<PAGE>

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

                                    FORM 10-Q

(Mark One)
[X]      Quarterly Report Under Section 13 or 15 (d) of the SECURITIES
         Exchange Act of 1934

                For the quarterly period ended September 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. October 29, 1999: 3,370,271


<PAGE>



                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index


                                                                           Page
PART I.  Financial Information

  Item 1.    Financial Statements

             Consolidated Statements of Operations
             Three and Nine Months ended September 30, 1999 and 1998...........3

             Consolidated Balance Sheets
             September 30, 1999 and December 31, 1998..........................5

             Consolidated Statements of Cash Flows
             Nine Months Ended September 30, 1999 and 1998.....................6

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


  Item 2.    Management's Discussion and Analysis
             of Financial Condition and Results of Operations.................13


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


PART II. Other Information


  Item 6.    Exhibits and Reports on Item 8-K.................................35



SIGNATURES   .................................................................37

<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements

<TABLE>
<CAPTION>

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

                                                                          Three Months Ended             Nine Months Ended
                                                                            September 30,                  September 30,
                                                                            1999          1998                1999         1998

                                                                      ---------------------------    ---------------------------
<S>                                                                       <C>           <C>                <C>          <C>
Interest income:

  Interest and fees on loans                                              $6,601        $6,489             $19,025      $18,987
  Interest on investment securities                                        1,048         1,115               3,011        3,340
  Interest on federal funds sold                                              37           207                 293          843
                                                                      ---------------------------    ---------------------------
Total interest income                                                      7,686         7,811              22,329       23,170

Interest expense:
  Interest on deposits                                                     2,623         2,680               7,271        8,544
  Interest on subordinated notes                                             ---           276                 142          830
  Interest on other borrowings                                                90           166                 297          315
                                                                      ---------------------------    ---------------------------
Total interest expense                                                     2,713         3,122               7,710        9,689
                                                                      ---------------------------    ---------------------------

Net interest income                                                        4,973         4,689              14,619       13,481
Provision for loan losses                                                    200           510                 700        1,530
                                                                      ---------------------------    ---------------------------

Net interest income after loan loss provision                              4,773         4,179              13,919       11,951

Noninterest income:
  Service charges on deposit accounts                                        253           261                 776          802
  Merchant draft processing, net                                             733           686               2,375        1,732
  Loan servicing income                                                       14           201                  79          485
  Net realized gain on sale of
    investment securities available for sale                                 ---            22                  14          127
  Other income                                                               193           226                 653          835
                                                                      ---------------------------    ---------------------------
Total noninterest  income                                                  1,193         1,396               3,897        3,981

Noninterest expense:
  Salaries and employee benefits                                           2,187         2,090               6,652        6,182
  Occupancy and equipment expense                                            598           695               1,713        1,919
  Other                                                                    1,415         1,259               3,790        4,134
                                                                      ---------------------------    ---------------------------
Total noninterest expense                                                  4,200         4,044              12,155       12,235
                                                                      ---------------------------    ---------------------------

  Income from continuing operations before income taxes
     and extraordinary item                                                1,766         1,531               5,661        3,697
  Provision for income taxes                                                 714           554               2,187        1,349
                                                                      ---------------------------    ---------------------------

Income from continuing operations before extraordinary item                1,052           977               3,474        2,348

Discontinued Operations:
  Income/(loss) from discontinued operations
    (less applicable income taxes of ($356), $210, ($439) and $760)        (519)           358               (429)        1,305
  Loss on disposal of discontinued operations, net of tax of ($113)        (167)           ---               (167)          ---
                                                                      ---------------------------    ---------------------------
    Income/(loss) from discontinued operations                             (686)           358               (596)        1,305
                                                                      ---------------------------    ---------------------------
Income before extraordinary item                                             366         1,335               2,878        3,653
Extraordinary item                                                           ---           ---                 459          ---
Income tax benefit                                                           ---           ---               (183)          ---
                                                                      ---------------------------    ---------------------------
Total extraordinary item, net of tax                                         ---           ---                 276          ---
                                                                      ---------------------------    ---------------------------

Net income                                                                   366         1,335               2,602        3,653
Dividends on preferred stock                                                 ---           ---                 ---          112
                                                                      ---------------------------    ---------------------------
Net income available for common stock shareholders                          $366        $1,335              $2,602       $3,541
                                                                      ===========================    ===========================
</TABLE>



                                                    (Continued)
<PAGE>

<TABLE>

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

<CAPTION>

                                                                    Three Months Ended             Nine Months Ended
                                                                       September 30,                 September 30,
                                                                    1999          1998            1999          1998
                                                                ----------------------------  ----------------------------
<S>                                                                 <C>           <C>             <C>           <C>

Basic earnings per common shares:
   Income from continuing operations before extraordinary item          $0.31         $0.29           $1.03         $0.72
   Income/(loss) from discontinued operations                          (0.20)          0.11          (0.18)          0.38
   Income before extraordinary item                                      0.11          0.40            0.85          1.14
   Net income available for common stock shareholders                    0.11          0.40            0.77          1.14
  Weighted average shares                                           3,390,000     3,369,000       3,385,000     3,101,000

Diluted earnings per common share and common equivalent share:
   Income from continuing operations before extraordinary item          $0.30         $0.28           $1.00         $0.68
   Income/(loss) from discontinued operations                          (0.20)          0.10          (0.17)          0.38
   Income before extraordinary item                                      0.11          0.38            0.83          1.05
   Net income available for common stock shareholders                    0.11          0.38            0.75          1.05
  Weighted average shares                                           3,458,000     3,486,000       3,472,000     3,465,000

See Notes to Consolidated Financial Statements.
</TABLE>


                                                  (Concluded)

<PAGE>

<TABLE>

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

                                                                            September 30,            December 31,
                                                                                 1999                     1998
                                                                           ------------------       ------------------
                                                                              (unaudited)
<S>                                                                        <C>                      <C>
Assets:
Cash and due from banks                                                              $23,451                  $15,982
Federal funds sold and repurchase agreements                                           1,795                   26,205
                                                                           ------------------       ------------------
  Cash and cash equivalents                                                           25,246                   42,187

Investment securities:
  Held to maturity (market value of $32,024 and $30,014)                              32,861                   29,872
  Available for sale, at market (amortized cost of $43,807 and $30,127)               43,234                   30,538
                                                                           ------------------       ------------------
    Total investment securities                                                       76,095                   60,410
Mortgage loans held for sale                                                          17,892                   32,620
Loans:
    Residential real estate mortgage                                                 126,033                   97,194
    Commercial real estate mortgage                                                   72,854                   59,257
    Commercial                                                                        62,228                   63,260
    Real estate construction                                                          43,046                   46,905
    Installment and other                                                              4,384                    5,095
    Less deferred loan fees                                                          (1,218)                  (2,395)
                                                                           ------------------       ------------------
        Total portfolio loans                                                        307,327                  269,316
    Less allowance for loan losses                                                   (7,963)                  (8,041)
                                                                           ------------------       ------------------
        Net loans                                                                    299,364                  261,275

Premises and equipment, net                                                            3,124                    4,082
Mortgage servicing rights                                                                 58                      305
Other real estate owned                                                                2,381                    2,181
Cash surrender value of life insurance                                                 3,149                    3,033
Other assets and interest receivable                                                   9,855                   16,206
                                                                           ------------------       ------------------
     Total assets                                                                   $437,164                 $422,299
                                                                           ==================       ==================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                                $77,105                  $82,448
  Interest-bearing transaction accounts                                              131,587                  141,316
  Time deposits $100,000 and over                                                     66,905                   62,600
  Other time deposits                                                                 92,331                   78,356
                                                                           ------------------       ------------------
    Total deposits                                                                   367,928                  364,720

Other borrowings                                                                      17,785                    1,371
Subordinated notes                                                                       ---                   12,000
Other liabilities and interest payable                                                12,022                    5,568
                                                                           ------------------       ------------------
     Total liabilities                                                               397,735                  383,659

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares; issued and
      outstanding: no shares                                                             ---                      ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 3,370,271 and 3,363,565 shares                          24,832                   25,801
  Retained earnings                                                                   14,929                   12,600
  Accumulated other comprehensive income/(loss), net                                   (332)                      239
                                                                           ------------------       ------------------
     Total shareholders' equity                                                       39,429                   38,640
                                                                           ------------------       ------------------
     Total liabilities and shareholders' equity                                     $437,164                 $422,299
                                                                           ==================       ==================

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>


<TABLE>


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

                                                                             Nine Months Ended
                                                                               September 30,
                                                                         1999               1998
                                                                     --------------     --------------
<S>                                                                  <C>                <C>
Cash flows from operating activities:

  Net income                                                                $2,602             $3,653

Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization, net                                         1,183              1,067
  Net realized gains on securities available for sale                         (14)              (127)
  Loans originated for sale                                              (250,853)          (327,381)
  Proceeds from sale of loans held for sale                                258,396            338,288
  Gain on sale of loans and loan servicing                                 (1,307)            (3,942)
  Provision for loan losses                                                    700              1,530
  Change in other assets and interest receivable                             2,776                774
  Change in other liabilities and interest payable                           9,807                907
  Other, net                                                                   215                416
                                                                     --------------     --------------
  Total adjustments                                                         20,903             11,532
                                                                     --------------     --------------

  Net cash provided by operating activities                                 23,505             15,185
                                                                     --------------     --------------

Cash flows from investing activities:
  Net change in loans                                                     (31,846)              (752)
  Proceeds from sales of loans in portfolio                                    ---                946
  Purchases of investment securities available for sale                   (19,698)           (20,150)
  Purchases of investment securities held to maturity                      (6,192)           (11,594)
  Sales of investment securities available for sale                            ---              2,987
  Maturities of investment securities available for sale                     5,987             17,900
  Maturities of investment securities held to maturity                       3,189             13,406
  Premises and equipment, net                                                (225)            (1,383)
  Purchase of mortgage servicing rights                                         71               (12)
  Proceeds from sale of other real estate owned                              1,888              5,205
                                                                     --------------     --------------
    Net cash provided by (used in) investment activities                  (46,826)              6,553
                                                                     --------------     --------------

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                       (5,343)           (15,253)
  Change in interest bearing transaction accounts                          (9,729)           (17,260)
  Change in subordinated debt                                             (12,000)                ---
  Change in time deposits                                                   18,280              (895)
  Change in other borrowings                                                16,414              2,257
  Issuance of stock                                                          (969)                463
  Dividends paid                                                             (273)              (381)
                                                                     --------------     --------------
    Net cash provided by (used in) financing activities                      6,380           (31,069)
                                                                     --------------     --------------

Net change in cash and cash equivalents                                   (16,941)            (9,331)
Cash and cash equivalents at beginning of period                            42,187             56,058
                                                                     --------------     --------------


Cash and cash equivalents at end of period                                 $25,246            $46,727
                                                                     ==============     ==============

</TABLE>

                                             (Continued)
<PAGE>


<TABLE>



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

                                                                                   Nine Months Ended
                                                                                    September 30,
                                                                               1999                1998
                                                                           --------------      -------------

Supplemental Disclosures:

<S>                                                                              <C>                <C>
Cash paid during the period for:
  Interest expense                                                               8,626              10,805
  Income taxes                                                                     959               1,245

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                                2,303               2,675
  Transfer from mortgage loans held for sale to loans                            8,607               8,999
  Dividend declared                                                                202                 136
  Conversion of Preferred Stock into Common Stock                                                    5,739






See notes to Consolidated Financial Statements.
</TABLE>


                                              (Concluded)


<PAGE>




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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements should be read
in  conjunction  with the financial  statements  and related notes  contained in
Redwood  Empire  Bancorp's  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 nine months ended  September 30, 1999 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 1999.

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

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

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


2.   Earnings per Share

     Basic  earnings  per share  excludes  dilution  and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares  outstanding  for the period.  Diluted  earnings  per share  reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised  or converted  into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
<PAGE>

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

                                                                                           Three Months Ended
                                                                                               September 30,
                                                                                   1999                          1998
                                                                           ------------------------      -----------------------
                                                                             Basic        Diluted          Basic       Diluted
                                                                           ----------    ----------      ----------   ----------
<S>                                                                        <C>           <C>       <C>   <C>          <C>       <C>
 Earnings per common share:

 Income from continuing operations before extraordinary item                  $1,052        $1,052            $977         $977
 Earnings per share from continuing operations before extraordinary item       $0.31         $0.30           $0.29        $0.28

 Income/(loss) from discontinued operations, net of tax                       ($686)        ($686)            $358         $358
 Earnings per share from income/(loss) of discontinued operations            ($0.20)       ($0.20)           $0.11        $0.10

 Net income                                                                     $366          $366          $1,335       $1,335
 Net income per share                                                          $0.11         $0.11           $0.40        $0.38

 Weighted average common shares outstanding                                    3,390         3,458 1         3,369        3,486 1
                                                                           ==========    ==========      ==========   ==========
</TABLE>


<TABLE>
<CAPTION>

                                                                                            Nine Months Ended
                                                                                               September 30,
                                                                                   1999                          1998
                                                                           ------------------------      -----------------------
                                                                             Basic        Diluted          Basic       Diluted
                                                                           ----------    ----------      ----------   ----------
<S>                                                                        <C>           <C>       <C>   <C>       <C><C>       <C>
 Earnings per common share:

 Income from continuing operations before extraordinary item                  $3,474        $3,474          $2,236 3     $2,348
 Earnings per share from continuing operations before extraordinary item       $1.03         $1.00           $0.72        $0.68

 Income/(loss) from discontinued operations                                   ($596)        ($596)          $1,193 3     $1,305
 Earnings per share from income/(loss) of discontinued operations            ($0.18)       ($0.17)           $0.38        $0.38

 Income before extraordinary item                                             $2,878        $2,878          $3,541 3     $3,653
 Earnings per share before extraordinary item                                  $0.85         $0.83           $1.14        $1.05

 Net income                                                                   $2,602        $2,602          $3,541 3     $3,653
 Net income per share                                                          $0.77         $0.75           $1.14        $1.05

 Weighted average common shares outstanding                                    3,385         3,472 1         3,101        3,465 2
                                                                           ==========    ==========      ==========   ==========

</TABLE>

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

 (2)  The weighted  average common shares  outstanding  include the dilutive
      effects of common stock options of 142 and  convertible  perpetual
      preferred stock of 222.

 (3)  These earnings per share amounts are shown net of $112 of dividends on
      preferred stock.


                                                (Concluded)


<PAGE>

3.   Comprehensive Income

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

                                                          Three Months Ended              Nine Months Ended
                                                           September 30,                  September 30,
                                                    -------------------------------   --------------------------
                                                        1999             1998            1999           1998
                                                    --------------   --------------   -----------    -----------
                                                            (In thousands)                  (In thousands)

<S>                                                 <C>              <C>              <C>            <C>
 Net income as reported                                      $366           $1,335        $2,236         $3,541
 Other comprehensive income (net of tax):
   Change in unrealized holding gain (losses)
      on available for sale securities
                                                             (20)              418         (563)            594
   Reclassification adjustment
                                                              - -             (14)           (8)           (39)
                                                    --------------   --------------   -----------    -----------
 Total comprehensive income                                  $346           $1,739        $1,665         $4,096
                                                    ==============   ==============   ===========    ===========
</TABLE>


4.   Common Stock Dividend

     On August  25,  1999 the  Board of  Directors  declared  a  quarterly  cash
dividend  of 6 cents per share on the  Company's  Common  Stock.  This  dividend
declaration  represents  an increase of 50% over the previous  quarter  dividend
payments. The dividend was paid on October 15, 1999 to shareholders of record on
September 30, 1999.


5.   Divestiture of Mortgage Banking and Mortgage Brokerage Units

     On September 10, 1999 the Company divested itself of its subprime  mortgage
brokerage and mortgage banking units,  Valley  Financial and Allied  Diversified
Credit.  The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding,  Inc., whose shareholders include senior management of
Valley Financial and Allied Diversified  Credit. As a result of the divestiture,
the Company lost ninety-five  employees of which sixty-three were transferred to
Valley Financial Funding,  Inc, while thirty-two were terminated by the Company.
As a result  of its  divestiture  the  Company  recorded  an  after-tax  loss of
$167,000 which is primarily comprised of termination  benefits.  The Company has
disclosed  the  operations  of  these  units  as well as the  after  tax loss on
disposition  as  discontinued  operations.   Accordingly,  historical  financial
information has been recast to present the operating results of Valley Financial
and  Allied  Diversified  Credit  as  discontinued   operations.   Revenue  from
discontinued  operations  was  $575,000  and  $4,319,000  for the three and nine
months ended September 30, 1999 compared to revenue of $2,857,000 and $8,120,000
for the same periods in 1998. As of September  30, 1999 mortgage  loans held for
sale,  which represents  previous  production from  discontinued  operations was
$17,892,000. Results of operations from September 10, 1999 to September 30, 1999
for discontinued operations were not material.

<PAGE>



6.   Extraordinary Item

     In the first quarter of 1999 the Company recorded an  extraordinary  charge
of  $276,000,  net of tax.  Such charge is  comprised  of the  unamortized  debt
issuance costs  associated  with the Company's  $12,000,000  subordinated  debt,
which was early  redeemed in the first  quarter of 1999. In the first quarter of
1999 Redwood obtained  funding for the early redemption  through an $8.0 million
dividend  from NBR,  the  redemption  of a $3.0  million  note from NBR and $1.0
million from Redwood's general corporate funds.


7.   Business Segments

     During the three and nine months  ended  September  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  and the  Company's  residential  mortgage
banking and brokerage arm, known as Valley  Financial were divested on September
10, 1999. The divestiture took the form of an asset sale and employee  transfer.
The Company has disclosed the operations of these units as well as the after tax
loss  on  disposition  as  discontinued  operations.   Accordingly,   historical
financial  information  regarding  segments  has been restated.

     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.
<PAGE>

<TABLE>
<CAPTION>
                                                               For the quarter ended September 30, 1999
                                                               ---------------------------------------
                                                                 Community                   Total
                                                                  Banking     Bankcard      Company
                                                               ---------------------------------------
                                                                           (in thousands)
<S>                                                            <C>            <C>          <C>
Total Interest Income                                              $7,686          $0        $7,686
Total Interest Expense                                              2,713           0         2,713
Interest income/(expense) allocation                                (140)         140             0
                                                               ---------------------------------------
Net Interest Income                                                 4,833         140         4,973
Provision for Loan Losses                                             200           0           200
Total other Operating Income                                          460         733         1,193
Total other Operating Expense                                       3,978         222         4,200
                                                               ---------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                            1,115         651         1,766
Provision for income taxes                                            504         210           714
                                                               ---------------------------------------
Income from continuing operations before extraordinary item          $611        $441        $1,052
                                                               =======================================

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

<TABLE>
<CAPTION>
                                                               For the quarter ended September 30, 1998
                                                               ---------------------------------------
                                                                 Community                   Total
                                                                  Banking     Bankcard      Company
                                                               ---------------------------------------
                                                                           (in thousands)
<S>                                                            <C>             <C>         <C>
Total Interest Income                                              $7,811          $0        $7,811
Total Interest Expense                                              3,112          10         3,122
Interest income/(expense) allocation                                (139)         139             0
                                                               ---------------------------------------
Net Interest Income                                                 4,560         129         4,689
Provision for Loan Losses                                             510           0           510
Total other Operating Income                                          710         686         1,396
Total other Operating Expense                                       3,913         131         4,044
                                                               ---------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                              847         684         1,531
Provision for income taxes                                            362         192           554
                                                               ---------------------------------------
Income from continuing operations before extraordinary item          $485        $492          $977
                                                                ======================================

Total Average Assets                                             $386,713      $9,625      $396,338
                                                                ======================================
</TABLE>
<TABLE>
<CAPTION>
                                                                  For the nine months ended September
                                                                              30, 1999
                                                                --------------------------------------
                                                                 Community                   Total
                                                                  Banking     Bankcard      Company
                                                                --------------------------------------
                                                                           (in thousands)
<S>                                                            <C>            <C>           <C>
Total Interest Income                                             $22,329          $0        $22,329
Total Interest Expense                                              7,707           3          7,710
Interest income/(expense) allocation                                (415)         415              0
                                                               ---------------------------------------
Net Interest Income                                                14,207         412         14,619
Provision for Loan Losses                                             700           0            700
Total other Operating Income                                        1,522       2,375          3,897
Total other Operating Expense                                      11,522         633         12,155
                                                               ---------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                            3,507       2,154          5,661
Provision for income taxes                                          1,515         672          2,187
                                                               ---------------------------------------
Income from continuing operations before extraordinary item        $1,992      $1,482         $3,474
                                                               =======================================

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

<TABLE>
<CAPTION>
                                                                 For the nine months ended September
                                                                               30, 1998
                                                               ---------------------------------------
                                                                 Community                   Total
                                                                  Banking     Bankcard      Company
                                                               ---------------------------------------
                                                                           (in thousands)
<S>                                                            <C>             <C>          <C>
Total Interest Income                                             $23,170          $0        $23,170
Total Interest Expense                                              9,664          25          9,689
Interest income/(expense) allocation                                (406)         406              0
                                                               ---------------------------------------
Net Interest Income                                                13,100         381         13,481
Provision for Loan Losses                                           1,530           0          1,530
Total other Operating Income                                        2,249       1,732          3,981
Total other Operating Expense                                      11,861         374         12,235
                                                               ---------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                            1,958       1,739          3,697
Provision for income taxes                                            863         486          1,349
                                                               ---------------------------------------
Income from continuing operations before extraordinary item        $1,095       1,253         $2,348
                                                               =======================================

Total Average Assets                                             $386,944      $9,478       $396,422
                                                               =======================================
</TABLE>

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

Forward-Looking Information

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

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

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

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

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

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

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

    -    Asset/liability matching risks and liquidity risks.

    -    Changes in the securities markets.

     The Company  undertakes  no  obligation  to revise or publicly  release the
results of any  revision to these  forward-looking  statements.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to 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  September  30, 1999,  and  significant  changes and trends in the  Company's
results of  operations  for the three and nine months ended  September 30, 1999,
compared to the same period in 1998.


Summary of Financial Results

     On September 10, 1999 the Company divested itself of its mortgage brokerage
and mortgage banking units,  Valley Financial and Allied Diversified Credit. The
divestiture  took the form of an asset  sale and  employee  transfer  to  Valley
Financial Funding,  Inc., whose shareholders include senior management of Valley
Financial and Allied  Diversified  Credit.  As a result of the divestiture,  the
Company lost  ninety-five  employees of which  sixty-three  were  transferred to
Valley Financial Funding,  Inc, while thirty-two were terminated by the Company.
As a result  of its  divestiture  the  Company  recorded  an  after-tax  loss of
$167,000 which is primarily comprised of termination  benefits.  The Company has
disclosed  the  operations  of  these  units  as well as the  after  tax loss on
disposition  as  discontinued  operations.   Accordingly,  historical  financial
information has been recast to present the operating results of Valley Financial
and Allied Diversified Credit as discontinued operations.

     The Company reported income from continuing  operations of $1,052,000 ($.30
per diluted  share) for the three months ended  September  30, 1999 and $977,000
($.28  per  diluted  share)  for the  same  period  in 1998.  From  discontinued
operations  for the third  quarter ended  September 30, 1999,  the Company had a
loss of $686,000  (($.20) per  diluted  share) and income of $358,000  ($.10 per
diluted  share) for the same period one year ago. Net income was $366,000  ($.11
per  diluted  share) for the  quarter  ended  September  30, 1999 as compared to
$1,335,000  ($.38 per diluted  share) one year ago.  The  increase in net income
from  continuing  operations for the third quarter in 1999, when compared to the
same period one year ago,  is due to an  increase  of  $284,000 in net  interest
income,  a decrease  of  $203,000  in non  interest  income,  a decrease  in the
provision  for loan  losses of  $310,000  and an  increase  of  $156,000  in non
interest expense.
<PAGE>



     For the nine  months  ended  September  30,  1999  income  from  continuing
operations  was  $3,474,000  ($1.00 per diluted share) as compared to $2,348,000
($.68  per  diluted  share)  for the  same  period  in 1998.  From  discontinued
operations for the first nine months of 1999, the Company had a loss of $596,000
(($.17) per diluted share) and income of $1,305,000 ($.38 per diluted share) for
the  same  period  one  year  ago.  Net  income  before  extraordinary  item was
$2,878,000  ($.83 per  diluted  share) and net income was  $2,602,000  ($.75 per
diluted  share) for the nine months ended  September  30,  1999,  as compared to
$3,541,000  ($1.05  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'  $12,000,000  subordinated  debt.  Such debt was
redeemed in the first quarter of 1999.

     The increase in income from continuing  operations  before an extraordinary
item  during the first nine  months of 1999 when  compared to the same period in
1998 is due to an increase of $1,138,000 in net interest  income,  a decrease of
$84,000 in non interest  income,  a decrease in the provision for loan losses of
$830,000, a decrease of $80,000 in non interest expense.


Net Interest Income

     Net interest  income from continuing  operations  increased from $4,689,000
during the third  quarter of 1998 to  $4,973,000  in the third  quarter of 1999,
which  represents  an increase  of  $284,000  or 6%. Such  increase is due to an
increase  in the  Company's net  interest  margin  from  5.30%  to 5.32%  and an
increase in average  earning assets of  $19,757,000  from  $354,049,000  for the
quarter ended September 30, 1998 to $373,806,000 for the quarter ended September
30, 1999.

     Net interest  income from  continuing  operations of $14,619,000  increased
$1,138,000  or 8% for the nine months ended  September 30, 1999 when compared to
the same period one year ago. The  increase is  primarily  due to an increase of
$10,097,000 or 3% in average  earning assets and a decrease of $11,820,000 or 4%
in interest bearing  liabilities.  Net interest margin for the first nine months
of 1999 was 5.37% as compared to 5.09% for the same period one year ago.

     For the first nine months of 1999,  the yield on earning  assets  decreased
from 8.75% to 8.20%  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 4.72%
for the nine months  ended  September  30, 1998 as compared to 3.92% 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 the third and fourth quarters of 1998.

     Average earning assets increased in the third quarter of 1999 when compared
to the same period one year ago. Average earning assets were $363,271,000 during
the nine month period ended  September 30, 1999 as compared to  $353,174,000  in
1998.  The increase in average  earning  assets  during the first nine months of
1999 when compared to 1998 is primarily due to an increase in average  portfolio
loans partially offset by a decline in federal funds sold.
<PAGE>

     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  $273,980,000  in  the  third  quarter  of  1998  to
$262,160,000  for the  same  period  in 1999  which  represents  a  decrease  of
$11,820,000.  This  decrease  was  partially  offset by an  increase  in average
noninterest bearing transaction accounts of $6,050,000.

     The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>

                                         Three months ended                          Three months ended
                                       September 30, 1999                          September 30, 1998
                              ----------------------------------------    ----------------------------------------

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

<S>                               <C>      <C>                   <C>          <C>      <C>                   <C>
Earning assets (1)                $373,806       $7,686          8.22         $354,049        $7,811         8.82
Interest-bearing liabilities       270,357        2,713          4.01          270,354         3,122         4.62
                                           -------------                               --------------
Net interest income                              $4,973                                       $4,689
                                           =============                               ==============
Net interest income to
  earning assets                                                 5.32                                        5.30

</TABLE>
<TABLE>
<CAPTION>

                                        Nine months ended                            Nine months ended
                                      September 30, 1999                           September 30, 1998
                             ----------------------------------------     ---------------------------------------

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

<S>                               <C>      <C>                  <C>           <C>      <C>                 <C>
Earning assets (1)                $363,271      $22,329         8.20          $353,174      $23,170         8.75
Interest-bearing liabilities       262,160       $7,710         3.92           273,980       $9,689         4.72
                                           -------------                               -------------
Net interest income                             $14,619                                     $13,481
                                           =============                               =============
Net interest income to
  earning assets                                                5.37                                        5.09

</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 nine months ended September 30, 1999 and 1998.  Changes not solely
attributable to rate or volume have been allocated to rate.

<TABLE>
<CAPTION>
                                                                Three months ended September 30, 1999
                                                                              over September 30, 1998
                                                         --------------------------------------------------
                                                             Volume            Rate             Total
                                                         --------------------------------------------------
                                                                           (in thousands)
<S>                                                               <C>             <C>                <C>
Increase (decrease) in interest income:
  Portfolio loans                                                   $844            ($732)            $112
  Investment securities                                             (42)              (25)            (67)
  Federal funds sold                                               (168)               (2)           (170)
                                                         --------------------------------------------------
Total increase (decrease)                                          2,035           (2,160)           (125)
                                                         --------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                             (46)             (179)           (225)
  Time deposits                                                      303             (135)             168
  Other borrowings                                                 (314)              (38)           (352)
                                                         --------------------------------------------------
Total increase (decrease)                                           (57)             (352)           (409)
                                                         --------------------------------------------------

Increase in net interest income                                   $2,093          ($1,809)           $284
                                                         ==================================================

</TABLE>
<TABLE>
<CAPTION>

                                                                   Year to date September 30, 1999
                                                                       over September 30, 1998
                                                         ---------------------------------------------------
                                                              Volume            Rate            Total
                                                         ---------------------------------------------------
                                                                           (in thousands)
<S>                                                                <C>            <C>               <C>
Increase (decrease) in interest income:
  Portfolio loans                                                  $1,772         ($1,734)              $38
  Investment securities                                             (142)            (187)            (329)
  Federal funds sold                                                (503)             (47)            (550)
                                                         ---------------------------------------------------
Total increase (decrease)                                           1,127          (1,968)            (841)
                                                         ---------------------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                             (275)            (904)          (1,179)
  Time deposits                                                       315            (409)             (94)
  Other borrowings                                                  (561)            (145)            (706)
                                                         ---------------------------------------------------
Total increase (decrease)                                           (521)          (1,458)          (1,979)
                                                         ---------------------------------------------------

Increase in net interest income                                    $1,648           ($510)           $1,138
                                                         ===================================================

</TABLE>
<PAGE>


Provision for Loan Losses

     The provision for loan losses for the three months ended September 30, 1999
was $200,000 as compared to $510,000 in the same  quarter in the previous  year.
For the nine months ended  September 30, 1999 the provision  decreased  $830,000
from  $1,530,000 in 1998 to $700,000 in 1999. A general decline in the provision
for  the  nine  months  ended  September  30,  1999  is due to  the  decline  of
nonperforming  loans.  For further  discussion see Allowance for Loan Losses and
Nonperforming Loans.


Noninterest Income and Expense and Income Taxes

     Noninterest Income

     The following table sets forth the components of the Company's  noninterest
income from continuing  operations for the three and nine months ended September
30, 1999, as compared to the same period in 1998.

<TABLE>
<CAPTION>

                                           Three Months Ended                      Nine Months Ended
                                              September 30,            %           September 30,              %
                                         ------------------------               -------------------------
(dollars in thousands)                      1999         1998       Change         1999          1998       Change
                                         -----------   ---------- -----------   -----------   ----------- ------------

<S>                                      <C>           <C>             <C>      <C>           <C>                <C>
Service charges on deposit accounts             253          261         (3)           776           802          (3)
Merchant draft processing, net                  733          686           7         2,375         1,732           37
Loan servicing income                            14          201        (93)            79           485         (84)
Gain (loss) on securities                       ---           22       (100)            14           127         (89)
Other income                                    193          226        (15)           653           835         (22)
                                         ===========   ==========               ===========   ===========
Total noninterest income                     $1,193       $1,396        (15)        $3,897        $3,981          (2)
                                         ===========   ==========               ===========   ===========
</TABLE>


     Noninterest income from continuing  operations decreased $203,000 or 15% to
$1,193,000  for the third quarter of 1999 when  compared to  $1,396,000  for the
same  period in 1998.  Such  decrease  is  primarily  due to a decrease  in loan
servicing  income of  $187,000,  a decrease  in other  income of $33,000  and an
increase of $47,000 in merchant card net revenue.

     Noninterest  income from continuing  operations was $3,897,000 for the nine
months ended September 30, 1999 as compared to $3,981,000 for the same period in
1998. The decrease of $84,000 or 2% is primarily  attributable  to a decrease in
loan servicing income.

     Noninterest Expense

     Noninterest expense from continuing  operations increased by $156,000 or 4%
to $4,200,000  during the third  quarter of 1999 compared to $4,044,000  for the
third  quarter  of  1998.   Noninterest  expense  decreased  $80,000  or  1%  to
$12,155,000  for the nine month  period  ended  September  30, 1999  compared to
$12,235,000 for the same period one year ago.
<PAGE>

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


<TABLE>
<CAPTION>

                                         Three Months Ended                       Nine Months Ended
                                           September 30,             %              September 30,            %
                                     ---------------------------              ------------------------
(dollars in thousands)                   1999          1998       Change         1999         1998         Change
                                     -------------  ------------ ----------   -----------  -----------   -----------

<S>                                  <C>            <C>               <C>     <C>          <C>                 <C>
Salaries and employee benefits             $2,187        $2,090          5        $6,652       $6,182             8
Occupancy and equipment expense               598           695       (14)         1,713        1,919          (11)
Other                                       1,415         1,259         12         3,790        4,134           (8)
                                     -------------  ------------              -----------  -----------
Total noninterest expense                  $4,200        $4,044          4       $12,155      $12,235           (1)
                                     =============  ============              ===========  ===========

</TABLE>


Income Taxes

     The  Company's  effective  tax rate  varies  with  changes in the  relative
amounts of its non-taxable income and nondeductible expenses. The effective rate
was 40.4% and 38.6% for the three and nine  months  ended  September  30,  1999,
compared to 36.2% and 36.5% for the same periods in 1998.


Business Segments

     During the three and nine months  ended  September  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  and the  Company's  residential  mortgage
banking and brokerage arm, known as Valley  Financial were divested on September
10, 1999. The divestiture took the form of an asset sale and employee  transfer.
The Company has disclosed the operations of these units as well as the after tax
loss  on  disposition  as  discontinued  operations.   Accordingly,   historical
financial  information  regarding  segments  has been restated.

<PAGE>

     Summary financial data by industry segment as follows:

<TABLE>
<CAPTION>

                                                  For the Three Months Ended       For the Nine Months Ended
                                                        September 30,                    September 30,
                                                        (in thousands)                   (in thousands)
                                                -------------------------------  -------------------------------
                                                    1999             1998            1999             1998
                                                --------------  ---------------  --------------   --------------


<S>                                             <C>             <C>              <C>              <C>
Community Banking:
   Revenue                                             $5,293           $5,270         $15,729          $15,349
   Expenses                                             4,178            4,423          12,222           13,391
                                                --------------  ---------------  --------------   --------------
     Income from continuing operations before
       income tax and extraordinary item                1,115              847           3,507            1,958
                                                ==============  ===============  ==============   ==============


Bankcard:
   Revenue                                                873              815           2,787            2,113
   Expenses                                               222              131             633              374
                                                --------------  ---------------  --------------   --------------
     Income from continuing operations before             651              684           2,154            1,739
       income tax and extraordinary item
                                                ==============  ===============  ==============   ==============


Total Company:
   Revenue                                              6,166            6,085          18,516           17,462
   Expenses                                             4,400            4,554          12,855           13,765
                                                --------------  ---------------  --------------   --------------
     Income from continuing operations before
       income tax and extraordinary item               $1,766           $1,531          $5,661           $3,697
                                                ==============  ===============  ==============   ==============

</TABLE>

     Community Banking

     The Community  Banking  segment  income before income tax increased for the
quarter ended  September 30, 1999 as well as the nine months ended September 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 $303,137,000  and $267,465,000 in the third
quarter  of 1999 and 1998,  which  reflects  a 13%  increase.  For the full nine
months such amounts  were  $289,569,000  and  $264,861,000  which  reflects a 9%
increase.


<PAGE>

     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. Third quarter of 1999 revenue was up $58,000 or 7% over the
same period in 1998. For the nine months ended  September 30, 1999,  revenue was
up $674,000 or 32% to $2,787,000  from $2,113,000 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  has  amortized  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.


Investment Securities

     Total investment  securities increased $15,685,000 or 26% to $76,095,000 as
of September 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  federal fund  investment  position and
redeploying  such amounts into the higher  yielding  investment  portfolio.  The
Company's average federal fund position was $7,927,000 for the first nine months
of 1999 as compared to $19,622,000 in 1998.

Loans

     Total loans  increased  $38,011,000 or 14% to $307,327,000 at September 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 nine months of 1999.


<PAGE>


     The following  table  summarizes  the  composition of the loan portfolio at
September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>

                                                 September 30, 1999                      December 31, 1998
                                         ------------------------------------    ------------------------------------
 (dollars in thousands)                        Amount              %                   Amount              %
                                         ------------------------------------    ------------------------------------

<S>                                      <C>               <C>                   <C>               <C>
 Residential real estate mortgage                 $126,033               41%               $97,194               36%
 Commercial real estate mortgage                    72,854                24                59,257                22
 Commercial                                         62,228                20                63,260                23
 Real estate construction                           43,046                14                46,905                18
 Installment and other                               4,384                 1                 5,095                 2
 Less deferred loan fees                           (1,218)                 0               (2,395)               (1)
                                         ------------------------------------    ------------------------------------
     Total portfolio loans                         307,327              100%               269,316              100%
                                                           ==================                      ==================
 Less allowance for loan losses                    (7,963)                                 (8,041)
                                         ------------------                      -----------------
     Net loans                                    $299,364                                $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           Nine months ended
                                                         September 30,             September 30,
                                                ---------------------------   --------------------------
(dollars in thousands)                             1999           1998           1999           1998
                                                -----------   -------------   -----------    -----------

<S>                                             <C>           <C>             <C>            <C>
Beginning allowance for loan losses                 $8,001          $7,930        $8,041         $7,645
Provision for loan losses                              200             510           700          1,530
Charge-offs                                          (399)           (369)       (1,312)        (1,240)
Recoveries                                             161             150           534            286
                                                ===========   =============   ===========    ===========
Ending allowance for loan losses                    $7,963          $8,221        $7,963         $8,221
                                                ===========   =============   ===========    ===========


Net charge-offs to average
   loans (annualized)                                 .30%            .31%          .36%           .48%

</TABLE>

     The allowance for loan losses as a percentage of portfolio  loans decreased
from 2.99% at  December  31, 1998 to 2.59% at  September  30,  1999.  The slight
decrease in this  percentage is due to a  $38,011,000  increase in the Company's
total loan portfolio and the general improvement of the Company's asset quality.


Nonperforming Assets

     The following table summarizes the Company's nonperforming assets.

<TABLE>
<CAPTION>
                                                              September 30,          December 31,
(dollars in thousands)                                            1999                  1998
                                                              --------------       ---------------

<S>                                                           <C>                  <C>
Nonaccrual loans                                                     $3,636                $5,556
Accruing loans past due 90 days or more                                 142                   ---
Restructured loans                                                    1,024                 1,045
                                                              --------------       ---------------
Total nonperforming loans                                             4,802                 6,601
Other real estate owned                                               2,381                 2,181
Other assets owned                                                       21                   129
                                                              --------------       ---------------
Total nonperforming assets                                           $7,204                $8,911
                                                              ==============       ===============



Nonperforming assets to total assets                                  1.65%                 2.11%

</TABLE>
<PAGE>

     Nonperforming assets have decreased from $8,911,000 as of December 31, 1998
to $7,204,000 as of September 30, 1999. The principal  reasons for this decrease
relates a decrease in nonaccrual  loans of $1,920,000,  offset by an increase in
accruing  loans past due 90 days or more of  $142,000  and an  increase in other
real estate owned of $200,000.

     Nonperforming  loans  consist  of loans to 29  borrowers,  14 of which have
balances  in excess of  $100,000.  The two  largest  have  recorded  balances of
$745,000  and  $713,000,  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 8  properties.  Five  properties  are
residential,  two are commercial  buildings and the remaining is a motel.  Other
assets  owned  included  contract  receivable  rights and  repossessed  personal
property carried at $21,000.

     Although  the volume of  nonperforming  assets  will  depend in part on the
future economic  environment,  there is also one loan relationship  which totals
approximately  $711,000  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 nine  months of 1999 the  Company  was  required by a mortgage
loan investor to repurchase  three  residential  mortgage loans in the amount of
$943,000.  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 or fraud. 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 $142,000
as of September 30, 1999 and $172,000 as of December 31, 1998.

     At September 30, 1999 the Company's  total recorded  investment in impaired
loans  (as  defined  by SFAS  114 and 118) was  $5,277,000  of which  $4,967,000
relates to the recorded  investment  for which there is a related  allowance for
credit losses of $1,148,000  determined in accordance with these  statements and
$310,000 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 nine
months ended  September 30, 1999 and 1998 was  $5,218,000 and  $10,062,000.  The
related amount of interest income  recognized during the periods that such loans
were impaired was $4,000 and $217,000 for the three and nine month periods ended
September  30,  1999 and $92,000 and  $409,000  for the same period in 1998.

<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 September 30, 1999,  Redwood held $624,000 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. On
August 25, 1999 the Company increased this dividend 50% to $.06 per share. Prior
to March 1999 Redwood was required to make monthly  payments of interest at 8.5%
on  $12,000,000 of  subordinated  debentures  issued in 1993.  The  subordinated
debentures  were early  redeemed in the first quarter of 1999.  Payment of these
obligations  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 nine months of 1999, NBR declared dividends of $9,200,000,
of which  $8,000,000  was used to fund the early  redemption of the  $12,000,000
subordinated debt. Management believes that at September 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 nine months ended
September  30, 1999 the  Company  received  cash of  $9,907,000  from  operating
activities and  $6,380,000 in financing  activities  while using  $33,228,000 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.
<PAGE>

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

     Under the risk-based capital standard,  assets reported on an institution's
balance  sheet  and  certain  off-balance  sheet  items  are  assigned  to  risk
categories, each of which is assigned a risk weight. This standard characterizes
an  institution's  capital as being  "Tier 1" capital  (defined  as  principally
comprising  shareholders' equity and noncumulative preferred stock) and "Tier 2"
capital  (defined as  principally  comprising  the allowance for loan losses 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 September 30, 1999 and December
31, 1998.

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

<S>                                                                  <C>           <C>
         September 30, 1999
           Total capital to risk based assets                        13.05%        12.71%
           Tier 1 capital to risk based assets                       11.79         11.44
           Leverage ratio                                             8.92          9.19

         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.

<PAGE>



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.

     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.

<PAGE>

     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  ongoing,  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  1999 with  technical  assistance  from the vendor and an outside
consultant.  At the date of this  report  the  Company  believes  has  completed
initial testing of all mission-critical IT systems.

     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.

<PAGE>

     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.

     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.

<PAGE>

     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.


Certain Important Considerations for Investors


     Merchant  Credit  Card  Processing.  The  Company's  profitability  can  be
negatively  impacted should one of the Company's  merchant credit card customers
be  unable  to pay  on  charge-backs  from  cardholders.  Due  to a  contractual
obligation between the Company and Visa and Mastercard,  NBR stands in the place
of the  merchant in the event that a merchant  is unable to pay on  charge-backs
from  cardholders.  Management has taken certain actions to decrease the risk of
merchant bankruptcy with its merchant bankcard business. These steps include the
discontinuance  of high-risk  accounts.  The Company  utilizes  ISO's to acquire
merchant credit card customers.  The Company's  ability to maintain and grow net
revenue from its merchant  credit card  processing  operation is dependent  upon
maintaining and adding to these ISO relationships.
<PAGE>

     Concentration of Lending Activities. Concentration of the Company's lending
activities in the real estate sector,  including  construction loans, could have
the effect of  intensifying  the impact on the Company of adverse changes in the
real estate  market in the  Company's  lending  areas.  At  September  30, 1999,
approximately  78% of the Company's loans were secured by real estate,  of which
30% were secured by commercial real estate,  including  small office  buildings,
owner-user  office/warehouses,  mixed use residential and commercial  properties
and retail  properties.  Substantially  all of the  properties  that  secure the
Company's present loans are located within Northern and Central California.  The
ability of the Company to continue to originate  mortgage or construction  loans
may be impaired by adverse  changes in local or  regional  economic  conditions,
adverse changes in the real estate market, increasing interest rates, or acts of
nature (including  earthquakes,  which may cause uninsured damage and other loss
of  value  to  real  estate  that  secures  the  Company's  loans).  Due  to the
concentration of the Company's real estate collateral,  such events could have a
significant  adverse  impact on the value of such  collateral  or the  Company's
earnings.

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

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


<PAGE>

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.

     The following table sets forth, as of September 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.

<PAGE>


<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                                   $1,795       $ ---        $ ---       $ ---        $ ---      $1,795
Investment securities and other                       4,989       8,871        9,924      26,992       25,319      76,095
Mortgage loans held for sale                         17,892         ---          ---         ---          ---      17,892
Loans                                               107,528      32,167       20,264      69,080       78,289     307,327
                                               ---------------------------------------------------------------------------
   Total interest-earning assets                    132,203      41,038       30,187      96,072      103,608     403,109
                                               ---------------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts               131,587         ---          ---         ---          ---     131,587
Time deposits                                        36,414      33,599       76,600      12,623          ---     159,236
Short-term borrowings                                17,785         ---          ---         ---          ---      17,785
                                               ---------------------------------------------------------------------------
  Total interest-bearing liabilities                185,786      33,599       76,600      12,623          ---     308,608
                                               ---------------------------------------------------------------------------

Interest rate sensitivity gap                     ($53,583)      $7,439    ($46,412)     $83,449     $103,608
                                               ===============================================================
Cumulative interest rate sensitivity gap           (53,583)    (46,144)     (92,556)     (9,108)       94,500
                                               ===============================================================

Interest rate sensitivity gap ratio                    0.71        1.22         0.39        7.61          ---
Cumulative interest rate sensitivity gap ratio         0.71        0.79         0.69        0.97         1.31

</TABLE>


     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.

<PAGE>

     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 September 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>
         September 30, 1999
         ------------------                  Change in Annual                         Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity


<S>            <C>                                <C>                                <C>
               +100                                173,000                           (4,711,000)
               -100                               (358,000)                           3,784,000
</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 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.

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

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

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

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

     10.6      The  Registrant's  Amended and  Restated  1991 Stock Option Plan,
               filed as Exhibit 4.1 to the Registrant's  Registration  Statement
               on Form S-8 filed on July 8, 1992  (Registration  No.  33-49372),
               and by this reference incorporated herein.
<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 September 30, 1999.


2.   Reports on Form 8-K

     Form 8-K dated  July 28,  1999  announcing  second  quarter  1999 financial
     results and  promotion announcement of James E. Beckwith to Chief Operating
     Officer under Item 5 "Other Events".

     Form 8-K dated  August 25, 1999  announcing  declaration  of quarterly cash
     dividned on its Common Stock under Item 5 "Other Events".

     Form  8-K  dated   August 30,  1999  announcing   divestiture  of  mortgage
     brokerage and mortgage banking units under Item 5 "Other Events".


<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:  11/12/99             BY:   /s/ James E. Beckwith
                                  James E. Beckwith
                                  Executive Vice President,
                                  Chief Operating Officer,
                                  Principal Financial Officer, and
                                  Principal Accounting Officer