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

                                    FORM 10-Q

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

                  For the quarterly period ended March 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

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 _



At May 7, 2002,  there were 3,493,715  shares of the  Registrant's  common stock
outstanding.

                         This page is page 1 of 36 pages.

<PAGE>



<TABLE>
<CAPTION>
                                                        REDWOOD EMPIRE BANCORP
                                                                  AND
                                                             SUBSIDIARIES

                                                                 Index


                                                                                             Page
PART I.  FINANCIAL INFORMATION

<S>    <C>        <C>                                                                          <C>
       Item 1.    Financial Statements


                  Consolidated Statements of Operations
                  Three Months Ended March 31, 2002 and 2001....................................3

                  Consolidated Balance Sheets
                  March 31, 2002 and December 31, 2001..........................................5

                  Consolidated Statements of Cash Flows
                  Three Months Ended March 31, 2002 and 2001....................................6

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


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

       Item 3.    Quantitative and Qualitative Disclosures
                  About Market Risk............................................................32


PART II. OTHER INFORMATION

       Item 2.  Changes in Securities and Use of Proceeds......................................35

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



SIGNATURES.....................................................................................36
</TABLE>

                         This page is page 2 of 36 pages.
<PAGE>


PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements




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

                                                             Three Months Ended
                                                                  March 31,
                                                              2002         2001
                                                           ---------------------
<S>                                                           <C>         <C>
Interest income:
  Interest and fees on loans ...........................      $6,217      $7,389
  Interest on investment securities ....................       1,088       1,387
  Interest on federal funds sold .......................         104         277
                                                              ------      ------
Total interest income ..................................       7,409       9,053

Interest expense:
  Interest on deposits .................................       2,162       3,600
  Interest on other borrowings .........................         258         152
                                                              ------      ------
Total interest expense .................................       2,420       3,752
                                                              ------      ------
Net interest income ....................................       4,989       5,301
Provision for loan losses ..............................          --          --
                                                              ------      ------
Net interest income after loan loss provision ..........       4,989       5,301

Noninterest income:
  Service charges on deposit accounts ..................         314         269
  Merchant draft processing, net .......................       1,179         813
  Loan servicing income ................................          54          77
  Net realized gains on
    investment securities available for sale ...........          35          --
  Other income .........................................         236         206
                                                              ------      ------
Total noninterest  income ..............................       1,818       1,365

Noninterest expense:
  Salaries and employee benefits .......................       2,046       2,232
  Occupancy and equipment expense ......................         524         489
  Other ................................................       1,168         929
                                                              ------      ------
Total noninterest expense ..............................       3,738       3,650
                                                              ------      ------
Income before income taxes .............................       3,069       3,016
Provision for income taxes .............................       1,122       1,229
                                                              ------      ------

Net income .............................................      $1,947      $1,787
                                                              ======      ======

Total comprehensive income .............................      $1,712      $2,255
                                                              ======      ======
</TABLE>

                                             (Continued)


                         This page is page 3 of 36 pages.

<PAGE>

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


                                                                             Three Months Ended
                                                                                 March 31,
                                                                            2002           2001
                                                                       -------------------------------

<S>                                                                          <C>            <C>
Basic earnings per common share:
   Net income                                                                     $.56           $.44
  Weighted average shares - basic                                            3,499,000      4,080,000

Diluted earnings per common share and common
    equivalent share:
   Net income                                                                     $.54           $.43
  Weighted average shares - diluted                                          3,632,000      4,191,000

See Notes to Consolidated Financial Statements.
</TABLE>


                                             (Concluded)






                         This page is page 4 of 36 pages.
<PAGE>


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

                                                                     March 31,   December 31,
                                                                       2002          2001
                                                                     --------------------------
                                                                            (unaudited)
Assets:
<S>                                                                  <C>          <C>
Cash and due from banks ..........................................   $  16,604    $  19,596
Federal funds sold ...............................................      44,760        4,653
                                                                     ---------    ---------
  Cash and cash equivalents ......................................      61,364       24,249
Investment securities:
  Held to maturity (fair value of $16,716 and $17,635) ...........      16,577       17,402
  Available for sale, at fair value (amortized cost of $49,948 and
  $46,433)........................................................      50,682       47,573
                                                                     ---------    ---------
    Total investment securities ..................................      67,259       64,975
Loans:
    Residential real estate mortgage .............................      92,842      101,175
    Commercial real estate mortgage ..............................     128,981      121,456
    Commercial ...................................................      72,969       70,438
    Real estate construction .....................................      45,011       46,501
    Installment and other ........................................      12,446       12,567
    Less net deferred loan fees ..................................        (624)        (488)
                                                                     ---------    ---------
        Total portfolio loans ....................................     351,625      351,649
    Less allowance for loan losses ...............................      (7,549)      (7,580)
                                                                      ---------    ---------
        Net loans ................................................     344,076      344,069

Premises and equipment, net ......................................       2,815        2,636
Mortgage servicing rights, net ...................................           4            4
Cash surrender value of life insurance ...........................       3,486        3,443
Other assets and interest receivable .............................      10,103        9,366
                                                                     ---------    ---------
     Total assets ................................................   $ 489,107    $ 448,742
                                                                     =========    =========

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits ............................   $ 100,519    $  86,969
  Interest-bearing transaction accounts ..........................     124,351      121,457
  Time deposits one hundred thousand and over ....................     107,523      112,638
  Other time deposits ............................................     104,563       76,348
                                                                     ---------    ---------
    Total deposits ...............................................     436,956      397,412

Short-term borrowings ............................................       4,025        3,870
Trust preferred securities .......................................      10,000       10,000
Other liabilities and interest payable ...........................      11,638       10,773
                                                                     ---------    ---------
     Total liabilities ...........................................     462,619      422,055

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
      none issued and outstanding ................................        --           --
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 3,485,757 and 3,530,135 shares .....      12,132       12,373
  Retained earnings ..............................................      13,930       13,653
  Accumulated other comprehensive income, net of tax .............         426          661
                                                                     ---------    ---------
     Total shareholders' equity ..................................      26,488       26,687
                                                                     ---------    ---------
     Total liabilities and shareholders' equity ..................   $ 489,107    $ 448,742
                                                                     =========    =========
</TABLE>

See Notes to Consolidated Financial Statements.


                         This page is page 5 of 36 pages.
<PAGE>



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

                                                                     Three Months Ended
                                                                          March 31,
                                                                       2002        2001
                                                                    ---------------------
<S>                                                                 <C>         <C>
Cash flows from operating activities:

  Net income ....................................................   $  1,947    $  1,787

Adjustments to reconcile net income to net cash
  from operating activities:
  Depreciation and amortization, net ............................         50        (127)
  Net realized gains on securities available for sale ...........        (35)         --
  Change in other assets and interest receivable ................       (628)        335
  Change in other liabilities and interest payable ..............        865      (2,257)
  Other, net ....................................................         --          30
                                                                     --------   ---------
  Total adjustments .............................................        252      (2,019)
                                                                     --------   ---------
  Net cash from operating activities ............................      2,199        (232)

Cash flows from investing activities:
  Net change in loans ...........................................         77      (3,901)
  Purchases of investment securities available for sale .........    (14,279)    (10,352)
  Proceeds from sales of investment securities available for sale      5,079          --
  Maturities of investment securities available for sale ........      5,681      16,431
  Maturities or calls of investment securities held to maturity .        931      10,431
  Purchases of premises and equipment, net ......................       (361)       (191)
  Proceeds from sale of other real estate owned .................         --          19
                                                                     --------   ---------
    Net cash from investing activities ..........................     (2,872)     12,437

Cash flows from financing activities:
  Net change in noninterest bearing transaction accounts ........     13,550      (3,189)
  Net change in interest bearing transaction accounts ...........      2,894         951
  Net change in time deposits ...................................     23,100       3,362
  Net change in short-term borrowings ...........................        155      (3,099)
  Issuance of trust preferred securities ........................         --      10,000
  Repurchases of common stock ...................................     (1,206)    (10,968)
  Cash dividends paid ...........................................       (705)       (429)
                                                                     --------   ---------
    Net cash from financing activities ..........................     37,788      (3,372)
                                                                     --------   ---------


Net change in cash and cash equivalents .........................     37,115       8,833
Cash and cash equivalents at beginning of period ................     24,249      43,927
                                                                     --------   ---------


Cash and cash equivalents at end of period ......................   $ 61,364    $ 52,760
                                                                    =========   =========
</TABLE>


                                                 (Continued)
                         This page is page 6 of 36 pages.

<PAGE>



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

                                                                     Three Months Ended
                                                                          March 31,
                                                                        2002     2001
                                                                     ------------------

<S>                                                                   <C>      <C>
Supplemental Disclosures:

Cash paid during the period for:
  Interest expense ................................................   $2,807   $3,829
  Income taxes ....................................................      614    1,715
</TABLE>











See Notes to Consolidated Financial Statements.


                                             (Concluded)






                         This page is page 7 of 36 pages.
<PAGE>



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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements should be read
in  conjunction  with the  consolidated  financial  statements and related notes
contained in Redwood Empire  Bancorp's 2001 Annual Report to  Shareholders.  The
statements  include the accounts of Redwood Empire Bancorp  ("Redwood," and with
its subsidiaries,  the "Company"),  and its wholly owned subsidiaries,  National
Bank of the  Redwoods  ("NBR")  and  Redwood  Statutory  Trust I  ("RSTI").  All
significant  inter-company  balances and transactions have been eliminated.  The
financial information contained in this report reflect all adjustments which, in
the opinion of management,  are necessary for a fair presentation of the results
of the interim periods.  All such adjustments are of a normal recurring  nature.
The results of  operations  and cash flows for the three  months ended March 31,
2002 are not necessarily  indicative of the results that may be expected for the
year ending December 31, 2002.

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
cash on hand,  amounts  due  from  banks,  federal  funds  sold  and  repurchase
agreements with original  maturities of 90 days or less.  Federal funds sold and
repurchase agreements are generally for one day periods.


2.   Earnings per Share

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

     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.





                         This page is page 8 of 36 pages.
<PAGE>

     The following  table  reflects the Company's  pertinent  earnings per share
data. The weighted average shares  outstanding have been restated to give effect
for the 2001 three-for-two stock split.

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                          2002                         2001
                                                --------------------------   -------------------------
                                                    Basic       Diluted          Basic      Diluted
                                                --------------------------   -------------------------
                                                        (in thousands, except per share data)
 <S>                                               <C>          <C>             <C>         <C>
Earnings per common share:

 Net income                                           $1,947       $1,947          $1,787      $1,787
 Earnings per share                                      .56          .54             .44         .43

 Weighted average common shares outstanding        3,499,000    3,632,000(1)    4,080,000   4,191,000(1)
</TABLE>


1)   The weighted average common shares outstanding include the dilutive effects
     of common  stock  options of 133,000 and 111,000 for the three months ended
     March 31, 2002 and March 31, 2001.




3.   Comprehensive Income

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


<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                             March 31,
                                                          2002        2001
                                                       ------------------------
                                                           (In thousands)

<S>                                                        <C>         <C>
         Net income as reported                            $1,947      $1,787
         Other comprehensive income (net of tax):
           Change in unrealized holding gain (losses)
              on available for sale securities               (215)        468
           Reclassification adjustment                        (20)        ---
                                                       ------------------------
         Total comprehensive income                        $1,712      $2,255
                                                       ========================
</TABLE>





4.   Subsequent Event - Common Stock Dividend

     On April 4, 2002 the Board of Directors  declared a quarterly cash dividend
of 20 cents per share on the Company's Common Stock. The dividend was payable on
April 29, 2002 to shareholders of record on April 17, 2002.



                         This page is page 9 of 36 pages.
<PAGE>

5.   Business Segments

     The Company  operates in two principal  business  segments:  core community
banking and merchant card services. The Company's core community banking segment
includes  commercial,   commercial  real  estate,   construction  and  permanent
residential lending along with all depository activities. The Company's merchant
card  services  industry  group  provides  credit card  settlement  services for
approximately 43,000 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, including indirect costs, such as overhead,  operations
and technology expense,  are allocated to the segments based on an evaluation of
costs for product or data  processing.  All amounts  other than  allocations  of
interest and indirect  costs are derived from third  parties.  The provision for
credit  losses  is  allocated  based  on  the  required  reserves  and  the  net
charge-offs  for each respective  segment.  The Company  allocates  depreciation
expense without allocating the related depreciable asset to that segment.

     Summary financial data by business segment follows:



<TABLE>
<CAPTION>
                                                               For the quarter ended March 31, 2002
                                                          -----------------------------------------------
                                                                             Merchant
                                                             Community         Card           Total
                                                              Banking        Services        Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                           <C>               <C>           <C>
Total interest income                                            $7,409         $   ---         $7,409
Total interest expense                                            2,418               2          2,420
Interest income/(expense) allocation                               (156)            156            ---
                                                          -----------------------------------------------
Net interest income                                               4,835             154          4,989
Provision for loan losses                                           ---             ---            ---
Total other operating income                                        639           1,179          1,818
Total other operating expense                                     3,088             650          3,738
                                                          -----------------------------------------------
Income before income taxes                                        2,386             683          3,069
Provision for income taxes                                          874             248          1,122
                                                          -----------------------------------------------
Net income                                                       $1,512            $435         $1,947
                                                          ===============================================

Total Average Assets                                           $443,027         $26,714       $469,741
                                                          ===============================================
</TABLE>



                         This page is page 10 of 36 pages.
<PAGE>




<TABLE>
<CAPTION>
                                                               For the quarter ended March 31, 2001
                                                           ----------------------------------------------
                                                                             Merchant
                                                              Community        Card           Total
                                                               Banking       Services        Company
                                                           ----------------------------------------------
                                                                          (in thousands)

<S>                                                              <C>            <C>            <C>
Total interest income                                              $9,053       $   ---          $9,053
Total interest expense                                              3,749             3           3,752
Interest income/(expense) allocation                                 (311)          311             ---
                                                           ----------------------------------------------
Net interest income                                                 4,993           308           5,301
Provision for loan losses                                             ---           ---             ---
Total other operating income                                          552           813           1,365
Total other operating expense                                       3,103           547           3,650
                                                           ----------------------------------------------
Income before income taxes                                          2,442           574           3,016
Provision for income taxes                                            995           234           1,229
                                                           ----------------------------------------------
Net income                                                         $1,447          $340          $1,787
                                                           ==============================================

Total Average Assets                                             $418,822       $24,601        $443,423
                                                           ==============================================
</TABLE>


6.   Common Stock Repurchases and Trust Preferred Issuance

     In January and February 2001, the Company's  Board of Directors  authorized
the  repurchase  of up to 10% of the  Company's  total  shares  outstanding,  or
427,500  shares in January 2001 and 385,500 shares in February 2001, as adjusted
for the  three-for-two  stock split  announced  September 20, 2001, of which all
shares have been  repurchased.  In August  2001,  the Company  announced a third
authorization  to repurchase an additional  355,500 shares,  as adjusted for the
three-for-two  stock split announced  September 20, 2001. To date, 97,686 shares
have been repurchased,  as adjusted for the three-for-two  stock split announced
September 20, 2001. Under the repurchase program,  the Company plans to purchase
shares  from  time to time on the open  market  and/or in  privately  negotiated
transactions.  The first two repurchase  authorizations were funded in part with
proceeds received from a $10,000,000 pooled trust preferred  securities offering
concluded  on February 22,  2001.  The  financing,  which  qualifies  for tier 1
capital treatment, for up to 25% of total tier 1 capital, bears an interest rate
of  10.20%  and is due in 30 years.  Debt  issuance  costs,  which  amounted  to
approximately $300,000, are being amortized over the life of the offering.


7.   Real Estate Investment Trust

     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 lending.







                         This page is page 11 of 36 pages.
<PAGE>


8.   New Accounting Pronouncements

     On January 1, 2002,  the Company  adopted a new  accounting  standard which
addresses  accounting  for goodwill  and other  intangible  assets  arising from
business  combinations.  Identifiable  intangible  assets must be separated from
goodwill.  Identifiable  intangible  assets  with  finite  useful  lives will be
amortized  under the new standard,  whereas  goodwill,  both amounts  previously
recorded  and future  amounts  purchased,  will cease  being  amortized.  Annual
impairment  testing will be required for goodwill with impairment being recorded
if the carrying amount of goodwill  exceeds its implied fair value.  Adoption of
this standard on January 1, 2002 did not have a material effect on the Company's
consolidation  financial  position  or results  of  operations,  and  management
believes  the goodwill of the Company  which totals  $674,000 at January 1, 2002
and March 31, 2002 is not impaired;  therefore,  no  impairment or  amortization
expense  was  recorded  during the quarter  ending  March 31,  2002.  The annual
goodwill  amortization  expense  for the  years  prior  to 2002  of  $84,000  is
considered  to be  immaterial  and,  therefore,  no pro  forma  disclosures  are
provided to reflect the impact of the new accounting  method on the prior period
financial statements.

     In August 2001, the Financial  Accounting  Standards Board issued Statement
of  Financial  Accounting  Standards  (SFAS)  No.  143,  "Accounting  for  Asset
Retirement Obligations" which will be adopted by the Company on January 1, 2003.
The new accounting standard addresses accounting for obligations associated with
the  retirement  of tangible,  long-lived  assets and requires a liability to be
recognized for the fair value of any such obligations. Adoption of this standard
on January 1, 2003 is not  expected to have a material  effect on the  Company's
consolidated financial position or results of operations.

     On January 1, 2002, the Company  adopted SFAS No. 144,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets."  This new  accounting  standard
establishes more restrictive  requirements for the  classification  of assets as
"held for  sale"  and also  expands  the  types of  dispositions  that are to be
accounted for as discontinued  operations.  Adoption of this standard on January
1, 2002 did not have a material effect on the Company's  consolidated  financial
position or results of operations.



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

Forward-Looking Information

     This  Quarterly  Report on Form 10-Q includes  forward-looking  information
which is subject to the "safe harbor"  created by Section 27A of the  Securities
Act of 1933,  as  amended,  and Section 21E of the  Securities  Act of 1934,  as
amended.  These  forward-looking  statements (which involve the Company's plans,
beliefs  and goals,  refer to  estimates,  projections  or  expectations  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
(many of which are beyond the


                         This page is page 12 of 36 pages.
<PAGE>

Company's ability to control):

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

     o    Changes  in the  interest  rate  environment  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    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,  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 as a result
          of shortages of electrical power or increases in energy costs.

     o    Certain operational risks involving data processing systems or fraud.


     Any forward-looking  statements made by the Company are intended to provide
investors with additional  information  with which they may assess the Company's
future potential. All forward-looking  statements are based on assumptions about
an  uncertain  future and are based on  information  available  at the date such
statements  are  issued.  The  Company  undertakes  no  obligation  to revise or
publicly   release  the  results  of  any  revision  to  these   forward-looking
statements.  For  additional  information  concerning  risks  and  uncertainties
related to the Company and its operations,  please refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 and "Certain  Important
Considerations for Investors" herein.

     The following sections discuss  significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 2001
to March 31, 2002.  Significant  changes and trends in the Company's  results of
operations  for the three  months  ended  March 31,  2002,  compared to the same
period in 2001 are also discussed.


                         This page is page 13 of 36 pages.
<PAGE>

Summary of Financial Results

     The Company  reported net income of $1,947,000 ($.54 per diluted share) for
the three  months  ended  March 31, 2002 as  compared  to  $1,787,000  ($.43 per
diluted  share) for the same  period in 2001,  an  increase  of  $160,000 in net
income or 9%. This  increase  is due to an  increase of $453,000 in  noninterest
income  partially offset by a decrease of $312,000 in net interest income and an
increase of $88,000 in noninterest  expense.  In addition,  net income increased
due to a decline in the Company's effective tax rate from 40.75% for the quarter
ended March 31, 2001 to 36.56% for the quarter ended March 31, 2002. For further
information, see "Income Taxes" in this section.

     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.


Net Interest Income

     Net interest income  decreased from $5,301,000 in the first quarter of 2001
to  $4,989,000  in the first  quarter of 2001,  which  represents  a decrease of
$312,000 or 6%. The decline in net  interest  income was driven by a decrease in
net  interest  margin to 4.58% for the three  months  ended  March 31, 2002 from
5.16% for the three  months  ended March 31, 2001.  The  Company's  net interest
margin has been negatively impacted by the rapid decline in the general interest
rate  environment.  In  addition,  the pooled  trust  preferred  debt  financing
completed in the first quarter of 2001 had a negative  impact of 22 basis points
on the net  interest  margin as of March 31, 2002,  when  compared to a negative
impact of 11 basis points one year ago. The $10,000,000 proceeds from the pooled
trust preferred offering were used to fund common stock repurchases.

     For the  three  months  ended  March  31,  2002,  yield on  earning  assets
decreased  to 6.80% from 8.81% for the same period one year ago. The decrease is
due to a decline in the general interest rate  environment.  Despite the decline
in interest rates,  average  portfolio  loans increased  $29,632,000 or 9%, when
compared to the same  quarter in 2001.  Average  commercial  real  estate  loans
increased  $24,691,000 or 25% and average  installment and other loans increased
$5,123,000 or 60% for the three months ended March 31, 2002 as compared to March
31, 2001.

     Yield paid on interest bearing liabilities decreased to 2.86% for the three
months  ended  March 31,  2002 as compared to 4.79% for the same period one year
ago.  This decline is  attributable  to a lower  interest  rate  environment  as
discussed  above,  offset by the impact of the Company's  pooled trust preferred
debt financing.



                         This page is page 14 of 36 pages.
<PAGE>

     With the  increase in average  earning  assets in the first three months of
2002, the Company's  funding levels also increased as average  interest  bearing
liabilities  increased $24,896,000 or 8% as compared to the same period one year
ago. The average balance of time deposits increased $16,746,000 during the first
three  months of 2002 as compared to the same period one year ago. The growth in
time deposits in 2002 is a result of the Company's efforts to fund earning asset
growth and build its deposit portfolio.

     The following is an analysis of the  Company's net interest  margin for the
indicated periods:

<TABLE>
<CAPTION>
                                          Three months ended                  Three months ended
                                            March 31, 2002                      March 31, 2001
                                 ------------------------------------- ----------------------------------

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

<S>                                   <C>          <C>         <C>          <C>         <C>       <C>
Commercial loans................       $69,344     $1,197      7.00%         $68,372    $1,745    10.35%
Real estate-mortgage loans......        97,077      1,722      7.19           97,922     2,009     8.32
Real estate-commercial loans....       123,131      2,282      7.52           98,440     2,189     9.02
Construction loans..............        45,620        863      7.67           46,344     1,268    11.10
Installment and other...........        13,622        153      4.56            8,499       178     8.49
Deferred loan fees..............          (523)       ---       ---             (938)      ---      ---
                                 --------------------------            ------------------------
  Portfolio loans...............       348,271      6,217      7.24          318,639     7,389     9.40

Investments.....................        68,941      1,088      6.40           77,931     1,387     7.22
Federal funds sold..............        24,429        104      1.73           19,954       277     5.63
                                 --------------------------            ------------------------
  Total earning assets (1)......      $441,641      7,409      6.80         $416,524     9,053     8.81
                                 ================                      ===============

Interest bearing transaction
  accounts......................      $124,386        423      1.38         $124,099       848     2.77
Time deposits...................       204,335      1,739      3.45          187,589     2,752     5.95
Other borrowings................        14,174        258      7.38            6,311       152     9.77
                                 --------------------------            ------------------------
   Total interest-bearing
     liabilities................      $342,895      2,420      2.86%        $317,999     3,752     4.79%
                                 ================                      ===============

                                                -----------                          ----------
Net interest income.............                   $4,989                               $5,301
                                                ===========                          ==========
Net interest income to
  earning assets................                               4.58%                               5.16%
</TABLE>




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



                         This page is page 15 of 36 pages.
<PAGE>

     The  following  table sets forth  changes in interest  income and  interest
expense for each major category of interest-earning  asset and  interest-bearing
liability,  and the amount of change attributable to volume and rate changes for
the three months ended March 31, 2002 and 2001. 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>
                                                                      Three months ended
                                                                March 31, 2002 compared to the
                                                              three months ended March 31, 2001
                                                           -----------------------------------------
                                                               Volume        Rate         Total
                                                           -----------------------------------------
                                                                        (in thousands)
<S>                                                                <C>         <C>          <C>
         Increase (decrease) in interest income:
           Commercial loans                                         $24         ($572)       ($548)
           Real estate-mortgage loans                               (17)         (270)        (287)
           Real estate-commercial loans                             494          (401)          93
           Construction loans                                       (20)         (385)        (405)
           Installment and other                                     79          (104)         (25)
           Investments                                             (151)         (148)        (299)
           Federal funds sold                                        52          (225)        (173)
                                                           -----------------------------------------
         Total increase (decrease)                                  461        (2,105)      (1,644)
                                                           -----------------------------------------

         Increase (decrease) in interest expense:
           Interest-bearing transaction accounts                      2          (427)        (425)
           Time deposits                                            228        (1,241)      (1,013)
           Other borrowings                                         151           (45)         106
                                                           -----------------------------------------
         Total increase (decrease)                                  381        (1,713)      (1,332)
                                                           -----------------------------------------

         Increase (decrease) in net interest income                 $80         ($392)       ($312)
                                                           =========================================
</TABLE>


Provision for Loan Losses

     Due to the absence of significant  net loan  charge-offs,  little change in
loan  portfolio  asset quality and the balance in the allowance for loan losses,
there was no provision for loan losses for the three months ended March 31, 2002
and  2001.  For  further  information,  see  "Allowance  for  Loan  Losses"  and
"Nonperforming Assets" in this section.



                         This page is page 16 of 36 pages.
<PAGE>


Noninterest Income and Expense and Income Taxes

Noninterest Income

     The following tables set forth the components of the Company's  noninterest
income for the three months ended March 31, 2002, as compared to the same period
in 2001.



<TABLE>
<CAPTION>
                                                    Three Months Ended
                                                        March 31,                $          %
                                              ---------------------------
                                                 2002            2001         Change      Change
                                              ------------    -----------   ------------------------
                                                (dollars in thousands)

<S>                                              <C>             <C>             <C>          <C>
Service charges on deposit accounts                $314            $269           $45         17%
Merchant draft processing, net                    1,179             813           366         45
Loan servicing income                                54              77           (23)       (30)
Net realized gain on securities
  available for sale                                 35             ---            35        ---
Other income                                        236             206            30         15
                                              ------------    -----------   ------------
Total noninterest income                         $1,818          $1,365          $453         33%
                                              ============    ===========   ============
</TABLE>


     Noninterest income increased $453,000,  or 33%, to $1,818,000 for the three
months ended March 31, 2002 when compared to  $1,365,000  for the same period in
2001.  During this  period,  such  increase is  primarily  due to an increase of
$366,000  in  merchant  card net  revenue,  an  increase  in service  charges of
$45,000,  an increase of $35,000 in gains associated with investment  securities
available  for sale, an increase in other  income,  all  partially  offset by an
decrease of $23,000 in loan servicing income during this period.


Noninterest Expense

     The following tables set forth the components of the Company's  noninterest
expense  during the three months  ended March 31, 2002,  as compared to the same
period in 2001.


<TABLE>
<CAPTION>
                                          Three Months Ended
                                              March 31,             $         %
                                      ---------------------------
                                          2002         2001       Change    Change
                                      -----------------------------------------------
                                        (dollars in thousands)

<S>                                          <C>          <C>       <C>         <C>
Salaries and employee benefits                2,046       $2,232    ($186)      (8%)
Occupancy and equipment expense                 524          489       35        7
Other                                         1,168          929      239       26
                                      -------------------------------------
Total noninterest expense                    $3,738       $3,650      $88        2%
                                      =====================================
</TABLE>


     Noninterest  expense increased by $88,000,  or 2%, to $3,738,000 during the
first quarter of 2002 as compared to  $3,650,000  for the first quarter of 2001.
The increase in noninterest  expense for the three-month  period ended March 31,
2002, as compared to the same period ended March 31, 2001, is attributable to an
increase in other expense of $239,000  partially offset by a decline in salaries
and employee benefits.


                         This page is page 17 of 36 pages.
<PAGE>

Income Taxes

     The  Company's  effective  tax rate  varies  with  changes in the  relative
amounts of its non-taxable income and nondeductible  expenses. The effective tax
rate was 36.56% for the three months ended March 31, 2002, as compared to 40.75%
for the same  period in 2001.  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 lending, and in addition the formation of
this Company resulted in a reduction of the Company's effective tax rate.

Business Segments

     The Company  operates in two  principal  product  and service  lines:  core
community  banking  and  merchant  credit  card  services.  The  Company's  core
community   banking  segment  includes   commercial,   commercial  real  estate,
construction  and  permanent   residential   lending  along  with  treasury  and
depository  activities.  The Company's  merchant card  services  industry  group
provides  credit card settlement  services for  approximately  43,000  merchants
throughout the United States.

Summary  financial  data by  business  segment for the  indicated  periods is as
follows:



<TABLE>
<CAPTION>
                                                               For the quarter ended March 31, 2002
                                                          -----------------------------------------------
                                                                               Merchant
                                                              Community          Card         Total
                                                               Banking         Services      Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                               <C>             <C>          <C>
Total interest income                                               $7,409        $   ---        $7,409
Total interest expense                                               2,418              2         2,420
Interest income/(expense) allocation                                  (156)           156           ---
                                                          -----------------------------------------------
Net interest income                                                  4,835            154         4,989
Provision for loan losses                                              ---            ---           ---
Total other operating income                                           639          1,179         1,818
Total other operating expense                                        3,088            650         3,738
                                                          -----------------------------------------------
Income before income taxes                                           2,386            683         3,069
Provision for income taxes                                             874            248         1,122
                                                          -----------------------------------------------
Net income                                                          $1,512           $435        $1,947
                                                          ===============================================

Total Average Assets                                              $443,027        $26,714      $469,741
                                                          ===============================================
</TABLE>



                         This page is page 18 of 36 pages.
<PAGE>



<TABLE>
<CAPTION>
                                                               For the quarter ended March 31, 2001
                                                          -----------------------------------------------
                                                                               Merchant
                                                              Community          Card         Total
                                                               Banking         Services      Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                               <C>             <C>         <C>
Total interest income                                               $9,053        $   ---       $9,053
Total interest expense                                               3,749              3        3,752
Interest income/(expense) allocation                                  (311)           311          ---
                                                          -----------------------------------------------
Net interest income                                                  4,993            308        5,301
Provision for loan losses                                              ---            ---          ---
Total other operating income                                           552            813        1,365
Total other operating expense                                        3,103            547        3,650
                                                          -----------------------------------------------
Income before income taxes                                           2,442            574        3,016
Provision for income taxes                                             995            234        1,229
                                                          -----------------------------------------------
Net income                                                          $1,447           $340       $1,787
                                                          ===============================================

Total Average Assets                                              $418,822        $24,601     $443,423
                                                          ===============================================
</TABLE>


         Community Banking

     The Community  Banking segment's income before income tax decreased for the
three months ended March 31, 2002 when compared to the same period in 2001.  The
decrease  is due to a decrease  in net  interest  income.  Net  interest  income
declined $158,000 for the three months ended March 31, 2002,  principally due to
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 Company increased its loan portfolio during the first three
months of 2002 through renewed  marketing  efforts.  For the quarter ended March
31,  2002,  total  average  portfolio  loans  were  $348,271,000,   up  9%  from
$318,639,000 for the quarter ended March 31, 2001.

         Merchant Card Services

     The Company's  merchant  credit card segment earned  $435,000 for the three
months  ended March 31, 2002  compared to $340,000  for the same period in 2001.
The  increase  in the  unit's  net income is due to an  increase  in  processing
revenue  brought  about by the Company's  efforts to build its overall  merchant
card services  business  through direct  marketing  efforts and new  independent
sales organization (ISO)  relationships.  The merchant credit card segment's net
income comprised  approximately 22% of the Company's consolidated net income for
the three months ended March 31, 2002.

     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 $1,233,000 and
$1,268,000 as of March 31, 2002 and 2001, was estimated based upon industry loss
data as a percentage of  transaction  volume  throughout  each year,  historical
losses incurred by the Company and management's  evaluation  regarding  merchant
and ISO risk. The Company utilizes

                         This page is page 19 of 36 pages.
<PAGE>

the  services of ISOs to acquire  merchants  as  customers.  The  provision  for
charge-back losses, which is included in the financial statements as a reduction
in merchant  draft  processing  income,  was $58,000 for the three  months ended
March 31,  2002,  as compared to $67,000  for the three  months  ended March 31,
2001.  For  further  discussion,   see  "Certain  Important  Considerations  for
Investors" in this section.

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

<TABLE>
<CAPTION>
                                               Three months ended
                                                    March 31,
                                                 2002       2001
                                             ------------------------
                                                 (in thousands)

<S>                                               <C>         <C>
                     Beginning allowance          $1,212      $1,277
                     Provision for losses             58          67
                     Recoveries                        8         ---
                     Charge-offs                     (45)        (76)
                                             ------------------------
                     Ending allowance             $1,233      $1,268
                                             ========================
</TABLE>


Investment Securities

     Total investment securities increased to $67,259,000, as of March 31, 2002,
compared to $64,975,000 as of December 31, 2001. The Company's  average  federal
funds  sold  position  was  $24,429,000  for the first  three  months of 2002 as
compared to $19,954,000  for the same period in 2001.  This was primarily due to
growth of the Company's deposit base.

Loans

     Total loans  decreased  slightly to $351,625,000 at March 31, 2002 compared
to $351,649,000 at December 31, 2001. The Company's  residential  loan portfolio
has experienced  substantial  paydown activity during the first quarter of 2002.
Despite this paydown  activity,  the Company continues to focus on growth in the
overall loan  portfolio  through  marketing  efforts and a general  expansion of
businesses  within the  Company's  market  area.  Commercial  real estate  loans
increased   $7,525,000  to  $128,981,000,   at  March  31,  2002,   compared  to
$121,456,000  at December 31, 2001.  Commercial  loans  increased  $2,531,000 to
$72,969,000, at March 31, 2002, compared to $70,438,000 at December 31, 2001.



                         This page is page 20 of 36 pages.
<PAGE>


     The following  table  summarizes  the  composition of the loan portfolio at
March 31, 2002 and December 31, 2001:



<TABLE>
<CAPTION>
                                      March 31, 2002                December 31, 2001
                                ----------------------------   -----------------------------
                                      Amount          %              Amount          %
                                ----------------------------   -----------------------------
                                                  (dollars in thousands)
<S>                                      <C>          <C>             <C>           <C>
 Residential real estate mortgage        $92,842       26%            $101,175       29%
 Commercial real estate mortgage         128,981       37              121,456       34
 Commercial                               72,969       21               70,438       20
 Real estate construction                 45,011       13               46,501       13
 Installment and other                    12,446        3               12,567        4
 Less deferred loan fees                    (624)     ---                 (488)     ---
                                ----------------------------   -----------------------------
     Total portfolio loans               351,625      100%             351,649      100%
                                                  ==========                    ============
 Less allowance for loan losses           (7,549)                       (7,580)
                                -------------------            ------------------
     Net loans                          $344,076                      $344,069
                                ===================            ==================
</TABLE>


Allowance for Loan Losses

     The allowance for loan losses is established through charges to earnings in
the form of the  provision  for loan  losses.  Loan  losses are  charged to, and
recoveries  are credited to, the  allowance  for loan losses.  The provision for
loan losses is determined  after  considering  various factors such as loan loss
experience, current economic conditions,  maturity of the portfolio, size of the
portfolio,  industry  concentrations,  borrower  credit  history,  the  existing
allowance  for loan  losses,  independent  loan  reviews,  current  charges  and
recoveries  to the  allowance  for loan  losses and the  overall  quality of the
portfolio,  as determined by  management,  regulatory  agencies and  independent
credit review consultants retained by the Company.

     The  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,  general economic conditions
and other qualitative factors.




                         This page is page 21 of 36 pages.
<PAGE>

     The following table summarizes changes in the Company's  allowance for loan
losses for the indicated periods:



<TABLE>
<CAPTION>
                                                         Three months ended
                                                              March 31,
                                                       ------------------------
                                                           2002        2001
                                                       ------------------------

                                                       (dollars in thousands)

<S>                                                        <C>         <C>
              Beginning allowance for loan losses          $7,580      $7,674
              Provision for loan losses                       ---         ---
              Charge-offs                                     (45)        ---
              Recoveries                                       14          22
                                                       ------------------------
              Ending allowance for loan losses             $7,549      $7,696
                                                       ========================


              Net charge-offs/(recoveries) to average
                 loans (annualized)                         0.04%      (0.03%)
</TABLE>


     The allowance for loan losses as a percentage of portfolio  loans decreased
slightly  from 2.16%,  at December  31, 2001,  to 2.15% at March 31,  2002.  The
growth in the Company's loan portfolio is primarily comprised of commercial real
estate  loans that  generally  bear a lower  credit  risk than  construction  or
commercial   loans.   Accordingly,   under  the  Company's   loan  loss  reserve
methodology,  such loans generally receive a lower loan loss reserve  allocation
as compared to commercial or construction loans.


Nonperforming Assets

     The following table  summarizes the Company's  nonperforming  assets at the
dates indicated:



<TABLE>
<CAPTION>
                                                       March 31,       December 31,
                                                         2002              2001
                                                    ----------------  ---------------
                                                         (dollars in thousands)
<S>                                                          <C>              <C>
Nonaccrual loans                                             $3,357           $2,892
Accruing loans past due 90 days or more                         ---              ---
Restructured loans                                              284              284
                                                    ----------------  ---------------
Total nonperforming loans                                     3,641            3,176
Other real estate owned                                         ---              ---
                                                    ----------------  ---------------
Total nonperforming assets                                   $3,641           $3,176
                                                    ================  ===============



Nonperforming assets to total assets                          0.74%            0.71%
</TABLE>




                         This page is page 22 of 36 pages.
<PAGE>

     Nonperforming  assets have  increased  slightly  from  3,176,000 or .71% of
total assets,  as of December 31, 2001, to $3,641,000 or .74% of total assets as
of March 31, 2002.  The increase is  attributable  to an increase of $465,000 in
nonaccrual loans during this period.

     Nonperforming  loans  consist  of loans to 16  borrowers,  7 of which  have
balances  in excess of  $100,000.  The two  largest  have  recorded  balances of
$810,000 and $723,000.  One property is secured by commercial  real estate,  the
other  by  commercial  property.   Based  on  information  currently  available,
management  believes  that  adequate  reserves are included in the allowance for
loan losses to cover any loss exposure that may result from these loans.

     At March 31, 2002,  the Company did not have any  properties  classified as
other real estate owned.

     Although  the volume of  nonperforming  assets  will  depend in part on the
future economic  environment,  there is one additional loan  relationship  which
totals  approximately  $1,153,000  as of March 31, 2002,  compared to three loan
relationships  totaling  approximately  $1,921,000 at December 31, 2001,  about
which  management has serious doubts as to the ability of the borrower to comply
with the present  repayment  terms.  This loan may become a nonperforming  asset
based on the  information  presently known about possible credit problems of the
borrower.

     At March 31, 2002,  the  Company's  total  recorded  investment in impaired
loans  (as  defined  by SFAS  114 and 118) was  $3,641,000  of which  $3,357,000
relates to the recorded  investment  for which there is a related  allowance for
loan losses of  $286,000.  The  remaining  $284,000  in  impaired  loans did not
require a valuation allowance.

     The Company's  average  recorded  investment  in impaired  loans during the
three months ended March 31, 2002 and 2001 was  $3,220,000 and  $1,965,000.  The
increase of $1,255,000  in the average  recorded  investment  of impaired  loans
during the three months  ending  March 31, 2002  compared to the same period one
year ago is  primarily  due to  growth  in  nonperforming  assets.  There was no
interest income  recognized during the periods that such loans were impaired for
the three  months  ended  March 31,  2002,  as compared to $29,000 for the three
months ended March 31, 2001.

     As of March 31, 2002 there was  $3,357,000 of loans on which the accrual of
interest had been  discontinued  as compared to $2,892,000 at December 31, 2001.
During the first three months of 2002 and 2001  interest  due but excluded  from
interest  income on loans placed on  nonaccrual  status was $36,000 and $18,000.
There was no interest  income  received  on  nonaccrual  loans  during the three
months  ending  March 31,  2002,  as compared to $4,000  during the three months
ending March 31, 2001.


                         This page is page 23 of 36 pages.
<PAGE>

     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. In the first three months of
2002 the Company  was not  required to  repurchase  any such loans.  The Company
maintains a reserve for its estimate of  potential  losses  associated  with the
repurchase of previously sold mortgage loans.  During the first quarter of 2002,
the Company  agreed to pay $33,000 for a  settlement  related to disputed  title
issues.  Reserves  for such  losses  totaled  $60,000  as of March 31,  2002 and
$93,000 as of December 31, 2001. The Company  expects that it may be required to
repurchase loans in the future.

     In 1995, Allied Savings Bank ("Allied"), formerly a wholly owned subsidiary
of the Company  which  merged into NBR in 1997,  sold a COFI ARM  mortgage  pool
whose carrying value was approximately $73,900,000 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
$71,500,000 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 Class B certificates shall only receive
principal payments after all Class A certificates are retired.







                         This page is page 24 of 36 pages.
<PAGE>

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

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

 Class A         $73,199,448      $5,138,905
 Class B           3,249,067       3,196,477
 Class C                 100             100
               ------------------------------
    Total pool   $76,448,615      $8,335,482
               ==============================

     Since inception the pool has realized losses of $52,590,  which reduced the
original  face value of the Class B  certificate.  Management  believes that the
difference  between the carrying amount of the Class B certificate of $3,135,681
and its face value of $3,196,477  is  sufficient  to absorb any future  realized
losses in the pool.


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>
                                                            March 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)             1,500           1,648           440          340        3,928
                                 ----------------------------------------------------------------------
     Total long-term debt
         and operating leases           $1,500          $1,648          $440      $10,340      $13,928
                                 =========================================================


 Commitments to extend credit                                                                   63,868
 Standby letters of credit                                                                         351
                                                                                         --------------
      Total contractual obligations
         and commitments                                                                       $78,147
                                                                                         ==============
</TABLE>






                         This page is page 25 of 36 pages.
<PAGE>

Liquidity

     Redwood's  primary  source of liquidity is  dividends  from NBR.  Redwood's
primary uses of liquidity have  historically  been  associated with common stock
repurchases,  dividend payments made to common stock holders,  interest payments
relating  to  Redwood's  trust  preferred  debt and  operating  expenses.  It is
Redwood's  general  policy  to  retain  liquidity  at  the  parent  level  which
management  believes  to be  consistent  with the  safety and  soundness  of the
Company as a whole.  As of March 31,  2002,  Redwood held $94,000 in deposits at
NBR.

     Redwood's current cash dividend is $.20 per common share per quarter to its
common stockholders.  Further,  Redwood is required to make semi-annual payments
of interest at 10.2% on  $10,000,000  of trust  preferred  securities  issued in
2001. Payment of these obligations is ultimately dependent on dividends from NBR
to Redwood.  Federal  regulatory  agencies  have the  authority  to prohibit the
payment of  dividends  by NBR to Redwood if a finding is made that such  payment
would  constitute  an  unsafe  or  unsound  practice  or  if  NBR  would  become
undercapitalized  as a  result.  If NBR is  restricted  from  paying  dividends,
Redwood  might  be  unable  to pay  dividends  to its  common  shareholders.  No
assurance  can be given as to the ability of NBR to pay  dividends to Redwood in
the future.  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.  Due to this
requirement,  NBR obtained such approval for its 2002 dividend plan from the OCC
in January 2002.

     During the first three months of 2002,  NBR declared a dividend  payable to
Redwood  of  $1,700,000.  Management  believes  that as of March 31,  2002,  the
Company's  liquidity position was adequate for the operations of Redwood and NBR
for the foreseeable future.

     Although  each  entity  within the  consolidated  Company  manages  its own
liquidity,  the  Company's  consolidated  cash flow can be  divided  into  three
distinct areas: operating,  investing and financing.  For the three months ended
March  31,  2002,  the  Company  received  cash  of  $2,199,000  from  operating
activities and $37,788,000 in financing  activities,  while using  $2,872,000 in
investing activities.


Capital Resources

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



                         This page is page 26 of 36 pages.
<PAGE>

     The Company and NBR are required to maintain minimum capital ratios defined
by various federal government regulatory agencies. The Board of Governors of the
Federal  Reserve System and the Office of the  Comptroller of Currency have each
established capital guidelines which include minimum capital requirements. These
regulations  impose  three  sets  of  standards:  "risk-based",  "leverage"  and
"tangible" capital.

     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).

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

     The following  table  summarizes  the  consolidated  capital ratios and the
capital ratios of the principal  subsidiaries at March 31, 2002 and December 31,
2001.




<TABLE>
<CAPTION>
                                    March 31, 2002                        December 31, 2001
                         --------------------------------------   -----------------------------------
                                          Well-      Minimum                    Well-      Minimum
                                       Capitalized                   Actual
                             Actual                Requirement               CapitalizedRequirement
                         --------------------------------------   -----------------------------------
<S>                            <C>          <C>           <C>          <C>        <C>         <C>
      Company
        Leverage                7.23%        5.00%        4.00%         7.46%      5.00%      4.00%
        Tier 1 risk-based       8.97         6.00         4.00          9.52       6.00       4.00
        Total risk-based       10.57        10.00         8.00         11.16      10.00       8.00

      NBR
        Leverage                7.55%        5.00%        4.00%         7.69%      5.00%      4.00%
        Tier 1 risk-based       9.36         6.00         4.00          9.82       6.00       4.00
        Total risk-based       10.62        10.00         8.00         11.08      10.00       8.00
</TABLE>


     In  January  and  February  2001,  the Board of  Directors  authorized  the
repurchase of up to 10% of the  Company's  total shares  outstanding  or 427,500
shares in January 2001 and 385,500  shares in February 2001, as adjusted for the
three-for-two stock split announced September 20, 2001, of which all shares have
been repurchased. In August 2001, the Company announced a third authorization to
repurchase an additional 355,500 shares, as adjusted for the three-for-two stock
split  announced   September  20,  2001.  To  date,   97,686  shares  have  been
repurchased,  as adjusted for the three-for-two  stock split announced September
20, 2001. Under the repurchase  program,  the Company plans to repurchase shares
from  time  to  time  on  the  open  market   and/or  in  privately   negotiated
transactions.  The first two repurchase  authorizations were funded in part with
proceeds received from a $10,000,000 pooled trust preferred  securities offering
which concluded on February 22, 2001.


                         This page is page 27 of 36 pages.
<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 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 March 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  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.

Certain Important Considerations for Investors

     Merchant  Credit  Card  Processing.  The  Company's  profitability  can  be
negatively  impacted should any of the Company's  merchant credit card customers
be  unable  to pay  on  charge-backs  from  cardholders.  Due  to a  contractual
obligation between the Company and Visa and Mastercard,  NBR stands in the place
of the  merchant  in the event  that a  merchant  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, 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
ISO's to acquire  merchant  credit  card  customers.  The  Company's  ability to
maintain and grow net revenue from its merchant credit card processing operation
is dependent upon  maintaining and adding to these ISO  relationships.



                         This page is page 28 of 36 pages.
<PAGE>

     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  affect 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 March 31,
2002 (the most recent period available from VISA),  the Company's  overall fraud
ratio  was less than 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 March 31, 2002,
the Company's total VISA transactions within these certain high-risk  categories
were 5.4% of 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 March 31,  2002 the
Company's  weekly VISA volume was 43% of the Company's  tangible equity capital,
and  aggregate  charge-backs  for the  previous six months were 5.3% of tangible
equity capital and the aggregate  charge-backs  for the quarter were .49% of the
interchange  count and .42% of the  interchange  amount.  Merchant  credit  card
participants,  such as the  Company,  must  comply  with these new VISA rules by
filing a  compliance  plan with  VISA.  At March 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 rule changes, VISA will require collateral of one to
four times the shortfall.

     Concentration of Lending Activities. Concentration of the Company's lending
activities in the real estate sector,  including  construction loans, could have
the effect of  intensifying  the impact on the Company of adverse changes in the
real  estate  market  in  the  Company's  lending  areas.  At  March  31,  2002,
approximately  76% of the Company's loans were secured by real estate,  of which
48% 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 in Northern  and Central  California.  The
ability of the Company to continue to originate  mortgage or construction  loans
may be impaired by adverse  changes in local or  regional  economic  conditions,
adverse changes in the real estate market, increasing interest rates, or acts of
nature (including  earthquakes,  which may cause uninsured damage and other loss
of  value to real  estate  that  secures  the  Company's  loans).  In  addition,
prolonged  electrical  power  shortages or increases in energy costs in Northern
California may cause adverse changes in the Company's local economy.  Due to the
concentration of the Company's real estate collateral,  such events could have a
significant  adverse  impact on the value of such  collateral  and the Company's
earnings.



                         This page is page 29 of 36 pages.
<PAGE>

     Events of September 11. The terrorist attacks on the World Trade Center and
the  Pentagon on  September  11, 2001,  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.  It is not
possible at this time to project the ultimate  economic  impact of these events.
However,  any  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. As a consequence  of this  situation,  a
major California public utility in the gas and power business became the subject
of a voluntary bankruptcy proceeding.  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.  Although the  situation  has  stabilized  recently,
customers of the  utilities  were faced at times in 2001 with  increased gas and
electric  prices,  power shortages and, in some cases,  rolling  blackouts.  The
long-term impact of the energy crisis in California on the Company's markets and
business cannot be predicted,  but could result in an economic  slow-down.  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 or operations.

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

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

                         This page is page 30 of 36 pages.
<PAGE>

     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.

     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   losses  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.

     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 March 31, 2002,  other than previously  disclosed on page 24, 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 the customary representations and warranties.

     Impact of New Accounting Standards. On January 1, 2002, the Company adopted
a new  accounting  standard  which  addresses  accounting for goodwill and other
intangible assets arising from business  combinations.  Identifiable  intangible
assets must be separated  from  goodwill.  Identifiable  intangible  assets with
finite useful lives will be amortized under the new standard,  whereas goodwill,
both amounts previously recorded and future amounts purchased,  will cease being
amortized.  Annual  impairment  testing  will  be  required  for  goodwill  with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. Adoption of this standard on January 1, 2002 did not have a material
effect  on  the  Company's   consolidation  financial  position  or  results  of
operations,  and  management  believes the goodwill of the Company  which totals
$674,000 at January 1, 2002 and March 31, 2002 is not  impaired;  therefore,  no
impairment or amortization  expense was recorded during the quarter ending March
31, 2002. The annual  goodwill  amortization  expense for years prior to 2002 of
$84,000 is considered to be immaterial and, therefore,  no pro forma disclosures
are  provided  to reflect the impact of the new  accounting  method on the prior
period financial statements.


                         This page is page 31 of 36 pages.
<PAGE>

     In August 2001, the Financial  Accounting  Standards Board issued Statement
of  Financial  Accounting  Standards  (SFAS)  No.  143,  "Accounting  for  Asset
Retirement Obligations" which will be adopted by the Company on January 1, 2003.
The new accounting standard addresses accounting for obligations associated with
the  retirement  of tangible,  long-lived  assets and requires a liability to be
recognized for the fair value of any such obligations. Adoption of this standard
on January 1, 2003 is not  expected to have a material  effect on the  Company's
consolidated financial position or results of operations.

     On January 1, 2002, the Company  adopted SFAS No. 144,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets."  This new  accounting  standard
establishes more restrictive  requirements for the  classification  of assets as
"held  for  sale"  and also  expands  the  types of  disposition  that are to be
accounted for as discontinued  operations.  Adoption of this standard on January
1, 2002 did not have a material effect on the Company's  consolidated  financial
position or results of operations.


Item 3.  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  interest earning assets are located at the
Bank  (or in  its  wholly-owned  subsidiary),  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.

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

                         This page is page 32 of 36 pages.
<PAGE>

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

     The following table sets forth,  as of March 31, 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 One   Within    After Five
                                           Months     Months       Year    Five Years    Years       Total
                                        -----------------------------------------------------------------------

                                                                (Dollars in thousands)
<S>                                       <C>         <C>         <C>        <C>         <C>         <C>
Interest earning assets:
Federal funds sold                         $44,760    $    ---    $    ---   $    ---    $    ---    $44,760
Investment securities and other              3,000       3,000     15,710      37,558      7,991      67,259
Loans                                      121,749      25,583     30,287      90,440     83,566     351,625
                                        -----------------------------------------------------------------------
   Total interest-earning assets           169,509      28,583     45,997     127,998     91,557     463,644
                                        -----------------------------------------------------------------------

Interest-bearing liabilities:

Interest-bearing transaction accounts      124,351         ---        ---         ---        ---     124,351
Time deposits                               81,767      86,863     36,872       6,584        ---     212,086
Trust preferred securities                     ---         ---        ---         ---     10,000      10,000
Short-term borrowings                        4,025         ---        ---         ---        ---       4,025
                                        -----------------------------------------------------------------------
  Total interest-bearing liabilities       210,143      86,863     36,872       6,584     10,000     350,462
                                        -----------------------------------------------------------------------

Interest rate sensitivity gap             ($40,634)   ($58,279)    $9,125    $121,414    $81,557
                                        ===========================================================
Cumulative interest rate sensitivity gap   (40,634)    (98,914)   (89,789)     31,625    113,182

Interest rate sensitivity gap ratio            0.81        0.33       1.25       19.44       9.16
Cumulative interest rate sensitivity
  gap ratio                                    0.81       0.67        0.73       1.09        1.32
</TABLE>



     The Company's gap position is  substantially  dependent  upon the volume of
mortgage 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.


                         This page is page 33 of 36 pages.
<PAGE>

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

     On a 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 summary  of
interest  rate risk  exposure as of March 31, 2002 as measured on a net interest
income  basis and a market  value of  equity  basis,  given a change in  general
interest rates of up to 200 basis points up and 200 basis points down.


<TABLE>
<CAPTION>
         March 31, 2002
                                             Change in Annual                        Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity

<S>             <C>                            <C>                                  <C>
                +200                              $572,000                          ($8,680,000)
                +100                              $305,000                          ($4,473,000)
                -100                             ($525,000)                          $2,311,000
                -200                           ($2,149,000)                          $2,972,000
</TABLE>


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


                         This page is page 34 of 36 pages.
<PAGE>


PART II  OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.

     On February 22, 2001, the Company  completed its $10,000,000  participation
in a pooled trust  preferred  securities  offering.  Issuance  costs amounted to
approximately  $300,000  and are being  amortized  over the 30-year  life of the
securities.  The Company,  relying on Section 4(2), Rule 506 and Rule 903 of the
Securities Act of 1933, as amended,  sold the  securities  directly to Preferred
Term Securities, Ltd. II, a Cayman Islands corporation.  The proceeds have been,
and will  continue  to be,  used for share  repurchases  and  general  corporate
purposes.

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

     a)   Exhibits.

          None.

     b)   Reports on Form 8-K

          1.   Form 8-K filing dated January 9, 2002  announcing  declaration of
               quarterly dividend.

          2.   Form 8-K filing dated January 16, 2002 announcing  fourth quarter
               2001 results.






                         This page is page 35 of 36 pages.
<PAGE>

                                   SIGNATURES



     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized and in the capacity indicated.





                             REDWOOD EMPIRE BANCORP
                                  (Registrant)




Date:  5/09/02               By:  /s/ James E. Beckwith
       -------                    ---------------------------------
                                  James E. Beckwith
                                  Executive Vice President,
                                  Chief Financial Officer and
                                  Chief Operating Officer,
                                  Principal Financial Officer, and
                                  Duly Authorized Officer










                         This page is page 36 of 36 pages.