositors  are  significantly  impacted  by  their  internal  systems  or their
customers or suppliers.
<PAGE>

     The Company  principally relies on third-party  software and processing for
its  mission-critical  applications  needs.  It  licenses  software  and/or data
processing  services  from outside  vendors for its critical  functions  such as
mortgage  lending,  merchant  credit card  program,  ATM,  item  processing  and
customer  statements.  The Company also is dependent on personal computers and a
local area network which is supported by a Microsoft operating environment.  The
foregoing systems are classified by the Company as mission critical  information
technology ("IT") systems.

     The Company's business also involves non-IT products and services,  some of
which have embedded  technology which might not be Year 2000 ready.  Some non-IT
products   and   services   involve   infrastructure   issues   such  as  power,
communications and water, as well as elevators, ventilation and air conditioning
equipment.  The Company  classifies power and  communications  as non-IT mission
critical systems.

     The Company's third-party  application  software,  data processing vendors,
local  area  network  and  operating  systems  and the power  and  communication
infrastructure provide critical support to substantially all of its business and
operations.   Failure  to  successfully  complete  renovation,   validation  and
implementation  of mission  critical  IT systems  could have a material  adverse
effect on the  operations and financial  performance  of the Company.  Moreover,
Year 2000 issues experienced by significant vendors or third-party processors or
customers of the Company could negatively  impact the business and operations of
the Company even if its critical IT systems function satisfactorily.  Due to the
many  variables  related to the Year 2000 issue and the lack of  information  on
Year  2000  readiness  from  non-IT  service  providers  such as power and phone
systems  vendors,  the Company cannot quantify the potential cost of problems if
the  Company's   renovation  and  implementation   efforts  or  the  efforts  of
significant vendors or customers are not successful.

     State of Readiness

     The Company has formed a Year 2000 team comprised of senior level employees
and officers who are familiar  with the business and  operations of the Company.
The Year 2000 team has  conducted a  comprehensive  review of the  Company's  IT
systems to identify  systems  that  present  Year 2000  issues.  The Company has
developed  a plan which it  believes  should  satisfactorily  resolve  Year 2000
problems  related to its  mission-critical  IT systems.  The Company's Year 2000
team  is also  using  external  resources  provided  by  outside  vendors  and a
consultant hired to assist the Company.

     Many  vendors  and  third-party  processors  of the  Company's  critical IT
systems  have  informed the Company  that their  products/systems  are Year 2000
compliant.  The  Company's  merchant  credit  card  program  is  dependent  on a
third-party  processor.  This  processor's  testing for Year 2000  compliance is
onging.  No  alternate  vendor is readily  available.  In the event this  vendor
cannot  satisfactorily  process  credit card changes for merchants in the Bank's
program,  the Bank's  results of  operations  could be  adversely  impacted.  If
initial testing for other critical IT systems is not  satisfactory,  the Company
plans to commence taking corrective action and complete  secondary testing by on
or about June 30, 1999.
<PAGE>

     The  Company has run tests on selected  components  of its core  processing
system  during  1998 with  technical  assistance  from the vendor and an outside
consultant.  At the date of this  report  the  Company  believes  it  remains on
schedule to complete initial testing of all  mission-critical IT systems by June
30, 1999.


     Costs

     The Company is  expensing  all period costs  associated  with the Year 2000
issue. Management estimates that the Bank will incur approximately an additional
$150,000 in Year 2000 related  expenses for the  identification,  correction and
reprogramming,  and testing of systems for Year 2000  compliance in fiscal 1999.
There can be no  assurance  that these  expenses  will not  increase  as further
testing  and  assessment  of vendor  and  customer  readiness  for the Year 2000
continues.  The above cost  estimates  include  costs for  consultants,  running
tests,  technical  assistance  from vendors and costs for products  replaced for
Year 2000  compliance.  These costs exclude the cost of the  Company's  internal
staff time.

     Risks

     Management believes it will be difficult to predict the outcome of the Year
2000 issue due to the  complexity of technology  and the inability to assess the
impact  of the Year 2000  problem  on  third-party  processors,  non-IT  mission
critical systems and the local, national and international  economy.  Management
has  attempted,  however,  to  identify  a most  reasonably  likely  worst  case
scenario.  This scenario  suggests  that the Year 2000 problem might  negatively
impact some of the Company's  significant  IT vendors and  processors and non-IT
vendors/products  through  the failure of the party to be prepared or the impact
on them of their own vendors and customers  including possible  short-term power
failures.  Management  believes  that if this  scenario  occurs  its  ability to
process  mortgages  and/or credit card charges could be temporarily  delayed and
earnings  could be  materially  adversely  impacted  especially  if a  recession
results.  It is not  possible  to  predict  the effect of this  scenario  on the
economic  viability of its customers and the related  adverse impact it may have
on the Company's  financial  position and results of  operations,  including the
level of the  Bank's  provision  for  possible  loan  losses in future  periods.
Further,  there can be no assurance that other possible  adverse  scenarios will
not occur.

     The  Company  presently  believes  that,  with  modifications  to  existing
software  within its  control  which  needs to be made Year 2000  compliant  and
assuming  representations  of Year 2000 readiness  from  significant IT vendors,
processors  and  customers  are  accurate,  the Year 2000 issue  should not pose
significant  operational  risks for the  Company's  IT systems  as so  modified.
However,  other  significant risks relating to the Year 2000 problem are that of
the unknown  impact of this problem on the  operations of the Bank's  customers,
processors and vendors, the impact of catastrophic  infrastructure failures such
as power,  communications  and water on the Company's  systems,  the economy and
future actions which banking or securities regulators may take.



<PAGE>

     The Company is making  efforts to ensure that its customer base is aware of
the Year 2000 problem.  Year 2000  correspondence  has been sent to both deposit
and loan customers. The Bank has amended its credit authorization  documentation
to include consideration  regarding the Year 2000 problem.  Significant customer
relationships  have been  identified,  and such customers are being contacted by
the Bank's employees to determine  whether they are aware of Year 2000 risks and
whether they are taking preparatory actions.

     The Company has also  attempted to contact  major  vendors and suppliers of
non-software  products  and  services  including  those where  products  utilize
embedded technology,  to determine the Year 2000 readiness of such organizations
and/or  the  products  and  services  which  the  Company  purchases  from  such
organizations.  The  Company is  monitoring  reports  provided  by such  vendors
regarding their preparations for Year 2000. This is an ongoing process,  and the
company  intends to continue to monitor the progress of such vendors through the
century date change.

     Federal  banking   regulators  have   responsibility  for  supervision  and
examination of banks to determine whether each institution has an effective plan
for identifying,  renovating,  testing and implementing  solutions for Year 2000
processing  and  coordinating   Year  2000  processing   capabilities  with  its
customers,  vendors and payment system partners.  Examiners are also required to
assess the  soundness  of an  institution's  internal  controls  and to identify
whether  further  corrective  action may be necessary  to assure an  appropriate
level of attention to Year 2000 processing capabilities.  Management believes it
is  currently in  compliance  with the federal bank  regulatory  guidelines  and
timetables.

     Contingency Plans

     The Company has developed  contingency  plans for software systems utilized
by the  Company,  should  they not  successfully  pass the  Company's  Year 2000
testing.  Generally this involves the  identification  of an alternate vendor or
expected  actions the  Company  could take,  as well as the  establishment  of a
trigger date to implement the contingency  plan. The Company is also considering
the  purchase  of a backup  generator  to  provide  power for  certain  critical
functions in the event of a power  failure and  additional  cash will be on hand
for potential  liquidity needs.  Company personnel are being trained to manually
perform  certain  critical  functions if computers  fail. The Company intends to
develop, in accordance with regulatory guidelines,  further contingency plans to
address potential business disruptions resulting from Year 2000 issues. However,
this process is not  expected to be  substantially  completed  until on or about
June 30,  1999.  The  Company's  contingency  plans  will be  subject  to change
throughout 1999.


<PAGE>

Certain Important Considerations for Investors

     Mortgage Banking and Brokerage Activity.  The Company's historic results of
operations has been significantly influenced by mortgage banking activity, which
can fluctuate significantly,  in both volume and profitability,  with changes in
interest  rate   movements.   In  the  fourth   quarter  of  1996,  the  Company
significantly  curtailed its "A paper" wholesale mortgage loan production.  As a
result of this action, the Company's future mortgage loan production revenue and
expenses  will be  significantly  reduced from  pre-1997  levels.  The Company's
current mortgage banking  operations  include both the origination and brokering
of retail oriented mortgage loan production. Such mortgage loan lending activity
primarily is centered in northern California.  The Company's ability to maintain
and grow mortgage banking and brokerage revenue depends on a favorable  interest
rate, economic and real estate market conditions.

     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.

     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,  1999,
approximately  78% of the Company's loans were secured by real estate,  of which
31% 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.

<PAGE>

         Competition from Other Financial Institutions. The Company competes for
deposits and loans  principally with major commercial  banks,  other independent
banks,   savings  and  loan  associations,   savings  banks,   thrift  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

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

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

<PAGE>

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

     The following table sets forth,  as of March 31, 1999, the  distribution of
repricing  opportunities for the Company's  earning assets and  interest-bearing
liabilities,  the interest rate  sensitivity  gap, the cumulative  interest rate
sensitivity gap, the interest rate  sensitivity gap ratio (i.e.,  earning assets
divided  by  interest-bearing  liabilities)  and the  cumulative  interest  rate
sensitivity gap ratio.


<TABLE>
<CAPTION>
                                                             After Three    After Six   After One
                                                  Within      Months but    Months but  Year But
                                                  Three       Within Six    Within One   Within    After Five
                                                  Months        Months         Year    Five Years    Years       Total
                                            ---------------------------------------------------------------------------

                                                                        (Dollars in thousands)
<S>                                              <C>          <C>          <C>         <C>          <C>         <C>    
Interest earning assets:
Federal funds sold                                $13,144       $ ---        $ ---       $ ---        $ ---     $13,144
Investment securities and other                     2,003       1,044       13,978      22,722       27,839      67,586
Mortgage loans held for sale                       26,270                      ---                      ---      26,270
                                                                  ---                      ---
Loans                                             102,103      31,582       27,521      60,204       63,871     285,281
                                            ---------------------------------------------------------------------------
   Total interest-earning assets                  143,520      32,626       41,499      82,926       91,710     392,281
                                            ---------------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts             138,340         ---          ---         ---          ---     138,340
Time deposits                                      40,905      41,187       42,508      16,779          ---     141,379
Short-term borrowings                               9,847         ---          ---         ---          ---       9,847
Long-term borrowings                                  ---         ---          ---         ---          ---         ---
Subordinated notes                                    ---         ---          ---         ---          ---         ---
                                            ---------------------------------------------------------------------------
  Total interest-bearing liabilities              189,092      41,187       42,508      16,779          ---     289,566
                                            ---------------------------------------------------------------------------

Interest rate sensitivity gap                    ($45,572)    ($8,561)     ($1,009)    $66,147      $91,710
                                            ===============================================================
Cumulative interest rate sensitivity gap          (45,572)    (54,133)     (55,142)     11,005      102,715

Interest rate sensitivity gap ratio                  0.76        0.79         0.98        4.94          ---
Cumulative interest rate sensitivity gap ratio       0.76        0.76         0.80        1.04         1.35
</TABLE>

<PAGE>

     The Company's gap position is  substantially  dependent  upon the volume of
mortgage  loans held for sale and held in the portfolio.  These loans  generally
have maturities greater than five years;  however,  mortgage loans held for sale
are generally  sold within 5 to 60 days of funding and therefore are  classified
in the above table as repricing  within three  months.  The Company  enters into
commitments to sell such loans on a forward basis, usually within 30 to 60 days.
The  amount of loans held for sale and the  amount of  forward  commitments  can
fluctuate  significantly from period to period.  Additionally,  interest-bearing
transaction accounts,  which consist of money market, demand and savings deposit
accounts,  are  classified  as  repricing  within  three  months.  Some of these
deposits may be repriced at management's option, and therefore a decision not to
reprice such  deposits  could  significantly  alter the  Company's  net interest
margin.

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

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

<TABLE>
<CAPTION>

         March 31, 1999
         -------------- 
                                      Change in Annual           Change in
         Change in Interest Rate    Net Interest Income   Market Value of Equity

<S>             <C>                     <C>                     <C>         
                +200                    $1,382,000              ($1,209,000)
                +100                       711,000                 (439,000)
                -100                      (891,000)              (1,886,000)
                -200                    (1,878,000)              (4,828,000)
</TABLE>

<PAGE>


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



<PAGE>

                          PART II. - OTHER INFORMATION


Item 4.      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
--------------                          -----------
 

     3.1          Articles of Incorporation.

     3.2          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.
  
     10.1         Employment Agreement between National Bank of the Redwoods and
                  Patrick W.  Kilkenny,  dated as of  January 1, 1994,  filed as
                  Exhibit 10.7 to the  Registrant's  1993 Annual  Report on Form
                  10-K and by this reference incorporated herein.

     10.2         Lease,  dated August 30, 1988,  between  National  Bank of the
                  Redwoods  and 137  Group,  a  general  partnership,  filed  as
                  Exhibit 10.1 to the  Registrant's  1989 Annual  Report on Form
                  10-K, and by this reference incorporated herein.

     10.3         Lease,  dated April 18, 1990,  between  Allied  Savings  Bank,
                  F.S.B.  and Stony Point West,  General  Partnership,  filed as
                  Exhibit 10.2 to the  Registrant's  1990 Annual  Report on Form
                  10-K, and by this reference incorporated herein.

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

     10.5         The National Bank of the Redwoods Stock Option Plan,  filed as
                  Exhibit 28.1 to the Registrant's  Post-Effective Amendment No.
                  1 to  Registration  Statement on Form S-4 dated March 27, 1989
                  (Registration   No.   33-24642),   and   by   this   reference
                  incorporated herein.

     10.6         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.
 
     10.7         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.

     10.8         Director  Retirement  Plan,  filed  as  Exhibit  10.10  to the
                  Registrant's Registration Statement on Form S-2 dated December
                  13, 1993  (Registration No.  33-71324),  and by this reference
                  incorporated herein.

     10.9         Chairman  Retirement  Agreement,   dated  November  30,  1993,
                  between  the  Registrant  and John H.  Downey,  Jr.,  filed as
                  Exhibit 10.11 to the  Registrant's  Registration  Statement on
                  Form S-2 dated December 13, 1993  (Registration No. 33-71324),
                  and by this reference incorporated herein.
<PAGE>

     10.10        Compensation Agreement between Patrick W. Kilkenny and Redwood
                  Empire Bancorp.

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

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

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

     27.          Financial  Data  Schedule for the period ended March 31, 1999.




 2.  REPORTS ON FORM 8-K

     Form 8-K dated February 24, 1999  announcing  completion of redemption of 8
     1/2% subordinated notes due 2004 and  announcing  quarterly  cash  dividend
     on common stock under Item 5 "Other Events".

     Form 8-K dated  January 27, 1999  announcing  fourth  quarter and full year
     1998 financial results.


<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: 5/13/99          BY:      /s/ James E. Beckwith                      
      -------                   ----------------------------------
                                James E. Beckwith
                                Executive Vice President,
                                Chief Financial Officer,
                                Principal Financial Officer, and
                                Principal Accounting Officer