================================================================================
                                  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 June 30,1999

                                       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. July 31, 1999: 3,409,807



<PAGE>


                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index

<TABLE>
<CAPTION>

                                                                          Page
<S>                                                                       <C>
PART I.  Financial Information

   Item 1.  Financial Statements

            Consolidated Statements of Operations
            Three and Six Months ended June 30, 1999 and 1998...............3

            Consolidated Balance Sheets
            June 30, 1999 and December 31, 1998.............................4

            Consolidated Statements of Cash Flows
            Six Months Ended June 30, 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..............................................30


PART II. Other Information

   Item 4.  Submission of Matters to a Vote of Securities Holders..........33

   Item 6.  Exhibits and Reports on Item 8-K...............................34



SIGNATURES  ...............................................................36

</TABLE>

<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              Six Months Ended
                                                                               June 30,                       June 30,
                                                                          1999         1998              1999          1998
                                                                      ---------------------------    ---------------------------
<S>                                                                   <C>              <C>           <C>               <C>
Interest income:

  Interest and fees on loans                                              $6,913        $6,814             $13,522      $13,668
  Interest on investment securities                                        1,007         1,099               1,963        2,225
  Interest on federal funds sold                                              78           310                 256          636
                                                                      ---------------------------    ---------------------------
Total interest income                                                      7,998         8,223              15,741       16,529

Interest expense:
  Interest on deposits                                                     2,755         3,257               5,476        6,638
  Interest on subordinated notes                                             ---           277                 142          554
  Interest on other borrowings                                               154            75                 207          149
                                                                      ---------------------------    ---------------------------
Total interest expense                                                     2,909         3,609               5,825        7,341
                                                                      ---------------------------    ---------------------------

Net interest income                                                        5,089         4,614               9,916        9,188
Provision for loan losses                                                    200           510                 500        1,020
                                                                      ---------------------------    ---------------------------
Net interest income after loan loss provision                              4,889         4,104               9,416        8,168

Noninterest income:
  Service charges on deposit accounts                                        268           267                 523          541
  Merchant draft processing, net                                             863           605               1,642        1,046
  Loan servicing income                                                      103           105                 169          284
  Net realized gain on sale of
    investment securities available for sale                                 ---           ---                  14          105
  Gain on sale of loans and loan servicing                                   536         1,655               1,240        2,602
  Mortgage loan brokerage revenue, net                                       828         1,084               2,030        1,905
  Other income                                                               193           409                 559          969
                                                                      ---------------------------    ---------------------------
Total noninterest  income                                                  2,791         4,125               6,177        7,452

Noninterest expense:
  Salaries and employee benefits                                           3,254         3,388               6,674        6,391
  Occupancy and equipment expense                                            826           841               1,629        1,650
  Other                                                                    1,688         2,079               3,275        3,916
                                                                      ---------------------------    ---------------------------
Total noninterest expense                                                  5,768         6,308              11,578       11,957
                                                                      ---------------------------    ---------------------------

  Income before income taxes and extraordinary item                        1,912         1,921               4,015        3,663
  Provision for income taxes                                                 694           710               1,503        1,345
                                                                      ---------------------------    ---------------------------

Income before extraordinary item                                           1,218         1,211               2,512        2,318

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

Net income                                                                 1,218         1,211               2,236        2,318
Dividends on preferred stock                                                 ---           ---                 ---          112
                                                                      ---------------------------    ---------------------------
Net income available for common stock shareholders                        $1,218        $1,211              $2,236       $2,206
                                                                      ===========================    ===========================

Earnings per common share and common equivalent share:
   Basic earnings per share before extraordinary item                       $.36          $.39                $.74         $.74
   Basic earnings per share                                                  .36           .39                 .66          .74
   Diluted earnings per share before extraordinary item                      .35           .35                 .72          .67
   Dilute earnings per share                                                 .35           .35                 .64          .67




See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
                                    REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                          Consolidated Balance Sheets
                                             (dollars in thousands)
                                                  (unaudited)
<TABLE>
<CAPTION>

                                                                          June 30,               December 31,
                                                                            1999                     1998
                                                                      ------------------       ------------------
<S>                                                                   <C>                      <C>
Assets:
Cash and due from banks                                                         $28,409                  $15,982
Federal funds sold and repurchase agreements                                      2,276                   26,205
                                                                      ------------------       ------------------
  Cash and cash equivalents                                                      30,685                   42,187

Investment securities:
  Held to maturity (market value of $32,405 and $30,014)                         33,252                   29,872
  Available for sale, at market (amortized cost of $32,134 and $30,127           31,597                   30,538
                                                                      ------------------       ------------------
    Total investment securities                                                  64,849                   60,410
Mortgage loans held for sale                                                     28,266                   32,620
Loans:
    Residential real estate mortgage                                            113,091                   97,194
    Commercial real estate mortgage                                              76,742                   59,257
    Commercial                                                                   58,312                   63,260
    Real estate construction                                                     45,211                   46,905
    Installment and other                                                         4,620                    5,095
    Less deferred loan fees                                                      (1,380)                  (2,395)
                                                                      ------------------       ------------------
        Total portfolio loans                                                   296,596                  269,316
    Less allowance for loan losses                                               (8,001)                  (8,041)
                                                                      ------------------       ------------------
        Net loans                                                               288,595                  261,275

Premises and equipment, net                                                       3,849                    4,082
Mortgage servicing rights                                                           192                      305
Other real estate owned                                                           2,486                    2,181
Cash surrender value of life insurance                                            3,111                    3,033
Other assets and interest receivable                                              9,833                   16,206
                                                                      ------------------       ------------------
     Total assets                                                              $431,866                 $422,299
                                                                      ==================       ==================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                           $90,197                  $82,448
  Interest-bearing transaction accounts                                         128,362                  141,316
  Time deposits $100,000 and over                                                65,502                   62,600
  Other time deposits                                                            82,501                   78,356
                                                                      ------------------       ------------------
    Total deposits                                                              366,562                  364,720

Other borrowings                                                                 13,870                    1,371
Subordinated notes                                                                  ---                   12,000
Other liabilities and interest payable                                           11,168                    5,568
                                                                      ------------------       ------------------
     Total liabilities                                                          391,600                  383,659

Shareholders' equity:
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding 3,409,807 and 3,363,565 shares                      26,015                   25,801
  Retained earnings                                                              14,563                   12,600
  Accumulated other comprehensive income, net                                      (312)                     239

                                                                      ------------------       ------------------
     Total shareholders' equity                                                  40,266                   38,640
                                                                      ------------------       ------------------


     Total liabilities and shareholders' equity                                $431,866                 $422,299
                                                                      ==================       ==================
</TABLE>
See Notes to Consolidated Financial Statements.



<PAGE>






                               REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                Consolidated Statements of Cash Flows
                                           (in thousands)
                                             (unaudited)
<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                 June 30,
                                                                         1999               1998
                                                                     --------------     --------------
<S>                                                                  <C>             <C>
Cash flows from operating activities:

  Net income                                                                $2,236             $2,318

Adjustments  to  reconcile   net  income  to  net  cash
  provided  by  operating activities:
  Depreciation and amortization, net                                           749                526
  Net realized gains on securities available for sale                          (14)              (105)
  Loans originated for sale                                               (192,313)          (220,571)
  Proceeds from sale of loans held for sale                                190,865            208,900
  Gain on sale of loans and loan servicing                                  (1,240)            (2,602)
  Provision for loan losses                                                    500              1,020
  Change in other assets and interest receivable                             3,073              1,522
  Change in other liabilities and interest payable                           8,953             (4,207)
  Other, net                                                                   102                430
                                                                     --------------     --------------
  Total adjustments                                                         10,675            (15,087)
                                                                     --------------     --------------
  Net cash provided by (used in) operating activities                       12,911            (12,769)
                                                                     --------------     --------------

Cash flows from investing activities:
  Net change in loans                                                      (22,411)            19,980
  Proceeds from sales of loans in portfolio                                    ---                288
  Purchases of investment securities available for sale                     (7,016)           (14,079)
  Purchases of investment securities held to maturity                       (6,160)           (11,131)
  Sales of investment securities available for sale                            ---              2,955
  Maturities of investment securities available for sale                     5,000             14,900
  Maturities of investment securities held to maturity                       2,774             11,382
  Premises and equipment, net                                                 (516)            (1,020)
  Purchase of mortgage servicing rights                                        ---                (11)
  Proceeds from sale of other real estate owned                              1,637              3,034
                                                                     --------------     --------------
    Net cash provided by (used in) investment activities                   (26,692)            26,298
                                                                     --------------     --------------

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                         7,749             (1,865)
  Change in interest bearing transaction accounts                          (12,954)           (11,693)
  Change in subordinated debt                                              (12,000)               ---
  Change in time deposits                                                    7,047             (4,294)
  Change in borrowings                                                      12,499              4,000
  Issuance of stock                                                            214                219
  Dividends paid                                                              (273)              (245)
                                                                     --------------     --------------
    Net cash provided by (used in) financing activities                      2,282            (13,878)
                                                                     --------------     --------------


Net change in cash and cash equivalents                                    (11,499)              (349)
Cash and cash equivalents at beginning of period                            42,187             56,058
                                                                     --------------     --------------
Cash and cash equivalents at end of period                                 $30,688            $55,709
                                                                     ==============     ==============

</TABLE>
                                             (Continued)



<PAGE>






                                  REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                   Consolidated Statements of Cash Flows
                                              (in thousands)
                                                (Continued)
<TABLE>
<CAPTION>
                                                                                   Six Months Ended
                                                                                       June 30,
                                                                               1999                1998
                                                                           --------------      -------------
<S>                                                                              <C>                 <C>
Supplemental Disclosures:

Cash paid during the period for:
  Interest expense                                                               5,798               5,261
  Income taxes                                                                     410                 820

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                                2,044               2,534
  Transfer from mortgage loans held for sale to loans                            1,547               5,564
  Dividend declared                                                                273                 245
  Conversion of Preferred Stock into Common Stock                                                    5,739
</TABLE>



See notes to Consolidated Financial Statements







<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 six  months  ended  June  30,  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
                                                                                  June 30,
                                                                     1999                          1998
                                                             ----------------------        -----------------------
                                                               Basic        Diluted          Basic       Diluted
                                                             ----------    ----------      ----------   ----------
<S>                                                          <C>           <C>             <C>          <C>
 Earnings per share before extraordinary item:

 Income before extraordinary item                               $1,218        $1,218          $1,211       $1,211
                                                             ==========    ==========      ==========   ==========

 Weighted average common shares outstanding                      3,395         3,509           3,141        3,463
                                                             ==========    ==========      ==========   ==========

 Earnings per share before extraordinary item                    $0.36         $0.35           $0.39        $0.35
                                                             ==========    ==========      ==========   ==========

 Earnings per share:
 Net income                                                     $1,218        $1,218          $1,211       $1,211
                                                             ==========    ==========      ==========   ==========

 Weighted average common shares outstanding                      3,395         3,509           3,141        3,463
                                                             ==========    ==========      ==========   ==========

 Earnings per share                                              $0.36         $0.35           $0.39        $0.35
                                                             ==========    ==========      ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                Six Months Ended
                                                                                   June 30,
                                                                     1999                          1998
                                                             ----------------------        -----------------------
                                                               Basic        Diluted          Basic       Diluted
                                                             ----------    ----------      ----------   ----------
<S>                                                          <C>           <C>             <C>          <C>
 Earnings per share before extraordinary item:

 Income before extraordinary item                               $2,512        $2,512          $2,318       $2,206
 Less: Preferred stock dividend                                    ---           ---             112          112
                                                             ----------    ---------       ---------    ---------
 Income before extraordinary item available to
   common stock shareholders                                     $2,512        $2,512          $2,206       $2,318
                                                             ==========    ==========      ==========   ==========

 Weighted average common shares outstanding                      3,383         3,485           2,967        3,454
                                                             ==========    ==========      ==========   ==========

 Earnings per share before extraordinary item                    $0.74         $0.72           $0.74        $0.67
                                                             ==========    ==========      ==========   ==========

 Earnings per share:
 Net income                                                     $2,236        $2,236          $2,318       $2,206
 Less: Preferred stock dividend                                    ---           ---             112          112
                                                             ---------     ---------       ---------    ---------
 Net income available to common stock shareholders              $2,236        $2,236          $2,206       $2,318
                                                             ==========    ==========      ==========   ==========

 Weighted average common shares outstanding                      3,383         3,485           2,967        3,454
                                                             ==========    ==========      ==========   ==========

 Earnings per share                                              $0.66         $0.64           $0.74        $0.67
                                                             ==========    ==========      ==========   ==========
</TABLE>


<PAGE>




3.       Comprehensive Income

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

<TABLE>
<CAPTION>
                                                          Three Months Ended               Six Months Ended
                                                              June 30,                       June 30,
                                                    -------------------------------   --------------------------
                                                        1999             1998            1999           1998
                                                    --------------   --------------   -----------    -----------
                                                            (In thousands)                  (In thousands)
<S>                                                 <C>              <C>              <C>            <C>
 Net income as reported                                    $1,218           $1,211        $2,236         $2,318
 Other comprehensive income (net of tax):
   Change in unrealized holding gain (losses)
      on available for sale securities
                                                             (361)             132          (543)           151
   Reclassification adjustment                                - -              - -            (8)           (25)
                                                    --------------   --------------   -----------    -----------
 Total comprehensive income                                  $857           $1,343        $1,685         $2,444
                                                    ==============   ==============   ===========    ===========
</TABLE>


4.       Common Stock Dividend

         On May 18,  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 July 15, 1999 to shareholders of record on June 30, 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 and six  months  ended  June 30,  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 including  indirect costs, such as overhead,  operations
and  technology  expense are allocated to the segments based on an evaluation of
costs for product or data  processing.  All amounts  other than  allocations  of
interest and indirect  costs are derived from third  parties.  The provision for
credit  losses  is  allocated  based  on  the  required  reserves  and  the  net
charge-offs for each respective segment.

<TABLE>
<CAPTION>
                                                         For the quarter ended June 30, 1999
                                            ------------------------------------------------------------
                                                                                 Mortgage
                                             Community                          Banking and    Total
                                              Banking    Sub Prime   Bankcard    Brokerage    Company
                                            ------------------------------------------------------------
                                                                   (in thousands)
<S>                                         <C>              <C>        <C>         <C>        <C>
Total Interest Income                            $7,415        $102          $0        $481      $7,998
Total Interest Expense                            2,909           0           0           0       2,909
Interest income/(expense) allocation                323         (74)        138        (387)          0
                                            ------------------------------------------------------------
Net Interest Income                               4,829          28         138          94       5,089
Provision for Loan Losses                           196           4           0           0         200
Total other Operating Income                        516          63         863       1,349       2,791
Total other Operating Expense                     3,359         283         347       1,779       5,768
                                            ------------------------------------------------------------
Income before income taxes                        1,790        (196)        654        (336)      1,912
Provision for income taxes                          659         (72)        236        (129)        694
                                            ------------------------------------------------------------
Income before extraordinary item                 $1,131       ($124)       $418       ($207)     $1,218
                                            ============================================================

Total Average Assets                           $394,990      $3,948     $10,233     $24,715    $433,886
                                            ============================================================
</TABLE>


<TABLE>
<CAPTION>
                                                         For the quarter ended June 30, 1998
                                            ------------------------------------------------------------
                                                                                 Mortgage
                                             Community                          Banking and    Total
                                              Banking    Sub Prime   Bankcard    Brokerage    Company
                                            ------------------------------------------------------------
                                                                   (in thousands)

<S>                                         <C>              <C>         <C>        <C>        <C>
Total Interest Income                            $7,614        $147          $0        $462      $8,223
Total Interest Expense                            3,585           8           8           8       3,609
Interest income/(expense) allocation                286         (78)        134        (342)          0
                                            ------------------------------------------------------------
Net Interest Income                               4,315          61         126         112       4,614
Provision for Loan Losses                           504           6           0           0         510
Total other Operating Income                        632         667         605       2,221       4,125
Total other Operating Expense                     3,595         556         253       1,904       6,308
                                            ------------------------------------------------------------
Income before income taxes                          848         166         478         429       1,921
Provision for income taxes                          314          60         177         159         710
                                            ------------------------------------------------------------
Income before extraordinary item                   $534        $106        $301        $270      $1,211
                                            ============================================================

Total Average Assets                           $383,664      $5,881      $9,450     $23,512    $422,507
                                            ============================================================
</TABLE>




<PAGE>



<TABLE>
<CAPTION>
                                                           For the six months ended June 30, 1999
                                              ------------------------------------------------------------------
                                                                                       Mortgage
                                               Community                              Banking and     Total
                                                Banking     Sub Prime    Bankcard      Brokerage     Company
                                              -----------------------------------------------------------------
                                                                             (in thousands)

<S>                                           <C>               <C>          <C>           <C>        <C>
Total Interest Income                              $14,643        $223            $0          $875     $15,741
Total Interest Expense                               5,811           5             3             6       5,825
Interest income/(expense) allocation                   762        (205)          275          (832)          0
                                              -----------------------------------------------------------------
Net Interest Income                                  9,594          13           272            37       9,916
Provision for Loan Losses                              490          10             0             0         500
Total other Operating Income                         1,063         163         1,642         3,309       6,177
Total other Operating Expense                        6,399         612           670         3,897      11,578
                                              -----------------------------------------------------------------
Income before income taxes                           3,768        (446)        1,244          (551)      4,015
Provision for income taxes                           1,426        (171)          462          (214)      1,503
                                              -----------------------------------------------------------------
Income before extraordinary item                    $2,342       ($275)         $782         ($337)     $2,512
                                              =================================================================

Total Average Assets                              $386,072      $5,655       $10,190       $26,542    $428,459
                                              =================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                           For the six months ended June 30, 1998
                                              ------------------------------------------------------------------
                                                                                       Mortgage
                                               Community                              Banking and     Total
                                                Banking     Sub Prime    Bankcard      Brokerage     Company
                                              -----------------------------------------------------------------
                                                                             (in thousands)

<S>                                           <C>               <C>           <C>          <C>        <C>
Total Interest Income                              $15,359        $277            $0          $893     $16,529
Total Interest Expense                               7,296          15            15            15       7,341
Interest income/(expense) allocation                   549        (151)          267          (665)          0
                                              -----------------------------------------------------------------
Net Interest Income                                  8,612         111           252           213       9,188
Provision for Loan Losses                            1,008          12             0             0       1,020
Total other Operating Income                         1,538         958         1,046         3,910       7,452
Total other Operating Expense                        7,053       1,144           498         3,262      11,957
                                              -----------------------------------------------------------------
Income before income taxes                           2,089         (87)          800           861       3,663
Provision for income taxes                             766         (33)          294           318       1,345
                                              -----------------------------------------------------------------
Income before extraordinary item                    $1,323        ($54)         $506          $543      $2,318
                                              =================================================================

Total Average Assets                              $387,913      $5,699        $9,404       $22,887    $425,903
                                              =================================================================
</TABLE>


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

Forward-Looking Information

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

    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 June 30, 1999,  and  significant  changes and trends in the
Company's  results of  operations  for the three and six  months  ended June 30,
1999, compared to the same period in 1998.

Summary of Financial Results

         The Company  reported net income of $1,218,000 ($.35 per diluted share)
for the three months ended June 30, 1999,  as compared to  $1,211,000  ($.35 per
diluted share) for the same period in 1998. Net income before extraordinary item
was $2,512,000  ($.72 per diluted share) and net income of $2,236,000  ($.64 per
diluted share) for the six months ended June 30, 1999, as compared to $2,318,000
($.67 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 slight increase in net income for the  second  quarter in 1999 when
compared  to the same  period one year ago is due to an  increase of $475,000 in
net interest income, a decrease of $1,334,000 in non interest income, a decrease
in the  provision  for loan losses of $310,000 and a decrease of $540,000 in non
interest expense.  The increase in income before  extraordinary  item during the
first six months of 1999 when  compared  to the same  period in 1998 is due to a
decrease of $1,275,000 in non interest  income,  a decrease in the provision for
loan losses of $520,000,  a decrease of $379,000 in non interest  expense and an
increase of $728,000 in net interest income.
<PAGE>

Net Interest Income

         Net interest income increased from $4,614,000 during the second quarter
of 1998 to  $5,089,000  in the  second  quarter  of 1999,  which  represents  an
increase  of  $475,000  or  9%.  Such  increase  is  due to an  increase  in the
Company's  net  interest  margin  from 4.90% to 5.15% and an increase in average
earning assets of $18,465,000  from  $376,513,000 for the quarter ended June 30,
1998 to $394,978,000 for the quarter ended June 30, 1999.

         Net interest income of $9,916,000  increased $728,000 or 8% for the six
months  ended June 30, 1999 when  compared to the same period one year ago.  The
increase is primarily due to an increase of $8,795,000 or 2% in average  earning
assets and a decrease of $13,307,000 or 4% in interest bearing liabilities.  Net
interest  margin for the first six months of 1999 was 5.08% as compared to 4.81%
for the same period one year ago.

         Yield on earning assets  decreased from 8.66% to 8.06% 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 was 4.83% for the six months ended June 30, 1998 as
compared to 4.01% 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  increased in the second  quarter of 1999 when
compared  to  the  same  period  one  year  ago.  Average  earning  assets  were
$390,602,000  during the six month  period  ended June 30,  1999 as  compared to
$381,807,000  in 1998.  The increase in average  earning assets during the first
six months of 1999 when  compared  to 1998 is  primarily  due to an  increase in
average  portfolio  loans and average  mortgage  loans held for sale,  partially
offset by a decline in federal funds sold.

         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  $303,984,000  in the  second  quarter  of  1998  to
$290,677,000  for the  same  period  in 1999  which  represents  a  decrease  of
$13,307,000.  This  decrease  was  partially  offset by an  increase  in average
noninterest bearing transaction accounts of $7,248,000.


<PAGE>



         The following is an analysis of the net interest margin:



<TABLE>
<CAPTION>
                                        Three months ended                          Three months ended
                                          June 30, 1999                               June 30, 1998
                              ----------------------------------------    ----------------------------------------
                                Average                       %             Average                       %
(dollars in thousands)          Balance      Interest       Yield           Balance      Interest       Yield
                              ----------------------------------------    ----------------------------------------

<S>                               <C>      <C>                   <C>          <C>      <C>                   <C>
Earning assets (1)                $394,978       $7,998          8.10         $376,513        $8,223         8.74
Interest-bearing liabilities       294,466        2,909          3.95          304,101         3,609         4.75
                                           -------------                               --------------
Net interest income                              $5,089                                       $4,614
                                           =============                               ==============
Net interest income to
  earning assets                                                 5.15                                        4.90
</TABLE>

<TABLE>
<CAPTION>
                                         Six months ended                            Six months ended
                                         June 30, 1999                               June 30, 1998
                             ----------------------------------------     ---------------------------------------
                                Average                      %              Average                      %
(dollars in thousands)          Balance      Interest      Yield            Balance      Interest      Yield
                             ----------------------------------------     ---------------------------------------

<S>                               <C>      <C>                  <C>           <C>      <C>                  <C>
Earning assets (1)                $390,602      $15,741         8.06          $381,807      $16,529         8.66
Interest-bearing liabilities       290,677        5,825         4.01           303,984        7,342         4.83
                                           -------------                               -------------
Net interest income                              $9,916                                      $9,187
                                           =============                               =============
Net interest income to
  earning assets                                                5.08                                        4.81
</TABLE>

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


<PAGE>




         The following  table sets forth changes in interest income and interest
expense for each major category of interest-earning  asset and  interest-bearing
liability,  and the amount of change attributable to volume and rate changes for
the three and six  months  ended  June 30,  1999 and 1998.  Changes  not  solely
attributable to rate or volume have been allocated to rate.

<TABLE>
<CAPTION>
                                                                Three months ended June 30, 1999
                                                                         over June 30, 1998
                                                         --------------------------------------------------
                                                             Volume            Rate             Total
                                                         --------------------------------------------------
                                                                           (in thousands)
<S>                                                      <C>                        <C>               <C>
Increase (decrease) in interest income:
  Portfolio loans                                                   $453             ($328)           $125
  Mortgage loans held for sale                                      (206)              180             (26)
  Investment securities                                             (911)              819             (92)
  Federal funds sold                                                (498)              266            (232)
                                                         --------------------------------------------------
Total increase (decrease)                                         (1,162)              937            (225)
                                                         --------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                              (77)             (352)           (429)
  Time deposits                                                      892              (965)            (73)
  Other borrowings                                                  (282)               84            (198)
                                                         --------------------------------------------------
Total increase (decrease)                                            533            (1,233)           (700)
                                                         --------------------------------------------------

Increase in net interest income                                  ($1,695)           $2,170            $475
                                                         ==================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                     Year to date June 30, 1999
                                                                          over June 30, 1998
                                                         ---------------------------------------------------
                                                              Volume            Rate            Total
                                                         ---------------------------------------------------
                                                                           (in thousands)
<S>                                                      <C>                        <C>             <C>
Increase (decrease) in interest income:
  Portfolio loans                                                   $906             ($979)           ($73)
  Mortgage loans held for sale                                       164              (237)            (73)
  Investment securities                                             (100)             (162)           (262)
  Federal funds sold                                                (330)              (50)           (380)
                                                         ---------------------------------------------------
Total increase (decrease)                                            640            (1,428)           (788)
                                                         ---------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                             (232)             (722)           (954)
  Time deposits                                                      132              (340)           (208)
  Other borrowings                                                  (240)             (114)           (354)
                                                         ---------------------------------------------------
Total increase (decrease)                                           (340)           (1,176)         (1,516)
                                                         ---------------------------------------------------

Increase in net interest income                                     $980             ($252)           $728
                                                         ===================================================
</TABLE>





<PAGE>

Provision for Loan Losses

         The  provision for loan losses for the three months ended June 30, 1999
amounted to $200,000 as compared to $510,000 in the same quarter in the previous
year.  For the six months ended June 30, 1999 the provision  decreased  $520,000
from  $1,020,000  in 1998 to  $500,000  in  1999.  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 and six months ended June 30, 1999,  as compared
to the same period in 1998.

<TABLE>
<CAPTION>
                                           Three Months Ended                       Six Months Ended
                                                June 30,               %              June 30,                %
                                          -----------------------               ------------------------
(dollars in thousands)                      1999         1998       Change         1999          1998       Change
                                         -----------   ---------- -----------   -----------   ----------- ------------

<S>                                      <C>           <C>               <C>    <C>           <C>                <C>
Service charges on deposit accounts             268          267           0           523          541           (3)
Merchant draft processing, net                  863          605          43         1,642        1,046           57
Loan servicing income                           103          105          (2)          169          284          (40)
Gain (loss) on securities                       ---          ---         ---            14          105          (87)
Gain on sale of loans and servicing             536        1,655         (68)        1,240        2,602          (52)
Mortgage brokerage revenue, net                 828        1,084         (24)        2,030        1,905            7
Other income                                    193          409         (53)          559          969          (42)
                                         -----------   ----------               -----------   ----------
Total other operating income                 $2,791       $4,125         (32)       $6,177       $7,452          (17)
                                         ===========   ==========               ===========   ===========
</TABLE>

         Other operating  income  decreased  $1,334,000 or 32% to $2,791,000 for
the second  quarter of 1999 when compared to  $4,125,000  for the same period in
1998.  Such  decrease is primarily due to a decrease of $256,000 in net mortgage
loan brokerage revenue, an increase of $258,000 in merchant card net revenue and
a decrease of  $1,119,000 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. The decrease in the second quarter of 1999 when
compared  to the second  quarter of 1998  relates to a slight  decrease  in loan
origination volume, a lower margin and an increasing mortgage loan interest rate
environment.  Net revenue from the mortgage loan brokerage operation amounted to
$828,000 in the second  quarter of 1999 as compared  to  $1,084,000  in 1998 and
$2,030,000  for the six month  period  ending  June 30,  1999 when  compared  to
$1,905,000  for the six month  period  ending  June 30,  1998.




         Other operating  income amounted to $6,177,000 for the six months ended
June 30,  1999 as  compared  to  $7,452,000  for the same  period  in 1998.  The
decrease of $1,275,000 or $17% is primarily  attributable  to a decrease in gain
on sale of loans and loan servicing due to decreased  mortgage loan  origination
volume and lower margins.

<PAGE>

         Other Operating Expense

         Other  operating  expense  decreased  by $540,000  or 9% to  $5,768,000
during the second  quarter of 1999 compared to $6,308,000 for the second quarter
of 1998,  primarily due to the Company's cost control  efforts.  Other operating
expense  decreased  379,000 or 3% to $11,578,000  for the six month period ended
June 30, 1999 compared to $11,957,000 for the same period one year ago.

         The following  table sets forth the  components of the Company's  other
operating  expense  during the three and six  months  ended  June 30,  1999,  as
compared to the same period in 1998.


<TABLE>
<CAPTION>
                                         Three Months Ended                        Six Months Ended
                                              June 30,               %                 June 30,              %
                                     ---------------------------              ------------------------
(dollars in thousands)                   1999          1998       Change         1999         1998         Change
                                     -------------  ------------ ----------   -----------  -----------   -----------

<S>                                  <C>            <C>               <C>     <C>          <C>                  <C>
Salaries and employee benefits             $3,254        $3,388        (4)        $6,674       $6,391             4
Occupancy and equipment expense               826           841        (2)         1,629        1,650            (1)
Other                                       1,688         2,079       (19)         3,275        3,916           (16)
                                     -------------  ------------              -----------  -----------
Total other operating expense              $5,768        $6,308        (9)       $11,578      $11,957            (3)
                                     =============  ============              ===========  ===========
</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 36.3% and 37.4% for the three and six months ended June 30,  1999,  compared
to 37.0% and 36.7% for the same periods in 1998.




<PAGE>



Business Segments

Summary financial data by industry segment as follows:


<TABLE>
<CAPTION>
                                         For the Three Months    For the Six Months
                                                Ended                   Ended
                                             June 30,                 June 30,
                                          (in thousands)           (in thousands)
                                         1999        1998         1999        1998
                                      -----------  ----------  -----------  ----------
<S>                                   <C>          <C>         <C>          <C>
Community Banking:
   Revenue                                 5,345       4,947       10,657       10,150
   Expenses                                3,555       4,099        6,889        8,061
                                      -----------  ----------  -----------  -----------
     Income (loss) before income tax       1,790         848        3,768        2,089
                                      ===========  ==========  ===========  ===========


Sub Prime:
   Revenue                                    91         728          176        1,069
   Expenses                                  287         562          622        1,156
                                      -----------  ----------  -----------  -----------
     Income (loss) before income tax        (196)        166         (446)         (87)
                                      ===========  ==========  ===========  ===========


Bankcard:
   Revenue                                 1,001         731        1,914        1,298
   Expenses                                  347         253          670          498
                                      -----------  ----------  -----------  -----------
     Income (loss) before income tax         654         478        1,244          800
                                      ===========  ==========  ===========  ===========


Mortgage Banking and Brokerage:
   Revenue                                 1,443       2,333        3,346        4,123
   Expenses                                1,779       1,904        3,897        3,262
                                      -----------  ----------  -----------  -----------
     Income (loss) before income tax        (336)        429         (551)         861
                                      ===========  ==========  ===========  ===========


Total Company:
   Revenue                                 7,880       8,739       16,093       16,640
   Expenses                                5,968       6,818       12,078       12,977
                                      -----------  ----------  -----------  -----------
     Income (loss) before income tax       1,912       1,921        4,015        3,663
                                      ===========  ==========  ===========  ===========
</TABLE>


         Community Banking

         The Community  Banking  segment  income before income tax increased for
the quarter  ended June 30,  1999 as well as the six months  ended June 30, 1999
when  compared to the same periods 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
moderately  increased all categories of permanent loans within the group through
renewed  marketing efforts and development of new distribution  channels.  Total
average  portfolio loans amounted to $293,321,000 and $257,094,000 in the second
quarter of 1999 and 1998, which reflects a 14% increase. For the full six months
such amounts are $282,698,000 and $263,574,000 which reflects a 7% increase.



<PAGE>



         Sub Prime Lending

         In the second  quarter of 1999 the Company's sub prime lending  segment
which is known as Allied Diversified Credit, or "ADC" recorded an operating loss
of $196,000 compared to operating income of $166,000 in 1998. For the six months
ended June 30, 1999 the segment recorded an operating loss of $446,000  compared
to a loss of $87,000  for the same period one year ago.  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 its 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. Second quarter of 1999 revenue was
up $270,000 or 37% over the same period in 1998.  For the six months  ended June
30, 1999,  revenue was up $616,000 or 47% to $1,914,000 from $1,298,000 one year
ago.  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 six months of 1999 when  compared to the same
period in 1998 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.  In response to these  conditions the Company is currently
evaluating its strategic options with respect to this unit.


Investment Securities

         Total investment  securities  increased $4,439,000 or 7% to $64,849,000
as of June 30, 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 $10,480,000 for the first
six months of 1999 as compared to $21,794,000 in 1998.
<PAGE>

Loans

         Total loans  increased  $27,280,000 or 10% to  $296,596,000 at June 30,
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 six months of 1999.

         The following table summarizes the composition of the loan portfolio at
June 30, 1999 and December 31, 1998

<TABLE>
<CAPTION>
                                                   June 30, 1999                         December 31, 1998
                                         ------------------------------------    ------------------------------------
 (dollars in thousands)                        Amount              %                   Amount              %
                                         ------------------------------------    ------------------------------------
 <S>                                     <C>               <C>                   <C>               <C>
Residential real estate mortgage                  $113,091                37%              $97,194                36%
 Commercial real estate mortgage                    76,742                26                59,257                22
 Commercial                                         58,312                20                63,260                23
 Real estate construction                           45,211                15                46,905                18
 Installment and other                               4,620                 2                 5,095                 2
 Less deferred loan fees                            (1,380)                0                (2,395)               (1)
                                         ------------------------------------    ------------------------------------
     Total portfolio loans                         296,596               100%              269,316               100%
                                                           ==================                      ==================
 Less allowance for loan losses                     (8,001)                                 (8,041)
                                         ------------------                      ------------------
     Net loans                                    $288,595                                $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           Six months ended
                                                            June 30,                   June 30,
                                                ---------------------------   --------------------------
(dollars in thousands)                             1999           1998           1999           1998
                                                -----------   -------------   -----------    -----------
<S>                                             <C>           <C>             <C>            <C>
Beginning allowance for loan losses                 $8,242          $7,649        $8,041         $7,645
Provision for loan losses                              200             510           500          1,020
Charge-offs                                           (656)           (334)         (913)          (871)
Recoveries                                             215             105           373            136
                                                -----------   -------------   -----------    -----------
Ending allowance for loan losses                    $8,001          $7,930        $8,001         $7,930
                                                ===========   =============   ===========    ===========


Net charge-offs to average
   loans (annualized)                                  .55%            .32%          .38%           .56%
</TABLE>

         The  allowance  for loan  losses as a  percentage  of  portfolio  loans
decreased  from 2.99% at December 31, 1998 to 2.70% at June 30, 1999. The slight
decrease in this  percentage is due to a  $27,280,000  increase in the Company's
total loan portfolio.


Nonperforming Assets

         The following table summarizes the Company's nonperforming assets.

<TABLE>
<CAPTION>
                                                                June 30,             December 31,
(dollars in thousands)                                            1999                  1998
                                                              --------------       ---------------
<S>                                                           <C>                  <C>
Nonaccrual loans                                                     $3,944                $5,556
Accruing loans past due 90 days or more                               1,664                   ---
Restructured loans                                                    1,029                 1,045
                                                              --------------       ---------------
Total nonperforming loans                                             6,637                 6,601
Other real estate owned                                               2,486                 2,181
Other assets owned                                                       67                   129
                                                              --------------       ---------------
Total nonperforming assets                                           $9,190                $8,911
                                                              ==============       ===============




Nonperforming assets to total assets                                   2.13%                 2.11%
</TABLE>
<PAGE>

         Nonperforming  assets have increased from $8,911,000 as of December 31,
1998 to $9,190,000 as of June 30, 1999. The principal  reasons for this increase
relates an increase  in accruing loans  past  due 90 days or more of $1,664,000,
all of  which  paid off subsequent to June 30, 1999, an increase  in other  real
estate   owned   of  $305,000  offset  by  a  decline  in  nonaccrual  loans  of
$1,612,000.

         Nonperforming loans consist of loans to 36 borrowers,  20 of which have
balances  in excess of  $100,000.  The two  largest  have  recorded  balances of
$1,405,000  and  $716,000,  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 eight  properties.  Four properties
are residential,  two are commercial buildings and the remaining are undeveloped
acres and a motel.  Other assets owned included  contract  receivable rights and
repossessed personal property carried at $67,000.

         Although the volume of nonperforming  assets will depend in part on the
future  economic  environment,  there  is  one  loan  relationship which  totals
approximately  $221,000  about  which  management  has serious doubts  as to the
ability of  the  borrower to comply with the present  repayment  terms and which
may become a nonperforming asset based on the information  presently known about
possible credit problems of the borrower.

         In the first six months of 1999 the Company was  required by a mortgage
loan  investor to repurchase  two  residential  mortgage  loans in the amount of
$205,000.  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 $152,000 as of June 30, 1999 and $172,000 as of December 31, 1998.

         At June 30, 1999 the Company's  total  recorded  investment in impaired
loans  (as  defined  by SFAS  114 and 118) was  $7,402,000  of which  $6,923,000
relates to the recorded  investment  for which there is a related  allowance for
credit losses of $1,136,000  determined in accordance with these  statements and
$478,000 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 six
months ended June 30, 1999 and 1998 was $7,660,000 and $11,888,000.  The related
amount of interest  income  recognized  during the periods  that such loans were
impaired was $91,000 and $213,000 for the three and six month periods ended June
30, 1999 and  $200,000  and  $317,000  for the same period in 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 June 30, 1999,  Redwood held $1,363,000 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.
Prior to March 1999 Redwood was required to make monthly payments of interest at
8.5% on $12,000,000 of subordinated  debentures issued in 1993. The subordinated
debentures  issue was early  redeemed in the first  quarter of 1999.  Payment of
these  obligations  was  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  six  months of  1999,  NBR  declared  dividends  of
$8,600,000,  of which  $8,000,000  was used to fund the early  redemption of the
$12,000,000  subordinated debt.  Management  believes that at June 30, 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 six months ended
June 30, 1999 the Company received cash of $12,911,000 from operating activities
and  $2,282,000 in financing  activities  while using  $26,692,000  in investing
activities.


Capital Resources

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

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

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

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

         The following  table  summarizes  the  consolidated  capital ratios and
the capital ratios of the principal  subsidiaries  at June 30, 1999 and December
31, 1998.

<TABLE>
<CAPTION>
                                                                  Company         NBR
                                                               -------------- -------------
<S>                                                                  <C>           <C>
         June 30, 1999
           Total capital to risk based assets                        13.05%        12.50%
           Tier 1 capital to risk based assets                       11.79         11.24
           Leverage ratio                                             9.31          8.67

         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 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.  The  Company  has  been informed that this  processor's
testing   for   Year  2000   compliance  is  onging, and  that  such  testing is
satisfactory.  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.

         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.
<PAGE>

         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 has developed,
in accordance with regulatory  guidelines,  further contingency plans to address
potential  business  disruptions  resulting from Year 2000 issues. 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  is  currently
evaluating its strategic options with respect to this business activity.

         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 June 30,
1999,  approximately  79% of the Company's loans were secured by real estate, of
which 33% were  secured  by  commercial  real  estate,  including  small  office
buildings,  owner-user  office/warehouses,  mixed use residential and commercial
properties  and retail  properties.  Substantially  all of the  properties  that
secure the  Company's  present  loans are located  within  Northern  and Central
California.  The ability of the Company to  continue  to  originate  mortgage or
construction  loans may be  impaired  by adverse  changes  in local or  regional
economic  conditions,  adverse  changes in the real  estate  market,  increasing
interest  rates,  or acts of  nature  (including  earthquakes,  which  may cause
uninsured  damage  and  other  loss of value to real  estate  that  secures  the
Company's  loans).  Due  to  the  concentration  of the  Company's  real  estate
collateral,  such events could have a significant adverse impact on the value of
such collateral or the Company's earnings.
<PAGE>

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

         Competition from Other Financial Institutions. The Company competes for
deposits and loans  principally with major commercial  banks,  other independent
banks,   savings  and  loan  associations,   savings  banks,   thrift  and  loan
associations,  credit unions, mortgage companies,  insurance companies and other
lending  institutions.   With  respect  to  deposits,   additional   significant
competition  arises from corporate and governmental debt securities,  as well as
money market  mutual  funds.  The Company also  depends for its  origination  of
mortgage  loans  on  independent  mortgage  brokers  who are  not  contractually
obligated  to do business  with the Company and are  regularly  solicited by the
Company's competitors.  Aggressive policies of such competitors have in the past
resulted, and may in the future result, in a decrease in the Company's volume of
mortgage  loan  originations  and/or a  decrease  in the  profitability  of such
originations,  especially during periods of declining  mortgage loan origination
volumes.  Several of the  nation's  largest  savings and loan  associations  and
commercial  banks have a  significant  number of branch  offices in the areas in
which the Company  conducts  operations.  Among the advantages  possessed by the
larger of these  institutions  are their ability to make larger  loans,  finance
extensive  advertising   campaigns,   access  international  money  markets  and
generally  allocate  their  investment  assets to regions  of highest  yield and
demand.


Item 3.  Quantitative and Qualitative Disclosure about Market Risk

         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.

         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.
<PAGE>

         The following table sets forth,  as of June 30, 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                      $2,276       $ ---        $ ---       $ ---        $ ---      $2,276
Investment securities and other          1,307       4,989       11,789      27,402       19,368      64,855
Mortgage loans held for sale            28,266         ---          ---         ---          ---      28,266
Loans                                  110,220      33,382       19,566      68,634       64,794     296,596
                                  ---------------------------------------------------------------------------
   Total interest-earning assets       142,069      38,371       31,355      96,036       84,162     391,993
                                  ---------------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction
  accounts                             128,362         ---          ---         ---          ---     128,362
Time deposits                           49,334      28,968       55,734      13,967          ---     148,003
Short-term borrowings                   13,870         ---          ---         ---          ---      13,870
                                  ---------------------------------------------------------------------------
  Total interest-bearing
    liabilities                        191,566      28,968       55,734      13,967          ---     290,235
                                  ---------------------------------------------------------------------------

Interest rate sensitivity gap         ($49,497)     $9,403     ($24,379)    $82,069      $84,162
                                  ===============================================================
  Cumulative interest rate
    sensitivity gap                    (49,497)    (40,094)     (64,473)     17,596      101,758
                                  ===============================================================

Interest rate sensitivity gap             0.74        1.32         0.56        6.88          ---
ratio
Cumulative interest rate                  0.74        0.82         0.77        1.06         1.35
sensitivity gap ratio
</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 100 basis points up and 100 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 June 30, 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 100 basis points up and 100 basis points down.

<TABLE>
<CAPTION>
         June 30, 1999
                                             Change in Annual                         Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity

<S>             <C>                                <C>                               <C>
                +100                                573,000                          (1,406,000)
                -100                               (694,000)                            106,000
</TABLE>

         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.      Submission of Matters to a vote of Security Holders

             (a)     The  Company  held  its  Annual Meeting of  Shareholders on
                     May 18, 1999.

             (b)     Proxies for the Annual Meeting were  solicited  pursuant to
                     Regulation  14 under the  Securities  Exchange Act of 1934.
                     There was no  solicitation  in opposition  to  management's
                     nominees  for  directors as listed in the  Company's  proxy
                     statement  for the Annual  Meeting,  and all such  nominees
                     were elected.

             (c)     The vote for the nominated directors was as follows:


<TABLE>
<CAPTION>
                         Nominee                    For         Withheld
<S>                  <C>                           <C>              <C>

                     Richard I. Colombini          2,986,519        5,526
                     Robert D. Cook                2,984,692        7,353
                     Patrick W. Kilkenny           2,985,664        6,381
                     William B. Stevenson          2,985,766        6,279
                     Tom D. Whitaker               2,985,433        6,612
</TABLE>


                     The vote for ratifying the appointment of Deloitte & Touche
                     LLP as the Company's independent auditors was as follows:
<TABLE>

<S>                          <C>                                  <C>
                             For                                  2,982,056
                             Against                                  3,049
                             Abstain                                  6,940
                             Broker Non-Vote                            -0-
</TABLE>



                     The vote to amend Section 2 of Article III of the Company's
                     Bylaws was as follows:
<TABLE>
<S>                          <C>                                  <C>
                             For                                  1,853,779
                             Against                                 94,792
                             Abstain                                  7,131
                             Broker Non-Vote                      1,036,343
</TABLE>




<PAGE>



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

1.       Exhibits.

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

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

         3.1               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  Statemen  on Form  S-8 filed on July 8,
                           1992  (Registration   No. 33-49372),   and   by  this
                           reference incorporated herein.


<PAGE>




         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.

         10.10             Compensation  Agreement  between  Patrick W. Kilkenny
                           and  Redwood  Empire  Bancorp filed  as Exhibit 10.20
                           to the  Registrant's 1996 Annual Report on Form 10K.

         10.11             Executive  Severance  Agreement   between  Patrick W.
                           Kilkenny  and   Redwood   Empire   Bancorp   filed as
                           Exhibit  10.21 to the Registrant's 1996 Annual Report
                           on Form 10K.

         10.12             Salary   Continuation  Agreement   between  James  E.
                           Beckwith   and  Redwood   Empire   Bancorp  filed  as
                           Exhibit  10.22 to the Registrant's 1996 Annual Report
                           on Form 10K.

         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 June 30,
                           1999.



2.       Reports on Form 8-K

         Form 8-K dated May 25,  1999  announcing  quarterly  cash  dividend  on
         common stock under Item 5 "Other Events".

         Form 8-K dated April 28, 1999  announcing  first quarter 1999 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:  8/12/99               BY:  /s/ James E. Beckwith
       -------                    -----------------------------
                                  James E. Beckwith
                                  Executive Vice President,
                                  Chief Operating Officer,
                                  Principal Financial Officer, and
                                  Principal Accounting Officer