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


                                    FORM 10-K/A
                         (Amendment No. 1 to Form 10-K)

[ X ]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934

                   For the fiscal year ended December 31, 2002
                                       or
[   ]  Transition report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934

             For the transition period from __________ to __________

                         Commission file number: 0-19231

                             REDWOOD EMPIRE BANCORP
             (Exact Name of Registrant as Specified in Its Charter)

            California                                       68-0166366
   -----------------------------------                    ----------------
      State or Other Jurisdiction of                       (IRS Employer
       Incorporation or Organization)                    Identification No.)

   111 Santa Rosa Avenue, Santa Rosa, California             95404-4905
   ---------------------------------------------             ----------
     (Address of Principal Executive Offices)                (Zip Code)

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


Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value.

     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 by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]

     Indicate by check mark whether the Registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes     No X

     The  aggregate  market  value  of the  Registrant's  common  stock  held by
non-affiliates  on June 28, 2002 (based on the closing  sale price of the Common
Stock) was $42,551,296.

     As of  March  5,  2003  there  were  3,373,523  shares  outstanding  of the
Registrant's common stock.


                                       1
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following  documents are  incorporated by reference in this Form
10-K:



        DOCUMENT                                   FORM 10-K REFERENCE

   Redwood's Definitive Proxy Statement                  Part III
   For the 2003 Annual Meeting of Shareholders







Explanatory Note: The undersigned  registrant hereby amends its Annual Report on
Form 10-K filed with the Securities and Exchange  Commission for the fiscal year
ended December 31, 2002 to include the certifications of the principal executive
officer  and the  principal  financial  officer  requried  by Section 302 of the
Sarbanes-Oxley Act of 2002, which certifications were inadvertantly  provided to
the SEC as  additional  correspondence  accompanying  the Annual  Report on Form
10-K.






                                       2
<PAGE>






<TABLE>
<CAPTION>
                                TABLE OF CONTENTS


                                                                                                                      Page
                                                          PART I

<S>               <C>                                                                                                   <C>
Forward-Looking Information............................................................................................. 4
Item 1.           Business.............................................................................................. 5
Item 2.           Properties........................................................................................... 20
Item 3.           Legal Proceedings.................................................................................... 20
Item 4.           Submission of Matters to a Vote of Security Holders.................................................. 21
</TABLE>



<TABLE>
<CAPTION>
                                                          PART II
<S>               <C>                                                                                                   <C>

Item 5.           Market for the Registrant's Common Equity and Related Stockholder Matters............................ 21
Item 6.           Selected Financial Data.............................................................................. 22
Item 7.           Management's Discussion and Analysis of Financial Condition and
                  Results of Operations................................................................................ 23
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk........................................... 49
Item 8.           Financial Statements and Supplementary Data.......................................................... 53
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial
                  Disclosure........................................................................................... 88
</TABLE>



<TABLE>
<CAPTION>
                                                         PART III

<S>               <C>                                                                                                   <C>
Item 10.          Directors and Executive Officers of the Registrant................................................... 88
Item 11.          Executive Compensation................................................................................88
Item 12.          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........89
Item 13.          Certain Relationships and Related Transactions........................................................90
Item 14.          Controls and Procedures...............................................................................90
</TABLE>


<TABLE>
<CAPTION>
                                                          PART IV

<S>               <C>                                                                                                   <C>
Item 15.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 90
</TABLE>

                                       3
<PAGE>


                                     PART I


Forward-Looking Information

     This Annual Report on Form 10-K includes forward-looking information, which
is subject to the "safe harbor"  created by Section 27A of the Securities Act of
1933,  as amended,  and Section 21E of the  Securities  Exchange Act of 1934, as
amended.  These forward-looking  statements (which involve,  among other things,
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve  certain  risks and  uncertainties  that could cause  actual  results to
differ materially from those in the forward-looking  statements.  Such risks and
uncertainties include, but are not limited to, the following factors:

o    Competitive  pressure  in the  banking  industry  and changes in banking or
     other laws and regulations or governmental fiscal or monetary policies.

o    Changes  in the  interest  rate  environment  (including  possible  further
     declines in interest  rates) and  volatility  of rate  sensitive  loans and
     deposits.

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

o    Uncertainty  regarding the economic  outlook  resulting from the continuing
     war on  terrorism,  as well as actions  taken or to be taken by the U.S. or
     other governments as a result of further acts or threats of terrorism or as
     a result of possible military action in Iraq.

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

o    Dividend restrictions.

o    Regulatory discretion.

o    Material losses in the Company's  merchant credit card processing  business
     from  merchant or card holder  fraud or merchant  business  failure and the
     ability of the  Company  to comply  with the rules and  regulations  of the
     major credit card associations,  such as Visa and Mastercard,  as described
     under "Certain Important Considerations for Investors" in this report.

o    Asset/liability repricing risks and liquidity risks.

o    Changes in the securities markets.

o    A decline in the health of the Northern California  economy,  including the
     long-term  impact of the  California  energy  crisis and the decline in the
     technology sector.

o    Certain operational risks involving data processing systems or fraud.

                                       4
<PAGE>

o    The  proposal  or  adoption  of  changes  in  accounting  standards  by the
     Financial   Accounting   Standards   Board,  the  Securities  and  Exchange
     Commission or other standard setting bodies.



     The  Company  undertakes  no  obligation  to update  these  forward-looking
statements to reflect  facts,  circumstances,  assumptions  or events that occur
after  the  date  the  forward-looking   statements  are  made.  For  additional
information  concerning risks and  uncertainties  related to the Company and its
operations please refer to "Certain  Important  Considerations for Investors" in
Item 1, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 and other information in this Report.



Item 1.     Business

     Redwood  Empire  Bancorp   ("Redwood,"  and  with  its  subsidiaries,   the
"Company") is a bank holding company  headquartered  in Santa Rosa,  California,
and  operating  in  Northern  California  with  two  wholly-owned  subsidiaries,
National Bank of the Redwoods, a national bank ("NBR" or the "Bank") and Redwood
Statutory Trust I, a Connecticut  statutory trust. A previously owned subsidiary
of the Company,  Allied Bank, F.S.B., a federal savings bank ("Allied"),  merged
with its sister subsidiary, NBR, in March 1997.

     (a)  General Development of Business.

     Redwood  is  a  California   corporation,   headquartered  in  Santa  Rosa,
California.  One of its wholly-owned  subsidiaries is NBR, a national bank which
was  chartered  in 1985.  In  addition,  NBR has three  wholly-owned  California
chartered subsidiaries,  Valley Mortgage Corporation, Allied Diversified Credit,
and  Redwood  Merchant  Services,  Inc.,  all of which are  currently  inactive.
Redwood was  created by NBR in August  1988,  in order to become a bank  holding
company  through  the  acquisition  of all of  NBR's  outstanding  shares.  That
transaction  was  consummated  in  January  1989.  Redwood  acquired  Allied  in
September 1990,  through a tax-free  reorganization  in which Redwood  exchanged
shares of its stock for all of the outstanding shares of Allied. The acquisition
of Allied was accounted  for as a pooling of interests  for financial  reporting
purposes.

     On October 31,  1992,  Lake  Savings  and Loan  Association,  a  one-branch
California  chartered savings and loan based in Lakeport,  California  ("Lake"),
was purchased for  approximately  $2,300,000 in cash, and merged into Allied. At
the time of its acquisition, Lake had total assets of approximately $41 million.
The acquisition was accounted for as a purchase.

     On November 4, 1994, Codding Bank, a multiple-branch  California  chartered
bank  based in  Rohnert  Park,  California  ("Codding"),  with  total  assets of
approximately  $42,048,000,  was  purchased for  $7,028,000  in cash,  including
merger related expenses, and merged into NBR.

     On March 24, 1997, Allied was merged into NBR.

     In September  1999, the Company  divested its sub prime mortgage  brokerage
and mortgage banking units,  Valley Financial and Allied Diversified Credit. The
divestiture took the form of an

                                       5
<PAGE>

asset sale and  employee  transfer  to Valley  Financial  Funding,  Inc.,  whose
shareholders   included  senior   management  of  Valley  Financial  and  Allied
Diversified  Credit. The Company 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.

     On February 22, 2001,  Redwood  Statutory Trust I ("RSTI"),  a wholly owned
subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities
with a liquidation  amount of $1,000 per security.  The proceeds of the offering
were loaned to the Company in exchange for junior  subordinated  debentures with
terms similar to the Capital Securities.  The sole assets of RSTI are the junior
subordinated  debentures  of the Company  and  payments  thereunder.  The junior
subordinated   debentures  and  the  back-up  obligations,   in  the  aggregate,
constitute a full and unconditional  guarantee by the Company of the obligations
of RSTI under the Capital  Securities.  Distributions on the Capital  Securities
are  payable  semi-annually  at the  annual  rate of 10.2% and are  included  in
interest expense in the consolidated financial statements.  These securities are
considered Tier 1 capital (with certain  limitations  applicable)  under current
regulatory  guidelines.  As of December  31,  2002,  the  outstanding  principal
balance of the Capital Securities was $10,000,000.  The principal balance of the
Capital  Securities  constitute the trust preferred  securities in the financial
statements.

     The junior subordinated debentures are subject to mandatory redemption,  in
whole or in part, upon repayment of the Capital  Securities at maturity or their
earlier  redemption at the  liquidation  amount.  Subject to the Company  having
received prior approval of the Federal  Reserve,  if then required,  the Capital
Securities  are  redeemable  prior to the maturity date of February 22, 2031, at
the option of the Company;  on or after February 22, 2021 at par; or on or after
February 22, 2011 at a premium,  or upon the  occurrence of specific  events set
forth in the trust indenture.  The Company has the option to defer distributions
on the  Capital  Securities  from  time to time for a period  not to  exceed  10
consecutive semi-annual periods.

     On January  15,  2002,  NBR  formed NBR Real  Estate  Investment  Trust,  a
Maryland Real Estate  Investment Trust. The entity was formed to hold NBR's real
estate secured loans and to better  organize NBR's  marketing and origination of
real estate secured loans.

     (b)  Financial Information About Industry Segments.

     The Company  operates in two principal  industry  segments:  core community
banking and  merchant  card  services.  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  approximately  39,000  merchants  located  throughout  the United
States.

     (c)  Narrative Description of Business.

     The Company's business strategy involves two principal business  activities
which are conducted through NBR: community banking and merchant card services.

     NBR  provides  its core  community  banking  services  through  five retail
branches  located in Sonoma  County,  California,  one retail branch  located in
Mendocino  County,  California,  and one retail  branch  located in Lake County,
California. NBR generally extends commercial loans to

                                       6
<PAGE>

professionals  and  businesses  with annual  revenues of less than $20  million.
These commercial loans are primarily for working capital and asset acquisitions.
NBR  emphasizes  the  origination  of  commercial  real estate  loans within its
primary market area. Such loans are either  owner-occupied or investor owned and
are usually supported by long-term leases.  Properties which secure loans within
the Company's commercial real estate portfolio include office buildings,  retail
centers and industrial buildings. NBR also originates commercial and residential
construction  loans for its  portfolio  along with  permanent  single family and
multi-family  residential  loans.  NBR's primary  targeted  lending  market area
includes the California counties north of San Francisco.

     The primary sources of funds for NBR's  commercial and residential  lending
programs are local deposits,  proceeds from loan sales, loan payments, and other
borrowings. NBR attracts deposits primarily from local businesses, professionals
and retail customers. NBR's primary deposit market areas include the counties of
Sonoma,  Mendocino and Lake. Sonoma,  Mendocino and Lake Counties have benefited
from the migration of population and businesses into the area, as well as growth
in established firms and industries.  These counties have generally exceeded the
growth in  population  and  economic  activity  of  California  as a whole.  NBR
generally does not purchase deposits through deposit brokers and had no brokered
deposits at December  31, 2002.  In addition to  deposits,  NBR may obtain other
borrowed  funds  through its  membership  in the  Federal  Home Loan Bank of San
Francisco (the "FHLB") and its retention of treasury,  tax and loan funds at the
Federal Reserve Bank of San Francisco.

     The  Company  provides  Visa and  Mastercard  credit  card  processing  and
settlement  services for approximately  39,000 merchants located  throughout the
United States.  In 2002, the Company's  processing volume exceeded $1.7 billion.
The  Company's  merchant  card  services  customer  base is made up of merchants
located in its primary  market area and  merchants who have been acquired by the
Company  through  the use of  independent  sales  agents and  independent  sales
organizations (individually an "ISO" and collectively "ISO's").

     The Company is regulated by various government  agencies,  with the primary
regulators  being the Board of  Governors  of the  Federal  Reserve  System (the
"FRB"),  the  Office of the  Comptroller  of the  Currency  (the  "OCC") and the
Federal Deposit Insurance Corporation (the "FDIC").

     The Company and its subsidiaries had 151 full-time-equivalent  employees at
December 31, 2002. Redwood's  headquarters are located at 111 Santa Rosa Avenue,
Santa Rosa, California 95404-4905, and its telephone number is (707) 573-4800.


Regulation and Supervision

The Effect of Government Policy on Banking

     The  earnings  and growth of the  Company  are  affected  not only by local
market area  factors and general  economic  conditions,  but also by  government
monetary and fiscal  policies.  For example,  the FRB  influences  the supply of
money  through its open market  operations  in U.S.  Government  securities  and
adjustments  to the  discount  rates  applicable  to  borrowings  by  depository
institutions and others. Such actions influence the growth of loans, investments
and  deposits  and also  affect  interest  rates  charged  on loans  and paid on
deposits.  The  nature  and impact of future

                                       7
<PAGE>

changes in such  policies on the business and earnings of the Company  cannot be
predicted.  Additionally,  state and federal  tax  policies  can impact  banking
organizations.

     As  a  consequence  of  the  extensive  regulation  of  commercial  banking
activities  in the United  States,  the business of the Company is  particularly
susceptible to being affected by the enactment of federal and state  legislation
which  may  have  the  effect  of  increasing  or  decreasing  the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other  financial  institutions.  Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.


Regulation and Supervision of Bank Holding Companies

     The Company is a bank holding  company  subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and is
examined by the FRB.  The FRB also has the  authority  to examine the  Company's
subsidiaries.

     The FRB has  significant  supervisory  and  regulatory  authority  over the
Company and its  affiliates.  The FRB requires  the Company to maintain  certain
levels of capital.  See "Capital  Standards."  The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB.  According  to FRB policy,  bank  holding  companies  are
expected to act as a source of financial  strength to subsidiary  banks,  and to
commit resources to support  subsidiary  banks.  This support may be required at
times when a bank holding company may not be able to provide such support.

     Under the BHCA, a company  generally  must obtain the prior approval of the
FRB  before it  exercises  a  controlling  influence  over a bank,  or  acquires
directly or indirectly,  more than 5% of the voting shares or substantially  all
of the assets of any bank or bank holding company. Thus, the Company is required
to  obtain  the  prior  approval  of the  FRB  before  it  acquires,  merges  or
consolidates  with any bank or bank  holding  company;  any  company  seeking to
acquire,  merge or consolidate with the Company also would be required to obtain
the prior approval of the FRB.

     The Company is generally prohibited under the BHCA from acquiring ownership
or  control of more than 5% of the voting  shares of any  company  that is not a
bank or bank  holding  company  and from  engaging  directly  or  indirectly  in
activities  other  than  banking,   managing  banks  or  providing  services  to
affiliates of the holding company.  However,  a bank holding  company,  with the
approval of the FRB,  may engage in, or acquire the voting  shares of  companies
engaged in,  activities  that the FRB has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident  thereto.  A
bank  holding  company must  demonstrate  that the benefits to the public of the
proposed  activity will outweigh the possible  adverse  effects  associated with
such activity.

     The   Gramm-Leach-Bliley   Act  of  1999  (GLBA)  eliminated  many  of  the
restrictions  placed on the  activities  of bank holding  companies  that become
financial  holding  companies.   Among  other  things,   GLBA  repealed  certain
Glass-Steagall  Act  restrictions on  affiliations  between banks and securities
firms, and amended the BHCA to permit bank holding  companies that are financial
holding  companies to engage in  activities,  and acquire  companies  engaged in
activities,  that are:

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<PAGE>

financial  in  nature  (including  insurance  underwriting,   insurance  company
portfolio investment,  financial advisory, securities underwriting,  dealing and
market-making,  and  merchant  banking  activities);   incidental  to  financial
activities;  or complementary to financial activities if the FRB determines that
they  pose  no  substantial  risk  to the  safety  or  soundness  of  depository
institutions  or the financial  system in general.  The Company has not become a
financial  holding company.  GLBA also permits  national banks,  such as NBR, to
engage  in  activities  considered  financial  in  nature  through  a  financial
subsidiary,  subject to certain conditions and limitations and with the approval
of the OCC.

     A bank  holding  company  may acquire  banks in states  other than its home
state without regard to the permissibility of such acquisitions under state law,
but subject to any state  requirement  that the acquired bank has been organized
and operating for the minimum period of time and providing that the bank holding
company,  prior to or following the proposed acquisition,  controls no more than
10% of the total amount of deposits of insured  depository  institutions  in the
United  States  and no more  than 30% of such  deposits  in that  state (or such
lesser or greater  amount set by state law).  Banks may also merge  across state
lines, creating interstate branches.  Furthermore,  a bank may open new branches
in a state in which it does not already have banking operations,  if the laws of
such state permit such de novo branching.

     Under  California  law,  (a)  out-of-state  banks that wish to  establish a
California  branch office to conduct core banking business must first acquire by
merger or purchase a California  bank or  industrial  loan company  which is not
less than five years old; (b) California  state-chartered banks are empowered to
conduct  various  authorized  branch-like  activities on an agency basis through
affiliated and unaffiliated  insured  depository  institutions in California and
other states; and (c) the California  Commissioner of Financial  Institutions is
authorized to approve an interstate  acquisition or merger which would result in
a  deposit  concentration  exceeding  30% if the  Commissioner  finds  that  the
transaction is consistent  with public  convenience  and advantage.  However,  a
state bank chartered in a state other than  California may not enter  California
by purchasing a California branch office of a California bank or industrial loan
company  without  purchasing  the  entire  entity or by  establishing  a de novo
California bank.

     The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend  which would impose undue  pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial  position.  The FRB's policy
is that a bank holding  company  should not  continue its existing  rate of cash
dividends on its common stock unless its net income is  sufficient to fully fund
each dividend and its prospective rate of earnings  retention appears consistent
with its capital needs, asset quality and overall financial  condition.  See the
section  entitled  "Restrictions  on  Dividends  and  Other  Distributions"  for
information regarding additional  restrictions on the ability of the Company and
NBR to pay dividends.

     Transactions  between  the Company and NBR are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are  unreasonable  in amount or exceed the fair  market  value of the
services  rendered  (or, if no market  exists,  actual  costs plus a  reasonable
profit). Subject to certain limitations,  depository institution subsidiaries of
bank  holding  companies  may extend  credit to,  invest in the  securities  of,
purchase assets from, or issue a guarantee,  acceptance,  or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with a
single  affiliate  may not exceed 10% of the  capital  stock and  surplus of


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<PAGE>

the institution,  and the aggregate of such transactions with all affiliates may
not exceed 20% of the capital stock and surplus of such institution. The Company
may only borrow from depository institution  subsidiaries if the loan is secured
by marketable  obligations with a value of a designated  amount in excess of the
loan.  Further,  the Company may not sell a  low-quality  asset to a  depository
institution subsidiary.

Bank Regulation and Supervision

     As a national bank, NBR is regulated,  supervised and regularly examined by
the OCC.  Deposit accounts at NBR are insured by the Bank Insurance Fund ("BIF")
and the Savings  Institution  Insurance Fund ("SAIF"),  as  administered  by the
FDIC,  to the  maximum  amount  permitted  by law.  The Bank is also  subject to
applicable  provisions of California law,  insofar as such provisions are not in
conflict  with or preempted by federal  banking law. The Bank is a member of the
Federal  Reserve System,  and is also subject to certain  regulations of the FRB
dealing  primarily  with check  clearing  activities,  establishment  of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and
Equal Credit Opportunity (Regulation B).

     The OCC may approve,  on a case-by-case  basis, the entry of bank operating
subsidiaries  into a business  incidental  to banking,  including  activities in
which the parent bank is not  permitted to engage.  A national bank is permitted
to engage in  activities  approved  for a bank  holding  company  through a bank
operating  subsidiary,  such as acting as an  investment  or financial  advisor,
leasing  personal  property and  providing  financial  advice to  customers.  In
general,  these activities are permitted only for well-capitalized or adequately
capitalized national banks.

The USA Patriot Act

     Title III of the United and Strengthening  America by Providing Appropriate
Tools  Required to Intercept and Obstruct  Terrorism Act of 2001,  ("USA Patriot
Act") includes numerous  provisions for fighting  international money laundering
and blocking  terrorist access to the U.S.  financial system.  The provisions of
Title III of the USA Patriot Act which affect banking  organizations,  including
NBR,  relate  principally  to U.S.  banking  organizations'  relationships  with
foreign banks and with persons who are resident  outside the United States.  The
USA  Patriot  Act  does not  immediately  impose  any new  filing  or  reporting
obligations for banking  organizations,  but does require certain additional due
diligence and record keeping  practices.  Some  requirements take effect without
the issuance of  regulations.  Other  provisions are to be  implemented  through
regulations that will be promulgated by the U.S. Department of the Treasury (the
"Treasury"),   in  consultation   with  the  FRB  and  other  federal  financial
institutions  regulators.  The federal banking agencies have begun proposing and
implementing regulations interpreting the USA Patriot Act.

     Part of the USA Patriot Act is the International Money Laundering Abatement
and  Financial  Anti-Terrorism  Act of 2001  (IMLAFATA).  Among its  provisions,
IMLAFATA  requires each  financial  institution  to: (i) establish an anti-money
laundering  program;  (ii)  establish due  diligence  policies,  procedures  and
controls with respect to its private banking accounts and correspondent  banking
accounts  involving  foreign  individuals and certain  foreign banks;  and (iii)
avoid  establishing,   maintaining,  administering,  or  managing  correspondent
accounts in the United States for, or on behalf of, a foreign bank that does not
have a physical  presence  in any  country.  In  addition,  IMLAFATA  contains a
provision  encouraging  cooperation  among  financial  institutions,  regulatory
authorities  and  law  enforcement  authorities  with  respect  to  individuals,
entities and

                                       10
<PAGE>

organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering  activities.  IMLAFATA expands the circumstances under which
funds  in a bank  account  may  be  forfeited  and  requires  covered  financial
institutions to respond under certain  circumstances to requests for information
from federal banking  agencies  within 120 hours.  IMLAFATA also amends the BHCA
and the Bank Merger Act to require the federal banking  agencies to consider the
effectiveness of a financial institution's anti-money laundering activities when
reviewing an application under these acts.

     Pursuant to IMLAFATA,  the Secretary of the Treasury,  in consultation with
the  heads of other  government  agencies,  has  adopted  and  proposed  special
measures  applicable to banks,  bank holding  companies,  and/or other financial
institutions.  These  measures  include  enhanced  record  keeping and reporting
requirements  for  certain  financial  transactions  that are of  primary  money
laundering  concern,  due  diligence  requirements   concerning  the  beneficial
ownership of certain types of accounts,  and  restrictions  or  prohibitions  on
certain types of accounts with foreign financial institutions.

Privacy Restrictions

     The GLBA, in addition to the  previously  described  changes in permissible
non-banking  activities permitted to banks, bank holding companies and financial
holding  companies,  also required the federal  banking  agencies,  among others
federal  regulatory  agencies,  to adopt  regulations  governing  the privacy of
consumer  financial  information.  The  OCC  adopted  such  regulations  with an
effective  date of November 13,  2000,  and a date of full  compliance  with the
regulations of July 1, 2001. The Bank is subject to the OCC's regulations.

     The  regulations  impose three main  requirements  established by the GLBA.
First, a banking  organization  must provide  initial notices to customers about
their privacy policies,  describing the conditions under which they may disclose
nonpublic  personal  information to nonaffiliated  third parties and affiliates.
Second,  banking  organizations  must provide  annual  notices of their  privacy
policies  to their  customers.  Third,  banking  organizations  must  provide  a
reasonable  method for customers to "opt-out" of  disclosures  to  nonaffiliated
third parties.

     In  connection  with the  regulations  governing  the  privacy of  consumer
financial information,  the federal banking agencies, including the OCC, adopted
guidelines for safeguarding confidential customer information, effective on July
1,  2001.  The  guidelines   require  banking   organizations  to  establish  an
information  security  program  to: (1)  identify  and assess the risks that may
threaten customer  information;  (2) develop a written plan containing  policies
and  procedures  to manage and control  these risks;  (3) implement and test the
plan;  and (4) adjust the plan on a  continuing  basis to account for changes in
technology,  the sensitivity of customer  information,  and internal or external
threats.  The  guidelines  also  outline the  responsibilities  of  directors of
banking organizations in overseeing the protection of customer information.

     The Company  complies with all provisions of the GLBA and all  implementing
regulations,  and NBR has developed  appropriate policies and procedures to meet
its responsibilities in connection with the privacy provisions of GLBA.

                                       11
<PAGE>

Capital Standards

     The federal banking agencies have risk-based  capital  adequacy  guidelines
intended to provide a measure of capital  adequacy  that  reflects the degree of
risk associated with a banking  organization's  operations for both transactions
reported on the  balance  sheet as assets and  transactions,  such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these  guidelines,  nominal dollar amounts of assets and credit equivalent
amounts  of off  balance  sheet  items are  multiplied  by one of  several  risk
adjustment  percentages,  which range from 0% for assets  with low credit  risk,
such as certain U.S. government  securities,  to 100% for assets with relatively
higher credit risk, such as certain loans.

     In  determining  the  capital  level the  Company  and NBR are  required to
maintain,  the  federal  banking  agencies  do  not,  in  all  respects,  follow
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP") and have special  rules which have the effect of reducing the amount of
capital they will recognize for purposes of determining the capital  adequacy of
NBR.

     A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total  risk-adjusted  assets and off balance sheet
items. The regulators measure  risk-adjusted  assets and off balance sheet items
against  both total  qualifying  capital  (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock,  retained  earnings,   noncumulative  perpetual  preferred  stock,  trust
preferred  securities  (for up to 25% of total tier 1  capital),  other types of
qualifying preferred stock and minority interests in certain subsidiaries,  less
most other intangible  assets and other  adjustments.  Net unrealized  losses on
available-for-sale  equity securities with readily  determinable fair value must
be deducted in determining Tier 1 capital. For Tier 1 capital purposes, deferred
tax assets that can only be realized if an institution earns sufficient  taxable
income in the future are limited to the amount that the  institution is expected
to realize within one year, or 10% of Tier 1 capital,  whichever is less. Tier 2
capital may consist of a limited  amount of the  allowance for possible loan and
lease losses,  term preferred stock and other types of preferred stock and trust
preferred  securities not qualifying as Tier 1 capital,  term  subordinated debt
and certain other instruments with some characteristics of equity. The inclusion
of  elements of Tier 2 capital are  subject to certain  other  requirements  and
limitations  of the  federal  banking  agencies.  The federal  banking  agencies
require a minimum ratio of qualifying total capital to risk-adjusted  assets and
off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
average risk-adjusted assets and off balance sheet items of 4%.

     Under OCC regulations,  there are also two rules governing  minimum capital
levels that  OCC-supervised  banks must maintain against the risks to which they
are exposed.  The first rule makes risk-based  capital standards  consistent for
two types of credit enhancements (i.e.,  recourse arrangements and direct credit
substitutes)  and  requires  different  amounts of capital  for  different  risk
positions in asset securitization transactions.  The second rule permits limited
amounts of unrealized  gains on debt and equity  securities to be recognized for
risk-based  capital purposes as of September 1, 1998. The OCC rules also provide
that a qualifying  institution  that sells small  business loans and leases with
recourse  must hold  capital only  against the amount of recourse  retained.  In
general,  a qualifying  institution  is one that is  well-capitalized  under the
OCC's prompt  corrective  action rules.  The amount of recourse that can receive
the preferential  capital treatment cannot exceed 15% of the institution's total
risk-based capital.

                                       12
<PAGE>

     Effective January 1, 2002, the federal banking agencies, including the OCC,
adopted new regulations to change their regulatory  capital standards to address
the  treatment of recourse  obligations,  residual  interests  and direct credit
substitutes in asset securitizations that expose banks primarily to credit risk.
Capital  requirements  for positions in  securitization  transactions are varied
according to their  relative risk  exposures,  while limited use is permitted of
credit  ratings  from  rating  agencies,  a  banking  organization's  qualifying
internal risk rating system or qualifying  software.  The regulation  requires a
bank to deduct  from  Tier 1  capital,  and from  assets,  all  credit-enhancing
interest only-strips,  whether retained or purchased,  that exceed 25% of Tier 1
capital. Additionally, a bank must maintain dollar-for-dollar risk-based capital
for  any  remaining  credit-enhancing  interest-only  strips  and  any  residual
interests  that do not  qualify for a  ratings-based  approach.  The  regulation
specifically  reserves the right to modify any  risk-weight,  credit  conversion
factor  or credit  equivalent  amount,  on a  case-by-case  basis,  to take into
account any novel  transactions  that do not fit well into the currently defined
categories.

     In addition to the  risked-based  guidelines,  the federal banking agencies
require banking  organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets,  referred to as the leverage capital ratio. For a
banking  organization  rated in the highest of the five  categories used to rate
banking  organizations,  the minimum  leverage  ratio of Tier 1 capital to total
assets must be 3%. It is  improbable,  however,  that an  institution  with a 3%
leverage ratio would receive the highest rating since a strong capital  position
is a significant  part of the  regulators'  rating.  Bank holding  companies not
rated in the highest  category must have a minimum leverage ratio of 4%. For all
banks not rated in the highest  category,  the minimum leverage ratio must be at
least 100 to 200 basis points above the 3% minimum.  Thus, the effective minimum
leverage ratio, for all practical purposes, must be at least 4% or 5% for banks.
In addition to these uniform  risk-based  capital guidelines and leverage ratios
that apply  across the  industry,  the  regulators  have the  discretion  to set
individual  minimum  capital  requirements  for specific  institutions  at rates
significantly above the minimum guidelines and ratios.

     As  of  December  31,  2002,  NBR's  capital  ratios  exceeded   applicable
regulatory requirements. The following tables present the capital ratios for the
Company and NBR,  compared to the  standards for  well-capitalized  bank holding
companies  and  depository  institutions,  as of December  31, 2002  (amounts in
thousands except percentage amounts).

<TABLE>
<CAPTION>
                                                                            The Company
                                              ---------------------------------------------------------------------
                                                        Actual                       Well              Minimum
                                                ------------------------          Capitalized          Capital
                                               Capital           Ratio               Ratio           Requirement
                                               -------           -----            -----------        -----------
<S>                                            <C>              <C>                   <C>                 <C>
Leverage.....................................  $35,604           6.96%                 5.00%              4.00%
Tier 1 Risk-Based............................   35,604           9.18                  6.00               4.00
Total Risk-Based.............................   41,585          10.72                 10.00               8.00
</TABLE>


<TABLE>
<CAPTION>
                                                                             The Bank
                                              ---------------------------------------------------------------------
                                                        Actual                       Well              Minimum
                                                ------------------------          Capitalized          Capital
                                               Capital           Ratio               Ratio           Requirement
                                               -------           -----            -----------        -----------
<S>                                            <C>              <C>                   <C>                 <C>
Leverage.....................................  $37,500           7.35%                 5.00%              4.00%
Tier 1 Risk-Based............................   37,500           9.68                  6.00               4.00
Total Risk-Based.............................   42,372          10.94                 10.00               8.00
</TABLE>


                                       13
<PAGE>

     The federal banking agencies must take into consideration concentrations of
credit  risk  and  risks  from  non-traditional   activities,   as  well  as  an
institution's ability to manage those risks, when determining the adequacy of an
institution's   capital.  This  evaluation  will  be  made  as  a  part  of  the
institution's  regular  safety and soundness  examination.  The federal  banking
agencies  must  also  consider  interest  rate  risk  (when  the  interest  rate
sensitivity  of an  institution's  assets does not match the  sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.


Prompt Corrective Action and Other Enforcement Mechanisms

     The  Federal  Deposit  Insurance   Corporation   Improvement  Act  of  1991
("FDICIA") requires each federal banking agency to take prompt corrective action
to resolve the problems of insured  depository  institutions,  including but not
limited to those that fall below one or more prescribed  minimum capital ratios.
The law required each federal banking agency to promulgate  regulations defining
the following five categories in which an insured depository institution will be
placed,  based on the level of its capital ratios: well capitalized,  adequately
capitalized,  undercapitalized,  significantly  undercapitalized  and critically
undercapitalized.

     Under the  prompt  corrective  action  provisions  of  FDICIA,  an  insured
depository  institution generally will be classified in the following categories
based on the capital measures indicated below:


<TABLE>
<CAPTION>
     "Well capitalized"                         "Adequately capitalized"
     ------------------                         ------------------------
<S>                                             <C>
     Total risk-based capital of 10%;           Total risk-based capital of 8%;
     Tier 1 risk-based capital of 6%; and       Tier 1 risk-based capital of 4%; and
     Leverage ratio of 5%.                      Leverage ratio of 4%.
</TABLE>

<TABLE>
<CAPTION>
     "Undercapitalized"                         "Significantly undercapitalized"
     ------------------                         --------------------------------
<S>                                             <C>
     Total risk-based capital less than 8%;     Total risk-based capital less than 6%;
     Tier 1 risk-based capital less than        Tier 1 risk-based capital less than 3%;
     4%; or                                     or
     Leverage ratio less than 4%.               Leverage ratio less than 3%.
</TABLE>

     "Critically undercapitalized"
     -----------------------------
     Tangible equity to total assets equal
     to or less than 2%.

     An institution  that, based upon its capital levels, is classified as "well
capitalized,"  "adequately  capitalized" or "undercapitalized" may be treated as
though it were in the next lower  capital  category if the  appropriate  federal
banking agency,  after notice and  opportunity  for hearing,  determines that an
unsafe or unsound  condition  or an unsafe or  unsound  practice  warrants  such
treatment.  At each successive  lower capital  category,  an insured  depository
institution is subject to more restrictions.

     In  addition  to  measures  taken  under  the  prompt   corrective   action
provisions,  commercial  banking  organizations  may  be  subject  to  potential
enforcement  actions  by the  federal  banking

                                       14
<PAGE>

agencies for unsafe or unsound  practices in conducting  their businesses or for
violations of any law, rule,  regulation or any condition  imposed in writing by
the agency or any written  agreement  with the agency.  Enforcement  actions may
include  the  imposition  of  a  conservator  or  receiver,  the  issuance  of a
cease-and-desist  order that can be  judicially  enforced,  the  termination  of
insurance of deposits (in the case of a depository institution),  the imposition
of civil money penalties,  the issuance of directives to increase  capital,  the
issuance  of formal  and  informal  agreements,  the  issuance  of  removal  and
prohibition orders against institution-affiliated parties and the enforcement of
such actions  through  injunctions or  restraining  orders based upon a judicial
determination  that the agency would be harmed if such equitable  relief was not
granted.  Additionally,  a holding  company's  inability to serve as a source of
strength to its subsidiary  banking  organizations  could serve as an additional
basis for a regulatory action against the holding company.


Safety and Soundness Standards

     FDICIA also implemented  certain specific  restrictions on transactions and
required  federal  banking  regulators  to adopt  overall  safety and  soundness
standards  for  depository   institutions  related  to  internal  control,  loan
underwriting  and  documentation  and asset growth.  Among other things,  FDICIA
limits the  interest  rates paid on deposits by  undercapitalized  institutions,
restricts  the use of brokered  deposits,  limits the  aggregate  extensions  of
credit by a depository institution to an executive officer, director,  principal
shareholder or related  interest,  and reduces  deposit  insurance  coverage for
deposits  offered  by  undercapitalized  institutions  for  deposits  by certain
employee benefits accounts.

     The federal  banking  agencies may require an  institution  to submit to an
acceptable  compliance plan as well as have the flexibility to pursue other more
appropriate or effective courses of action given the specific  circumstances and
severity of an institution's noncompliance with one or more standards.


Restrictions on Dividends and Other Distributions

     The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory  restrictions  which limit the amount  available for
such  distribution  depending  upon the earnings,  financial  condition and cash
needs  of the  institution,  as  well as  general  business  conditions.  FDICIA
prohibits  insured  depository  institutions  from paying management fees to any
controlling  persons  or,  with  certain  limited  exceptions,   making  capital
distributions,  including dividends, if, after such transaction, the institution
would be undercapitalized.

     The  payment of  dividends  by a national  bank is  further  restricted  by
additional  provisions  of federal  law,  which  prohibit  a national  bank from
declaring  a dividend  on its shares of common  stock  unless its  surplus  fund
exceeds the amount of its common capital (total  outstanding common shares times
the par  value  per  share).  Additionally,  if  losses  have at any  time  been
sustained  equal to or exceeding a bank's  undivided  profits  then on hand,  no
dividend may be paid.  Moreover,  even if a bank's  surplus  exceeded its common
capital and its undivided profits exceed its losses,  the approval of the OCC is
required for the payment of dividends if the total of all dividends  declared by
a national  bank in any calendar  year would exceed the total of its net profits
of that year combined

                                       15
<PAGE>

with its  retained  net profits of the two  preceding  years,  less any required
transfers to surplus or a fund for the  retirement  of any  preferred  stock.  A
national bank must consider other business factors in determining the payment of
dividends.  The payment of  dividends  by NBR is  governed  by NBR's  ability to
maintain  minimum  required  capital  levels and an adequate  allowance for loan
losses.

     Regulators  also have authority to prohibit a depository  institution  from
engaging in business  practices  which are  considered  to be unsafe or unsound,
possibly  including  payment  of  dividends  or  other  payments  under  certain
circumstances even if such payment are not expressly prohibited by statute.

     In January 2003, NBR received  approval for its 2003 dividend plan from the
OCC.  In 2001,  2001 and 2000 NBR  declared  dividends  payable  to  Redwood  of
$6,600,000, $5,900,000 and $12,129,000.

Premiums for Deposit Insurance and Assessments for Examinations

     FDICIA established several mechanisms to increase funds to protect deposits
insured by the BIF and SAIF  administered by the FDIC. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury;  up to 90% of the fair
market value of assets of institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions that are members of the
BIF and SAIF.  Any borrowings not repaid by asset sales are to be repaid through
insurance  premiums  assessed  to member  institutions.  Such  premiums  must be
sufficient  to repay any borrowed  funds  within 15 years and provide  insurance
fund reserves of $1.25 for each $100 of insured  deposits.  FDICIA also provides
authority for special assessments against insured deposits.  No assurance can be
given at this time as to what the future level of premiums will be.

Community Reinvestment Act and Fair Lending

     The Bank is subject to certain  fair  lending  requirements  and  reporting
obligations   involving   home  mortgage   lending   operations   and  Community
Reinvestment  Act ("CRA")  activities.  The CRA  generally  requires the federal
banking  agencies to evaluate the record of a financial  institution  in meeting
the credit needs of their local  communities,  including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required  for a  violation  of certain  fair  lending  laws,  the federal
banking  agencies may take  compliance  with such laws and CRA into account when
regulating and supervising other activities.

Recently Enacted Legislation, Regulations and Accounting Guidance

     On July 30, 2002,  President Bush signed into law The Sarbanes-Oxley Act of
2002.  This  new  legislation   addresses  accounting  oversight  and  corporate
governance matters, including:

     o    the creation of a five-member  oversight board that will set standards
          for accountants and have investigative and disciplinary powers;

     o    the  prohibition of accounting  firms from providing  various types of
          consulting  services to public clients and requiring  accounting firms
          to rotate partners among public client assignments every five years;

     o    increased penalties for financial crimes;

                                       16
<PAGE>

     o    expanded disclosure of corporate  operations and internal controls and
          certification of financial statements;

     o    enhanced controls on, and reporting of, insider trading; and

     o    prohibition on lending to officers and directors of public  companies,
          although  NBR may still make these  loans  within the  constraints  of
          existing banking relations.

     The Nasdaq National  Market has proposed  additional  corporate  governance
rules that have been  presented to the  Securities  and Exchange  Commission for
review and approval.  The proposed changes are intended to allow shareholders to
more easily and effectively  monitor the performance of companies and directors.
The Company has  implemented  procedures  to comply  with the  requirements  for
expanded  disclosure of internal controls and the certification of the financial
statements.  A significant portion of the remaining items in the new legislation
will become  effective  during 2003.  The Company is currently  evaluating  what
impact the new legislation and its  implementing  regulations will have upon our
operations, including a likely increase in certain outside professional costs.


Pending Legislation and Regulations and Accounting Guidance

     Additional  proposals  to change  the laws and  regulations  governing  the
banking and financial  services industry are frequently  introduced in Congress,
in the state legislatures and before the various bank regulatory  agencies.  The
likelihood and timing of any such changes and the impact such changes might have
on the Company cannot be determined at this time.


Competition

     In the past, an independent  bank's principal  competitors for deposits and
loans  have been  other  banks  (particularly  major  banks),  savings  and loan
associations  and  credit  unions.  To a  lesser  extent,  competition  was also
provided  by thrift  and  loans,  mortgage  brokerage  companies  and  insurance
companies. Other institutions,  such as brokerage houses, mutual fund companies,
credit  card  companies,   and  even  retail  establishments  have  offered  new
investment  vehicles,  which also compete with banks for deposit  business.  The
direction of federal  legislation in recent years,  especially the GLBA,  favors
competition among different types of financial institutions. Using the financial
holding company structure,  insurance companies and securities firms may compete
more  directly  with  banks  and  bank  holding  companies.

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  contractual
obligations between the Company and VISA and Mastercard, NBR stands in the place
of the  merchant  in the event  that a  merchant  refuses,  or is unable  due to
bankruptcy or other reasons to pay on charge-backs from cardholders.  Management
has taken certain actions to decrease the risk of merchant bankruptcy associated
with its merchant credit card business.  These steps include the  discontinuance
of  high-risk  accounts.  Chargeback  exposure  can also result from  fraudulent
credit card transactions  initiated by merchant customers.  To mitigate merchant
fraud risk, the Company employs certain underwriting  standards when accepting a
new  merchant.  Further,  the Company  monitors  merchant  activity  for unusual
transactions.  In addition,

                                       17
<PAGE>

the Company bears the risk of merchant  nonpayment  of  applicable  interchange,
assessment  and  other  fees.  Failure  by the  merchants  to pay such  fees may
adversely  affect the Company's  revenues.  The Company utilizes ISOs to acquire
merchant credit card customers.  The Company's  ability to maintain and grow net
revenue from its merchant  credit card  processing  operation is dependent  upon
maintaining and adding to these ISO relationships.

     Merchant  credit card  processing  services are highly  regulated by credit
card  associations  such as VISA.  In order to  participate  in the credit  card
programs,  the Company must comply with the credit card association's  rules and
regulations  that may change from time to time.  If the Company  fails to comply
with these credit card association  standards,  the Company's status as a member
service provider and as a certified  processor could be suspended or terminated.
During  November  1999,  VISA  adopted  several  rule changes to reduce risks in
high-risk  merchant  credit card  programs and these rule  changes  affected the
Company's  merchant  credit card business.  The rule changes went into effect on
March 31, 2001. These changes included a requirement that a processor's reported
fraud ratios be no greater than three times the national  average.  At September
30, 2002 (the most recent  period  available  from VISA) the  Company's  overall
fraud ratio was .24% to the VISA  requirement.  Other VISA changes  included the
requirement that total  processing  volume in certain  high-risk  categories (as
defined by VISA) be less than 20% of total  processing  volume.  At December 31,
2002 (the most recent information available from VISA), the Company's total VISA
transactions  within these certain high-risk  categories were 1.39% of its total
VISA processing volume. Other changes VISA announced included a requirement that
weekly  VISA  volumes  be less  than  60% of an  institution's  tangible  equity
capital,  as well as a requirement that aggregate  charge-backs for the previous
six months be less than 5% of the  institution's  tangible equity capital or the
aggregate  charge-backs  for the  quarter  be less than .59% of the  interchange
count and .95% of the interchange  amount. At December 31, 2002 (the most recent
information  available from VISA),  the Company's  weekly VISA volume was 54% of
the  Company's  tangible  equity  capital,  and aggregate  charge-backs  for the
previous  six months were 5.29% of  tangible  equity  capital and the  aggregate
charge-backs for the quarter were .37% of the of the interchange  count and .31%
of the interchange amount. Merchant bankcard participants,  such as the Company,
must  comply  with these VISA rules by filing a  compliance  plan with VISA.  At
December 31, 2002, the Company is in compliance  with all rule changes that went
into  effect on March 31,  2001,  based on VISA's  acceptance  of the  Company's
compliance plan.  Should the Company be unable to comply with these rules,  VISA
will require collateral of one to four times the short fall.

     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 December  31,  2002,
approximately  79% of the Company's loans were secured by real estate,  of which
55% 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, construction and other
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  or  floods,  which may cause
uninsured  damage  and  other  loss of value to real  estate  that  secures  the
Company's  loans).  In addition,  the long-term impact of the California  energy
crisis may cause adverse  changes in the  Company's  local  economy.  Due to the
concentration of the Company's real estate collateral in California, such events
could have a significant  adverse impact on the value of such  collateral or the
Company's earnings.

                                       18
<PAGE>

     War on Terrorism.  The terrorist  attacks on the World Trade Center and the
Pentagon on September 11, 2001, ongoing acts or threats of terrorism and actions
taken by the U.S. or other governments as a result of such acts or threats, have
contributed  to the  continuing  downturn in U.S.  economic  conditions and have
resulted  in  increased   uncertainty   regarding  the  economic  outlook.  Past
experience  suggests  that shocks to American  society of far less severity have
resulted in a temporary loss of consumer and business confidence and a reduction
in the rate of economic  growth.  Continual  deterioration in either the U.S. or
the California economy could adversely affect the Company's  financial condition
and results of operations.

     California Energy Crisis. Due to problems  associated with the deregulation
of the electrical power industry in California,  California  utilities and other
energy industry  participants have experienced  difficulties with the supply and
price of electricity and natural gas. The California energy situation  continues
to be fluid and  subject  to many  uncertainties  and a number of  lawsuits  and
regulatory  proceedings  have been commenced  concerning  various aspects of the
current  energy  situation.  The  long-term  impact  of  the  energy  crisis  in
California on the Company's markets and business cannot be predicted,  but could
result in a  sustained  period of  economic  difficulties.  This  could  have an
adverse  effect on the demand for new loans,  the ability of  borrowers to repay
outstanding loans, the value of real estate and other collateral  securing loans
and,  as  a  result,  on  the  Company's  financial  condition  and  results  of
operations.

     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.  See "Regulation and  Supervision,"
above.

     Competition  from Other Financial  Institutions.  NBR 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,  mutual funds and other
lending  institutions.   With  respect  to  deposits,   additional   significant
competition  arises from corporate and governmental debt securities,  as well as
money market  mutual  funds.  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  NBR  conducts  operations.  Banks,  securities  firms  and
insurance  companies  can also now combine in a new type of  financial  services
firm,  called a "financial  holding  company".  Financial  holding companies can
offer virtually any type of financial  service,  including  banking,  securities
underwriting,  insurance (both agency and  underwriting),  and merchant banking.
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.  In  addition,  such  large  financial
institutions  may have greater access to capital at a lower cost than NBR, which
may adversely affect NBR's ability to compete effectively.

     In addition,  the market in which the Company  competes for merchant credit
card  processing  is  intensely  competitive  and,  in  recent  years,  has been
characterized by increased consolidation. This consolidation has enabled certain
of the Company's competitors to have access to significant capital,  management,
marketing and technological resources that are equal to or greater than those of
the  Company,  and there can be no  assurance  that the Company  will be able to
continue to compete successfully with such other processors.

                                       19
<PAGE>

     Critical  Accounting  Policies.  The  Company's  financial  statements  are
presented in accordance with  accounting  principles  generally  accepted in the
United States of America (US GAAP). The financial  information  contained within
our financial statements is, to a significant extent, financial information that
is based on approximate  measures of the financial  effects of transactions  and
events  that have  already  occurred.  A variety  of  factors  could  affect the
ultimate  value that is obtained  either when  earning  income,  recognizing  an
expense, recovering an asset or relieving a liability. Along with other factors,
we use  historical  loss  factors to  determine  the  inherent  loss that may be
present in our loan and lease portfolio. Actual loses could differ significantly
from the historical  loss factors that we use.  Other  estimates that we use are
fair  value of our  securities  and  expected  useful  lives of our  depreciable
assets.  We have not entered into derivative  contracts for our customers or for
ourselves, which relate to interest rate, credit, equity, commodity,  energy, or
weather-related   indices.  US  GAAP  itself  may  change  from  one  previously
acceptable method to another method.  Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change. Accounting standards and interpretations currently affecting the Company
and its  subsidiaries  may  change  at any  time,  and the  Company's  financial
condition and results of operations may be adversely affected.

     Our most  significant  estimates are approved by our Management team, which
is comprised of our most senior officers.  At each financial reporting period, a
review of these estimates is then presented to our Board of Directors.

     As of December 31, 2002,  other than  disclosed on pages 45 and 46, we have
not created  any special  purpose  entities  to  securitize  assets or to obtain
off-balance  sheet funding.  Although we have sold a number of loans in the past
two years, those loans have been sold to third parties without recourse, subject
to customary representations and warranties. Please see our disclosure regarding
contractual obligations and commitments on page 46.


Item 2.     Properties

     The Company owns two  depository  branches  and leases six other  locations
used in the normal course of business.  In addition,  the Company leases certain
equipment.  There are no  contingent  rental  payments  and the Company has five
sublease  arrangements.  Total  rental  expenses  under  all  leases,  including
premises, totaled $1,326,000, $1,282,000 and $1,202,000, in 2002, 2001 and 2000.
The  expiration  dates of the leases  vary,  with the first such lease  expiring
during 2003 and the last such lease expiring during 2009. The Company  maintains
insurance coverage on its premises, leaseholds and equipment, including business
interruption and record reconstruction coverage.


Item 3.     Legal Proceedings

     Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending  against the Company or its  subsidiaries.  Based upon
information available to the Company, its review of such lawsuits and claims and
consultation  with its counsel,  the Company believes the liability  relating to
these  actions,  if  any,  would  not  have a  material  adverse  effect  on its
consolidated financial statements.


                                       20
<PAGE>

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

     No matters were  submitted to a vote of the Company's  shareholders  during
the fourth quarter of 2002.


PART II


Item 5.      Market for the Registrant's Common Equity and Related Stockholder
             Matters

     The Company's Common Stock is publicly traded on the NASDAQ National Market
under the symbol  "REBC".  On  September  20,  2001,  the  Company  announced  a
three-for-two  stock split of its outstanding shares of common stock. All common
stock prices and dividends per share have been restated for the stock split.  As
of December  31,  2002,  the Company  believes,  based upon  information  it has
obtained from its transfer  agent,  there are 945  shareholders of record of its
Common Stock.

     There are regulatory  limitations on cash dividends that may be paid by the
Company as well as regulatory  limitations on cash dividends that may be paid by
NBR to Redwood which could limit the Company's ability to pay dividends. Federal
regulatory agencies also have the authority to prohibit the payment of dividends
by NBR if a finding  is made that such  payment  would  constitute  an unsafe or
unsound practice, or if NBR became critically undercapitalized.  See "Regulation
and  Supervision" in Item 1 and Note N to the Company's  Consolidated  Financial
Statements.


<TABLE>
<CAPTION>
                                                                Redwood Empire Bancorp
                                                                  Common Stock Prices

                              Qtr 1       Qtr 2       Qtr 3       Qtr 4             Qtr 1       Qtr 2       Qtr 3       Qtr 4
                               2001        2001        2001        2001              2002        2002        2002       2002
                            ----------- ----------- ----------- -----------       ----------- ----------- ----------- ----------
<S>                           <C>         <C>         <C>         <C>               <C>         <C>         <C>         <C>
High                          $19.00      $21.47      $25.57      $26.01            $28.80      $32.75      $28.00      $29.32
Low                            13.50       17.07       18.60       22.37             24.40       26.16       25.20       25.75
Close                          17.17       19.73       25.50       24.50             28.25       27.40       27.00       26.59

Dividends
Declared per share               .100        .133        .133        N/A               .200        .200        .200        .200
</TABLE>











                                       21
<PAGE>


Item 6.  Selected Financial Data


Summary of Consolidated Financial Data and Performance Ratios
<TABLE>
<CAPTION>
                                                                          At or for the Year ended December 31,
                                                                  2002        2001       2000        1999         1998
                                                                  ----        ----       ----        ----         ----
                                                                      (dollars in thousands, except per share data)
 Statements of Operations:
<S>                                                             <C>         <C>         <C>        <C>          <C>
 Total interest income                                           $30,536     $33,555     $35,163    $30,633      $30,557
 Net interest income                                              20,866      20,104      20,844     19,687       18,058
 Provision for loan losses                                           ---         ---         150        750        2,040
 Noninterest income                                                7,615       6,599       6,106      5,197        5,625
 Income from continuing operations before extraordinary item       7,961       7,307       6,466      4,875        2,904
 Income (loss) from discontinued operations                          ---         ---         ---       (437)       2,187
 Extraordinary loss, net of tax                                      ---         ---         ---       (276)         ---
 Net income                                                        7,961       7,307       6,466      4,162        5,091
 Net income available to common stock shareholders                 7,961       7,307       6,466      4,162        4,979
 Balance Sheets:
 Total assets                                                   $513,181    $448,742    $453,439   $423,046     $422,299
 Total loans                                                     365,076     351,649     315,101    314,445      269,316
 Mortgage loans held for sale (Discontinued operations)              ---         ---         ---        ---       32,620
 Allowance for loan losses                                         7,400       7,580       7,674      7,931        8,041
 Total deposits                                                  453,093     397,412     405,333    369,509      364,720
 Shareholders' equity                                             28,807      26,687      35,459     37,444       38,640
 Performance and Financial Ratios:
 Return on average assets from continuing operations               1.62%       1.63%       1.47%      1.20%        0.73%
 Return on average common equity from continuing operations       28.98%      26.41%      17.75%     12.40%        8.09%
 Common dividend payout ratio                                     35.08%      18.09%      25.29%     19.51%        8.09%
 Average equity to average assets from continuing operations       5.58%       6.17%       8.30%      9.66%        9.09%
 Leverage ratio                                                    6.96%       7.46%       7.72%      8.66%        8.84%
 Tier 1 risk-based capital ratio                                   9.18%       9.52%       9.99%     11.74%       11.84%
 Total risk-based capital ratio                                   10.72%      11.16%      11.25%     13.01%       16.94%
 Net interest margin from continuing operations                    4.49%       4.78%       5.08%      5.30%        5.11%
 Noninterest expense from continuing operations to net
    interest income and other noninterest income from
continuing operations                                             56.20%      54.12%      59.18%     64.97%       71.26%
 Average earning assets to average total assets from
    continuing operations                                         94.34%      93.72%      93.50%     91.20%       89.40%
 Nonperforming assets to total assets                              0.54%       0.71%       0.43%      1.52%        2.11%
 Net loan charge-offs to average loans                             0.05%       0.03%       0.12%      0.29%        0.62%
 Allowance for loan losses to total loans                          2.03%       2.16%       2.44%      2.52%        2.99%
 Allowance for loan losses to nonperforming loans                264.85%     238.66%     637.91%    194.34%      121.82%
 Share Data (1):
 Common shares outstanding (000)                                   3,405       3,530       4,287      4,844        5,054
 Book value per common share                                       $8.46       $7.56       $8.27      $7.73        $7.65
 Basic earnings per common share:
   Income from continuing operations before extraordinary item     $2.29       $1.97       $1.41       $.97         $.59
   Income (loss) from discontinued operations                        ---         ---        ---        (.09)         .46
   Income before extraordinary item                                 2.29        1.97        1.41        .88         1.05
   Net income available for common stock shareholders               2.29        1.97        1.41        .82         1.05
   Weighted average shares outstanding (000)                       3,474       3,703       4,577      5,046        4,755
 Diluted earnings per common share:
   Income from continuing operations before extraordinary item     $2.21       $1.91       $1.39       $.94         $.54
   Income (loss) from discontinued operations                        ---         ---        ---        (.08)         .42
   Income before extraordinary item                                 2.21        1.91        1.39        .86          .96
   Net income available for common stock shareholders               2.21        1.91        1.39        .80          .96
   Weighted average shares outstanding (000)                       3,600       3,825       4,664      5,184        5,197
 Cash dividends per common share                                    $.80        $.37        $.37       $.16         $.08

(1)      Restated for 2001 3 for 2 stock split.
</TABLE>

                                       22
<PAGE>


Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations

Overview

Forward-Looking Information

     This Annual Report on Form 10-K includes forward-looking information, which
is subject to the "safe harbor"  created by Section 27A of the Securities Act of
1933,  as amended,  and Section 21E of the  Securities  Exchange Act of 1934, as
amended.  These forward-looking  statements (which involve,  among other things,
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve  certain  risks and  uncertainties  that could cause  actual  results to
differ materially from those in the forward-looking  statements.  Such risks and
uncertainties include, but are not limited to, the following factors:

     o    Competitive pressure in the banking industry and changes in banking or
          other  laws  and  regulations  or  governmental   fiscal  or  monetary
          policies.

     o    Changes in the interest rate environment  (including  possible further
          declines in interest rates) and volatility of rate sensitive loans and
          deposits.

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

     o    Uncertainty   regarding  the  economic  outlook   resulting  from  the
          continuing  war on terrorism,  as well as actions taken or to be taken
          by the  U.S.  or other  governments  as a result  of  further  acts or
          threats of  terrorism  or as a result of possible  military  action in
          Iraq.

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

     o    Dividend restrictions.

     o    Regulatory discretion.

     o    Material  losses in the  Company's  merchant  credit  card  processing
          business from card holder fraud or merchant  business  failure and the
          ability of the Company to comply with the regulations and rules of the
          major  credit  card  associations,  such as Visa  and  Mastercard,  as
          described under "Certain  Important  Considerations  for Investors" in
          this report.

     o    Asset/liability repricing risks and liquidity risks.

     o    Changes in the securities markets.

                                       23
<PAGE>

     o    A decline in the health of the Northern California economy,  including
          the long-term  impact of the California  energy crisis and the decline
          in the technology sector.

     o    Certain operational risks involving data processing systems or fraud.

     o    The  proposal or adoption of changes in  accounting  standards  by the
          Financial  Accounting  Standards  Board,  the  Securities and Exchange
          Commission or other standard setting bodies.

     The Company undertakes no obligation to update  forward-looking  statements
to reflect facts, circumstances, assumptions or events that occur after the date
the forward-looking  statements are made. For additional  information concerning
risks and uncertainties related to the Company and its operations,  please refer
to  "Certain  Important  Considerations  for  Investors"  in  Item  1 and  other
information in this Report.

General

     The Company derives its income from two principal sources: (1) net interest
income,  which is the  difference  between  the  interest  income it receives on
interest-earning  assets and the  interest  expense it pays on  interest-bearing
liabilities;  and (2) non  interest  income or fee income which  includes,  fees
earned on deposit services, fees earned from servicing loans for investors, fees
from processing services, electronic-based cash management services and merchant
credit card processing.

     The following analysis of the Company's  financial condition and results of
operations  should  be read  in  conjunction  with  the  Consolidated  Financial
Statements of Redwood Empire Bancorp and related notes thereto  included in this
Annual Report on Form 10-K.  Average  balances,  including such balances used in
calculating  financial and performance  ratios, are generally daily averages for
NBR,  which  management  believes are  representative  of the  operations of the
Company.



Results of Operations

     In 2002, the Company  reported net income of  $7,961,000,  or $2.21 diluted
per  share,  as  compared  to 2001 and 2000 net income of  $7,307,000,  or $1.91
diluted per share, and $6,466,000, or $1.39 diluted per share.

     Return on average  assets for the year ended December 31, 2002 was 1.62% as
compared  to 1.63% and 1.47% for the years  ended  December  31,  2001 and 2000.
Return on average common equity was 28.98% for the year ended December 31, 2002,
as compared to 26.41% and 17.75% for the years ended December 31, 2001 and 2000.

     The Company's results in 2002 improved from 2001.  Improvement was shown in
noninterest income, which increased $1,016,000 to $7,615,000 in 2002 as compared
to  $6,599,000  in 2001 and net interest  income,  which  increased  $762,000 to
$20,866,000 in 2002 as compared to $20,104,000 in 2001. In addition,  net income
increased  due to a decline in the  Company's  effective  tax rate from 40.4% in
2001 to 36.2% in 2002.  For  further  information,  see  "Income  Taxes" in this
section.

                                       24
<PAGE>

     The Company's results in 2001 improved from 2000.  Improvement was shown in
noninterest  expense,  which  decreased  $1,497,000  to  $14,451,000  in 2001 as
compared to $15,948,000 in 2000. Other noninterest  income increased $493,000 to
$6,599,000 in 2001 as compared to $6,106,000 in 2000. Improvement was also shown
in the provision for loan losses, which declined by $150,000 in 2001 as compared
to 2000.

     Net Interest  Income.  For 2002, the Company's net interest income amounted
to $20,866,000 as compared to $20,104,000 in 2001 and  $20,844,000 in 2000. This
represents  an increase of $762,000 or 4% in 2002,  a decrease of $740,000 or 4%
in 2001 and an increase of $1,157,000 or 6% in 2000, in each case as compared to
prior  year.  The  increase in 2002 as compared to 2001 is due to an increase in
average earning assets of $44,273,000 from  $420,340,000 in 2001 to $464,613,000
in 2002,  offset by a decline in the net  interest  margin from 4.78% in 2001 to
4.49% in 2002.  Such decline in the net interest  margin is primarily due to the
lower interest rate  environment and the Company  carrying  $29,948,000 in lower
yielding  overnight  investments during 2002 as compared to $17,552,000 in 2001.
The decrease in 2001 as compared to 2000 is due to a negative impact of $882,000
associated with the trust  preferred debt financing.  Without the impact of such
long term  financing,  net  interest  income  would  have  increased  in 2001 by
$142,000 as a result of growth in average earning assets of $9,799,000.










                                       25
<PAGE>


     The following  table presents for the years  indicated the  distribution of
consolidated  average assets,  liabilities and shareholders'  equity, as well as
the total dollar amounts of interest  income from average earning assets and the
resultant  yields,  and the  dollar  amounts of  interest  expense  and  average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are  included in the  calculation  of the average  balances of loans,  and
interest not accrued is excluded.



<TABLE>
<CAPTION>
                                             2002                           2001                           2000
                                  ----------------------------  ------------------------------ ------------------------------
                                    Average           Yield/      Average            Yield/      Average            Yield/
                                    Balance  Interest  Rate       Balance   Interest  Rate       Balance  Interest   Rate
                                  ----------------------------  ------------------------------ ------------------------------
                                                                    (dollars in thousands)
<S>                                     <C>       <C>      <C>        <C>        <C>       <C>        <C>       <C>        <C>
Assets:
Portfolio loans                         $356,953  $25,678   7.19%     $327,913   $27,904    8.51%     $329,799  $29,769    9.03%
Mortgage loans held for sale                 307       24   7.82           ---       ---     ---           ---      ---     ---
Investment securities (1)                 77,405    4,335   5.60        74,875     4,879    6.52        74,880    5,035    6.72
Federal funds sold                        29,948      499   1.67        17,552       772    4.40         5,862      359    6.12
                                        -----------------             ------------------              -----------------
    Total earning assets                 464,613   30,536   6.57       420,340    33,555    7.98       410,541   35,163    8.57
                                                   ------                         ------                         ------
Other non-earning assets                  35,396                        35,841                          36,541
Allowance for loan losses                 (7,543)                       (7,673)                         (7,997)
                                        ---------                     ---------                       ---------
    Total average assets                $492,466                      $448,508                        $439,085
                                        =========                     =========                       =========

Liabilities and Shareholders' Equity:
Interest bearing transaction accounts   $123,068    1,618   1.31      $123,537     2,762    2.24      $125,626    3,675    2.93
Time deposits                            217,332    6,961   3.20       186,011     9,668    5.20       180,130   10,294    5.71
Trust preferred securities                10,000    1,003  10.03         8,700       882   10.14           ---      ---     ---
Other borrowings                           4,169       88   2.11         3,360       139    4.14         5,333      350    6.56
                                        -----------------             ------------------              -----------------
  Total interest bearing liabilities     354,569    9,670   2.73       321,608    13,451    4.18       311,089   14,319    4.60
                                                   --------------                 ---------------                ---------------
Non-interest bearing demand deposits      99,148                        88,909                          80,923
Other non-interest bearing liabilities    11,274                        10,322                          10,635
Shareholders' equity                      27,475                        27,669                          36,438
                                        ---------                     ---------                       ---------
 Total average liabilities and
     shareholders' equity               $492,466                      $448,508                        $439,085
                                        =========                     =========                       =========
Net interest spread                                         3.84                            3.80                           3.97
                                                           ======                          ======                         ======
Net interest income and
  net interest margin                             $20,866   4.49%                $20,104    4.78%               $20,844    5.08%
                                                  ===============                ================               ================


(1) Investment securities are shown with the fair value adjustment included.
</TABLE>



     The Company's average earning assets for 2002 increased  approximately 11%,
or $44,273,000,  to $464,613,000,  as compared to $420,340,000 for 2001. Average
earning assets increased approximately 2%, or $9,799,000, in 2001 as compared to
2000.  During 2002, the increase in average  earning assets was driven by strong
deposit  growth.  The  increase in earning  assets  resulted  primarily  from an
increase of $33,347,000 in average outstanding  commercial real estate loans. In
December 2000, the Company sold $21,205,000 in single-family  residential  loans
and securitized another $17,949,000 as part of an asset repositioning  strategy.
The funds  received  from the loan sale have been used to fund  growth in higher
yielding  relationship-based   commercial  and  commercial  real  estate  loans.
Adjusting  for the impact of the 2000  single-family  residential  loan sale and
securitization, average portfolio loans increased $37,268,000 during 2001.

                                       26
<PAGE>

     With the increase in average  earning assets in 2002 discussed  above,  the
Company's funding levels also increased. The average balance of higher cost time
deposits increased  $31,321,000 in 2002 compared to an increase of $5,881,000 in
2001.  The  growth  in time  deposits  in 2002  was a result  of the  successful
introduction of the Company's liquid CD product. Additionally,  average interest
bearing  transaction  accounts  decreased  $469,000  in  2002 as  compared  to a
decrease of $2,089,000 in 2001. Average other borrowings increased $2,419,000 in
2002 and $6,727,000 in 2001, primarily due to the impact of the Company's pooled
trust preferred debt financing.

     The  following  table sets forth  changes in interest  income and  interest
expense  for  each  major   category  of  average   earning  asset  and  average
interest-bearing  liability, and the amount of change attributable to volume and
rate changes for the years indicated. Changes not solely attributable to rate or
volume have been allocated  proportionately  to the change due to volume and the
change due to rate.


<TABLE>
<CAPTION>
                                                          2002 over 2001                     2001 over 2000
                                                  ------------------------------     ------------------------------
                                                     Volume     Rate     Total         Volume      Rate    Total
                                                  ------------------------------     ------------------------------
                                                                           (in thousands)
<S>                                                  <C>     <C>       <C>             <C>      <C>       <C>
Increase (decrease) in interest income:
Portfolio loans (1), (2)                             $2,332  ($4,558)  ($2,226)        ($169)   ($1,696)  ($1,865)
Mortgage loans held for sale                             24      ---        24           ---        ---       ---
Investment securities                                   160     (704)     (544)          ---       (156)     (156)
Federal funds sold                                      365     (638)     (273)          539       (126)      413
                                                  ------------------------------     ------------------------------
  Total increase (decrease)                           2,881   (5,900)   (3,019)          370     (1,978)   (1,608)
                                                  ------------------------------     ------------------------------

Increase (decrease) in interest expense:
Interest bearing transaction accounts                   (10)  (1,134)   (1,144)          (60)      (853)     (913)
Time deposits                                         1,437   (4,144)   (2,707)          328       (954)     (626)
Trust preferred                                         130       (9)      121           882        ---       882
Other borrowings                                         28      (79)      (51)         (106)      (105)     (211)
                                                  ------------------------------     ------------------------------
  Total increase (decrease)                           1,585   (5,366)   (3,781)        1,044     (1,912)     (868)
                                                  ------------------------------     ------------------------------
  Increase (decrease) in net interest income         $1,296    ($534)     $762         ($674)      ($66)    ($740)
                                                  ==============================     ==============================

(1)  Does not include interest income which would have been earned on nonaccrual
     loans  had such  loans  performed  in  accordance  with  their  terms.

(2)  Amortized  loan fees of  $377,000,  $584,000  and  $966,000 are included in
     interest income for 2002, 2001 and 2000.
</TABLE>


     The net interest margin  decreased to 4.49% for the year ended December 31,
2002,  as compared to 4.78% and 5.08% for the years ended  December 31, 2001 and
2000.  During 2002 and 2001,  the Company's net interest  margin was  negatively
impacted by sluggish  loan growth and the decline in the general  interest  rate
environment. In addition, the pooled trust preferred debt financing which funded
two stock purchase plans had a negative  impact on the net interest margin of 19
basis points in 2002 and 21 basis points in 2001.  The yield on average  earning
assets decreased to 6.57% in 2002 compared to 7.98% in 2001 and 8.57% in 2000.

     The effective rates on average  interest-bearing  liabilities  decreased to
2.72% for 2002 as compared to 4.18% for 2001 and 4.60% for 2000. The decrease in
2002 and 2001 is attributable to a lower interest rate environment, as discussed
above,  offset by the  impact  of the  Company's  pooled  trust  preferred  debt
financing.

                                       27
<PAGE>

     Provision for Loan Losses.  Annual  fluctuations  in the provision for loan
losses  result  from  management's  regular  assessment  of the  adequacy of the
allowance for loan losses.  There was no provision for loan losses for the years
ended  December  31,  2002 and 2001.  In 2001,  the  provision  for loan  losses
decreased from $150,000 in 2000.  This decrease in the provision for loan losses
in 2002 and 2001  when  compared  to 2000 was due to the  minimal  level of loan
charge-offs and management's assessment of the level of risk in the portfolio.

     Noninterest Income. Noninterest income from continuing operations increased
15%, or  $1,016,000,  to $7,615,000  as compared to  $6,599,000,  for 2001.  The
Company's  noninterest  income from continuing  operations for 2001 increased by
$493,000 or 8% from the $6,106,000 it received  during 2000. The following table
sets forth the sources of noninterest income from continuing  operations for the
years ended December 31, 2002, 2001 and 2000.



<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                      2002        2001         2000
                                                  -----------------------------------
                                                             (in thousands)
<S>                                                 <C>         <C>          <C>
  Service charges on deposit accounts               $1,188      $1,116       $1,077
  Merchant draft processing, net                     5,009       4,240        4,856
  Loan servicing income                                268         295          272
  Net realized gains (losses) on
    securities available for sale                      294         112         (171)
  Gain (loss) on sale of loans                          13         ---         (584)
  Other income                                         843         836          656
                                                  ---------   ---------    ---------
                                                    $7,615      $6,599       $6,106
                                                  =========   =========    =========
</TABLE>




     Merchant  draft  processing  net revenue  amounted to $5,009,000 in 2002 as
compared to $4,240,000 in 2001 and  $4,856,000 in 2000. The increase of $769,000
during 2002 when compared to 2001 is a result of the Company  achieving  success
in building  its overall  merchant  draft  processing  business  through  direct
marketing efforts and new independent  sales  organization  (ISO) business.  The
decrease of $616,000  during 2001 when compared to 2000 is due to the expiration
of a large merchant draft processing  contract with an ISO. In 2000, the Company
benefited from the amortization of a lump sum payment of $2,600,000  received in
December  1998.  Such  payment  was a result  of a  renegotiated  merchant  card
services  contract  with an ISO. As of December 31,  2000,  the payment had been
fully  amortized.  For the year ended  December  31, 2000 the  Company  recorded
$1,440,000 as revenue associated with the payment. In addition,  under the terms
of the renegotiated  contract the Company received a contract,  completion bonus
in the amount of $528,000 during 2000.

                                       28
<PAGE>

     The Company bears certain risks  associated  with its merchant  credit card
processing  business.  Due to a contractual  obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
is unable to pay charge-backs from cardholders.  As a result of this obligation,
NBR may  incur  losses  associated  with its  merchant  credit  card  processing
business.  Accordingly,  NBR has  established  a reserve to  provide  for losses
associated with charge-back losses.  Such reserve,  which totaled $1,261,000 and
$1,212,000 as of December 31, 2002 and 2001,  was estimated  based upon industry
loss data as a  percentage  of  transaction  volume  throughout  each year,  the
historical  losses  incurred  by  NBR  and  management's  assumptions  regarding
merchant  and ISO risk.  For  additional  information,  please refer to "Certain
Important Considerations for Investors" in Item I in this Report.

     Loan servicing  revenues  decreased to $268,000 for the year ended December
31, 2002,  compared to $295,000 in 2001,  and $272,000 in 2000.  The decrease in
2002 was due to a decrease in the Company's servicing portfolio,  as compared to
an increase in the servicing portfolio during 2001. Future loan servicing income
will be  dependent,  in part,  on  prepayments  of loans  held in the  Company's
servicing portfolio.

     During 2002, the Company sold $9,025,000 in investment securities available
for sale, and recorded a gain on such sales of $294,000.  See Note D of Notes to
Consolidated  Financial Statements.  During 2001, the Company sold $5,806,000 in
investment  securities  available for sale, and recorded a gain on such sales of
$112,000.

     Noninterest  Expense.  Noninterest expense amounted to $16,005,000 in 2002,
$14,451,000  in 2001 and  $15,948,000  in 2000.  This  represents an increase of
$1,554,000  or 11% in 2002  and a  decrease  of  1,497,000  or 9% in  2001  when
compared to 2000.

     Salaries and employee benefits expense for 2002 increased $631,000,  or 8%,
to  $8,967,000,  as compared to  $8,336,000  for 2001.  This  compared with a 4%
decrease  during 2001 over the 2000  salaries and employee  benefits  expense of
$8,640,000.  The  increase  in 2002 is a result of an  increase  in the  average
number of  full-time-equivalent  staff employed by the Company.  The decrease in
2001 is a result of the  Company's  emphasis  on  improving  efficiency  through
process   improvement   and   job   function   consolidation.    The   Company's
full-time-equivalent  staff levels were 151,  148, and 150 at December 31, 2002,
2001, and 2000.

     Occupancy and equipment expense was $2,126,000 in 2002, $2,026,000 in 2001,
and  $2,040,000 in 2000.  In 2002  occupancy  and  equipment  expense  increased
$100,000 due to normal operating cost increases. In 2001 the decrease of $14,000
as  compared  to  2000  was  attributable  to  the  Company's   decreased  space
requirements as a result of the relocation of operating personnel.


                                       29
<PAGE>


     The following table describes the components of other  noninterest  expense
for the years ended December 31, 2002, 2001 and 2000.


<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                        2002        2001           2000
                                                  ---------------------------------------
                                                              (in thousands)
<S>                                                   <C>         <C>             <C>
        Professional fees                             $1,119        $360            $950
        Regulatory expense and insurance                 420         396             453
        Postage and office supplies                      531         529             463
        Shareholder expenses and director fees           379         377             412
        Advertising                                      400         484             420
        Telephone                                        395         389             351
        Electronic data processing                     1,113         944           1,274
        Other                                            555         610             945
                                                  ---------------------------------------
                                                      $4,912      $4,089          $5,268
                                                  =======================================
</TABLE>





     Other  noninterest  expenses  were  $4,912,000  during 2002, an increase of
$823,000,  or  20%,  when  compared  to  2001  expenses  of  $4,089,000.   Other
noninterest  expense decreased  $1,179,000 or 22% in 2001 when compared to 2000.
The increase during 2002 is in part due to legal and consulting fees of $415,000
associated with certain  corporate  activities,  including  exploring  strategic
options for the Company and its Merchant Card  Services  segment and $163,000 in
expenses  incurred  in  association  with  the  formation  of  NBR  Real  Estate
Investment  Trust.  The  decline  in  2001  was  the  result  of  an  efficiency
improvement  initiative,  which  began in  December  2000.  One  aspect  of such
initiative was to focus on vendor expense control.

     Income Taxes.  The Company's  effective tax rate varies with changes in the
relative  amounts of its  non-taxable  income and  nondeductible  expenses.  The
Company's  effective  tax rate on  continuing  operations  was 36.2% in 2002 and
40.4% in 2001 and 2000.  The primary  reason for the  reduction in the Company's
effective  tax rate in 2002 was the January 15, 2002  formation  of the NBR Real
Estate  Investment  Trust, a Maryland Real Estate  Investment Trust. This entity
was formed as a subsidiary of NBR to hold NBR's real estate secured loans and to
better organize NBR's marketing and origination of real estate secured  lending.
As a result of the formation and funding of this entity, along with the one-time
benefit  associated with the current year recapture of only 50% of the Company's
California state bad debt reserve,  and the allowed  permanent  deduction of the
other 50% of the  Company's  California  state bad debt  reserve,  the Company's
effective tax rate was reduced to 36.2%.


Business Segments

     The Company  operates in two principal  industry  segments:  core community
banking and merchant credit card services.  The Company's core community banking
industry segment includes commercial,  commercial real estate, construction, and
permanent residential lending along with


                                       30
<PAGE>

treasury  and  depository  activities.  The  Company's  merchant  card  services
industry group provides credit card settlement services for approximately 39,000
merchants throughout the United States.

         Summary financial data by industry segment follows:

<TABLE>
<CAPTION>
                                                  For the Year Ended,
                                                      December 31,
                                     -----------------------------------------------
                                          2002           2001            2000
                                     -----------------------------------------------
                                                     (in thousands)

    Community Banking:
<S>                                        <C>             <C>             <C>
     Revenue                                $22,876         $21,421         $20,960
     Expenses                                13,327          12,222          14,089
                                     -----------------------------------------------
         Income before income tax            $9,549          $9,199          $6,871
                                     ===============================================

    Average assets                         $465,678        $422,134        $414,181
                                     ===============================================

    Merchant Credit Card Services:
     Revenue                                 $5,605          $5,282          $5,990
     Expenses                                 2,678           2,229           2,009
                                     -----------------------------------------------
         Income before income tax            $2,927          $3,053          $3,981
                                     ===============================================

    Average assets                          $26,788         $26,374         $24,904
                                     ===============================================

    Total Company:
     Revenue                                $28,481         $26,703         $26,950
     Expenses                                16,005          14,451          16,098
                                     -----------------------------------------------
         Income before income tax           $12,476         $12,252         $10,852
                                     ===============================================

    Average assets                         $492,466        $448,508        $439,085
                                     ===============================================
</TABLE>


Community Banking

     The Community  Banking  segment's  income  before income taxes  amounted to
$9,549,000 in 2002 as compared to $9,199,000 in 2001 and $6,871,000 in 2000. The
Community Banking segment's  revenues increased in 2002 over 2001 as a result of
an increase in net interest  income.  Net interest  income  increased  due to an
increase in earning  assets,  offset by a decline in the general  interest  rate
environment  and the issuance of pooled trust preferred debt  securities,  which
have been fully allocated to the Community Banking segment.  The increase during
2001 over 2000 is the result of increased  service charges on deposit  accounts,
loan  servicing  income  and the  absence  of any  loss on  sale  of  loans  and
investment securities. Additionally, during 2002 and 2001, the Company increased
its loan portfolio through marketing efforts. Total average portfolio loans were
$356,953,000 in 2002 up from $327,913,000 in 2001.


Merchant Card Services

     The Merchant Card Services segment provides Visa and Mastercard credit card
processing and settlement  services for  approximately  39,000 merchants located
throughout the United States. In 2002,  processing volume exceeded $1.7 billion.
The  Company's  merchant  card  services


                                       31
<PAGE>

customer  base is made up of  merchants  located in its primary  market area and
merchants who have been acquired by the Company through the use of ISOs.

     During 2002, the Merchant Card Services segment net income decreased due to
an increase in salary and benefits  expenses.  The increase in the unit's salary
and benefits expense is due to a build-up in sales  development  personnel.  The
increase in expenses was partially  offset by an increase in processing  revenue
brought  about by the  Company's  efforts  to build its  overall  merchant  card
services business through direct marketing efforts, new ISO relationships and an
increase in the  realization  in deferred  processing  revenue  associated  with
certain merchants.  During 2001, the Merchant Card Services segment's net income
declined due to a decline in processing revenue,  which is directly attributable
to the expiration of a large  merchant  credit card  processing  contract in the
fourth  quarter of 2000.  In 2000 and 1999,  the  segment  had  experienced  two
successive years of revenue and earnings growth due to an increase in the number
of  merchants  it services  and an increase of ISOs to market its  services.  In
December 1998, the Company  renegotiated the terms of a processing contract with
an ISO who  represented  $1,736,000 or 66% of the Company's  merchant  draft net
processing  revenue,  $1,412,000 or 45%, $1,979,000 or 41% and $114,000 or 3% of
such revenue in 1999,  2000 and 2001. As a result of the  renegotiation  the ISO
brought down its processing rate in consideration for a payment of $2,600,000 to
the Company. The Company amortized the payment over the life of the renegotiated
contract. During 2000, 1999 and 1998, $1,440,000,  $910,000 and $250,000 of this
payment was recognized as revenue.  At December 31, 2000 such processing revenue
had been fully amortized.

     Under  the terms of the  renegotiated  contract,  the  Company  received  a
contract  completion  bonus in the amount of $528,000  during 2000.  Since April
1999, in an effort to offset the anticipated decline in future merchant bankcard
processing  revenues from the completion of the contract  discussed  above,  the
Company has been building its overall  merchant card services  business  through
additional  direct  marketing  efforts,   hiring  of  additional  personnel  and
developing new ISO  relationships.  Costs  associated with this build up account
for the increase in the unit's expenses in 2002, which amounted to $2,678,000 as
compared to $2,229,000 in 2001 and $2,009,000 in 2000.

     The Company bears certain risks  associated  with its merchant  credit card
processing  business.  Due to a contractual  obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
is unable to pay charge-backs from cardholders.  As a result of this obligation,
NBR may  incur  losses  associated  with its  merchant  credit  card  processing
business.  Accordingly,  NBR has  established  a reserve to  provide  for losses
associated with charge-back losses.  Such reserve,  which totaled $1,261,000 and
$1,212,000 as of December 31, 2002 and 2001,  was estimated  based upon industry
loss data as a percentage of transaction volume throughout each year, historical
losses incurred by NBR, and management's  assumptions regarding merchant and ISO
risk. The provision for charge-back  losses,  which is included in the financial
statements as a reduction in merchant  draft  processing  income,  was $246,000,
$138,000 and $713,000 in 2002, 2001 and 2000. The relatively higher level of the
provision  during  2000  reflects  the growth in  proprietary  merchant  account
volume,  increased exposure to internet merchants, and a new ISO relationship in
which the Company  assumed fraud risk directly  rather than looking first to the
ISO.  For   additional   information,   please   refer  to  "Certain   Important
Considerations for Investors" in Item I in this Report.


                                       32
<PAGE>


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



                                            For the Year Ended
                                               December 31,
                                        2002         2001        2000
                                   --------------------------------------
                                              (in thousands)

        Beginning allowance              $1,212        $1,277     $908
        Provision for losses                246           138      713
        Recoveries                           37           105      ---
        Charge-offs                        (234)         (308)    (344)
                                   --------------------------------------
        Ending allowance                 $1,261        $1,212   $1,277
                                   ======================================


Investment Portfolio

     The Company  classifies  its  investment  securities as held to maturity or
available  for sale.  The  Company's  intent is to hold all  securities  held to
maturity until maturity and management believes that the Company has the ability
to do so.  Securities  available for sale may be sold to implement the Company's
asset/liability  management  strategies  and in  response to changes in interest
rates,  prepayment rates and similar factors. The following table summarizes the
maturities of the Company's  debt  securities at their  carrying value and their
weighted average yields at December 31, 2002. In the following table,  yields on
tax-exempt securities have been presented on a tax-equivalent basis.



<TABLE>
<CAPTION>
                                                          Debt Securities
                                                         Available for Sale
                                                            After Five
                                      After One Through       Through            After
                    Within One Year       Five Years         Ten Years          Ten Years            Total
                  ------------------------------------------------------------------------------------------------
                    Amount    Yield    Amount    Yield     Amount   Yield    Amount    Yield     Amount    Yield
                  ------------------------------------------------------------------------------------------------
                                                      (dollars in thousands)
<S>                   <C>      <C>       <C>     <C>     <C>           <C>    <C>       <C>       <C>      <C>
 U.S. Government
   obligations        $3,029   2.95 %    $6,343  5.28 %  $     ---     ---      $ ---   ---        $9,372  4.53 %
 Mortgage-backed         ---    ---              ---           ---     ---     71,183   5.26%      71,183  5.26
 Other securities        ---    ---         ---  ---           ---     ---        ---   ---           ---   ---
                  -----------        -----------         -----------       -----------        ------------
   Total              $3,029   2.95 %    $6,343  5.28 %  $     ---     ---    $71,183   5.26 %    $80,555  5.17 %
                  ===========        ===========         ===========       ===========        ============
</TABLE>

<TABLE>
<CAPTION>
                                                         Held to Maturity
                                                            After Five
                                      After One Through       Through             After
                    Within One Year       Five Years          Ten Years          Ten Years           Total
                  ------------------------------------------------------------------------------------------------
                    Amount    Yield    Amount    Yield     Amount    Yield    Amount    Yield    Amount    Yield
                  ------------------------------------------------------------------------------------------------
                                                   (dollars in thousands)
<S>                    <C>      <C>       <C>     <C>        <C>      <C>      <C>      <C>       <C>      <C>
 U.S. Government
   obligations         $ ---    ---       $ ---   ---         $ ---   ---        $ ---   ---        $ ---   ---
 Mortgage-backed         ---    ---         ---   ---           ---   ---        8,611  8.17 %      8,611  8.17 %
 Other securities        ---    ---       1,190  4.36 %       1,887   4.53 %     5,076  4.33        8,153  2.71
                  -----------        -----------         -----------        -----------        -----------
   Total               $ ---    ---      $1,190  4.36 %      $1,887   4.53 %   $13,687  6.74 %    $16,764  5.82 %
                  ===========        ===========         ===========        ===========        ===========
</TABLE>


                                       33
<PAGE>



     The following table  summarizes the book value of the Company's  investment
securities held on the dates indicated:


<TABLE>
<CAPTION>
                                                                 Available for Sale
                                                                    December 31,
                                                       2002             2001             2000
                                                -----------------------------------------------------
                                                                   (in thousands)
<S>                                                     <C>               <C>              <C>
 U.S. Government obligations                             $9,372           $10,360          $28,001
 Mortgage-backed securities                              71,183            25,390           18,664
 Other securities                                           ---             9,308            5,967
 FHLB and FRB Stock                                       2,602             2,515            2,777
                                                -----------------------------------------------------
   Total                                                $83,157           $47,573          $55,409
                                                =====================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                  Held to Maturity
                                                                    December 31,
                                                       2002             2001             2000
                                               -----------------------------------------------------
                                                                   (in thousands)
<S>                                                    <C>                <C>              <C>
 U.S. Government obligations                           $    ---            $2,000          $12,991
 Mortgage-backed securities                               8,611             9,066           11,953
 Other securities                                         8,153             6,336            4,857
                                                -----------------------------------------------------
   Total                                                $16,764           $17,402          $29,801
                                                =====================================================
</TABLE>


Loan Portfolio


     The Company  concentrates its lending  activities in three principal areas:
real estate  mortgage  loans  (residential  and commercial  loans),  real estate
construction  loans and  commercial  loans.  At December 31,  2002,  these three
categories  accounted for  approximately  67%, 12% and 17% of the Company's loan
portfolio.  The  interest  rates  charged for the loans made by the Company vary
with the degree of risk,  the size and  maturity  of the loans,  the  borrowers'
depository  relationships  with the Company and  prevailing  money  market rates
indicative of the Company's cost of funds.

     Concentration of the Company's lending activities in the real estate sector
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. The ability of
the Company to continue to originate mortgage,  construction and other 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 or floods,  which may cause  uninsured  damage and other
loss of value to real estate that secures the Company's loans). In addition, the
long-term  impact of the California  energy crisis may cause adverse  changes in
the Company's  local  economy.  Due to the  concentration  of the Company's real
estate  collateral in California,  such events could have a significant  adverse
impact on the value of such collateral or the Company's earnings.

     The following table sets forth the amounts of loans outstanding by category
as of the dates indicated.  There were no  concentrations of loans exceeding 10%
of total loans which are not  otherwise  disclosed as a category of loans in the
table below.
                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                                        December 31,
                                   ---------------------------------------------------------------------------------------
                                          2002             2001             2000              1999             1998
                                   ---------------------------------------------------------------------------------------
                                                                       (in thousands)
<S>                                        <C>              <C>              <C>               <C>              <C>
 Residential real estate mortgage           $87,764         $101,175          $98,914          $130,504          $97,194
 Commercial real estate mortgage            158,018          121,456           93,091            79,476           59,257
 Commercial                                  62,958           70,438           66,645            61,165           63,260
 Real estate construction                    42,749           46,501           49,460            40,059           46,905
 Installment and other                       14,260           12,567            7,900             4,624            5,095
 Net deferred fees                             (673)            (488)            (909)           (1,383)          (2,395)
                                   ---------------------------------------------------------------------------------------
   Total loans                              365,076          351,649          315,101           314,445          269,316
 Allowance for loan losses                   (7,400)          (7,580)          (7,674)           (7,931)          (8,041)
                                   ---------------------------------------------------------------------------------------
   Net loans                               $357,676         $344,069         $307,427          $306,514         $261,275
                                   =======================================================================================
</TABLE>



     Real  Estate  Mortgage  Loans.  As of  December  31,  2002,  the  Company's
residential  mortgage  loans  totaled  $87,764,000,  or 24%, of its total loans.
These loans were  predominantly  originated  in Sonoma and  Mendocino  Counties.
Total  residential  loans  decreased  $13,411,000  during 2002 as compared to an
increase  of  $2,261,000  in 2001.  The  decrease  during 2002 was the result of
substantial paydown activity, as compared to the increase during 2001, which was
the result of normal loan origination  activity.  During 2000, total residential
loans  decreased  due to the  Company's  sale of  $21,205,000  in single  family
residential loans and the  securitization  of another  $17,949,000 as part of an
asset repositioning strategy. The funds received from the loan sale were used to
fund growth in higher yielding relationship-based commercial and commercial real
estate loans.

     At December 31, 2002,  $32,448,000,  or 37%, of the  Company's  residential
real estate mortgage loans were fixed-rate  mortgage loans having original terms
ranging from one to thirty  years.  Another  $17,540,000,  or 20%,  were held as
adjustable-rate  mortgages.  The balance of these  loans,  $37,776,000,  or 43%,
consisted of  multifamily  loans and loans on improved  single-family  lots. The
majority of the Company's  residential mortgage loans have been underwritten for
the  Company's  portfolio  and do not  necessarily  meet  standard  underwriting
criteria for sale in the secondary market. Approximately 48% of the total amount
outstanding had principal  balances that were less than $300,000.  The Company's
residential real estate mortgage loans  predominately have loan-to-value  ratios
of 80% or less,  using current loan balances and appraised values as of the time
of  origination.   The  Company's  general  policy  is  not  to  exceed  an  80%
loan-to-value ratio on residential mortgage loans without mortgage insurance.

                                       35
<PAGE>

    As of  December  31,  2002,  the Company had  outstanding  $158,018,000  in
commercial mortgage loans, which constituted 43% of total loans. Of these loans,
45% were secured by owner-occupied  commercial properties and have 5- to 15-year
maturities based upon 25- to 30-year amortization periods. The ratio of the loan
principal  amount to appraised  values is generally 75% or less, using appraised
values at the time of loan  origination,  and the  loans are for  owner-occupied
small office buildings or  office/warehouses.  The Company originates commercial
mortgage  loans that are  guaranteed by the SBA up to 70% to 90% of the balance.
The SBA guaranteed  portion of such loans can be sold into the secondary  market
with  the  unguaranteed  principal  balance  retained.  The  aggregate  retained
unguaranteed  principal  balance of such loans was $8  million at  December  31,
2002.  Approximately 30% of the total amount outstanding of commercial  mortgage
loans had principal balances that were less than $250,000.

     Real  Estate   Construction  Loans.  The  Company's  primary  market  focus
emphasizes  individual  borrowers and small residential and commercial projects.
The economic viability of the project and the borrower's past development record
and  creditworthiness  are  primary  considerations  in  the  loan  underwriting
decision.  The Company had  $42,749,000  in  construction  loans  outstanding at
December  31,  2002,  comprising  12% of  its  total  loans.  These  loans  were
principally  located in  Northern  California.  This  represents  a decrease  of
$3,752,000 or 8% from 2001. During 2001, construction loans decreased $2,959,000
or 6% from 2000. In 2000 construction  loans increased  $9,401,000 or 23%. As of
December  31,  2002,  approximately  $5 million of these loans  consisted  of 23
single-family  individual-borrower  construction  loans, and the remaining loans
included 24 subdivision  projects, 16 land development projects and 8 commercial
projects.  At December 31, 2002,  the largest  single-family  construction  loan
commitment was  $1,240,000,  and the average  commitment was less than $494,000.
The largest commitment for a subdivision  project was $6,276,000 and the average
subdivision  commitment was less than $1,117,000.  The average  commitment for a
commercial project was approximately $1,387,000.

     Construction  loans are funded on a  line-item,  percentage  of  completion
basis.  As the  builder  completes  various  line  items  (foundation,  framing,
electrical,  etc.) of the project,  or portions of those line items, the work is
reviewed by one of several  independent  inspectors  hired by the Company.  Upon
approval from the inspector, the Company funds the draw request according to the
percentage completion of the line items that have been approved.  Actual funding
checks must be signed by an officer of the  Company,  and that officer must also
initial the line-item  worksheet used to support the draw request.  In addition,
Company personnel or agents routinely inspect the various construction projects,
all of which are located in the Company's lending area.

     Commercial real estate mortgage and construction lending contains potential
risks which are not inherent in other types of portfolio loans.  These potential
risks include  declines in market values of underlying real property  collateral
and, with respect to construction lending, delays or cost overruns,  which could
expose the Company to loss. In addition, risks in commercial real estate lending
include declines in commercial real estate values,  general economic  conditions
surrounding the commercial  real estate  properties and vacancy rates. A decline
in general economic conditions or real estate values within the Company's market
area could have a negative  impact on the  performance  of the loan portfolio or
value of the collateral.  Because the Company lends primarily  within its market
area,  the real  property  collateral  for its loans is similarly  concentrated,
rather than  diversified  over a broader  geographic  area.  The  Company  could
therefore  be  adversely  affected  by a decline  in real  estate  values in its
primary  market area even if real estate values  elsewhere in California  remain
stable or increase.

                                       36
<PAGE>

     Commercial   Loans.   Commercial  loans  consist  primarily  of  short-term
financing  for  businesses  and  professionals  located in Sonoma and  Mendocino
Counties. At December 31, 2002, these loans totaled $62,958,000,  or 17%, of the
Company's  total  loans.  This  represents  a decrease of  $7,480,000  or 11% as
compared to an increase of $3,793,000  or 6% from 2001 and 2000.  The decline in
commercial  loans during 2002 is due to normal loan payoffs and the  competitive
banking environment. The increase during 2001 was due to the Company's marketing
efforts and a general  expansion of businesses within the Company's market area.
The commercial  loans are  diversified as to industries and types of businesses,
with no significant industry concentrations. Commercial loan borrowers generally
have  deposit  relationships  with the  Company.  The  commercial  loans  can be
unsecured  or secured  by  various  assets,  including  equipment,  receivables,
deposits and other  assets.  Commercial  loans may be secured by  commercial  or
residential  property;  however, they are not classified as mortgage loans since
these loans are not typically taken out for the purpose of acquiring real estate
and the loans are short-term.  In these cases, the mortgage  collateral is often
taken as additional collateral.  As of December 31, 2002, the size of individual
commercial  loans varied widely,  with 93% having  principal  balances less than
$350,000.  At December 31, 2002, the Company had 10 commercial  borrowers  whose
aggregate individual liability exceeded $2,000,000.

     Loan  Commitments.  In the normal  course of  business,  there are  various
commitments outstanding to extend credit that are not reflected in the financial
statements.  Annual review of the commercial credit lines and ongoing monitoring
of  outstanding  balances  reduces  the  risk  of  loss  associated  with  these
commitments. There were $75,958,000 in undisbursed loan commitments and $307,000
in standby letters of credit.

     Maturity Distribution.  The following table shows the maturity distribution
of the Company's commercial and real estate construction loans outstanding as of
December 31, 2002, which, based on remaining scheduled  repayments of principal,
were due within the periods indicated.


<TABLE>
<CAPTION>
                                                        After One
                                              Within     Through    After Five
                                             One Year   Five Years    Years        Total
                                          -------------------------------------------------
                                                           (in thousands)

<S>                                            <C>         <C>         <C>        <C>
   Commercial                                  $19,433     $17,403     $26,122     $62,958
   Real estate construction                     33,816       8,807         126      42,749
                                          -------------------------------------------------
     Total                                     $53,249     $26,210     $26,248    $105,707
                                          =================================================


   Loans with fixed interest rates              $5,681      $3,828        $839     $10,348
   Loans with variable interest rates           47,568      22,382      25,409      95,359
                                          -------------------------------------------------
     Total                                     $53,249     $26,210     $26,248    $105,707
                                          =================================================
</TABLE>



                                       37
<PAGE>


Deposit Structure

     The Company's time deposits of $100,000 or more had the following  schedule
of maturities at December 31, 2002 (in thousands):


              Remaining Maturity:
                Three months or less                           $30,400
                Over three months to six months                 13,248
                Over six months to 12 months                    21,997
                Over 12 months                                   3,355
                                                    -------------------
                  Total                                        $69,000
                                                    ===================


     Time  deposits of $100,000 or more are generally  from the Company's  local
business and professional customer base. The Company primarily attracts deposits
from local businesses and professionals,  as well as through retail certificates
of deposits,  savings and checking accounts.  In addition to the Company's local
depository  offices,  it  attracts  certificates  of  deposit,   primarily  from
financial  institutions  throughout the nation,  by publishing rates in national
publications.  These  certificates  of deposit  have often been set at  interest
rates at local market  retail  deposit rates to attract  deposits.  The national
deposit market is utilized to supplement the Company's  liquidity  needs.  There
can be no assurance that this funding practice will continue to provide deposits
at attractive  rates or that applicable  federal  regulations will not limit the
Company's  ability  to  attract  deposits  in this  manner.  The  amount of such
deposits  was  $399,000 and  $11,052,000  as of December 31, 2002 and 2001.  The
Company  generally  does not  purchase  brokered  deposits  and had no  brokered
deposits at December 31, 2002. The Company also accepts  certificates of deposit
from  the  State  of  California.  Such  certificates  of  deposit  amounted  to
$10,000,000 and $15,045,000 as of December 31, 2002 and 2001. In order to accept
deposits  from the  State of  California,  the  Company  is  required  to pledge
investment  securities.  The  carrying  amount of such  securities  amounted  to
$13,016,000 and $16,786,000 as of December 31, 2002 and 2001.


                                       38
<PAGE>



     The following table sets forth the  distribution  of the Company's  average
daily deposits for the periods indicated.



<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                 ------------------------------------------------------------------
                                        2002                  2001                   2000
                                 ---------------------  --------------------   --------------------
                                     Amount     Rate       Amount     Rate       Amount      Rate
                                 ---------------------  --------------------   --------------------
                                                      (dollars in thousands)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
 Transaction accounts:
   Savings & Money Market            $93,166    1.56%      $95,773    2.59%      $98,576    3.40 %
   NOW                                29,902    0.55        27,764    1.00        27,050    1.19
   Noninterest bearing                99,148     ---        88,909     ---        80,923     ---
 Time deposits $100,000 and over      91,705    3.27       102,185    5.28        81,215    5.86
 Other time deposits                 125,627    3.16        83,826    5.09        98,915    5.60
</TABLE>


     The potential  impact on the  Company's  liquidity  from the  withdrawal of
these  deposits is considered in the  Company's  asset and liability  management
policies,  which  attempt to  anticipate  adequate  liquidity  needs through its
management of  investments,  federal  funds sold,  or by  generating  additional
deposits.


Other Borrowings

     NBR has a short term borrowing agreement with the Federal Home Loan Bank of
San  Francisco  (FHLB).   This  agreement  is  collateralized  by  approximately
$42,000,000 in residential  mortgage loans.  Available credit under this line at
December  31, 2002 was  $37,000,000.  Advances  can be made on a  long-term  and
short-term basis with a rolling maturity date. On occasion,  a borrowing is made
on a fixed maturity basis.  In such  instances,  maturities do not extend beyond
one  year.  As of  December  31,  2002,  there  was an  outstanding  balance  of
$5,000,000 under this line.  Redwood also maintains a $2,500,000  unsecured line
of credit with a major financial institution. As of December 31, 2002, there was
an outstanding  balance of $1,150,000 under this line. In addition,  the Company
enters into various short-term borrowing agreements, which include Treasury, Tax
and  Loan  borrowings.  These  borrowings  have  maturities  of one  day and are
collateralized by investments or loans.

     The following  table  summarizes the balances  outstanding at year end, the
highest amount of borrowings  outstanding  for a month-end  during the year, the
average balance of borrowings and the weighted  average rate for the years ended
December 31, 2002, 2001 and 2000 (in thousands).


<TABLE>
<CAPTION>
                                                       2002           2001          2000
                                                 -------------------------------------------

<S>                                                 <C>           <C>             <C>
 Balance, December 31                                $12,356         $3,870         $3,528
 Average balance during the year                       4,169          3,360          5,333
 Weighted average interest rate during the year        2.11%          4.14%          6.56%
 Maximum month-end balance during year               $12,356         $6,000        $11,350
 Date of maximum month-end balance                  December      September       November
</TABLE>



                                       39
<PAGE>


Trust Preferred Securities

     On February 22, 2001,  Redwood  Statutory Trust I ("RSTI"),  a wholly owned
subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities
with a  liquidation  amount of $1,000  per  security.  The net  proceeds  of the
offering  were  loaned  to the  Company  in  exchange  for  junior  subordinated
debentures with terms similar to the Capital Securities. The sole assets of RSTI
are the junior subordinated  debentures of the Company and payments  thereunder.
The  junior  subordinated  debentures  and  the  back-up  obligations,   in  the
aggregate,  constitute a full and unconditional  guarantee by the Company of the
obligations of RSTI under the Capital  Securities.  Distributions on the Capital
Securities  are  payable  semi-annually  at the  annual  rate of  10.2%  and are
included in interest expense in the  consolidated  financial  statements.  These
securities are considered Tier 1 capital (with certain  limitations  applicable)
under  current  bank  regulatory  guidelines.  As  of  December  31,  2002,  the
outstanding  principal  balance of the Capital  Securities was $10,000,000.  The
principal  balance of the  Capital  Securities  constitute  the trust  preferred
securities in the financial statements.

     The junior subordinated debentures are subject to mandatory redemption,  in
whole or in part, upon repayment of the Capital  Securities at maturity or their
earlier  redemption at the  liquidation  amount.  Subject to the Company  having
received prior approval of the Federal  Reserve,  if then required,  the Capital
Securities  are  redeemable  prior to the maturity date of February 22, 2031, at
the option of the Company;  on or after February 22, 2021 at par; or on or after
February 22, 2011 at a premium,  or upon the  occurrence of specific  events set
forth in the trust indenture.  The Company has the option to defer distributions
on the  Capital  Securities  from  time to time for a period  not to  exceed  10
consecutive semi-annual periods.

Asset Quality

     The Company  attempts to minimize credit risk through its  underwriting and
credit  review  policies.  The Company  conducts its own internal  credit review
processes  and, in addition,  contracts  with an  independent  loan reviewer who
performs  semi-annual reviews of new loans and potential problem loans that fall
within predetermined  parameters.  The Board of Directors of NBR has an internal
asset review  committee which reviews the asset quality of new and problem loans
on a quarterly basis and reports the findings to the full Board. In management's
opinion,  this  loan  review  system  facilitates  the early  identification  of
potential problem loans.

     The  performance of the Company's loan portfolio is evaluated  regularly by
management.  The  Company  places a loan on  nonaccrual  status  when one of the
following events occurs: (1) any installment of principal or interest is 90 days
or more past due (unless, in management's  opinion, the loan is well secured and
in the process of collection); (2) management determines the ultimate collection
of principal of or interest on a loan to be unlikely; or (3) the terms of a loan
have been  renegotiated to less than market rates due to a serious  weakening of
the borrower's financial condition.

                                       40
<PAGE>

     With respect to the Company's  policy of placing loans 90 days or more past
due on  nonaccrual  status unless the loan is well secured and in the process of
collection, a loan is considered to be in the process of collection if, based on
a  probable  specific  event,  it is  expected  that the loan  will be repaid or
brought  current.  Generally,  this collection  period would not exceed 30 days.
When a loan is placed on nonaccrual  status,  the Company's general policy is to
reverse  and  charge  against  current  income  previously  accrued  but  unpaid
interest.  Interest income on such loans is subsequently  recognized only to the
extent that cash is received  and future  collection  of  principal is deemed by
management to be probable.  Where the collectability of principal or interest on
a loan is  considered to be doubtful by  management,  it is placed on nonaccrual
status prior to becoming 90 days delinquent.

     Interest income is recognized on impaired loans in a manner similar to that
of all loans.  It is the Company's  policy to place loans that are delinquent 90
days or more as to  principal  or  interest  on  nonaccrual  status  unless well
secured and in the process of  collection,  and to reverse from  current  income
accrued  but  uncollected  interest.  Cash  payments  subsequently  received  on
nonaccrual  loans are  recognized  as income only when the future  collection of
principal is considered by management to be probable.

     At December 31, 2002 and 2001, the Company's  total recorded  investment in
impaired loans was $2,794,000 and $3,176,000 of which  $2,493,000 and $2,892,000
related to the recorded  investment  for which there is a related  allowance for
credit losses of $670,000 and $318,000.  The amount of that recorded  investment
for which  there is no related  allowance  for credit  losses was  $301,000  and
$284,000 at December 31, 2002 and 2001. At December 31, 2002,  substantially all
of the  impaired  loan  balance  was  measured  based on the  fair  value of the
collateral,  with the remainder  measured by the estimated present value of cash
flows.

     The average  recorded  investment in impaired  loans during the years ended
December 31, 2002, 2001 and 2000 was $1,866,000,  $2,973,000 and $1,424,000. The
related amount of interest income  recognized  during the period that such loans
were impaired during such year was $65,000, $49,000 and $65,000.

     As of December 31, 2002 and 2002,  there were  $2,516,000 and $2,892,000 of
loans on which the accrual of interest had been  discontinued.  Interest due but
excluded from interest income on loans placed on nonaccrual  status was $66,000,
$88,000  and  $72,000  for the years ended  December  31,  2002,  2001 and 2000.
Interest income received on nonaccrual  loans was $0, $1,000 and $14,000 for the
years ended December 31, 2002, 2001 and 2000.




                                       41
<PAGE>


The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated.


<TABLE>
<CAPTION>
                                                                               December 31,
                                                          ---------------------------------------------------------
                                                            2002        2001       2000        1999        1998
                                                          ---------------------------------------------------------
                                                                           (dollars in thousands)

<S>                                                          <C>        <C>         <C>         <C>         <C>
 Nonaccrual loans                                            $2,516     $2,892        $908      $3,063      $5,556
 Accruing loans past due 90 days or more                          6        ---         ---         ---         ---
 Restructured loans (in compliance with modified terms)         272        284         295       1,018       1,045
                                                          ---------------------------------------------------------
   Total nonperforming loans                                  2,794      3,176       1,203       4,081       6,601
 Other real estate owned                                        ---        ---         757       2,363       2,181
 Other assets owned                                             ---        ---         ---         ---         129
                                                          ---------------------------------------------------------
   Total nonperforming assets                                $2,794     $3,176      $1,960      $6,444      $8,911
                                                          =========================================================

 Nonperforming loans to total loans                            0.77%      0.90%       0.38%       1.30%       2.45%
 Nonperforming assets to total assets                          0.54       0.71        0.43        1.52        2.11
 Allowance for loan losses to nonperforming assets           264.85     238.66      391.53      123.08       90.24
 Allowance for loan losses to nonperforming loans            264.85     238.66      637.91      194.34      121.82
</TABLE>


     Nonperforming loans totaled $2,794,000 at December 31, 2002,  consisting of
$476,000  that were  secured  by  residential  real  estate  with the  remaining
$2,318,000  either unsecured or  collateralized by various business assets other
than real estate.

     At December 31, 2002,  the Company did not carry any assets  classified  as
other real estate owned.

     In  addition  to the  above  mentioned  assets,  as of  December  31,  2002
management of the Company has identified  eight lending  relationships  which in
aggregate amount to approximately  $1,244,000 in potential  nonperforming loans,
as to which it has serious  doubts as to the ability of the  borrowers to comply
with the  present  repayment  terms and which may become  nonperforming  assets,
based on known information  about possible credit problems of the borrower.  Two
of these loans are secured by real estate and the others are secured by business
assets.


                                       42
<PAGE>


         The following table provides certain information for the years
indicated with respect to the Company's allowance for loan losses as well as
charge-off and recovery activity.



<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                      -----------------------------------------------------------------
                                         2002         2001          2000         1999          1998
                                      -----------------------------------------------------------------
                                                           (dollars in thousands)


<S>                                            <C>          <C>           <C>          <C>           <C>
 Balance at beginning of period                $7,580       $7,674        $7,931       $8,041        $7,645
                                           -----------------------------------------------------------------

 Charge-offs:
   Residential real estate mortgage               ---          ---           111           21           617
   Commercial real estate mortgage                ---          ---           ---          612           355
   Commercial                                     264          177           461          769           794
   Real estate construction                        22          ---            90          100           179
   Installment and other                           12            8            39           13            55
                                           -----------------------------------------------------------------
 Total charge-offs                                298          185           701        1,515         2,000
                                           -----------------------------------------------------------------

 Recoveries:
   Residential real estate mortgage               ---            4            69           42            31
   Commercial real estate mortgage                ---          ---            22           45            10
   Commercial                                      99           75           169          498           279
   Real estate construction                         2         ---              3           53             3
   Installment and other                           17           12            31           17            33
                                           -----------------------------------------------------------------
 Total recoveries                                 118           91           294          655           356
                                           -----------------------------------------------------------------

 Net charge-offs                                  180           94           407          860         1,644
                                           -----------------------------------------------------------------

 Provision for loan losses                        ---          ---           150          750         2,040
                                           -----------------------------------------------------------------

 Balance at end of period                      $7,400       $7,580        $7,674       $7,931        $8,041
                                           =================================================================

 Net charge-offs during the period
   to average loans                              0.05%        0.03%         0.12%        0.29%         0.62%
 Allowance for loan losses to total loans        2.03         2.16          2.44         2.52          2.99
 Allowance for loan losses
   to nonperforming loans                      264.85       238.66        637.91       194.34        121.82
</TABLE>



     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.

                                       43
<PAGE>

         The adequacy of the Company's allowance for loan losses is based on
specific and formula allocations to the Company's loan portfolio. Specific
allocations of the allowance for loan losses are made to identified problem
loans where management has identified significant conditions or circumstances
related to a given loan, which management believes indicates the probability
that a loss may occur. The specific allocations are increased or decreased
through management's reevaluation on a quarterly basis 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.

     It is the policy of management to make  additions to the allowance for loan
losses so that it  remains  adequate  to cover  probable  incurred  losses,  and
management  believes  that the  allowance  at December  31,  2002 was  adequate.
However,  the  determination  of the amount of the allowance is  judgmental  and
subject  to  economic  conditions  which  cannot be  predicted  with  certainty.
Accordingly,  the Company cannot predict whether  charge-offs of loans in excess
of the allowance may be required in future periods.

     The table below sets forth the  allocation of the allowance for loan losses
by loan type as of the dates specified.  The allocation of individual categories
of loans  includes  amounts  applicable  to  specifically  identified as well as
estimated  losses  inherent  in that  segment  of the  loan  portfolio  and will
necessarily change whenever management  determines that the risk characteristics
of the loan portfolio have changed.

     Management  believes  that any breakdown or allocation of the allowance for
loan losses into loan  categories  lends an appearance of exactness,  which does
not exist,  in that the allowance is utilized as a single  amount  available for
all loans.  The  allocation  below should not be interpreted as an indication of
the specific amounts or loan categories in which future charge-offs will occur.


                                       44
<PAGE>




<TABLE>
<CAPTION>
                                                              December 31,
                      -----------------------------------------------------------------------------------------------------
                            2002                2001               2000              1999               1998
                      -----------------------------------------------------------------------------------------------------
                      Allowance    % of    Allowance    % of    Allowance    % of    Allowance    % of   Allowance    % of
                      for Losses   Loans   for Losses   Loans   for Losses   Loans   for Losses   Loans  for Losses   Loans
                      -----------------------------------------------------------------------------------------------------
                                                        (dollars in thousands)

<S>                     <C>       <C>        <C>       <C>        <C>       <C>        <C>      <C>        <C>       <C>
 Residential real
  estate mortgage       $1,322     24%       $1,283     29%       $1,194     32%       $2,258    42%       $1,725     36%
 Commercial real
   estate mortgage       2,386     43         1,839     34         1,549     29           947    25         1,260     22
 Commercial              2,341     17         2,198     20         2,187     21         2,088    19         2,514     23
 Real estate
construction               871     12         1,433     13         1,416     16         1,064    13         1,691     17
 Installment and
other                      447      4           427      4           257      2           130     1           207      2
 Unallocated                33    ---           400    ---         1,071    ---         1,444   ---           644    ---
                       ---------------    -----------------     ----------------   -----------------    -----------------
 Total                  $7,400    100%       $7,580    100%       $7,674    100%       $7,931   100%       $8,041    100%
                       ===============    =================     ================   =================    =================
</TABLE>


Mortgage Repurchase Commitments

     From time to time the Company may be required to repurchase  mortgage loans
from  mortgage  loan  investors as a result of breaches of  representations  and
warranties in the purchase  agreement between the investor and the Company.  The
Company may also be required to  reimburse a mortgage  loan  investor for losses
incurred  as a result of  liquidating  collateral,  which had secured a mortgage
loan sold by the  Company.  Such  representations  and  warranties  include  the
existence of a valid appraisal, status of borrower or fraud. The Company expects
that it may be  required  to  repurchase  loans in the  future.  During 2002 the
Company was required to repurchase one mortgage loan for $72,000, as compared to
2001,  during  which the Company was not  required to  repurchase  any  mortgage
loans. In 2000, the Company was required, by various mortgage loan investors, to
repurchase 2 nonperforming residential mortgage loans totaling $120,000.


Investment in REMIC

     In 1995,  Allied,  formally a wholly owned  subsidiary of Redwood which was
merged into NBR in 1997,  sold a COFI ARM mortgage pool whose carrying value was
approximately $73.9 million as part of a transaction that resulted in creating a
Real Estate  Mortgage  Investment  Conduit  ("REMIC").  The REMIC  issued  three
classes of mortgage  pass-through  mortgage  certificates,  A, B and C. The sale
transaction  took place as a result of Allied  selling 100% interest in the COFI
indexed ARM mortgage  pool in exchange for cash of $71.5 million and a Class "B"
certificate  which  represented  the first  loss  position  with  respect to any
ultimate losses realized upon the liquidation of defaulted mortgage loans in the
pool.  As part of the sale  transaction,  Allied  retained the  servicing of the
pool.  The  Class  "A" and  Class "B"  certificates  have  sequential  rights to
principal  payments,  such that the Class "B"  certificate  shall  only  receive
principal payments after all Class "A" certificates are retired.

                                       45
<PAGE>



     The  composition  of the  original  certificate  balances  along with their
respective December 31, 2002 balances is as follows:


                                           Original         December 31, 2002
                                         Certificate           Certificate
                                          Face Value            Face Value
                                     --------------------  --------------------

                       Class A              $73,199,448             $2,598,893
                       Class B                3,249,067              3,196,477
                       Class C                      100                    100
                                     --------------------  --------------------
                                            $76,448,615             $5,795,470
                                     ====================  ====================

     Since  inception the pool has realized  losses of $52,590 which reduced the
original face value of the Class "B" certificate.


Contractual Obligations and Commitments

     The  following  table  presents  our  longer  term,   non-deposit  related,
contractual  obligations  and our commitments to extend credit to our borrowers,
in aggregate and by payment due dates:




<TABLE>
<CAPTION>
                                                                           December 31, 2002
                                                   ------------------------------------------------------------------
                                                     Less Than     One Through      Four To     After Five
                                                      One Year     Three Years    Five Years      Years      Total
                                                   ------------------------------------------------------------------
                                                                            (in thousands)

<S>                                                        <C>             <C>           <C>        <C>      <C>
 Trust preferred securities                                $ ---           $ ---         $ ---      $10,000  $10,000
 Operating leases (premises)                               1,455           1,850         1,248          556    5,109
                                                   ------------------------------------------------------------------
     Total long-term debt
         and operating leases                             $1,455          $1,850        $1,248      $10,556  $15,109
                                                   =========================================================

 Commitments to extend credit                                                                                 75,959
 Standby letters of credit                                                                                       307
                                                                                                           ----------
      Total contractual obligations and commitments                                                          $91,375
                                                                                                           ==========
</TABLE>


                                       46
<PAGE>


Liquidity


     Redwood's  primary  source of liquidity is  dividends  from NBR.  Redwood's
primary uses of liquidity are associated with common stock repurchases, dividend
payments made to the shareholders, interest payments relating to Redwood's trust
preferred debt and operating  expenses.  It is the Company's  policy to maintain
liquidity  levels  at  the  parent  company  which  management  believes  to  be
consistent  with the  safety and  soundness  of the  Company  as a whole.  As of
December 31, 2002, Redwood held $46,000 in deposits at NBR. In addition, Redwood
has a $2,500,000  unsecured line of credit with a major  financial  institution,
which bears an interest rate equal to the federal  funds rate plus 1.50%.  As of
December 31, 2002,  there was an  outstanding  balance of $1,150,000  under this
line of credit.

     Payment of dividends by Redwood is ultimately  dependent on dividends  from
NBR to Redwood.  Federal regulatory  agencies have the authority to prohibit the
payment of  dividends  by NBR to Redwood if a finding is made that such  payment
would   constitute   an  unsafe  or  unsound   practice   or  if  NBR  would  be
undercapitalized  as a  result.  If NBR is  restricted  from  paying  dividends,
Redwood might be unable to pay the above obligations.  No assurance can be given
as to the ability of NBR to pay dividends to Redwood.  At December 31, 2002, NBR
could not pay additional dividends to Redwood without prior regulatory approval.
The approval of the OCC is required for the payment of dividends if the total of
all dividends  declared by a national bank in any calendar year would exceed the
total of its net profits of that year  combined with its retained net profits of
the two preceding  years,  less any required  transfers to surplus or a fund for
the retirement of any preferred  stock.  In January 2003, NBR received  approval
for its 2003  dividend  plan from the OCC. In 2002,  2001 and 2000 NBR  declared
dividends  payable to Redwood of  $6,600,000,  $5,900,000 and  $12,129,000.  For
additional  information,  please see "Regulation  and  Supervision" in Item I of
this report and Note N to the Consolidated Financial Statements included in this
Report.

     Although  each  entity  within  the  consolidated  group  manages  its  own
liquidity,  the  Company's  consolidated  cash flows can be  divided  into three
distinct areas; operating,  investing and financing. For the year ended December
31, 2002, the Company  received  $5,261,000  and  $57,687,000 in cash flows from
operations  and  financing  activities  while  using  $47,860,000  in  investing
activities.

     The principal  source of asset  liquidity is federal funds sold.  Secondary
sources of liquidity are loan repayments,  investment  securities  available for
sale, maturing investment securities held to maturity, and loans and investments
that can be used as collateral for other  borrowings.  At December 31, 2002, the
Company had $17,500,000 in federal funds sold. Total investment  securities were
$99,921,000, of which $34,402,000 were pledged.

                                       47
<PAGE>

     Liability-based liquidity includes interest-bearing and noninterest bearing
retail deposits,  which are a relatively  stable source of funds,  time deposits
from  financial  institutions   throughout  the  United  States,  federal  funds
purchased,  and other  short-term  and long-term  borrowings,  some of which are
collateralized.  As required by the Federal Home Loan Bank,  NBR  collateralizes
its advances from the FHLB with residential mortgage loans. Management uses FHLB
advances  as part of its  funding  strategy  because  the  rates  paid for those
advances are generally in line with the rates paid on time deposits. At December
31, 2002,  approximately  $42,000,000 of residential mortgage loans were pledged
to secure any funds the Company  may borrow  from the FHLB in the future.  NBR's
FHLB borrowing limitation at December 31, 2002 was $37,000,000.  At December 31,
2002, NBR had outstanding FHLB advances of $5,000,000.  At December 31, 2001 and
2000 NBR had paid off all FHLB  advances.  Management  believes that at December
31, 2002 the  Company's  liquidity  position was adequate for the  operations of
Redwood and its subsidiaries for the foreseeable future.


Capital

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

     The Company and NBR are each 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 two sets of standards:  "risk-based"  and
"leverage".

     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, trust preferred  securities,  for up to 25% of
total tier 1 capital,  and  noncumulative  preferred stock) and "Tier 2" capital
(defined  as   principally   comprising   the  allowance  for  loan  losses  and
subordinated  debt).  At December 31, 2002,  2001 and 2000,  the Company and its
subsidiaries  were required to maintain a total  risk-based  capital ratio of 8%
and a Tier 1 capital ratio of at least 4%.

     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% for other than the highest rated  institutions.  The
minimum  leverage  ratio for the Company and NBR is based on average  assets for
the quarter.

     NBR maintains  insurance on its customer  deposits with the Federal Deposit
Insurance  Corporation  ("FDIC").  The  FDIC  manages  the Bank  Insurance  Fund
("BIF"), which insures deposits of commercial banks such as NBR, and the Savings
Association   Insurance  Fund  ("SAIF"),   which  insures  deposits  of  savings
associations.  FDICIA mandated that the two funds maintain  reserves at 1.25% of
their respective federally insured deposits.


                                       48
<PAGE>


     The table  below  shows  the  capital  ratios  for the  Company  and NBR at
December 31, 2002.



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

<S>                                                                <C>           <C>
          Total capital to risk weighted assets                    10.72%        10.94%
          Tier 1 capital to risk weighted assets                    9.18          9.68
          Leverage ratio                                            6.96          7.35
</TABLE>


     Under the most stringent capital requirement, the Company has approximately
$10,542,000   in   capital   above   the   level  at   which  it  would   become
under-capitalized.  Similarly,  NBR has $11,395,000 in capital in excess of that
level.



Common Stock Repurchase

     During the years  ended  December  31,  2002,  2001 and 2000,  the  Company
repurchased  common stock of the  Company.  The number of shares and the average
cost per share of such repurchases is as follows:



                                     2002      2001      2000
                                  --------------------------------

 Common shares repurchased           137,328   866,308    643,313

 Average price paid                   $27.55    $18.92     $12.88


     The above table reflects the  three-for-two  common stock split,  which was
effective on October 19, 2001.

     As of the date of this  filing,  the  Company  has a current  common  stock
repurchase  authorization  outstanding of 355,500 shares,  of which 237,003 have
been purchased at an average cost of $26.81.



Certifications Under Section 906 of the Sarbanes-Oxley Act of 2002

     The  certification  by the  Company's  chief  executive  officer  and chief
financial officer of this report on Form 10-K, as required by section 906 of the
Sarbanes-Oxley  Act of 2002 (18 U.S.C.  Section 1350), has been submitted to the
Securities  and Exchange  Commission as additional  correspondence  accompanying
this report.

Item 7A. Quantitative and Qualitative Disclosures 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


                                       49
<PAGE>

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" in Item 7.

     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.  NBR'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. NBR, 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. NBR 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.

     NBR 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.  NBR has adopted  formal  policies and practices to
monitor and manage  interest  rate risk  exposure.  As part of this effort,  NBR
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.


                                       50
<PAGE>


         The following table sets forth, as of December 31, 2002, the
distribution of repricing opportunities for the Company's earning assets and
interest-bearing liabilities, the interest rate sensitivity gap, the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.,
earning assets divided by interest-bearing liabilities) and the cumulative
interest rate sensitivity gap ratio.

<TABLE>
<CAPTION>
                                                               After Three   After Six   After One
                                                    Within     Months But   Months But    Year But
                                                     Three     Within Six     Within       Within   After Five
                                                    Months       Months      One year    Five Years    Years      Total
                                                 --------------------------------------------------------------------------
                                                                          (dollars in thousands)
<S>                                                  <C>          <C>         <C>           <C>        <C>        <C>
Earning assets:
Federal funds sold                                     $17,500        $ ---        $ ---       $ ---      $ ---    $17,500
Investment securities                                    7,165        7,240       16,887      49,140     19,489     99,921
Loans                                                   99,763       56,893       31,916     138,534     37,970    365,076
                                                 --------------------------------------------------------------------------
Total earning assets                                   124,428       64,133       48,803     187,674     57,459    482,497
                                                 --------------------------------------------------------------------------

Interest-bearing liabilities:

Interest-bearing transaction accounts                  128,292          ---          ---         ---        ---    128,292
Time deposits                                           66,289       61,861       84,344       8,823        ---    221,317
Other borrowings                                        12,356          ---          ---         ---        ---     12,356
Trust preferred securities                                 ---          ---          ---         ---     10,000     10,000
                                                 --------------------------------------------------------------------------
Total interest-bearing liabilities                     206,937       61,861       84,344       8,823     10,000    371,965
                                                 --------------------------------------------------------------------------

Interest rate sensitivity gap                        ($82,509)       $2,272    ($35,541)    $178,851    $47,459   $110,532
                                                 ==========================================================================

Cumulative interest rate sensitivity gap             ($82,509)    ($80,237)   ($115,778)     $63,073   $110,532
                                                 ===============================================================

Interest rate sensitivity gap ratio                      0.60%        1.04%        0.58%      21.27%      5.75%

Cumulative interest rate sensitivity gap ratio           0.60%        0.70%        0.67%       1.17%      1.30%
</TABLE>


     The Company's gap position is  substantially  dependent  upon the volume of
loans held in the portfolio.  These loans generally have maturities greater than
five  years;  however,  these  loans  have a  repricing  frequency  of at  least
quarterly and therefore  are  classified in the above table as repricing  within
three months. Additionally, interest-bearing transaction accounts, which consist
of money market 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.

     Even though the  Company's gap position is liability  sensitive  within the
one year time horizon, 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  refinancing  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.

                                       51
<PAGE>

     On a quarterly basis, NBR management  prepares an analysis of interest rate
risk exposure.  Such analysis  calculates the change in net interest  income and
the  theoretical  market  value of the Bank's  equity  given a change in general
interest rates of 200 basis points up and 200 basis points down. All changes are
measured in dollars and are  compared to projected  net interest  income and the
current  theoretical market value of the Bank's equity.  This theoretical market
value of the Bank's equity is calculated by  discounting  cash flows  associated
with the Company's assets and liabilities.  The following is a December 31, 2002
and 2001  summary of interest  rate risk  exposure as measured on a net interest
income  basis and a market  value of  equity  basis,  given a change in  general
interest rates of 200 basis points up and 200 basis points down.



<TABLE>
<CAPTION>
                                             Change in Annual                         Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity

<S>      <C>    <C>                              <C>                               <C>
         2002
         ----
                +200                               $546,000                        ($10,255,000)
                +100                                412,000                          (4,324,000)
                -100                             (1,541,000)                          1,363,000
                -200                             (3,371,000)                          3,807,000

         2001
         ----
                +200                               $307,000                         ($8,154,000)
                +100                                173,000                          (4,180,000)
                -100                               (328,000)                          1,690,000
                -200                             (2,240,000)                          2,289,000
</TABLE>


     The  Company's  interest  rate risk  exposure to a rising rate  environment
remained relatively stable in 2002 compared to 2001, while exposure to a falling
interest rate environment  increased in 2002 compared to 2001. This increase was
principally  due to the current low rate  environment  which  limits the Company
from lowering its funding costs at a rate  consistent  with potential 100 or 200
basis point declines in yields on earning assets.

     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  of 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
the current market rate.  Actual results could differ  significantly  from those
estimates  which  would  result in  significant  differences  in the  calculated
projected change.



                                       52
<PAGE>


Item 8.  Financial Statements and Supplementary Data

Financial Statements

     The  following   consolidated  financial  statements  of  Redwood  and  its
subsidiaries  and the  report  of  independent  auditors  are  included  in this
section:


<TABLE>
<CAPTION>
                                                                                                             Page

<S>                                                                                                          <C>
         Report of Independent Auditors.......................................................................54
         Consolidated Financial Statements of Redwood Empire Bancorp and Subsidiaries
           Consolidated Statements of Operations for the years ended
                December 31, 2002, 2001 and 2000..............................................................55
           Consolidated Balance Sheets as of December 31, 2002 and 2001.......................................56
           Consolidated Statements of Shareholders' Equity for the years ended
                December 31, 2002, 2001 and 2000..............................................................57
           Consolidated Statements of Cash Flows for the years ended
                December 31, 2002, 2001 and 2000..............................................................58
           Notes to Consolidated Financial Statements.........................................................60
</TABLE>


                                       53
<PAGE>






REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Shareholders of
Redwood Empire Bancorp
Santa Rosa, California


     We have audited the  accompanying  consolidated  balance  sheets of Redwood
Empire Bancorp and  subsidiaries  (Company) as of December 31, 2002 and 2001 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended  December 31,  2002,  2001 and 2000.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Redwood
Empire Bancorp and subsidiaries as of December 31, 2002 and 2001 and the results
of their  operations and their cash flows for the years ended December 31, 2002,
2001 and 2000 in conformity with accounting principles generally accepted in the
United States of America.




                                     Crowe, Chizek and Company LLP
South Bend, Indiana
January 9, 2003










                                       54
<PAGE>



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

                                                                                   Year Ended December 31,
                                                                       ------------------------------------------------
                                                                            2002            2001            2000
                                                                       ------------------------------------------------
<S>                                                                          <C>             <C>             <C>
Interest income:
  Interest and fees on loans                                                   $25,702         $27,904         $29,769
  Interest on investment securities                                              4,335           4,879           5,035
  Interest on federal funds sold                                                   499             772             359
                                                                       ------------------------------------------------
Total interest income                                                           30,536          33,555          35,163

Interest expense:
  Interest on deposits                                                           8,579          12,430          13,969
  Interest on other borrowings                                                      88             139             350
  Interest on trust preferred securities                                         1,003             882             ---
                                                                       ------------------------------------------------
Total interest expense                                                           9,670          13,451          14,319
                                                                       ------------------------------------------------

Net interest income                                                             20,866          20,104          20,844
Provision for loan losses                                                          ---             ---             150
                                                                       ------------------------------------------------

Net interest income after provision for loan losses                             20,866          20,104          20,694
                                                                       ------------------------------------------------

Noninterest income:
  Service charges on deposit accounts                                            1,188           1,116           1,077
  Merchant draft processing, net                                                 5,009           4,240           4,856
  Loan servicing income                                                            268             295             272
  Net realized gains (losses) on securities
    available for sale                                                             294             112           (171)
  Gain/(loss) on sale of loans                                                      13             ---           (584)
  Other income                                                                     843             836             656
                                                                       ------------------------------------------------
Total noninterest income                                                         7,615           6,599           6,106
                                                                       ------------------------------------------------

Noninterest expense:
  Salaries and employee benefits                                                 8,967           8,336           8,640
  Occupancy and equipment expense                                                2,126           2,026           2,040
  Other                                                                          4,912           4,089           5,268
                                                                       ------------------------------------------------
Total noninterest expense                                                       16,005          14,451          15,948
                                                                       ------------------------------------------------

Income before income taxes                                                      12,476          12,252          10,852
Provision for income taxes                                                       4,515           4,945           4,386
                                                                       ------------------------------------------------

Net income                                                                      $7,961          $7,307          $6,466
                                                                       ================================================

Basic earnings per common share:
  Net income                                                                     $2.29           $1.97           $1.41
  Weighted average shares                                                    3,474,000       3,703,000       4,577,000

Diluted earnings per common share:
  Net income                                                                     $2.21           $1.91           $1.39
  Weighted average shares                                                    3,600,000       3,825,000       4,664,000


 See Notes to Consolidated Financial Statements.
</TABLE>


                                       55
<PAGE>


<TABLE>
<CAPTION>

                                   REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                         Consolidated Balance Sheets
                                      (in thousands, except share data)


                                                                                     December 31,    December 31,
                                                                                         2002            2001
                                                                                    -------------------------------
<S>                                                                                      <C>           <C>
Assets:
Cash and due from banks                                                                    $21,837       $19,596
Federal funds sold                                                                          17,500         4,653
                                                                                    -------------------------------
  Cash and cash equivalents                                                                 39,337        24,249

Investment securities:
  Held to maturity, at cost (fair value: 2002 - $17,268; 2001 - $17,635)                    16,764        17,402
  Available for sale, at fair value (amortized cost: 2002 - $81,092; 2001 -$46,433)         83,157        47,573
                                                                                    -------------------------------
    Total investment securities                                                             99,921        64,975
Loans:
    Portfolio loans                                                                        365,076       351,649
    Allowance for loan losses                                                               (7,400)       (7,580)
                                                                                    -------------------------------
        Net loans                                                                          357,676       344,069

Premises and equipment, net                                                                  2,760         2,636
Cash surrender value of life insurance                                                       3,620         3,443
Other assets and interest receivable                                                         9,867         9,370
                                                                                    -------------------------------
          Total Assets                                                                    $513,181      $448,742
                                                                                    ===============================

Liabilities and Shareholders' Equity:
Deposits:
  Noninterest bearing demand deposits                                                     $103,484       $86,969
  Interest bearing transaction accounts                                                    128,292       121,457
  Time deposits one hundred thousand and over                                               69,000       112,638
  Other time deposits                                                                      152,317        76,348
                                                                                    -------------------------------
    Total deposits                                                                         453,093       397,412

Other borrowings                                                                            12,356         3,870
Trust preferred securities                                                                  10,000        10,000
Other liabilities and interest payable                                                       8,925        10,773
                                                                                    -------------------------------
          Total Liabilities                                                                484,374       422,055
                                                                                    -------------------------------

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: 2002 - 3,404,890 shares, 2001 - 3,530,135 shares                     10,853        12,373
  Retained earnings                                                                         16,654        13,653
  Accumulated other comprehensive income, net of tax                                         1,300           661
                                                                                    -------------------------------
          Total Shareholders' Equity                                                        28,807        26,687
                                                                                    -------------------------------

      Total Liabilities and Shareholders' Equity                                          $513,181      $448,742
                                                                                    ===============================

See Notes to Consolidated Financial Statements.
</TABLE>


                                       56
<PAGE>


<TABLE>
<CAPTION>
                                            REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                      For the Years ended December 31, 2002, 2001 and 2000
                                              (in thousands, except per share data)

                                                                                                       Accumulated
                                                                                                          Other
                                                        Comprehensive          Common      Retained     Comprehensive
                                                            Income        Shares   Stock   Earnings   Income (loss), Net  Total
---------------------------------------------------------------------------------------------------------------------------------

<S>                                                             <C>        <C>    <C>      <C>                <C>      <C>
Balances, January 1, 2000                                                  3,229  $22,033  $15,950            ($539)   $37,444
Comprehensive income:
  Net income                                                    $6,466                       6,466                       6,466
Other comprehensive income:
  Unrealized holding gains arising
    during period, net of tax of $377                              514
  Add:  reclassification adjustment
    net of tax of $69                                              102
                                                        ---------------
     Other comprehensive income                                    616                                           616       616
                                                        ---------------
     Comprehensive income                                       $7,082
                                                        ===============
Common stock repurchased                                                   (430)  (8,283)                              (8,283)
Stock options exercised, net of tax effect                                    59      851                                  851
Cash dividends declared - common ($0.37 per share)                                         (1,635)                     (1,635)

                                                                      ---------------------------------------------------------
Balances, December 31, 2000                                                2,858   14,601   20,781                77    35,459
Comprehensive income:
  Net income                                                    $7,307                       7,307                       7,307
Other comprehensive income:
  Unrealized holding gains arising
    during period, net of tax of $468                              651
  Less:  reclassification adjustment
    net of tax of ($45)                                           (67)
                                                        ---------------
     Other comprehensive income                                    584                                           584       584
                                                        ---------------
     Comprehensive income                                       $7,891
                                                        ===============
Common stock repurchased                                                   (595)  (3,278) (13,113)                    (16,391)
Stock split - 3 for 2                                                      1,193
Stock options exercised, net of tax effect and shares
redeemed                                                                      74    1,050                                1,050
Cash dividends declared - common ($0.37 per share)                                         (1,322)                     (1,322)

                                                                      ---------------------------------------------------------
Balances, December 31, 2001                                                3,530   12,373   13,653               661    26,687
Comprehensive income:
  Net income                                                    $7,961                       7,961                       7,961
Other comprehensive income:
  Unrealized holding gains arising
    during period, net of tax of $395                              824
  Less:  reclassification adjustment
    net of tax of ($109)                                         (185)
                                                        ---------------
     Other comprehensive income                                    639                                           639       639
                                                        ---------------
     Comprehensive income                                       $8,600
                                                        ===============
Common stock repurchased                                                   (137)  (1,616)  (2,167)                     (3,783)
Stock options exercised, net of tax effect                                    12       96                                   96
Cash dividends declared - common ($0.80 per share)                                         (2,793)                     (2,793)

                                                                      ---------------------------------------------------------
Balances, December 31, 2002                                                3,405  $10,853  $16,654            $1,300   $28,807
                                                                      =========================================================

See Notes to Consolidated Financial Statements.
</TABLE>

                                       57
<PAGE>


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


                                                                                       Year ended December 31,
                                                                                 2002           2001            2000
                                                                            ----------------------------------------------
<S>                                                                               <C>           <C>              <C>
Cash flows from operating activities:
Net income                                                                         $7,961        $7,307           $6,466
                                                                            ----------------------------------------------
Adjustments to reconcile net income to net cash from operating activities:
   Depreciation and amortization, net                                                 456           130              (72)
   Net realized (gains) losses on securities available for sale                      (294)         (112)             171
   Loans originated for sale                                                       (1,807)          ---              ---
   Proceeds from sale of loans held for sale                                        1,820           ---              ---
   Gain on sale of loans and loan servicing                                           (13)          ---              ---
   Loss on sale of portfolio loans                                                    ---           ---              584
   Provision for loan losses                                                          ---           ---              150
   Change in cash surrender value of life insurance                                  (177)         (168)             (88)
   Change in other assets and interest receivable                                    (837)          706               26
   Change in other liabilities and interest payable                                (1,848)        2,084           (2,279)
   Other, net                                                                         ---           ---              ---
                                                                            ----------------------------------------------
    Total adjustments                                                              (2,700)        2,640           (1,508)
                                                                            ----------------------------------------------
  Net cash from operating activities                                                5,261         9,947            4,958
                                                                            ----------------------------------------------

Cash flows from investing activities:
  Net change in loans                                                             (13,230)      (36,058)         (40,072)
  Proceeds from sale of loans in portfolio                                            ---           ---           20,621
  Purchases of investment securities available for sale                           (64,436)      (24,832)          (3,941)
  Purchases of investment securities held to maturity                              (4,840)       (1,326)            (906)
  Sales of investment securities available for sale                                 9,319         5,918           10,890
  Maturities of investment securities available for sale                           20,569        27,883            3,011
  Maturities of investment securities held to maturity                              5,623        13,866            1,430
  Purchase of premises and equipment, net of retirements                             (865)         (884)            (351)
  Proceeds from sale of other real estate owned                                       ---           757            2,427
                                                                            ----------------------------------------------
    Net cash from investing activities                                            (47,860)      (14,676)          (6,891)
                                                                            ----------------------------------------------

Cash flows from financing activities:
  Net change in noninterest bearing transaction accounts                           16,515        (4,758)          13,974
  Net change in interest bearing transaction accounts                               6,835        (5,884)           2,984
  Net change in time deposits                                                      32,331         2,721           18,866
  Net change in other borrowings                                                    8,486           342           (1,167)
  Issuance of trust preferred securities                                              ---        10,000              ---
  Repurchases of common stock                                                      (3,783)      (16,391)          (8,283)
  Issuance of common stock                                                             96           773              566
  Cash dividends paid                                                              (2,793)       (1,752)          (1,635)
                                                                            ----------------------------------------------
    Net cash from financing activities                                             57,687       (14,949)          25,305
                                                                            ----------------------------------------------
Net change in cash and cash equivalents                                            15,088       (19,678)          23,372
Cash and cash equivalents at beginning of year                                     24,249        43,927           20,555
                                                                            ----------------------------------------------

Cash and cash equivalents at end of year                                          $39,337       $24,249          $43,927
                                                                            ==============================================
</TABLE>


                                               (Continued)



                                       58
<PAGE>

<TABLE>
<CAPTION>
                                 REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

                                             (in thousands)
                                              (Continued)


                                                                        Year ended December 31,
                                                                    2002          2001         2000
                                                                ------------- ---------------------------
<S>                                                                   <C>           <C>           <C>
Supplemental Disclosures:

Cash paid during the year for:
  Income taxes                                                        $5,193        $5,155        $4,354
  Interest                                                             9,311        13,618        13,989

Noncash investing and financing activities:
  Transfer from loans to other real estate owned                         ---           ---          $821
  Securitization of residential real estate loans, net                   ---           ---        17,949

                                              (Concluded)



See Notes to Consolidated Financial Statements.

</TABLE>










                                       59
<PAGE>


103

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - DESCRIPTION OF BUSINESS

     Redwood  Empire  Bancorp   ("Redwood,"  and  with  its  subsidiaries,   the
"Company") is a financial  institution  holding company  headquartered  in Santa
Rosa,  California,  and operating in Northern  California with two  wholly-owned
subsidiaries,  National Bank of the Redwoods,  a national bank chartered in 1985
and Redwood  Statutory Trust I (RST1),  a Connecticut  statutory  Trust. In 2002
National Bank of the Redwoods (and with its  subsidiary,  "NBR") formed NBR Real
Estate Investment Trust, a Maryland Real Estate Investment Trust. The entity was
formed to hold NBR's real  estate  secured  loans and to better  organize  NBR's
marketing and origination of real estate secured lending. The Company's business
strategy  involves two principal  business  activities,  core community  banking
services and merchant card services, which are conducted through NBR.

     NBR  provides  its core  community  banking  services  through  five retail
branches  located in Sonoma  County,  California,  one retail branch  located in
Mendocino  County,  California,  and one retail  branch  located in Lake County,
California.  Loan services at NBR are generally extended to professionals and to
businesses with annual revenues of less than $20 million.  Commercial  loans are
primarily for working  capital,  asset  acquisition  and commercial real estate.
NBR's targeted  commercial banking market area includes the California  counties
north of San Francisco.  NBR generates noninterest income through merchant draft
processing by virtue of its status as a Principal Member of Visa/MasterCard.  In
addition, NBR originates both commercial and residential  construction loans for
its portfolio.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The  accounting  and  reporting   policies  of  the  Company  conform  with
accounting  principles  generally  accepted in the United  States of America and
general  practices  within the banking  industry.  The  preparation of financial
statements in conformity with accounting  principles  generally  accepted in the
United States of America  requires  management to make estimates and assumptions
that affect the reported  amounts of assets and  liabilities  and  disclosure of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates. The estimates of allowance for
loan losses,  allowance for merchant card charge-back  losses and fair values of
securities and other financial instruments are particularly subject to change. A
summary of the more significant policies follows:

Basis of Presentation

     The  consolidated  financial  statements  include  the  accounts of Redwood
Empire Bancorp and its wholly-owned subsidiaries,  National Bank of the Redwoods
(NBR) and RST1. All material  intercompany  transactions  and accounts have been
eliminated.


                                       60
<PAGE>

     For the purpose of the statements of cash flows,  cash and cash equivalents
have been defined as cash on hand,  demand  deposits with  correspondent  banks,
cash items in transit and federal funds sold.

Investment Securities

     Securities  held to maturity are carried at cost  adjusted by the accretion
of  discounts  and  amortization  of  premiums.  The Company has the ability and
intent to hold these investment securities to maturity. Securities available for
sale  may  be  sold  to  implement  the  Company's  asset/liability   management
strategies and in response to changes in interest  rates,  prepayment  rates and
similar factors.  Available for sale securities are recorded at market value and
unrealized  gains or losses,  net of income taxes,  are included in  accumulated
other  comprehensive  income or loss, as a separate  component of  shareholders'
equity. Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock
are restricted  equity  securities and are carried at cost. Gain or loss on sale
of  investment  securities  is  based  on the  specific  identification  method.
Interest  income  includes   amortization  of  purchased  premium  or  discount.
Securities  are  written  down to fair value when a decline in fair value is not
temporary.

Loans and the Allowance for Loan Losses

     Loans are stated at the principal balance  outstanding net of the allowance
for loan losses and net  deferred  loan fees or costs.  Loan fees net of certain
related  direct costs to originate  loans are  deferred and  amortized  over the
contractual life of the loan using a method  approximating  the interest method.
Loan fees and direct costs related to the origination of loans held for sale are
recognized  as a component  of gain or loss on sale of  mortgage  loans when the
related  loans are sold.

     The allowance for loan losses is maintained at a level considered  adequate
for probable  incurred  credit losses that can be reasonably  anticipated and is
based on  management's  quarterly  evaluation of the economic  climate and other
factors related to the collectability of loan balances.

     The factors  considered by management include growth and composition of the
loan portfolio,  overall  portfolio  quality,  review of specific problem loans,
historical  loss  rates,   regulatory  reviews,  trends  and  concentrations  in
delinquencies  and current  economic  conditions  that may affect the borrower's
ability to pay. The actual results could differ  significantly from management's
estimates.  The allowance for loan losses is increased by provisions  charged to
operations and reduced by loan charge-offs net of recoveries.  A loan charge-off
is recorded when a loan has been determined by management to be uncollectable.

     A loan is impaired when, based upon current  information and events,  it is
probable  that NBR will be unable to collect all amounts  due  according  to the
contractual  terms of the loan  agreement.  This  standard is  applicable to all
loans,  uncollateralized  as well  as  collateralized,  except  loans  that  are
measured at the lower of cost or fair value. Impairment is measured based on the
present value of expected future cash flows  discounted at the loan's  effective
interest  rate,  the loan's  observable  market price,  or the fair value of the
collateral if the loan is collateral dependent.

                                       61
<PAGE>

     Interest income is recognized on impaired loans in a manner similar to that
of all loans.  It is the Company's  policy to place loans that are delinquent 90
days or more as to  principal  or  interest  on  nonaccrual  status  unless well
secured and in the process of  collection,  and to reverse from  current  income
accrued  but  uncollected  interest.  Cash  payments  subsequently  received  on
nonaccrual  loans are  recognized as income only where the future  collection of
all principal is considered by management to be probable.

     The  Company  originates  loans  to  customers  under  a SBA  program  that
generally  provides for SBA  guarantees of 70% to 85% of each loan.  The Company
may sell the  guaranteed  portion  of each loan to a third  party and retain the
unguaranteed  portion in its own portfolio.  A gain is recognized on these loans
through  collection  on sale of a  premium  over the  adjusted  carrying  value,
through  retention of an ongoing  rate  differential  less a normal  service fee
(excess  servicing fee) between the rate paid by the borrower to the Company and
the rate paid by the Company to the purchaser, or both.

     To calculate the gain or loss on the sale,  the  Company's  investment in a
SBA loan is allocated among the retained  portion of the loan,  excess servicing
retained  and the sold portion of the loan,  based on the  relative  fair market
value of each  portion.  The gain on the sold portion of the loan is  recognized
currently.  The  excess  servicing  fees  are  reflected  as an  asset  which is
amortized  over an  estimated  life using a method  approximating  the  interest
method; in the event future prepayments are significant and future expected cash
flows are inadequate to cover the unamortized excess servicing asset, additional
amortization would be recognized.

Other Real Estate Owned

     Property  acquired by the Company  through  foreclosure  is recorded at the
lower of estimated fair value less  estimated  selling costs (fair value) or the
carrying value of the related loan at the date of  foreclosure.  At the time the
property  is  acquired,  if the  fair  value  is  less  than  the  loan  amounts
outstanding,  any  difference is charged  against the allowance for loan losses.
After  acquisition,  valuations are periodically  performed and, if the carrying
value  of the  property  exceeds  the  fair  value,  a  valuation  allowance  is
established  by a charge to operations.  Subsequent  increases in the fair value
may reduce or eliminate this allowance.

     Operating costs on foreclosed  real estate are expensed as incurred.  Costs
incurred for physical  improvements to foreclosed real estate are capitalized if
the value is recoverable through future sale.

Company Owned Life Insurance

     The  Company  has  purchased  life   insurance   policies  on  certain  key
executives.  Company  owned life  insurance  is recorded  at its cash  surrender
value, or the amount that can be realized.


                                       62
<PAGE>


Mortgage Banking and Hedging Activities

     Mortgage  loans  held for sale are  carried  at the lower of cost or market
value as determined by outstanding  commitments  from  investors,  indicators of
value obtained by management from  independent  third parties,  current investor
yield requirements calculated on an aggregate loan basis and the market value of
its hedging instruments.  Valuation  adjustments are charged against the gain or
loss on sale of mortgage loans.

Off-Balance-Sheet Risk

     The Company is party to financial instruments with  off-balance-sheet  risk
in the normal  course of business to meet the  financing  needs of its customers
and to  reduce  its own  exposure  to  fluctuations  in  interest  rates.  These
financial  instruments  include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount  recognized in the balance sheet. The
contract  or  notional  amounts  of those  instruments  reflect  the  extent  of
involvement the Company has in particular classes of financial instruments.

     The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial  instrument  for  commitments  to extend credit and
standby letters of credit is represented by the  contractual  notional amount of
those instruments.

     Loan commitments are typically contingent upon the borrower meeting certain
financial  and  other  covenants,  and such  commitments  typically  have  fixed
expiration dates and require payment of a fee. As many of these  commitments are
expected  to expire  without  being  drawn upon,  the total  commitments  do not
necessarily  represent  future cash  requirements.  The Company  evaluates  each
potential  borrower  and  the  necessary  collateral  on  an  individual  basis.
Collateral  varies,  but  may  include  real  property,   bank  deposits,   debt
securities, equity securities, or business assets.

     Standby  letters  of credit  are  conditional  commitments  written  by the
Company to  guarantee  the  performance  of a customer to a third  party.  These
guarantees relate primarily to inventory  purchases by the Company's  commercial
customers, and such guarantees are typically short-term.  Credit risk is similar
to that  involved in extending  loan  commitments  to customers  and the Company
accordingly uses evaluation and collateral requirements similar to those of loan
commitments. Virtually all such commitments are collateralized.

Premises and Equipment

     Premises  and  equipment  consist  of  building,   leasehold  improvements,
furniture and equipment and are stated at cost,  less  accumulated  depreciation
and amortization.  Depreciation is computed using the straight-line  method over
the estimated useful lives for financial reporting purposes,  and an accelerated
method for income tax  reporting.  The  estimated  useful life of furniture  and
equipment is between five and ten years.  Leasehold  improvements  are amortized
over the  terms of the  lease or their  estimated  useful  lives,  whichever  is
shorter.



                                       63
<PAGE>

Income Taxes

     The  Company  accounts  for  income  taxes  using  an asset  and  liability
approach, which requires the recognition of deferred tax assets and liabilities.
Future  tax  benefits  attributable  to  temporary  differences  are  recognized
currently to the extent that  realization  of such  benefits is more likely than
not.  These future tax benefits are measured by applying  currently  enacted tax
rates.  A valuation  allowance,  if needed,  reduces  deferred tax assets to the
amount expected to be realized.

Earnings per Common Share

     Basic  earnings  per common  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 common 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.

     On September 20, 2001, the Company announced a three-for-two stock split of
its outstanding  shares of common stock.  Earnings per share information for all
periods presented give effect to the stock split.

     The  following  table  reconciles  the numerator  and  denominator  used in
computing both basic  earnings per common share and diluted  earnings per common
share for the periods  indicated.  The weighted average shares  outstanding have
been restated to give effect for the 2001 3 for 2 stock split.


<TABLE>
<CAPTION>
                                                                      Twelve Months Ended
                                                                          December 31,
                                              ---------------------------------------------------------------------
                                                      2002                    2001                    2000
                                              ---------------------   ---------------------   ---------------------
                                                Basic    Diluted        Basic    Diluted        Basic    Diluted
                                                           (2)                     (2)                     (2)
                                              --------- -----------   ---------------------   ---------------------
                                                              (in thousands except per share data)
<S>                                             <C>         <C>          <C>        <C>          <C>        <C>
 Earnings per common share:
 Net income                                     $7,961      $7,961       $7,307     $7,307       $6,466     $6,466
 Net income per share                            $2.29       $2.21        $1.97      $1.91        $1.41      $1.39

 Weighted average common shares
    outstanding                                  3,474       3,600(1)     3,703      3,825(1)     4,577      4,664(1)

</TABLE>

 Notes to earnings per common share table:

(1)  The weighted average common shares outstanding include the dilutive effects
     of common stock options of 126, 122 and 87 for 2002, 2001 and 2000.

(2)  Stock options of 18, 0 and 90 shares of common stock were not considered in
     computing  earnings  per common  share for 2002,  2001 or 2000 because they
     were not diultive.



                                       64
<PAGE>


Stock-Based Compensation

     Employee  compensation  expense under stock  options is reported  using the
intrinsic  value method.  No stock-based  compensation  cost is reflected in net
income,  as all options  granted had an exercise  price equal to or greater than
the market price of the underlying  common stock at date of grant. The following
table  illustrates  the effect on net income using earnings per share if expense
was measured using fair value recognition  provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.


<TABLE>
<CAPTION>
                                                         2002           2001           2000
                                                   -----------------------------------------------
                                                   (dollars in thousands, except per share data)

<S>                                                        <C>             <C>            <C>
 Net income as reported                                    $7,961          $7,307         $6,466
 Deduct: Stock-based compensation expense
   determined under fair value based method                  (166)           (166)          (194)
                                                   -----------------------------------------------
 Pro forma net income                                      $7,795          $7,141         $6,272
                                                   ===============================================

 Basic earnings per share as reported                       $2.29           $1.97          $1.41
 Pro forma basic earnings per share                          2.24            1.93           1.37

 Diluted earnings per share as reported                     $2.21           $1.91          $1.39
 Pro forma diluted earnings per share                        2.17            1.87           1.34
</TABLE>


         Pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.


<TABLE>
<CAPTION>
                                                         2002           2001           2000
                                                   -----------------------------------------------

<S>                                                        <C>             <C>            <C>
 Risk-free interest rate                                     4.06%          4.88%          6.41%
 Expected option life in years                                  10             10             10
 Expected stock price volatility                            32.44%         33.25%         32.36%
 Dividend yield                                               3.7%           2.9%           1.9%
</TABLE>


Business Segments

     Internal financial  information is primarily reported and aggregated in two
lines of business, community banking and bankcard services.

Comprehensive Income

     Comprehensive  income includes net income and other comprehensive income or
loss. The Company's only source of other comprehensive income or loss is derived
from unrealized  gains and


                                       65
<PAGE>

losses on investment securities available-for-sale. Reclassification adjustments
result from gains or losses on  investment  securities  available-for-sale  that
were  realized  and  included in net income of the current  period that also had
been included in other comprehensive  income or loss as unrealized holding gains
or losses in the  period in which  they  arose.  They are  excluded  from  other
comprehensive income or loss of the current period to avoid double counting.

Recently Issued But Not Yet Effective Accounting Pronouncements

     New accounting  standards for asset retirement  obligations,  restructuring
activities and exit costs,  operating leases,  and early  extinguishment of debt
were issued in 2002.  Management  has  determined  that when the new  accounting
standards  are  adopted  in 2003  they  will not have a  material  impact on the
Company's financial condition or results of operations.

NOTE C - CASH AND DUE FROM BANKS

     NBR is required to maintain average reserve and clearing balances including
cash on hand or on deposit with the Federal  Reserve Bank. The required  reserve
balance  included in cash and due from banks was  approximately  $1,200,000  and
$3,247,000 at December 31, 2002 and 2001. These balances do not earn interest.

NOTE D - INVESTMENT SECURITIES

An analysis of the investment securities portfolio follows:





<TABLE>
<CAPTION>
                                                             Gross           Gross
                                              Fair        Unrealized       Unrealized
                                              Value          Gains           Losses
                                         ------------------------------------------------
                                                         (in thousands)
<S>                                             <C>              <C>               <C>
 December 31, 2002:
 Available for sale:
   U.S. Government obligations                   $9,372            $371            $ ---
   Mortgage-backed                               71,183           1,694              ---
   Other securities                                 ---             ---              ---
                                         ------------------------------------------------
      Total debt securities                      80,555           2,065              ---
   FRB and FHLB stock                             2,602             ---              ---
                                         ------------------------------------------------
     Total available for sale                   $83,157          $2,065            $ ---
                                         ================================================
</TABLE>


                                       66
<PAGE>



<TABLE>
<CAPTION>
                                                             Gross           Gross
                                            Carrying     Unrecognized     Unrecognized      Fair
                                             Amount          Gains           Losses         Value
                                         ------------------------------------------------------------
                                                                  (in thousands)
<S>                                             <C>                <C>             <C>       <C>
 Held to maturity:
   Mortgage-backed                               $8,611            $274            $ ---      $8,885
   Other securities                               8,153             239              (9)       8,383
                                         ------------------------------------------------------------
     Total held to maturity                     $16,764            $513             ($9)     $17,268
                                         ============================================================
</TABLE>


<TABLE>
<CAPTION>
                                                             Gross           Gross
                                              Fair        Unrealized       Unrealized
                                              Value          Gains           Losses
                                         ------------------------------------------------
                                                         (in thousands)
<S>                                             <C>              <C>               <C>
 December 31, 2001:
 Available for sale:
   U.S. Government obligations                  $10,360            $339             $---
   Mortgage-backed                               25,390             528             (16)
   Other securities                               9,308             312             (23)
                                         ------------------------------------------------
     Total debt securities                       45,058           1,179             (39)
   FRB and FHLB stock                             2,515             ---              ---
                                         ------------------------------------------------
     Total available for sale                   $47,573          $1,179            ($39)
                                         ================================================
</TABLE>



<TABLE>
<CAPTION>
                                                             Gross           Gross
                                            Carrying     Unrecognized     Unrecognized      Fair
                                             Amount          Gains           Losses         Value
                                         ------------------------------------------------------------
                                                                  (in thousands)
<S>                                             <C>                <C>             <C>       <C>
 Held to maturity:
   U.S. Government obligations                   $2,000             $72            $ ---      $2,072
   Mortgage-backed                                9,066             118              ---       9,184
   Other securities                               6,336              66             (23)       6,379
                                         ------------------------------------------------------------
     Total held to maturity                     $17,402            $256            ($23)     $17,635
                                         ============================================================
</TABLE>



                                       67
<PAGE>



     Debt  securities by  contractual  maturity at December 31, 2002 were due as
follows.  Securities not due at single maturity date, primarily  mortgage-backed
securities, are shown separately.


                                               Fair
                                               Value
                                        -------------------
                                          (in thousands)
 Available for sale:
   One year or less                                 $3,029
   After one year through five years                 6,343
   After five years through ten years                  ---
   After ten years                                   2,602
   Mortgage-backed                                  71,183
                                        -------------------
                                                   $83,157
                                        ===================


                                             Carrying              Fair
                                              Amount              Value
                                        ------------------- ------------------
                                                   (in thousands)
 Held to maturity:
   One year or less                                  $ ---              $ ---
   After one year through five years                 1,190              1,242
   After five years through ten years                1,887              1,985
   After ten years                                   5,076              5,156
   Mortgage-backed                                   8,611              8,885
                                        ------------------- ------------------
                                                   $16,764            $17,268
                                        =================== ==================


     Proceeds from sales of available for sale  investments  in debt  securities
during 2002, 2001 and 2000 were $9,319,000,  $5,918,000, and $10,890,000.  These
sales  resulted in the  realization  of gross gains of $294,000 and $112,000 for
2002 and 2001, and gross losses of $171,000 for 2000.

     Securities carried at approximately $34,402,000 and $34,910,000 at December
31, 2002 and 2001 were pledged to secure public deposits,  bankruptcy  deposits,
and treasury tax and loan borrowings.



                                       68
<PAGE>


NOTE E - MORTGAGE LOAN SERVICING

     The Company services mortgage loans and participating interests in mortgage
loans owned by  investors.  The unpaid  principal  balances  of  mortgage  loans
serviced for others are as follows:


                                                      December 31,
                                                2002               2001
                                          --------------------------------------
                                                     (in thousands)
 Mortgage loan portfolios serviced for:
   Freddie Mac                                        $347               $1,005
   Fannie Mae                                          610                1,555
   Other investors                                   7,421               12,481
                                          ----------------- --------------------
                                                    $8,378              $15,041
                                          ================= ====================



NOTE F - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

     The Company  primarily makes permanent and  construction  residential  real
estate  loans in  California,  and loans to  individuals  and  small  businesses
primarily  in Sonoma  and  Mendocino  Counties,  California.  There are no major
industry segments in the loan portfolio. Outstanding loans by type were:



                                                  December 31,
                                             2002              2001
                                       -----------------------------------
                                                 (in thousands)

 Residential real estate mortgage               $87,764          $101,175
 Commercial real estate mortgage                158,018           121,456
 Commercial                                      62,958            70,438
 Real estate construction                        42,749            46,501
 Installment and other                           14,260            12,567
 Less net deferred fees                           (673)             (488)
                                       ----------------- -----------------
   Total loans                                  365,076           351,649
 Less allowance for loan losses                 (7,400)           (7,580)
                                       ----------------- -----------------
   Net loans                                   $357,676          $344,069
                                       ================= =================


                                       69
<PAGE>


         Activity in the allowance for loan losses is summarized as follows:



<TABLE>
<CAPTION>
                                                   2002          2001          2000
                                                ---------------------------------------
                                                             (in thousands)
<S>                                                <C>           <C>           <C>
      Balance, beginning of year                   $7,580        $7,674        $7,931
      Provision for loan losses                       ---           ---           150
      Loans charged off                              (298)         (185)         (701)
      Recoveries                                      118            91           294
                                                -----------   -----------   -----------
      Balance, end of year                         $7,400        $7,580        $7,674
                                                ===========   ===========   ===========
</TABLE>


     At December 31, 2002 and 2001 the Company's  total  recorded  investment in
impaired loans was $2,794,000 and $3,176,000 of which  $2,493,000 and $2,892,000
relates to the recorded  investment  for which there is a related  allowance for
loan losses of $670,000 and $318,000,  and $301,000 and $284,000  relates to the
amount of that recorded  investment for which there is no related  allowance for
loan losses.  At December 31, 2002 and 2001,  substantially  all of the impaired
loan balance was measured  based on the fair value of the  collateral,  with the
remainder measured by estimated cash flow.

     The average  recorded  investment in impaired  loans during the years ended
December 31, 2002, 2001 and 2000 was $1,866,000,  $2,973,000 and $1,424,000. The
related amount of interest income recognized on an accrual and cash basis during
the periods that such loans were impaired was $65,000, $49,000 and $65,000.

     As of December 31, 2002 and 2001 there were  $2,516,000  and  $2,892,000 of
loans on  nonaccrual.  Interest due but excluded from  interest  income on these
nonaccrual loans was $66,000,  $88,000, and $72,000 for the years ended December
31, 2002, 2001 and 2000.  Interest  income recorded on nonaccrual  loans was $0,
$1,000 and $14,000 for the years ended December 31, 2002, 2001 and 2000.

     At December  31, 2002 and 2001 there was $6,000 and $0 in loans past due 90
days or more as to interest or principal and still accruing interest

     The Company  originates  SBA loans for sale to investors.  A summary of the
activity in SBA loans is as follows:



<TABLE>
<CAPTION>
                                                                     December 31,
                                                           2002         2001          2000
                                                        ----------------------------------------
                                                                    (in thousands)
<S>                                                          <C>          <C>           <C>
 SBA guaranteed portion of loans serviced for others         $4,389       $8,389        $10,926
 SBA loans, net of sold portion                               7,938        8,163          7,402
</TABLE>


                                       70
<PAGE>


         From time to time the Company may extend credit to executive officers,
directors and related parties. There were no such balances outstanding at
December 31, 2002 and 2001.


NOTE G - PREMISES, EQUIPMENT AND LEASES

A summary of premises and equipment is as follows:



<TABLE>
<CAPTION>
                                                                 December 31,
                                                             2002          2001
                                                         ---------------------------
                                                                 (in thousands)
<S>                                                           <C>          <C>
       Land                                                      $187         $187
       Building and leasehold improvements                      3,352        3,349
       Furniture and equipment                                  9,258        9,608
                                                         ---------------------------
       Total premises and equipment                            12,797       13,144
       Less accumulated depreciation and amortization         (10,037)     (10,508)
                                                         ---------------------------
       Premises and equipment, net                             $2,760       $2,636
                                                         ===========================
</TABLE>

     Depreciation  expense for the years ended December 31, 2002, 2001, and 2000
was $741,000, $736,000, and $1,050,000.

     The Company leases certain premises and equipment used in the normal course
of business.  There are no contingent  rental  payments and the Company has five
subleased properties. Total rental expense under all leases, including premises,
totaled $1,326,000,  $1,282,000,  and $1,202,000 in 2002, 2001 and 2000. Minimum
future lease  commitments  total  $5,109,000.  Lease commitments are as follows:
2003 - $1,455,000;  2004 - $1,217,000;  2005 - $633,000, 2006 - $616,000, 2007 -
$632,000 and thereafter - $556,000.  Minimum future sublease  receivables are as
follows: 2003 - $162,000;  2004 - $112,000;  2005 - $37,000; 2006 - $22,000; and
2007 - $19,000. All subleases expire by 2007.


NOTE H - DEPOSITS

     Interest  expense on time  certificates  of deposit of $100,000 or more was
$2,996,000, $5,398,000, and $4,756,000 during 2002, 2001 and 2000.


                                       71
<PAGE>


     At December 31, 2002 the scheduled  maturities for all time deposits are as
follows:

    Year ending
    December 31,                       (in thousands)
---------------------                --------------------

        2003                                    $212,490
        2004                                       5,765
        2005                                       1,575
        2006                                         307
        2007                                       1,180
                                     --------------------
                                                $221,317
                                     ====================


NOTE I - INCOME TAXES

         The provision (benefit) for income taxes consists of the following:


                                              Year Ended December 31,
                                          2002          2001         2000
                                      ----------------------------------------
                                                  (in thousands)
 Current:
   Federal                                 $4,402        $4,268      $3,999
   State                                      257         1,080       1,057
                                      ------------- --------------------------
                                            4,659         5,348       5,056
                                      ------------- --------------------------
 Deferred:
   Federal                                    139          (300)       (513)
   State                                     (283)         (103)       (157)
                                      ------------- --------------------------
                                             (144)         (403)       (670)
                                      ------------- --------------------------
                                           $4,515        $4,945      $4,386
                                      ============= ==========================

         A reconciliation of the statutory income tax rate to the effective
income tax rate attributable to continuing operations of the Company is as
follows:

<TABLE>
<CAPTION>
                                                 2002          2001         2000
                                              ------------------------------------

<S>                                                 <C>          <C>         <C>
 Income tax at federal statutory rate               35.0%        35.0%       35.0%
 State franchise tax, net of federal benefit         (.1)         5.2         5.4
 Other                                               1.3           .2         ---
                                              -----------   ----------   ---------
                                                    36.2%        40.4%       40.4%
                                              ===========   ==========   =========
</TABLE>



                                       72
<PAGE>


     Deferred  income taxes,  included in other assets and interest  receivable,
reflect the tax effect of temporary  differences  existing between the financial
statement basis and tax basis of the Company's assets and liabilities.  Deferred
tax benefits  attributable to temporary differences are recognized to the extent
that  realization of such benefits is more likely than not. The Company believes
it is more likely than not that the net deferred tax assets at December 31, 2002
and 2001 will be utilized to reduce future taxable  income.  Accordingly,  there
was no valuation  allowance  associated with deferred tax assets at December 31,
2002 and 2001.  The tax effect of the  principal  temporary  items  creating the
Company's  net  deferred  tax  asset  included  in  other  assets  and  interest
receivable are:


                                                  December 31,
                                                2002         2001
                                          -------------------------
                                                 (in thousands)
 Deferred tax assets:
   Allowance for  loan losses                 $3,392       $3,252
   Restructuring costs                           ---           43
   Accrued expenses not yet deductible           746          707
   Depreciation                                  482          507
   Securities marked to market for
     tax purposes                                765          479
   Other                                         261          100
                                          ------------ ------------
     Total deferred tax assets                 5,646        5,088
                                          ------------ ------------

 Deferred tax liabilities:
   Unrealized gain on securities
     available for sale                         (765)        (479)
   FHLB stock dividends                         (361)        (322)
   State taxes                                  (420)         (45)
                                          ------------ ------------
     Total deferred tax liabilities           (1,546)        (846)
                                          ------------ ------------

 Net deferred tax asset                       $4,100       $4,242
                                          ============ ============



                                       73
<PAGE>


NOTE J - OTHER BORROWINGS

         Other borrowings consist of the following:

                                                          December 31,
                                                       2002         2001
                                                   ------------------------
                                                         (in thousands)
 Treasury, tax and loan note                          $3,870       $3,870
 Advances from the FHLB                                5,000          ---
 Advance from Wells Fargo                              1,150          ---
 Security repurchase agreement                         2,336          ---
                                                   -----------   ----------
                                                     $12,356       $3,870
                                                   ===========   ==========


Treasury, Tax and Loan Note

     The Company  enters into various  short-term  borrowing  agreements,  which
include Treasury,  Tax and Loan borrowings.  These borrowings have maturities of
one day and are collateralized by investments or loans.

Advances from the FHLB

     The Company has a short-term borrowing agreement with the Federal Home Loan
Bank of San  Francisco  (FHLB).  These  borrowings  have  maturities of one day.
During  2002  and  2001,  the  highest  month-end  balance  during  the year was
$5,000,000 and $6,000,000. At December 31, 2002 there was an outstanding balance
of $5,000,000 as compared to the line of credit being fully paid off at December
31, 2001. All borrowings from the FHLB must be  collateralized,  and the Company
has  pledged  approximately  $42,000,000  of  residential  mortgage  loans as of
December 31, 2002, to the FHLB to secure any funds it may borrow.  The available
credit under this agreement at December 31, 2002 was $37,000,000.

Advances from UBOC

     During  1999,  Redwood  entered  into  an  agreement  with  Union  Bank  of
California (UBOC) to obtain a $3,000,000 unsecured line of credit for short-term
borrowing  purposes.  At December  31, 2002 and 2001 the line had been paid off.
The average balance of UBOC advances was $35,000 for 2001 at an average interest
rate of 9.02%. The highest month-end balance during 2001 was $1,278,500.  During
2002, there were no advances under this line of credit.


                                       74
<PAGE>


Advances from Wells Fargo

     During 2001,  Redwood  entered  into an agreement  with Wells Fargo Bank to
obtain a $2,500,000  unsecured line of credit for short-term borrowing purposes.
At December 31, 2002 there was an outstanding  balance of $1,150,000 as compared
to the line having been paid off as of December 31, 2001.  The available  credit
under this line at December  31,  2002 was  $1,350,000.  The average  balance of
advances was $298,000 and $523,000 for 2002 and 2001 at an average interest rate
of 3.41% and 5.12%.  The  highest  month-end  balance  during  2002 and 2001 was
$1,150,000  and  $1,500,000.  This  agreement has a maturity date of October 15,
2003.


NOTE K - NONINTEREST EXPENSE - OTHER

     The major components of noninterest expense - other are as follows:


                                                 Year Ended December 31,
                                             2002         2001          2000
                                        --------------------------------------
                                                     (in thousands)
 Professional fees                          $1,119         $360          $950
 Regulatory expense and insurance              420          396           453
 Postage and office supplies                   531          529           463
 Shareholder expenses and director fees        379          377           412
 Advertising                                   400          484           420
 Telephone                                     395          389           351
 Electronic data processing                  1,113          944         1,274
 Other                                         555          610           945
                                        -----------   ----------   -----------
                                            $4,912       $4,089        $5,268
                                        ===========   ==========   ===========



NOTE L - STOCK OPTIONS AND BENEFIT PLANS

     The Company's 1991 stock option plan,  which was amended in 1992,  provides
for the granting of both incentive stock options and nonqualified  stock options
to directors and key employees.  Generally,  options outstanding under the stock
option plan are granted at prices  equal to the market value of the stock at the
date of grant, vest ratably over a four year service period and expire ten years
subsequent  to the award.  During 2001,  all shares  remaining in this plan were
granted.

     During 2001, the Company's  2001 stock option plan was adopted.  Similar to
the 1991 stock option  plan,  incentive  stock  options and  nonqualified  stock
options may be granted to key employees and directors. Options outstanding under
the stock  option  plan are granted at prices  equal to the market  value of the
stock at the date of grant,  vest ratably  over a four year  service  period and
expire ten years subsequent to the award.


                                       75
<PAGE>


     Outstanding  common stock options at December 31, 2002, are  exercisable at
various dates through 2012. The following table summarizes option activity.  The
following information has been restated to give effect of the September 20, 2001
3 for 2 stock split.


                                                               Weighted Average
                                                  Number         Option Price
                                                 of Shares         per Share
                                             ----------------------------------
                                               (in thousands)

 Balance at January 1, 2000                           412             $8.35
   Options exercised                                  (88)             6.49
   Options cancelled                                   (2)            13.67
                                             ----------------------------------
 Balance at December 31, 2000                         322              8.81
   Options granted                                     60             18.17
   Options exercised, net of shares redeemed         (119)             7.95
   Options cancelled                                   (3)            13.67
                                             ----------------------------------
 Balance at December 31, 2001                         260             11.34
   Options granted                                     19             30.04
   Options exercised                                  (12)             7.40
                                             ----------------------------------
 Balance at December 31, 2002                         267            $12.84
                                             ==================


     At December 31, 2002, 184,000 shares were available for future grants under
the 2001 plan.

     Additional  information  regarding  options  outstanding as of December 31,
2002 is as follows:



<TABLE>
<CAPTION>
                                           Options Outstanding            Options Exercisable
                                  -------------------------------------------------------------------
                                    Weighted Avg.
     Range of                         Remaining
     Exercise          Number        Contractual    Weighted Avg.       Number       Weighted Avg.
      Prices         Outstanding     Life (yrs)     Exercise Price    Exercisable    Exercise Price
-----------------------------------------------------------------------------------------------------
                   (in thousands)                                   (in thousands)
<S>                            <C>       <C>                  <C>               <C>            <C>
  $4.00 - $5.99                 30       2                    $5.62              30            $5.62
   6.00 - 7.99                  60       3                     6.69              60             6.69
   8.00 - 9.99                  23       3                     8.69              23             8.69
  10.00 - 11.99                  9       6                    11.42               9            11.42
  12.00 - 13.99                 66       5                    13.67              66            13.67
  16.00 - 17.99                 38       8                    17.17               9            17.17
  18.00 - 19.99                 22       8                    19.84               6            19.84
  30.00 - 31.99                 19       9                    30.04             ---              ---
                  -----------------                                -----------------
                               267                            12.84             203            10.09
                  =================                                =================
</TABLE>



                                       76
<PAGE>


     In 1991 the Company  established a 401(K)  savings plan for employees  over
age 21 who have at least 90 days of continuous  service.  The Company's matching
contributions  are based on a  sliding  scale  for a  maximum  contribution  per
employee of $2,000 for 2000. The maximum contribution per employee was increased
to $4,000 in 2001 and  remained  the same  during  2002.  Company  contributions
totaled $221,000, $228,000, and $146,000 in 2002, 2001 and 2000.

     In December 1993 the Company established a supplemental benefit plan (Plan)
to provide death benefits and supplemental income payments during retirement for
selected  officers.  The  Plan is a  nonqualified  defined  benefit  plan and is
unsecured.  Benefits  under  the Plan are  fixed  for each  participant  and are
payable over a specific period following the participant's retirement or at such
earlier date as termination or death occurs. Participants vest in the plan based
on their  years of  service  subsequent  to being  covered  by the  Plan.  As of
December 31, 2002, 2001 and 2000, there is only one participant in the plan. The
Company has purchased  insurance  policies to provide for its obligations  under
the Plan in the event a participant dies prior to retirement. The cash surrender
value of such  policies was  $3,620,000  at December 31, 2002 and  $3,443,000 at
December 31, 2001. Under this Plan, the Company  recognized  expense of $81,000,
$70,000, and $64,000 in 2002, 2001 and 2000. The aggregate liability of the Plan
was approximately $324,000 and $275,000 at December 31, 2002 and 2001.


NOTE M - TRUST PREFERRED SECURITIES

     On February 22, 2001,  Redwood  Statutory Trust I ("RSTI"),  a wholly owned
subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities
with a liquidation  amount of $1,000 per security.  The proceeds of the offering
were loaned to the Company in exchange for junior  subordinated  debentures with
terms similar to the Capital Securities.  The sole assets of RSTI are the junior
subordinated  debentures  of the Company  and  payments  thereunder.  The junior
subordinated   debentures  and  the  back-up  obligations,   in  the  aggregate,
constitute  a  full  and  unconditional  guarantee  by  the  Corporation  of the
obligations of RSTI under the Capital  Securities.  Distributions on the Capital
Securities  are  payable  semi-annually  at the  annual  rate of  10.2%  and are
included in interest expense in the  consolidated  financial  statements.  These
securities are considered Tier 1 capital (with certain  limitations  applicable)
under  current  regulatory  guidelines.  As of  December  31,  2002 and 2001 the
outstanding  principal  balance of the Capital  Securities was $10,000,000.  The
principal  balance of the  Capital  Securities  constitute  the trust  preferred
securities in the financial statements.

     The junior subordinated debentures are subject to mandatory redemption,  in
whole or in part, upon repayment of the Capital  Securities at maturity or their
earlier  redemption at the  liquidation  amount.  Subject to the Company  having
received prior approval of the Federal  Reserve,  if then required,  the Capital
Securities  are  redeemable  prior to the maturity date of February 22, 2031, at
the option of the Company;  on or after February 22, 2021 at par; or on or after
February 22, 2011 at a premium,  or upon  occurrence of specific  events defined
within the trust indenture. The Company has the option to defer distributions on
the  Capital  Securities  from  time to  time  for a  period  not to  exceed  10
consecutive semi-annual periods.

                                       77
<PAGE>

NOTE N - REGULATORY MATTERS

     One of the  principal  sources of cash for Redwood is  dividends  from NBR.
Total  dividends  which may be declared  by  subsidiary  financial  institutions
depend on the regulations  which govern them. In addition,  regulatory  agencies
can place dividend restrictions on the subsidiaries based on their evaluation of
the  financial  condition of the  subsidiaries.  No  restrictions  are currently
imposed by regulatory  agencies on the  subsidiaries  other than the limitations
found in the regulations which govern the respective subsidiaries.  The approval
of the  OCC is  required  for the  payment  of  dividends  if the  total  of all
dividends  declared by a national  bank in any  calendar  year would  exceed the
total of its net profits of that year  combined with its retained net profits of
the two preceding  years,  less any required  transfers to surplus or a fund for
the retirement of any preferred  stock.  At December 31, 2002, NBR could not pay
additional dividends to Redwood without prior regulatory approval.

     NBR is subject to  certain  restrictions  under the  Federal  Reserve  Act,
including restrictions on the extension of credit to affiliates.  In particular,
it is  prohibited  from lending to an  affiliated  company  unless the loans are
secured by specific types of  collateral.  Such secured loans and other advances
from the subsidiaries are limited to 10 percent of the subsidiary's  equity.  No
such loans or advances were outstanding during 2002 or 2001.

     Redwood  and NBR are  subject to various  regulatory  capital  requirements
administered  by the federal  banking  agencies.  In  addition to these  capital
guidelines,  the Federal Deposit Insurance  Corporation  Improvement Act of 1991
(FDICIA)  required  each  federal  banking  agency  to  implement  a  regulatory
framework for prompt corrective actions for insured depository institutions that
are not adequately  capitalized.  The FRB, FDIC, OCC and OTS have adopted such a
system  which became  effective  on December  19, 1992.  Failure to meet minimum
capital  requirements can initiate certain  mandatory,  and possibly  additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material effect on the Company's financial  statements.  The regulations require
the  Company  to  meet  specific  capital   adequacy   guidelines  that  involve
quantitative   measures  of  the  Company's  assets,   liabilities  and  certain
off-balance-sheet  items as calculated  under regulatory  accounting  practices.
NBR's capital  classification  is also subject to  qualitative  judgments by the
regulators about components, risk weightings and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company to maintain a minimum  leverage  ratio of Tier 1 capital (as
defined in the regulations) to adjusted assets (as defined),  and minimum ratios
of Tier 1 and total capital (as defined) to  risk-weighted  assets (as defined).
As of December  31, 2002 and 2001,  the most  recent  notification  from the OCC
categorized NBR as well  capitalized  under the regulatory  framework for prompt
corrective  action.  To be  categorized as well  capitalized,  NBR must maintain
minimum total risk-based,  Tier 1 risk-based,  and Tier 1 leverage ratios as set
forth in the table.  There are no conditions  or events since that  notification
that  management  believes  have  changed  NBR's  category.  The Company is also
considered to be well capitalized as of December 31, 2002 and 2001.


                                       78
<PAGE>




<TABLE>
<CAPTION>
                                                                                                To Be Categorized as
                                                                          For Capital          Well-Capitalized Under
                                                    Actual             Adequacy Purposes      Prompt Corrective Action
                                           ------------------------------------------------------------------------------
                                                Amount      Ratio       Amount        Ratio        Amount        Ratio
                                           ------------------------------------------------------------------------------
                                                 (in thousands           (in thousands)             (in thousands)
<S>                                                <C>       <C>            <C>         <C>             <C>       <C>
 At December 31, 2002:

   Company
     Leverage Capital (to Average Assets)          $35,604    6.96%         $20,456     4.00%           $25,570    5.00%
     Tier 1 Capital (to Risk-weighted Assets)       35,604    9.18%          15,522     4.00%            23,283    6.00%
     Total Capital (to Risk-weighted Assets)        41,585   10.72%          31,043     8.00%            38,804   10.00%

   NBR
     Leverage Capital (to Average Assets)           37,500    7.35%          20,411     4.00%           $25,514    5.00%
     Tier 1 Capital (to Risk-weighted Assets)       37,500    9.68%          15,489     4.00%            23,233    6.00%
     Total Capital (to Risk-weighted Assets)        42,372   10.94%          30,977     8.00%            38,722   10.00%



 At December 31, 2001:

   Company
     Leverage Capital (to Average Assets)          $33,844    7.46%         $18,156     4.00%           $22,695    5.00%
     Tier 1 Capital (to Risk-weighted Assets)       33,844    9.52%          14,217     4.00%            21,325    6.00%
     Total Capital (to Risk-weighted Assets)        39,650   11.16%          28,434     8.00%            35,542   10.00%

   NBR
     Leverage Capital (to Average Assets)          $34,835    7.69%         $18,113     4.00%           $22,641    5.00%
     Tier 1 Capital (to Risk-weighted Assets)       34,835    9.82%          14,189     4.00%            21,283    6.00%
     Total Capital (to Risk-weighted Assets)        39,308   11.08%          28,378     8.00%            35,472   10.00%

</TABLE>

     Management  believes that as of December 31, 2002, the Company and NBR meet
all capital  requirements  to which they are subject.  Under the most  stringent
capital requirement,  NBR has approximately $11,395,000 in excess capital before
it  becomes   "undercapitalized"  under  the  regulatory  framework  for  prompt
corrective action.

     The prompt  corrective  action  regulations  impose  restrictions  upon all
financial  institutions  to refrain  from certain  actions  which would cause an
institution to be classified as  "undercapitalized",  such as the declaration of
dividends or other  capital  distributions  or payment of  management  fees,  if
following the  distribution  or payment the  institution  would be classified as
"undercapitalized".  In addition, financial institutions which are classified as
"undercapitalized"   are  subject  to  certain   mandatory   and   discretionary
supervisory actions.



                                       79
<PAGE>


NOTE O - BUSINESS SEGMENTS

     The Company  operates in two principal  industry  segments:  core community
banking,  and merchant card  services.  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 approximately 39,000 merchants throughout the United States.

     The  condensed  income  statements  and  average  assets of the  individual
segments  are set forth in the table  below.  The  information  in this table is
derived from the internal  management  reporting  system used by  management  to
measure  the  performance  of the  segments  and  the  Company.  The  management
reporting  system  assigns  balance  sheet and  income  statement  items to each
segment based on internal management accounting policies. Net interest income is
determined  by the Company's  internal  funds  transfer  pricing  system,  which
assigns a cost of funds or credit  for funds to assets or  liabilities  based on
their  type,  maturity  or  repricing  characteristics.  Noninterest  income and
expense directly attributable to a segment are assigned to that business.  Total
other operating expense includes indirect costs, such as overhead and operations
and  technology  expense,  which  are  allocated  to the  segments  based  on an
evaluation  of costs for  product or data  processing.  All  amounts  other than
allocations of interest and indirect  costs are derived from third parties.  The
provision for credit losses is allocated based on the required  reserves and the
net charge-offs for each respective segment. The Company allocates  depreciation
expense without allocating the related depreciable asset to that segment.








                                       80
<PAGE>




<TABLE>
<CAPTION>
                                                 For the year ended December 31, 2002
                                                              (in thousands)
                                               ------------------------------------------
                                                  Community                      Total
                                                   Banking      Bankcard        Company
                                               ------------------------------------------

<S>                                               <C>         <C>              <C>
Total interest income                              $30,536    $    ---          $30,536
Total interest expense                               9,641          29            9,670
Interest income (expense) allocation                  (625)        625              ---
                                               ------------------------------------------
Net interest income                                 20,270         596           20,866
Provision for loan losses                              ---         ---              ---
Total other operating income                         2,606       5,009            7,615
Total other operating expense                       13,327       2,678           16,005
                                               ------------------------------------------
Income before income taxes                           9,549       2,927            12,476
Provision for income taxes                           3,469       1,046            4,515
                                               ------------------------------------------
Net income                                          $6,080      $1,881           $7,961
                                               ==========================================

Total Average Assets                              $465,678     $26,788         $492,466
                                               ==========================================
</TABLE>



<TABLE>
<CAPTION>
                                                 For the year ended December 31, 2001
                                                             (in thousands)
                                               ------------------------------------------
                                                  Community                      Total
                                                   Banking      Bankcard        Company
                                               ------------------------------------------
<S>                                               <C>          <C>             <C>
Total interest income                               $33,555      $ ---           $33,555
Total interest expense                              13,441          10           13,451
Interest income (expense) allocation                (1,052)      1,052              ---
                                               ------------------------------------------
Net interest income                                 19,062       1,042           20,104
Provision for loan losses                              ---         ---              ---
Total other operating income                         2,359       4,240            6,599
Total other operating expense                       12,222       2,229           14,451
                                               ------------------------------------------
Income before income taxes                           9,199       3,053           12,252
Provision for income taxes                           3,714       1,231            4,945
                                               ------------------------------------------
Net income                                          $5,485      $1,822           $7,307
                                               ==========================================

Total Average Assets                              $422,134     $26,374         $448,508
                                               ==========================================
</TABLE>







                                       81
<PAGE>





<TABLE>
<CAPTION>
                                                 For the year ended December 31, 2000
                                                             (in thousands)
                                               ------------------------------------------
                                                   Community                      Total
                                                   Banking      Bankcard        Company
                                               ------------------------------------------
<S>                                               <C>            <C>           <C>
Total interest income                              $35,163        $ ---          $35,163
Total interest expense                              14,298            21          14,319
Interest income (expense) allocation                (1,155)        1,155             ---
                                               ------------------------------------------
Net interest income                                 19,710         1,134         20,844
Provision for loan losses                              150           ---            150
Total other operating income                         1,250         4,856          6,106
Total other operating expense                       13,939         2,009         15,948
                                               ------------------------------------------
Income before income taxes                           6,871         3,981         10,852
Provision for income taxes                           2,776         1,610          4,386
                                               -----------------------------------------
Net income                                          $4,095        $2,371         $6,466
                                               =========================================

Total Average Assets                              $414,181       $24,904       $439,085
                                               ==========================================
</TABLE>


NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS

     The Company discloses the fair values of financial instruments for which it
is  practicable  to estimate  their  value.  Although  management  uses its best
judgment  in  assessing  fair  values,  there  are  inherent  weaknesses  in any
estimating  technique  that may be reflected in the fair values  disclosed.  The
fair  value  estimates  are made at a discrete  point in time based on  relevant
market data,  information  about the financial  instruments,  and other factors.
Estimates of fair value of financial  instruments  without  quoted market prices
are subjective in nature and involve various  assumptions and estimates that are
matters of judgment.  Changes in the assumptions used could significantly affect
these  estimates.  The fair values have not been adjusted to reflect  changes in
market  conditions for the period  subsequent to the valuation dates of December
31, 2002 and 2001, and therefore, estimates presented herein are not necessarily
indicative of amounts which could be realized in a current transaction.

     The following  estimates and assumptions were used on December 31, 2002 and
2001 to estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value.

(a)  Cash and Cash Equivalents

     For cash and cash equivalents, the carrying amount is a reasonable estimate
of fair value.






                                       82
<PAGE>


(b)  Investment Securities

     Fair value equals  quoted market  price,  if available.  If a quoted market
price is not available,  fair value is estimated  using quoted market prices for
similar securities.  For investments in unregistered  mortgage-backed securities
with recourse,  fair value was estimated based on the expected future cash flows
to  be  received  adjusted  for  prepayments,  foreclosures,  losses  and  other
significant  factors impacting fair value.  U.S.  Government agency stock has no
trading  market but is  required  as part of  membership,  and  therefore  it is
carried at cost.

(c)  Loans, net

     To estimate fair value of loans held for investment,  including  commercial
loans, mortgages,  construction and other loans, each loan category is segmented
by fixed and  adjustable  rate  interest  terms,  by estimated  credit risk,  by
maturity, and by performing and nonperforming categories.

     The fair value of performing loans is estimated by discounting  contractual
cash flows using the current interest rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining  maturities.
Assumptions   regarding   credit  risk,   cash  flow,  and  discount  rates  are
judgmentally determined using available market information.

     The fair value of  nonperforming  loans and loans  delinquent  more than 30
days is  estimated  by  discounting  estimated  future cash flows using  current
interest  rates with an additional  risk  adjustment  reflecting  the individual
characteristics of the loans.

(d)  Interest Receivable and Payable

     For interest  receivable and payable,  the carrying  amount is a reasonable
estimate of fair value.

(e)       Deposits

     The fair value of deposits  with no stated  maturity,  such as  noninterest
bearing  demand  deposits,  savings and money market  accounts,  is equal to the
amount  payable on demand on December 31, 2002 and 2001.  The fair value of time
deposits  is based  on the  discounted  value of  contractual  cash  flows.  The
discount rate is based on rates  currently  offered for deposits of similar size
and remaining maturities.

(f)  Other Borrowings and Trust Preferred Securities

     The discounted value of contractual cash flows at market interest rates for
debt with similar terms and remaining  maturities  are used to estimate the fair
value of existing debt.


                                       83
<PAGE>


(g)  Cash Surrender Value of Life Insurance

     For cash  surrender  value of life  insurance,  the  carrying  amount  is a
reasonable estimate of fair value.

 (h) Commitments to Fund Other Loans

     The fair value of commitments to fund other loans represents fees currently
charged to enter into similar agreements with similar remaining maturities.


     The estimated  fair values of the Company's  financial  instruments  are as
follows:



<TABLE>
<CAPTION>
                                                               December 31,
                                                      2002                      2001
                                           ----------------------------------------------------
                                             Carrying        Fair       Carrying       Fair
                                              Amount        Value        Amount       Value
                                           ----------------------------------------------------
                                                               (in thousands)
<S>                                           <C>          <C>           <C>         <C>
 Assets:
   Cash and cash equivalents                   $39,337      $39,337       $24,249     $24,249
   Investment securities                        99,921      100,425        64,975      65,208
   Loans, net                                  357,676      359,533       344,069     341,467
   Cash surrender value of life insurance        3,620        3,620         3,443       3,443
   Interest receivable                           2,325        2,325         2,545       2,545

 Liabilities:
   Deposits                                   (453,093)    (455,169)     (397,412)   (399,546)
   Other borrowings                            (12,356)     (12,358)       (3,870)     (3,866)
   Trust preferred securities                  (10,000)     (10,678)      (10,000)    (10,000)
   Interest payable                             (1,797)      (1,797)       (1,438)     (1,438)
</TABLE>




NOTE Q - COMMITMENTS AND CONTINGENCIES

     Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending  against the Company or its  subsidiaries.  Based upon
information available to the Company, its review of such lawsuits and claims and
consultation  with its counsel,  the Company believes the liability  relating to
these  actions,  if  any,  would  not  have a  material  adverse  effect  on its
consolidated financial statements.


                                       84
<PAGE>


         A listing of financial instruments whose contract amounts represent
credit risk is as follows:



<TABLE>
<CAPTION>
                                       December 31, 2002              December 31, 2001
                                  Fixed Rate   Variable Rate     Fixed Rate   Variable Rate
                                 ------------------------------ ------------------------------
                                                        (in thousands)

<S>                                    <C>             <C>             <C>            <C>
 Commitments to extend credit          $13,746         $62,213         $8,772         $58,714
 Standby letters of credit                 307             ---            233             ---
</TABLE>


     Commitments  to make  loans are  generally  made for  periods of 60 days or
less. The fixed rate loan  commitments  have interest rates ranging from 4.5% to
9.25% and maturities ranging from one month to 198 months.


NOTE R - CONDENSED FINANCIAL INFORMATION OF
         REDWOOD EMPIRE BANCORP (PARENT ONLY)




<TABLE>
<CAPTION>
                             CONDENSED BALANCE SHEETS

                                                                    December 31,
                                                                  2002         2001
                                                          --------------------------
                                                                   (in thousands)
 <S>                                                           <C>          <C>
Assets
 Cash and cash equivalents                                         $46         $202
 Investment in NBR                                              39,604       36,353
 Investment in RST1                                                310          310
 Other assets                                                      816          691
                                                          ------------- ------------
   Total assets                                                $40,776      $37,556
                                                          ============= ============

 Liabilities and Shareholders' Equity
 Trust preferred securities                                    $10,000      $10,000
 Short term borrowings                                           1,150          ---
 Borrowings from RST1                                              310          310
 Other liabilities                                                 509          559
 Shareholders' equity                                           28,807       26,687
                                                          ------------- ------------
     Total liabilities and shareholders' equity                $40,776      $37,556
                                                          ============= ============
</TABLE>




                                       85
<PAGE>



<TABLE>
<CAPTION>
                             CONDENSED STATEMENTS OF OPERATIONS

                                                                Year Ended December 31,
                                                              2002       2001        2000
                                                           ----------------------------------
                                                                    (in thousands)

<S>                                                           <C>        <C>        <C>
  Dividends from NBR                                          $6,600     $5,900     $12,129
  Interest expense                                             1,013        910          81
  Operating expenses                                             979        585         828
                                                           ----------------------------------
Income before equity in undistributed income of NBR            4,608      4,405      11,220
                                                           ----------------------------------
Equity in undistributed (excess distributed) income of NBR     2,612      2,299      (5,106)
                                                           ----------------------------------
Income before income taxes                                     7,220      6,704       6,114
Income tax benefit                                              (741)      (603)       (352)
                                                           ----------------------------------
Net income                                                    $7,961     $7,307      $6,466
                                                           ==================================
</TABLE>



<TABLE>
<CAPTION>
                                 CONDENSED STATEMENTS OF CASH FLOWS

                                                                           Year Ended December 31,
                                                                        2002         2001        2000
                                                                     -------------------------------------
                                                                                (in thousands)
<S>                                                                     <C>         <C>         <C>
 Cash flows from operating activities:
   Net income                                                           $7,961       $7,307      $6,466
                                                                     ------------ ------------------------
   Adjustments:
       Amortization and depreciation                                       ---          ---           1
       Equity in (undistributed) excess distributed income of NBR       (2,612)      (2,299)      5,106
       Change in other assets                                             (125)         642         (64)
       Change in other liabilities                                         (50)         274         197
                                                                     ------------ ------------------------
         Total adjustments                                              (2,787)      (1,383)      5,240
                                                                     ------------ ------------------------
          Net cash from operating activities                             5,174        5,924      11,706
                                                                     ------------ ------------------------
 Cash flows from investing activities:
       Capital investment into RST1                                        ---         (310)        ---
                                                                     ------------ ------------------------
          Net cash from investing activities                               ---         (310)        ---
                                                                     ------------ ------------------------
 Cash flows from financing activities:
   Net change in other borrowings                                        1,150          ---        (825)
   Issuance of common stock                                                 96          773         566
   Issuance of trust preferred securities                                  ---       10,000         ---
   Net proceeds from borrowings from RST1                                  ---          310         ---
   Repurchases of common stock                                          (3,783)     (16,391)     (8,283)
   Cash dividends paid                                                  (2,793)      (1,752)     (1,635)
                                                                     ------------ ------------------------
         Net cash from financing activities                             (5,330)      (7,060)    (10,177)
                                                                     -------------------------------------
 Net change in cash and cash equivalents                                  (156)      (1,446)      1,529
 Cash and cash equivalents at beginning of year                            202        1,648         119
                                                                     ------------ ------------------------
 Cash and cash equivalents at end of year                                  $46         $202      $1,648
                                                                     ============ ========================
</TABLE>

                                       86
<PAGE>

NOTE S- QUARTERLY RESULTS (UNAUDITED)

     The  following  table  summarizes  the  Company's  quarterly  results.  All
earnings  per share data and common  stock  prices  have been  restated  to give
effect of the Company's September 20, 2001 3 for 2 stock split.


<TABLE>
<CAPTION>
                                                     Q1       Q2       Q3       Q4          Q1       Q2       Q3       Q4
                                                   2001     2001     2001     2001        2002     2002     2002     2002
                                                 -------------------------------------  -------------------------------------

<S>                                                 <C>      <C>      <C>      <C>         <C>      <C>      <C>      <C>
 Interest income                                    $9,053   $8,442   $8,317   $7,743      $7,409   $7,734   $7,806   $7,587
 Net interest income                                 5,301    4,826    4,991    4,986       4,989    5,323    5,271    5,283
 Provision for loan losses                             ---      ---      ---      ---         ---      ---      ---      ---
 Other operating income                              1,365    1,552    1,694    1,988       1,818    1,793    2,155    1,849
 Other operating expenses                            3,650    3,432    3,629    3,740       3,738    3,904    4,303    4,060
                                                 -------------------------------------  -------------------------------------
 Income before income taxes                          3,016    2,946    3,056    3,234       3,069    3,212    3,123    3,072
 Provision for income taxes                          1,229    1,178    1,224    1,314       1,122    1,187    1,165    1,041
                                                 -------------------------------------  -------------------------------------
 Net income                                         $1,787   $1,768   $1,832   $1,920      $1,947   $2,025   $1,958   $2,031
                                                 =====================================  =====================================


 Earnings per common share:
   Basic earnings per common share:                    .44      .49      .51      .54         .56      .58      .56      .59
   Diluted earnings per common share:                  .43      .47      .50      .52         .54      .56      .54      .57

 Common Stock Prices:
   High                                             $19.00   $21.47   $25.57   $26.01      $28.80   $32.75   $28.00   $29.32
   Low                                               13.50    17.07    18.60    22.37       24.40    26.16    25.20    25.75
   Close                                             17.17    19.73    25.50    24.50       28.25    27.40    27.00    26.59

</TABLE>



                                       87
<PAGE>


Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure

         None.

                                    PART III


Item 10.     Directors and Executive Officers of the Registrant

     Reference is made to the  information  contained  in the Sections  entitled
"Nominees",   "Executive  Officers"  and  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" of Redwood's  Proxy Statement for the May 20, 2003 Annual
Meeting  of  Shareholders,  to be filed  pursuant  to  Regulation  14A under the
Securities Exchange Act of 1934, as amended, and by this reference  incorporated
herein.

Item 11.     Executive Compensation

     Reference is made to the  information  contained  in the Sections  entitled
"Performance   Graph",   "Board  Compensation   Committee  Report  on  Executive
Compensation",   "Compensation  of  Directors",   "Executive  Compensation"  and
"Supplemental  Benefit Plans" of Redwood's  Proxy Statement for the May 20, 2003
Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, and by this reference  incorporated
herein.












                                       88
<PAGE>


Item 12.     Security Ownership of Certain Beneficial Owners and Management and
             Related Stockholder Matters

     Information  concerning ownership of the equity stock of Redwood by certain
beneficial owners and management is contained in the Sections entitled "Security
Ownership of Certain Beneficial  Owners" and "Security  Ownership of Management"
of  Redwood's   Proxy   Statement  for  the  May  20,  2003  Annual  Meeting  of
Shareholders,  to be filed  pursuant  to  Regulation  14A under  the  Securities
Exchange Act of 1934, as amended, and is by this reference incorporated herein.

     The following table provides  information  relating to the Company's equity
compensation plans as of December 31, 2002:


<TABLE>
<CAPTION>

                                              (a)                                                            (c)
                                        Number of                                           Number of securities
                                    securities to                                        remaining available for
                                   be issued upon                           (b)            future issuance under
                                      exercise of              Weighted-average              equity compensation
                                      outstanding             exercise price of                 plans (excluding
                                          options           outstanding options          securities reflected in
                                                                                                     column (a))
                                 --------------------      ------------------------      ---------------------------
<S>                                       <C>                            <C>                             <C>
Plan Category:


Equity compensation plans
approved by shareholders                  267,000                        $12.84                          184,000
Equity compensation plans not
approved by shareholders                      ---                           ---                              ---
                                 --------------------                                    ---------------------------
Total                                     267,000                        $12.84                          184,000
                                 ====================                                    ===========================
</TABLE>

     All equity  compensation  plans have been approved by the shareholders.  At
December 31,  2002,  there were 184,000  shares of common  stock  available  for
future  issuance  under the  Company's  2001 stock option plan.  For  additional
information  concerning the Company's equity  compensation  plans, see Note L to
our Consolidated Financial Statements included in this Report.









                                       89
<PAGE>


Item 13. Certain Relationships and Related Transactions

         Reference is made to the information contained in the Section entitled
"Certain Transactions" of Redwood's Proxy Statement for the May 20, 2003 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, and by this reference incorporated
herein.

Item 14.     Controls and Procedures

(a)      Evaluation of Disclosure Controls and Procedures.

     Based on their evaluation as of December 31, 2002, the Company's  principal
executive  officer and  principal  financial  officer  have  concluded  that the
Company's  disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c)  under the Securities  Exchange Act of 1934 (the "Exchange  Act")) are
effective to ensure that information  required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded,  processed,
summarized  and reported  within the time periods  specified in  Securities  and
Exchange Commission rules and forms.

(b)      Changes in Internal Controls.

     Such officers have also concluded that there were no significant changes in
the Company's  internal  controls or in other  factors that could  significantly
affect these controls  subsequent to the date of the most recent  evaluation and
that  there  were  no  significant  deficiencies  or  material  weaknesses,  and
therefore no corrective actions needed to be taken.


                                     PART IV

Item 15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) 1.  Financial Statements.

     The  following   consolidated  financial  statements  of  Redwood  and  its
     subsidiaries  and  independent  auditors'  report are  included in Part III
     (Item 8) of this Form 10-K:

                                                                            Page

     Report of Independent Auditors...........................................54
     Consolidated Financial Statements of Redwood Empire Bancorp
       and Subsidiaries
     Consolidated Statements of Operations for the years ended
       December 31, 2002, 2001 and 2000.......................................55
     Consolidated Balance Sheets as of December 31, 2002 and 2001.............56
     Consolidated Statements of Shareholders' Equity for the years ended
       December 31, 2002, 2001 and 2000.......................................57
     Consolidated Statements of Cash Flows for the years ended
       December 31, 2002, 2001 and 2000.......................................58
     Notes to Consolidated Financial Statements...............................60






                                       90
<PAGE>

     2.   Financial Statement Schedules.

          All financial statement schedules have been omitted, as inapplicable.


     3.   Exhibits.

          The  following   documents  are  filed  herewith  or  incorporated  by
          reference in this Annual Report on Form 10-K.














                                       91
<PAGE>



   Exhibit
   Number                Description


   3.1    Amended  Articles of  Incorporation of Redwood.

   3.2    Amended and  Restated  By-Laws of Redwood  dated May 18, 1999 filed as
          Exhibit  3.2 to our  Annual  Report  on Form  10-K for the year  ended
          December 31, 2001 and by this reference incorporated herein.

   4.     Indenture,  dated February 22, 2001,  between Redwood and State Street
          Bank and Trust Company of Connecticut,  National Association, filed as
          Exhibit  4 to our  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2000 and by this reference incorporated herein.

   4.1    Amended and Restated Declaration of Trust, dated February 22, 2001, by
          and among State Street Bank and Trust Company of Connecticut, National
          Association,  Redwood and the  Administrators  named  therein filed as
          Exhibit  4.1 to our  Annual  Report  on Form  10-K for the year  ended
          December 31, 2000 and by this reference incorporated herein.

   4.2    Certificate of Amendment of Certificate  of  Determination  of Rights,
          Preferences,  Privileges and  Restrictions of the  Registrant's  7.80%
          Noncumulative  Convertible  Perpetual  Preferred Stock, Series A dated
          August 11, 1998 filed as Exhibit 4.2 to our Annual Report on Form 10-K
          for  the  year  ended   December  31,  2001  and  by  this   reference
          incorporated herein.

   10.    Executive Salary  Continuation  Agreement  between Patrick W. Kilkenny
          and Redwood dated November 1, 1993,  Amendment 1 dated April 25, 1996,
          Amendment 2 dated  November 16, 1999,  and Amendment 3 dated March 21,
          2001,  filed as Exhibit  10 to our Annual  Report on Form 10-K for the
          year  ended  December  31,  2001  and by this  reference  incorporated
          herein. *

   10.1   Executive Severance Agreement between Patrick W. Kilkenny and Redwood,
          filed as Exhibit  10.1 to our Annual  Report on Form 10-K for the year
          ended December 31, 1999 and by this reference incorporated herein. *

   10.2   Executive Salary Continuation  Agreement between James E. Beckwith and
          Redwood  dated  November  9, 2001 filed as Exhibit  10.2 to our Annual
          Report on Form 10-K for the year ended  December  31, 2001 and by this
          reference incorporated herein. *

   10.3   Executive  Severance  Agreement between James E. Beckwith and Redwood,
          filed as Exhibit  10.3 to our Annual  Report on Form 10-K for the year
          ended December 31, 1999 and by this reference incorporated herein. *





                                       92
<PAGE>



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

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

   10.6   Redwood's  2001  Stock  Option  Plan,  filed  as  Appendix  A  to  our
          Definitive Proxy Statement on Form 14A filed with the SEC on April 13,
          2001, and by this reference incorporated herein. *

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

   10.8   Redwood's  Dividend  Reinvestment  and Stock  Purchase  Plan  filed as
          Exhibit 4.1 to our Registration  Statement on Form S-3 dated April 28,
          1993 (Registration No. 33-61750),  and by this reference  incorporated
          herein.

   10.9   Lease,  dated June 1, 1999,  between National Bank of the Redwoods and
          Advanced  Development  &  Investments,  filed as  Exhibit  10.8 to our
          Annual Report on Form 10-K for the year ended December 31, 1999 and by
          this reference incorporated herein.

   10.10  Placement  Agreement,  dated February 9, 2001, between Redwood,  First
          Tennessee Capital Markets and Keefe,  Bruyette & Woods, Inc., filed as
          Exhibit  10.9 to our  Annual  Report on Form  10-K for the year  ended
          December 31, 2000 and by this reference incorporated herein.

   10.11  Subscription  Agreement,  dated  February  22, 2001,  between  Redwood
          Statutory Trust I, Redwood and Preferred Term Securities II, Ltd filed
          as Exhibit  10.10 to our Annual Report on Form 10-K for the year ended
          December 31, 2000 and by this reference incorporated herein.

   10.12  Guarantee  Agreement,  dated February 22, 2001, by and between Redwood
          and State  Street  Bank and Trust  Company  of  Connecticut,  National
          Association  filed as Exhibit  10.11 to our Annual Report on Form 10-K
          for  the  year  ended   December  31,  2000  and  by  this   reference
          incorporated herein.

                                       93
<PAGE>



   10.13  NBR REIT  Declaration  of  Trust,  dated  February  5,  2002  filed as
          Exhibit  10.13 to our  Annual  Report on Form 10-K for the year  ended
          December 31, 2001 and by this reference incorporated herein.

   10.14  NBR REIT Bylaws dated  February 5, 2002 filed as Exhibit  10.14 to our
          Annual Report on Form 10-K for the year ended December 31, 2001 and by
          this reference incorporated herein.

   10.15  Lease,  dated August 22, 2002,  between  National Bank of the Redwoods
          and Santa Rosa Northpoint Associates.

   11.    Statement re Computation of Per Share Earnings.

   21.    Subsidiaries of the Registrant.

   23.1   Consent of Crowe, Chizek and Company LLP.


* Management contract or compensatory plan, contract or arrangement.


(b)  Reports on Form 8-K.

     A report on Form 8-K was filed on  October  7, 2002 to report  under Item 5
     the  approval  of  a  quarterly  cash  dividend  and  containing  unaudited
     financial statements.

     A report on Form 8-K was filed on October 16,  2002 to report  under Item 5
     the press release of earnings for the third quarter of 2002.

(c)  Exhibits Required by Item 601 of Regulation S-K

     Reference is made to the exhibits under Item 15(a)(3) of this report.

(d)  Additional Financial Statements

     Not applicable.





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<PAGE>



                                   SIGNATURES



     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.




REDWOOD EMPIRE BANCORP



By:        /S/ PATRICK W. KILKENNY                        Dated:  March 26, 2003
           -----------------------------
           Patrick W. Kilkenny
           President, Chief Executive Officer and Director
           (Principal Executive Officer)


And By:    /S/ JAMES E. BECKWITH                          Dated:  March 26, 2003
           ------------------------------------------
           James E. Beckwith
           Executive Vice President
           Chief Operating Officer
           Chief Financial Officer
           (Principal Financial Officer
           and Principal Accounting Officer)





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<PAGE>


Pursuant  to the  requirements  of the  Securities  Exchange  Act of 1934,  this
amendment  has been  signed  below by the  following  persons  on  behalf of the
registrant and in the capacities and on the date indicated.



/S/ JOHN H. BRENENGEN                                     Dated:  March 26, 2003
--------------------------------------------
John H. Brenengen, Director


/S/ DANA R. JOHNSON                                       Dated:  March 26, 2003
--------------------------------------------
Dana R. Johnson, Director
Chairman of the Board


/S/ PATRICK W. KILKENNY                                   Dated:  March 26, 2003
--------------------------------------------
Patrick W. Kilkenny, Director


/S/ GREGORY J. SMITH                                      Dated:  March 26, 2003
--------------------------------------------
Gregory J. Smith, Director


/S/ MARK H. RODEBAUGH                                     Dated:  March 26, 2003
--------------------------------------------
Mark H. Rodebaugh, Director



                                                          Dated:  March 26, 2003
--------------------------------------------
William B. Stevenson, Director


















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<PAGE>
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER


I, Patrick W. Kilkenny, certify that:

1)   I have reviewed this annual report on Form 10-K of Redwood Empire Bancorp;

2)   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3)   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4)   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5)   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and



                                       97
<PAGE>

6)   The registrant's other certifying officers and I have indicated in this
     annual report whether there were significant changes in internal controls
     or in other factors that could significantly affect internal controls
     subsequent to the date of our most recent evaluation, including any
     corrective actions with regard to significant deficiencies and material
     weaknesses.




Date: March 26, 2003



/s/ Patrick W. Kilkenny
_____________________________________
Patrick W. Kilkenny
President and Chief Executive Officer
(Principal Executive Officer)





















                                       98
<PAGE>
                   CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


I, James E. Beckwith, certify that:

1)   I have reviewed this annual report on Form 10-K of Redwood Empire Bancorp;

2)   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3)   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4)   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5)   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

                                       99
<PAGE>

6)   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.




Date: March 26, 2003



/s/ James E. Beckwith
_____________________________________

James E. Beckwith
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)















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