================================================================================

                                  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 September 30, 2001

                                       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 November 8, 2001, there were 3,516,329 shares of the Registrant's common
stock outstanding.


                        This page is page 1 of 37 pages.
<PAGE>




                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index


                                                                            Page
PART I.  FINANCIAL INFORMATION

       Item 1.    Financial Statements

                  Consolidated Statements of Operations
                  Three and Nine Months Ended September 30, 2001 and 2000......3

                  Consolidated Balance Sheets
                  September 30, 2001 and December 31, 2000.....................5

                  Consolidated Statements of Cash Flows
                  Nine Months Ended September 30, 2001 and 2000................6

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


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

       Item 3.    Quantitative and Qualitative Disclosures
                  About Market Risk...........................................33


PART II. OTHER INFORMATION

       Item 2.    Changes in Securities and Use of Proceeds...................36

       Item 6.    Exhibits and Reports on Form 8-K............................36



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


                        This page is page 2 of 37 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           Nine Months Ended
                                                                  September 30,               September 30,
                                                               2001          2000          2001          2000
                                                           --------------------------------------------------------
<S>                                                              <C>           <C>          <C>           <C>
Interest income:
  Interest and fees on loans                                     $6,954        $7,766       $21,310       $21,964
  Interest on investment securities                               1,192         1,213         3,791         3,753
  Interest on federal funds sold                                    171            48           711           271
                                                           --------------------------------------------------------
Total interest income                                             8,317         9,027        25,812        25,988

Interest expense:
  Interest on deposits                                            3,018         3,622         9,951        10,236
  Interest on other borrowings                                      308           128           743           261
                                                           --------------------------------------------------------
Total interest expense                                            3,326         3,750        10,694        10,497
                                                           --------------------------------------------------------

Net interest income                                               4,991         5,277        15,118        15,491
Provision for loan losses                                           ---           ---           ---           150
                                                           --------------------------------------------------------

Net interest income after loan loss provision                     4,991         5,277        15,118        15,341

Noninterest income:
  Service charges on deposit accounts                               284           264           819           792
  Merchant draft processing, net                                  1,098         1,116         2,930         3,088
  Loan servicing income                                              69            67           226           187
  Net realized (losses)/gains on sale of
    investment securities available for sale                         22           (86)           22          (124)
  Other income                                                      221           137           614           492
                                                           --------------------------------------------------------
Total noninterest  income                                         1,694         1,498         4,611         4,435

Noninterest expense:
  Salaries and employee benefits                                  2,066         2,133         6,287         6,375
  Occupancy and equipment expense                                   511           498         1,503         1,508
  Other                                                           1,052         1,297         2,921         3,908
                                                           --------------------------------------------------------
Total noninterest expense                                         3,629         3,928        10,711        11,791
                                                           --------------------------------------------------------

Income before income taxes                                        3,056         2,847         9,018         7,985
Provision for income taxes                                        1,224         1,149         3,631         3,238
                                                           --------------------------------------------------------

Net income                                                       $1,832        $1,698        $5,387        $4,747
                                                           ========================================================

Total comprehensive income                                       $2,256        $2,010        $6,266        $4,968
                                                           ========================================================

                                   (Continued)
</TABLE>





                        This page is page 3 of 37 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           Nine Months Ended
                                                                  September 30,               September 30,
                                                               2001          2000          2001          2000
                                                           --------------------------------------------------------

<S>                                                            <C>           <C>           <C>           <C>
Basic earnings per common share:
   Net income                                                       $.51          $.39         $1.43         $1.02
  Weighted average shares - basic                              3,564,000     4,410,000     3,755,000     4,675,500

Diluted earnings per common share and common equivalent share:
   Net income                                                       $.50          $.38         $1.39         $1.00
  Weighted average shares - diluted                            3,697,000     4,513,500     3,877,000     4,759,500

See Notes to Consolidated Financial Statements.


                                   (Concluded)
</TABLE>










                        This page is page 4 of 37 pages.
<PAGE>



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

                                                                            September 30,          December 31,
                                                                                2001                   2000
                                                                           ----------------       ----------------
                                                                             (unaudited)
<S>                                                                              <C>                    <C>
Assets:
Cash and due from banks                                                           $21,147                $21,599
Federal funds sold and repurchase agreements                                        2,490                 22,328
                                                                           ----------------       ----------------
  Cash and cash equivalents                                                        23,637                 43,927
Investment securities:
  Held to maturity (fair value of $18,801 and $29,657)                             18,346                 29,801
  Available for sale, at fair value (amortized cost of $55,068 and $55,276)        56,716                 55,409
                                                                           ----------------       ----------------
    Total investment securities                                                    75,062                 85,210
Loans:
    Residential real estate mortgage                                              101,460                 98,914
    Commercial real estate mortgage                                               110,699                 93,091
    Commercial                                                                     78,685                 66,645
    Real estate construction                                                       41,897                 49,460
    Installment and other                                                          10,636                  7,900
    Less deferred loan fees                                                          (466)                  (909)
                                                                           ----------------       ----------------
        Total portfolio loans                                                     342,911                315,101
    Less allowance for loan losses                                                 (7,609)                (7,674)
                                                                           ----------------       ----------------
        Net loans                                                                 335,302                307,427

Premises and equipment, net                                                         2,600                  2,489
Mortgage servicing rights, net                                                         13                     25
Other real estate owned                                                               ---                    757
Cash surrender value of life insurance                                              3,400                  3,275
Other assets and interest receivable                                                9,249                 10,329
                                                                           ----------------       ----------------
     Total assets                                                                $449,263               $453,439
                                                                           ================       ================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                             $94,266                $91,727
  Interest-bearing transaction accounts                                           122,567                127,341
  Time deposits $100,000 and over                                                 105,907                 93,040
  Other time deposits                                                              77,468                 93,225
                                                                           ----------------       ----------------
    Total deposits                                                                400,208                405,333

Other short-term borrowings                                                         3,415                  3,528
Trust preferred                                                                    10,000                    ---
Other liabilities and interest payable                                              9,794                  9,119
                                                                           ----------------       ----------------
     Total liabilities                                                            423,417                417,980

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
      none outstanding                                                                ---                    ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 2,373,512 and 2,858,154 shares                       12,222                 14,601
  Retained earnings                                                                12,668                 20,781
  Accumulated other comprehensive income, net                                         956                     77
                                                                           ----------------       ----------------
     Total shareholders' equity                                                    25,846                 35,459
                                                                           ----------------       ----------------
     Total liabilities and shareholders' equity                                  $449,263               $453,439
                                                                           ================       ================

See Notes to Consolidated Financial Statements.
</TABLE>

                        This page is page 5 of 37 pages.

<PAGE>






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

                                                                             Nine Months Ended
                                                                               September 30,
                                                                          2001               2000
                                                                     ---------------     --------------
<S>                                                                        <C>                <C>
Cash flows from operating activities:

  Net income                                                                $5,387             $4,747

Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization, net                                            14                851
  Net realized loss (gains) on securities available for sale                   (22)               124
  Provision for loan losses                                                    ---                150
  Change in other assets and interest receivable                               293                (55)
  Change in other liabilities and interest payable                             630             (2,878)
  Other, net                                                                    30                ---
                                                                     ---------------     --------------
  Total adjustments                                                            945             (1,808)
                                                                     ---------------     --------------

  Net cash from operating activities                                         6,332              2,939

Cash flows from investing activities:
  Net change in loans                                                      (27,159)           (23,068)
  Purchases of investment securities available for sale                    (24,818)            (3,943)
  Purchases of investment securities held to maturity                       (1,326)              (874)
  Proceeds from sales of investment securities available for sale            1,022              8,918
  Maturities of investment securities available for sale                    24,058                162
  Maturities or calls of investment securities held to maturity             12,886              1,029
  Purchases of premises and equipment, net                                    (651)              (410)
  Proceeds from sale of other real estate owned                                512              2,259
                                                                     ---------------     --------------
    Net cash provided by/(used in) investing activities                    (15,476)           (15,927)

Cash flows from financing activities:
  Change in noninterest bearing transaction accounts                         2,539              3,350
  Change in interest bearing transaction accounts                           (4,774)            (2,043)
  Change in time deposits                                                   (2,890)            19,763
  Change in other short-term borrowings                                       (113)              (851)
  Trust preferred issuance                                                  10,000                ---
  Issuance/(repurchase) of common stock                                    (14,634)            (7,752)
  Dividends paid                                                            (1,274)            (1,104)
                                                                     ---------------     --------------
    Net cash (used in)/provided by financing activities                    (11,146)            11,363
                                                                     ---------------     --------------


Net change in cash and cash equivalents                                    (20,290)            (1,625)
Cash and cash equivalents at beginning of period                            43,927             20,555
                                                                     ---------------     --------------


Cash and cash equivalents at end of period                                 $23,637            $18,930
                                                                     ===============     ==============


                                             (Continued)
</TABLE>


                        This page is page 6 of 37 pages.
<PAGE>




<TABLE>
<CAPTION>
                                Consolidated Statements of Cash Flows
                                            (in thousands)
                                             (Unaudited)
                                             (Continued)

                                                                             Nine Months Ended
                                                                               September 30,
                                                                          2001               2000
                                                                     ---------------     --------------

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

Cash paid during the period for:
  Interest expense                                                          $10,759            $11,514
  Income taxes                                                                2,925              3,279

Noncash investing and financing activities:
  Transfers from loans to other real estate owned                               ---                821
  Dividends declared                                                            474                440

</TABLE>






See Notes to Consolidated Financial Statements.


                                             (Concluded)



                        This page is page 7 of 37 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 financial statements and related notes contained in
Redwood Empire Bancorp's 2000 Annual Report to Shareholders. The statements
include the accounts of Redwood Empire Bancorp ("Redwood"), and its wholly owned
subsidiary, National Bank of the Redwoods ("NBR", together with Redwood, the
"Company"). 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 nine
months ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.

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

         For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and repurchase
agreements 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 37 pages.
<PAGE>


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


<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                    September 30,
                                                                         2001                           2000
                                                              ---------------------------    ----------------------------
                                                                 Basic         Diluted           Basic         Diluted
                                                              ------------   ------------    -------------   ------------

<S>                                                             <C>            <C>       <C>    <C>            <C>       <C>
Earnings per common share:

 Net income                                                        $1,832         $1,832           $1,698         $1,698
 Earnings per share                                                   .51            .50              .39            .38

 Weighted average common shares outstanding                     3,564,000      3,697,000 (1)    4,410,000      4,514,000 (1)
</TABLE>

1)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 133,000 and 104,000 for the three months ended
     September 30, 2001 and September 30, 2000.


<TABLE>
<CAPTION>
                                                                                   Nine Months Ended
                                                                                    September 30,
                                                                         2001                           2000
                                                              ---------------------------    ----------------------------
                                                                 Basic         Diluted           Basic         Diluted
                                                              ------------   ------------    -------------   ------------

<S>                                                             <C>            <C>       <C>    <C>            <C>       <C>
 Earnings per common share:

 Net income                                                        $5,387         $5,387           $4,747         $4,747
 Earnings per share                                                  1.43           1.39             1.02           1.00

 Weighted average common shares outstanding                     3,755,000      3,877,000 (1)    4,676,000      4,760,000 (1)
</TABLE>

1)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 122,000 and 84,000 for the nine months ended
     September 30, 2001 and September 30, 2000.



3.       Comprehensive Income

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




<TABLE>
<CAPTION>
                                                 Three Months Ended           Nine Months Ended
                                                   September 30,                September 30,
                                                  2001        2000             2001        2000
                                              -------------------------    -------------------------
                                                                 (In thousands)

<S>                                                <C>          <C>             <C>          <C>
Net income as reported                             $1,832       $1,698          $5,387       $4,747
Other comprehensive income (net of tax):
  Change in unrealized holding gain (losses)
     on available for sale securities                 437          262             892          149
  Reclassification adjustment                         (13)          50             (13)          72
                                              -------------------------    -------------------------
Total comprehensive income                         $2,256       $2,010          $6,266       $4,968
                                              =========================    =========================
</TABLE>


                        This page is page 9 of 37 pages.
<PAGE>

4.       Common Stock Dividend

         On August 22, 2001 the Board of Directors declared a quarterly cash
dividend of 13 cents per share on the Company's Common Stock, as adjusted for
the three-for-two stock split. The dividend was paid on October 15, 2001 to
shareholders of record on September 28, 2001.


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 37,000 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.



                       This page is page 10 of 37 pages.
<PAGE>
Summary financial data by business segment follows:
<TABLE>
<CAPTION>
                                                                      For the quarter ended September 30, 2001
                                                                  --------------------------------------------------
                                                                                      Merchant
                                                                     Community          Card            Total
                                                                      Banking         Services         Company
                                                                  --------------------------------------------------
                                                                                   (in thousands)
<S>                                                                      <C>              <C>             <C>
Total interest income                                                      $8,317         $   ---           $8,317
Total interest expense                                                      3,323               3            3,326
Interest income/(expense) allocation                                         (266)            266              ---
                                                                  --------------------------------------------------
Net interest income                                                         4,728             263            4,991
Provision for loan losses                                                     ---             ---              ---
Total other operating income                                                  596           1,098            1,694
Total other operating expense                                               3,062             567            3,629
                                                                  --------------------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                                   2,262             794            3,056
Provision for income taxes                                                    906             318            1,224
                                                                  --------------------------------------------------
Income from continuing operations before extraordinary item                $1,356            $476           $1,832
                                                                  ==================================================

Total Average Assets                                                     $422,976         $27,589         $450,565
                                                                  ==================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                       For the quarter ended September 30, 2000
                                                                 --------------------------------------------------
                                                                                      Merchant
                                                                     Community          Card            Total
                                                                      Banking         Services         Company
                                                                  --------------------------------------------------
                                                                                   (in thousands)
<S>                                                                      <C>              <C>             <C>
Total interest income                                                      $9,027         $   ---           $9,027
Total interest expense                                                      3,643             107            3,750
Interest income/(expense) allocation                                         (327)            327              ---
                                                                  --------------------------------------------------
Net interest income                                                         5,057             220            5,277
Provision for loan losses                                                     ---             ---              ---
Total other operating income                                                  382           1,116            1,498
Total other operating expense                                               3,398             530            3,928
                                                                  --------------------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                                   2,041             806            2,847
Provision for income taxes                                                    823             326            1,149
                                                                  --------------------------------------------------
Income from continuing operations before extraordinary item                $1,218            $480           $1,698
                                                                  ==================================================

Total Average Assets                                                     $412,459         $24,976         $437,435
                                                                  ==================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                    For the nine months ended September 30, 2001
                                                                  --------------------------------------------------
                                                                                      Merchant
                                                                     Community          Card            Total
                                                                      Banking         Services         Company
                                                                  --------------------------------------------------
                                                                                   (in thousands)
<S>                                                                      <C>              <C>             <C>
Total interest income                                                     $25,812         $   ---          $25,812
Total interest expense                                                     10,686               8           10,694
Interest income/(expense) allocation                                         (840)            840              ---
                                                                  --------------------------------------------------
Net interest income                                                        14,286             832           15,118
Provision for loan losses                                                     ---             ---              ---
Total other operating income                                                1,681           2,930            4,611
Total other operating expense                                               9,061           1,650           10,711
                                                                  --------------------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                                    6,906           2,112            9,018
Provision for income taxes                                                  2,781             850            3,631
                                                                  --------------------------------------------------
Income from continuing operations before extraordinary item                $4,125          $1,262           $5,387
                                                                  ==================================================

Total Average Assets                                                     $420,341         $25,952         $446,293
                                                                  ==================================================
</TABLE>
                       This page is page 11 of 37 pages.
<PAGE>

<TABLE>
<CAPTION>
                                                                    For the nine months ended September 30, 2000
                                                                  --------------------------------------------------
                                                                                      Merchant
                                                                     Community          Card            Total
                                                                      Banking         Services         Company
                                                                  --------------------------------------------------
                                                                                   (in thousands)

<S>                                                                      <C>              <C>             <C>
Total interest income                                                     $25,988         $   ---          $25,988
Total interest expense                                                     10,390             107           10,497
Interest income/(expense) allocation                                         (909)            909              ---
                                                                  --------------------------------------------------
Net interest income                                                        14,689             802           15,491
Provision for loan losses                                                     150             ---              150
Total other operating income                                                1,347           3,088            4,435
Total other operating expense                                              10,334           1,457           11,791
                                                                  --------------------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                                    5,552           2,433            7,985
Provision for income taxes                                                  2,250             988            3,238
                                                                  --------------------------------------------------
Income from continuing operations before extraordinary item                $3,302          $1,445           $4,747
                                                                  ==================================================

Total Average Assets                                                     $411,540         $24,996         $436,536
                                                                  ==================================================
</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, 53,308 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
amounted to approximately $300,000 are being amortized over the life of the
offering.




                       This page is page 12 of 37 pages.
<PAGE>


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

Forward-Looking Information

         This Quarterly Report on Form 10-Q includes forward-looking information
which is subject to the "safe harbor" created by 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 our 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 (including possible further
         declines in interest rates) and volatility of rate sensitive loans and
         deposits.

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

    o    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.



                       This page is page 13 of 37 pages.
<PAGE>


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, 2000 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, 2000 to September 30, 2001. Significant changes and trends in the
Company's results of operations for the three and nine months ended September
30, 2001, compared to the same period in 2000 are also discussed.


Summary of Financial Results

         The Company reported net income of $1,832,000 ($.50 per diluted share)
for the three months ended September 30, 2001 as compared to $1,698,000 ($.38
per diluted share) for the same period in 2000, an increase of $134,000 in net
income or 8%. This increase is due to a decline of $299,000 in noninterest
expense, an increase of $196,000 in noninterest income, all partially offset by
a decrease of $286,000 in net interest income.

         Net income for the nine months ended September 30, 2001 was $5,387,000
($1.39 per diluted share) as compared to $4,747,000 ($1.00 per diluted share)
for the same period in 2000, an increase in net income of $640,000 or 13%. This
increase is due to a decline of $1,080,000 in noninterest expense, a decrease of
$150,000 in the provision for loan losses, an increase in noninterest income of
$176,000, partially offset by a decrease of $373,000 in net interest income. 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 $5,277,000 in the third quarter of
2000 to $4,991,000 in the third quarter of 2001, which represents a decrease of
$286,000 or 5%. The decline in net interest income was driven by a decrease in
net interest margin to 4.69% for the three months ended September 30, 2001 from
5.18% for the three months ended September 30, 2000. 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 which
funded two stock repurchase plans had a negative impact of 26 basis points on
the net interest margin, when compared with the third quarter of 2000.



                       This page is page 14 of 37 pages.
<PAGE>

         Net interest income for the nine months ended September 30, 2001 was
$15,118,000, which represents a decrease of $373,000 when compared to the same
period one year ago. The Company's net interest margin decreased from 5.07% at
September 30, 2000 to 4.83% at September 30, 2001. The decline in net interest
margin is largely due to the interest expense of the Company's pooled trust
preferred debt financing which amounted to $621,000 for the nine months ended
September 30, 2001. Such debt had a negative impact on net interest margin of 20
basis points during this period.

         For the three months ended September 30, 2001, yield on earning assets
decreased to 7.81% from 8.86% for the same period one year ago. The decrease is
due to a decline in the general interest rate environment. During the first nine
months of 2001, the Federal Reserve lowered its discount rate 4.50%. To
partially counter the impact of a lower interest rate environment, the Company
has embarked on an asset repositioning strategy. In December 2000, the Company
sold $21,205,000 in single family residential loans and securitized another
$17,949,000 as part of this asset repositioning strategy. Funds received from
the loan sale have been used to fund growth in higher yielding,relationship-
based commercial and commercial real estate loans. For the quarter ended
September 30, 2001, average residential loans have declined $44,523,000 or 32%
while average commercial loans increased by $9,707,000 or 15% and average
commercial real estate loans increased $23,470,000 or 28%, all when compared to
the same quarter in 2000. At September 30, 2001, overall average portfolio loans
decreased $6,955,000 from September 30, 2000. However, when considering the
impact of the single family residential loan sale and securitization, average
total portfolio loans grew $32,199,000 or 11% as of September 30, 2001 when
compared to September 30, 2000.

         For the first nine months of 2001, the yield on earning assets
decreased to 8.25% from 8.50% for the same period one year ago. This decrease is
primarily due to the decline in the general interest rate environment. While
overall average portfolio loans decreased $4,597,000 during this period when
compared to the same period one year ago, commercial loans increased $10,888,000
or 18% and commercial real estate increased by $19,282,000 or 23%. However, when
considering the impact of the single family residential loan sale and
securitization mentioned above, average total portfolio loans grew $34,557,000
or 12% for the first nine months of 2001 when compared to one year ago.

         Yield paid on interest bearing liabilities decreased to 4.09% for the
three months ended September 30, 2001 as compared to 4.83% for the same period
one year ago. Yield paid on interest bearing liabilities decreased to 4.46% for
the nine months ended September 30, 2001, as compared to 4.53% for the same
period in 2000. These declines are attributable to a lower interest rate
environment as discussed above, offset by the impact of the Company's pooled
trust preferred debt financing.

         With the increase in average earning assets in the first nine months of
2001, the Company's funding levels also increased as average interest bearing
liabilities increased $11,461,000 or 4% during this period. The average balance
of higher cost time deposits increased $7,421,000 during the first nine months
of 2001 as compared to the same period one year ago. The growth in time deposits
in 2001 is a result of the Company's efforts to fund earning asset growth.


                       This page is page 15 of 37 pages.
<PAGE>

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

<TABLE>
<CAPTION>
                                          Three months ended                  Three months ended
                                          September 30, 2001                  September 30, 2000
                                 ------------------------------------- ----------------------------------

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

<S>                                   <C>          <C>         <C>        <C>         <C>         <C>
Commercial loans                       $74,716     $1,697      9.01%       $65,009    $1,765      10.92%

Real estate-mortgage loans              93,952      1,864      7.87        138,475     2,698       7.84

Real estate-commercial loans           106,666      2,280      8.48         83,196     1,862       9.00

Construction loans                      41,353        940      9.02         43,095     1,317      12.29

Installment and other                   11,038        173      6.22          5,504       124       9.06

Deferred loan fees                        (612)       ---       ---         (1,210)      ---        ---
                                 --------------------------            -----------------------
  Portfolio loans                      327,113      6,954      8.43        334,068     7,766       9.35


Investments                             76,330      1,192      6.20         72,821     1,213       6.70

Federal funds sold                      19,149        171      3.54          2,731        48       7.07
                                 --------------------------            -----------------------
  Total earning assets (1)                                     7.81                                8.86
                                      $422,591      8,317                 $409,620     9,027
                                 ================                      =============

Interest bearing transaction
accounts                              $123,410        674      2.17       $123,419       936       3.05

Time deposits                          184,415      2,344      5.04        182,082     2,686       5.93

Other borrowings                        14,875        308      8.21          6,721       128       7.66
                                 --------------------------            -----------------------
   Total interest-bearing             $322,700      3,326      4.09%      $312,222     3,750       4.83%
liabilities
                                 ================                      =============

                                                -----------                        -----------
Net interest income                                $4,991                             $5,277
                                                ===========                        ===========
Net interest income to
  earning assets                                               4.69%                               5.18%
</TABLE>


                       This page is page 16 of 37 pages.
<PAGE>





<TABLE>
<CAPTION>
                                               Nine months ended                       Nine months ended
                                               September 30, 2001                     September 30, 2000
                                      -------------------------------------  --------------------------------------

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

<S>                                        <C>        <C>           <C>         <C>           <C>          <C>
Commercial loans                            $72,092    $5,106        9.47%       $61,204       $4,898      10.69%

Real estate-mortgage loans                   95,185     5,796        8.14        134,697        7,734       7.67

Real estate-commercial loans                102,423     6,732        8.79         83,141        5,466       8.78

Construction loans                           42,643     3,142        9.85         42,835        3,548      11.06

Installment and other                         9,981       534        7.15          5,535          318       7.67

Deferred loan fees                             (801)      ---         ---         (1,292)         ---        ---
                                      --------------------------             --------------------------
  Portfolio loans                           321,523    21,310        8.86        326,120       21,964       9.00


Investments                                  76,267     3,791        6.65         76,068        3,753       6.59

Federal funds sold                           20,464       711        4.65          6,009          271       6.02
                                      --------------------------             --------------------------
  Total earning assets (1)                 $418,254    25,812        8.25       $408,197       25,988       8.50
                                      ==============                         ==============

Interest bearing transaction accounts      $123,730     2,304        2.49       $126,124        2,788       2.95

Time deposits                               185,502     7,647        5.51        178,081        7,448       5.59

Other borrowings                             11,581       743        8.58          5,147          261       6.77
                                      --------------------------             --------------------------
   Total interest-bearing liabilities      $320,813                  4.46%      $309,352                    4.53%
                                                       10,694                                  10,497

                                                    ------------                           ------------
Net interest income                                   $15,118                                 $15,491
                                                    ============                           ============
Net interest income to
  earning assets                                                     4.83%                                  5.07%
</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 17 of 37 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 and nine months ended September 30, 2001 and 2000. 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
                                                     September 30, 2001 compared to the
                                                   three months ended September 30, 2000
                                                  -----------------------------------------
                                                      Volume        Rate         Total
                                                  -----------------------------------------
                                                               (in thousands)

<S>                                                  <C>          <C>            <C>
Increase (decrease) in interest income:
  Commercial loans                                     $972       ($1,040)        ($68)
  Real estate-mortgage loans                         (3,530)        2,696         (834)
  Real estate-commercial loans                        2,020        (1,602)         418
  Construction loans                                   (205)         (172)        (377)
  Installment and other                                 382          (333)          49
  Investments                                           227          (248)         (21)
  Federal funds sold                                    629          (506)         123
                                                  -----------------------------------------
Total increase (decrease)                               495        (1,205)        (710)
                                                  -----------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                 ---          (262)        (262)
  Time deposits                                         136          (478)        (342)
  Other borrowings                                      672          (492)         180
                                                  -----------------------------------------

Total increase (decrease)                               808        (1,232)        (424)
                                                  -----------------------------------------

Increase (decrease) in net interest income            ($313)          $27        ($286)
                                                  =========================================
</TABLE>


<TABLE>
<CAPTION>
                                                   Nine months ended September 30, 2001
                                                           compared to the nine
                                                      months ended September 30, 2000
                                                  ----------------------------------------
                                                     Volume        Rate         Total
                                                  ----------------------------------------
                                                               (in thousands)
<S>                                                  <C>           <C>         <C>
Increase (decrease) in interest income:
  Commercial loans                                   $1,081        ($873)        $208
  Real estate-mortgage loans                         (3,177)       1,239       (1,938)
  Real estate-commercial loans                        1,690         (424)       1,266
  Construction loans                                    (21)        (385)        (406)
  Installment and other                                 319         (103)         216
  Investments                                            13           25           38
  Federal funds sold                                    687         (247)         440
                                                  ----------------------------------------
Total increase (decrease)                               592         (768)        (176)
                                                  ----------------------------------------

Increase (decrease) in interest expense:
  Interest-bearing transaction accounts                 (69)        (415)        (484)
  Time deposits                                         409         (210)         199
  Other borrowings                                      530          (48)         482
                                                  ----------------------------------------
Total increase (decrease)                               870         (673)         197
                                                  ----------------------------------------

Increase (decrease) in net interest income            ($278)        ($95)       ($373)
                                                  ========================================
</TABLE>

                       This page is page 18 of 37 pages.
<PAGE>

Provision for Loan Losses

         Due to the balance in the allowance for loan losses, there was no
provision for loan losses for the quarters ended September 30, 2001 and
September 30, 2000. For the nine months ended September 30, 2001 there was no
provision as compared to $150,000 for the nine months ended September 30, 2000.
For further information, see "Allowance for Loan Losses" and "Nonperforming
Assets" in this section.


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 and nine months ended September 30, 2001, as
compared to the same period in 2000.


<TABLE>
<CAPTION>
                                             Three Months Ended
                                                September 30,            $           %
                                         ----------------------------
                                             2001          2000        Change     Change
                                         ---------------------------------------------------
                                           (dollars in thousands)

<S>                                           <C>          <C>             <C>       <C>
Service charges on deposit accounts             $284         $264           $20        8%
Merchant draft processing, net                 1,098        1,116           (18)      (2)
Loan servicing income                             69           67             2        3
Gain (loss) on sale of securities                 22          (86)          108      126
Other income                                     221          137            84       61
                                         ----------------------------------------

Total noninterest income                      $1,694       $1,498          $196       13%
                                         ========================================
</TABLE>


         Noninterest income increased $196,000, or 13%, to $1,694,000 for the
third quarter of 2001 when compared to $1,498,000 for the same period in 2000.
During this period, such increase is primarily due to an increase of $108,000 in
gains associated with investment securities available for sale, an increase in
service charges of $20,000, an increase of $84,000 in other income, all
partially offset by an decrease of $18,000 in merchant card net revenue during
this period.

<TABLE>
<CAPTION>
                                             Nine Months Ended
                                               September 30,            $           %
                                        ----------------------------
                                            2001          2000        Change     Change
                                        ---------------------------------------------------
                                          (dollars in thousands)

<S>                                         <C>          <C>             <C>         <C>
Service charges on deposit accounts           $819         $792           $27          3%
Merchant draft processing, net               2,930        3,088          (158)        (5)
Loan servicing income                          226          187            39         21
Gain (loss) on sale of securities               22         (124)          146        118
Other income                                   614          492           122         25
                                        ----------------------------------------
Total noninterest income                    $4,611       $4,435          $176          4%
                                        ========================================
</TABLE>

                        This page is page 19 of 37 pages.
<PAGE>


         Noninterest income increased $176,000, or 4%, to $4,611,000 for the
nine months ended September 30, 2001 when compared to $4,435,000 one year ago.
During this period, the increase is due to an increase of $146,000 in gains
associated with investment securities available for sale and an increase of
$122,000 in other income. Merchant card net revenue declined $158,000 during
this period. In the fourth quarter of 2000, a large merchant card processing
contract with an independent sales organization ("ISO", or collectively,
"ISO's") expired. To help offset the decline in merchant credit card processing
revenue brought about by the expiration of this contract, the Company has been
seeking to build its overall merchant credit card processing business through
direct marketing efforts and new ISO business. Excluding net revenue from
merchant credit card processing, noninterest income grew $334,000, or 25%, for
the first nine months of 2001 when compared to the same period one year ago.


Noninterest Expense

         The following tables set forth the components of the Company's
noninterest expense during the three and nine months ended September 30, 2001,
as compared to the same period in 2000.


<TABLE>
<CAPTION>
                                             Three Months Ended
                                               September 30,             $          %
                                        ----------------------------
                                            2001           2000       Change     Change
                                        -------------  ------------- ----------------------
                                          (dollars in thousands)

<S>                                           <C>            <C>         <C>         <C>
Salaries and employee benefits                $2,066         $2,133       ($67)       (3%)
Occupancy and equipment expense                  511            498         13         3
Other                                          1,052          1,297       (245)      (19)
                                        -------------  ------------- ----------
Total noninterest expense                     $3,629         $3,928      ($299)       (8%)
                                        =============  ============= ==========
</TABLE>


         Noninterest expense decreased by $299,000, or 8%, to $3,629,000 during
the third quarter of 2001 as compared to $3,928,000 for the third quarter of
2000. The decrease in noninterest expense for the three-month period ended
September 30, 2001, as compared to the same period ended September 30, 2000, is
attributable to a decline in salaries and employee benefits of $67,000 and other
expense of $245,000. During the fourth quarter of 2000, the Company embarked on
an efficiency improvement initiative, which seeks to lower to Company's
efficiency ratio to less than 50%. Such initiative is primarily comprised of
process improvement, job-function consolidation and vendor expense control. For
the quarter ended September 30, 2001 the Company's efficiency ratio was 54.29%
as compared to 57.98% for the same period one year ago.




                        This page is page 20 of 37 pages.
<PAGE>



<TABLE>
<CAPTION>
                                             Nine Months Ended
                                               September 30,             $          %
                                        ----------------------------
                                            2001           2000       Change     Change
                                        -------------  ------------- ----------------------
                                          (dollars in thousands)

<S>                                          <C>            <C>        <C>           <C>
Salaries and employee benefits               $ 6,287         $6,375       ($88)       (1%)
Occupancy and equipment expense                1,503          1,508         (5)       (0)
Other                                          2,921          3,908       (987)      (25)
                                        -------------  ------------- ----------
Total noninterest expense                    $10,711        $11,791    ($1,080)       (9%)
                                        =============  ============= ==========
</TABLE>

         Noninterest expense decreased by $1,080,000, or 9%, to $10,711,000
during the nine months ended September 30, 2001 as compared to $11,791,000
during the same period one year ago. The decline in noninterest expense is
directly attributable to the Company's focus on improving efficiency as referred
to above. The Company's efficiency ratio for the first nine months of 2001
amounted to 54.29% as compared to 59.17% for the same period one year ago.


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 40.05% and 40.26% for the three and nine months ended September 30,
2001, as compared to 40.36% and 40.55% for the same periods in 2000.

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 37,000 merchants
throughout the United States.

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

<TABLE>
<CAPTION>
                                                                          For the quarter ended September 30, 2001
                                                                          ----------------------------------------
                                                                                           Merchant
                                                                            Community        Card        Total
                                                                             Banking       Services     Company
                                                                          ----------------------------------------
                                                                                      (in thousands)

<S>                                                                          <C>            <C>          <C>
Total interest income                                                          $8,317       $   ---        $8,317
Total interest expense                                                          3,323             3         3,326
Interest income/(expense) allocation                                             (266)          266           ---
                                                                          ----------------------------------------
Net interest income                                                             4,728           263         4,991

Provision for loan losses                                                         ---           ---           ---
Total other operating income                                                      596         1,098         1,694
Total other operating expense                                                   3,062           567         3,629
                                                                          ----------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                                       2,262           794         3,056
Provision for income taxes                                                        906           318         1,224
                                                                          ----------------------------------------
Income from continuing operations before extraordinary item                    $1,356          $476        $1,832
                                                                          ========================================

Total Average Assets                                                         $422,976       $27,589      $450,565
                                                                          ========================================
</TABLE>

                       This page is page 21 of 37 pages.

<PAGE>
<TABLE>
<CAPTION>
                                                                           For the quarter ended September 30, 2000
                                                                           ----------------------------------------
                                                                                           Merchant
                                                                             Community       Card        Total
                                                                              Banking      Services     Company
                                                                           ----------------------------------------
                                                                                        (in thousands)
<S>                                                                           <C>           <C>          <C>
Total interest income                                                           $9,027       $  ---        $9,027
Total interest expense                                                           3,643          107         3,750
Interest income/(expense) allocation                                              (327)         327           ---
                                                                           ----------------------------------------
Net interest income                                                              5,057          220         5,277
Provision for loan losses                                                          ---          ---           ---
Total other operating income                                                       382        1,116         1,498
Total other operating expense                                                    3,398          530         3,928
                                                                           ----------------------------------------
Income from continuing operations before income taxes
   and extraordinary item                                                        2,041          806         2,847
Provision for income taxes                                                         823          326         1,149
                                                                           ----------------------------------------
Income from continuing operations before extraordinary item                     $1,218         $480        $1,698
                                                                           ========================================

Total Average Assets                                                          $412,459      $24,976      $437,435
                                                                           ========================================
</TABLE>
<TABLE>
<CAPTION>
                                                                           For the nine months ended September 30, 2001
                                                                           --------------------------------------------
                                                                                           Merchant
                                                                             Community       Card         Total
                                                                              Banking      Services      Company
                                                                           -----------------------------------------
                                                                                        (in thousands)
<S>                                                                           <C>           <C>          <C>
Total interest income                                                          $25,812      $   ---       $25,812
Total interest expense                                                          10,686            8        10,694
Interest income/(expense) allocation                                              (840)         840           ---
                                                                           -----------------------------------------
Net interest income                                                             14,286          832        15,118
Provision for loan losses                                                          ---          ---           ---
Total other operating income                                                     1,681        2,930         4,611
Total other operating expense                                                    9,061        1,650        10,711
                                                                           -----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                                         6,906        2,112         9,018
Provision for income taxes                                                       2,781          850         3,631
                                                                           ----------------------------------------
Income from continuing operations before extraordinary item                     $4,125       $1,262        $5,387
                                                                           =========================================

Total Average Assets                                                          $420,341      $25,952      $446,293
                                                                           =========================================
</TABLE>
<TABLE>
<CAPTION>
                                                                            For the nine months ended September 30, 2000
                                                                            --------------------------------------------
                                                                                           Merchant
                                                                             Community       Card          Total
                                                                              Banking      Services       Company
                                                                            -----------------------------------------
                                                                                         (in thousands)
<S>                                                                            <C>         <C>            <C>
Total interest income                                                           $25,988    $   ---         $25,988
Total interest expense                                                           10,390        107          10,497
Interest income/(expense) allocation                                               (909)       909             ---
                                                                            -----------------------------------------
Net interest income                                                              14,689        802          15,491
Provision for loan losses                                                           150        ---             150
Total other operating income                                                      1,347      3,088           4,435
Total other operating expense                                                    10,334      1,457          11,791
                                                                            -----------------------------------------
Income from continuing operations before income taxes
  and extraordinary item                                                          5,552      2,433           7,985
Provision for income taxes                                                        2,250        988           3,238
                                                                           ----------------------------------------
Income from continuing operations before extraordinary item                      $3,302     $1,445          $4,747
                                                                            =========================================

Total Average Assets                                                           $411,540    $24,996        $436,536
                                                                            =========================================
</TABLE>

                       This page is page 22 of 37 pages.
<PAGE>


         Community Banking

         The Community Banking segment's income before income tax increased for
the three and nine months ended September 30, 2001 when compared to the same
periods in 2000. The increase is due to increased operating income, reduced
operating expenses and no provision for loan losses. For the three and nine
months ended September 30, 2001, segment expenses declined $336,000 or 10% and
$1,273,000 or 12%, primarily due to reduced overhead and administrative
expenses. This reduction in expenses offset the decline in net interest income.
Net interest income declined $329,000 and $403,000 for the three and nine months
ended September 30, 2001, principally due to the issuance of pooled trust
preferred debt financing which has been fully allocated to the Community Banking
segment. The Company increased its loan portfolio during the first nine months
of 2001 through renewed marketing efforts. At September 30, 2001, total average
portfolio loans were $321,523,000, up 12% from $286,966,000 at September 30,
2000, after consideration of the impact of the single family residential loan
sale and securitization in the fourth quarter of 2000.

         Merchant Card Services

         The Company's credit card segment earned $476,000 and $1,262,000 in the
three and nine months ended September 30, 2001 compared to $480,000 and
$1,445,000 for the same periods in 2000. The decline in the unit's net income is
due to a decline in processing revenue, which is directly attributable to the
expiration of a large merchant credit card processing contract in the fourth
quarter of 2000. The merchant credit card segment's net income comprised 26% and
23% of the Company's consolidated net income for the three and nine months ended
September 30, 2001.

         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
$1,213,000 and $1,266,000 as of September 30, 2001 and 2000, 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 assumptions
regarding merchant and Independent Sales Organization (ISO) risk. The Company
utilizes 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 $74,000 for the nine months
ended September 30, 2001, as compared to $654,000 for the nine months ended
September 30, 2000. There was no provision for charge-back losses for the third
quarter ended September 30, 2001, as compared to $417,000 for the same period
ended September 30, 2000. Charge offs were $52,000 and $241,000 for the three
and nine months ended September 30, 2001, as compared to $296,000 for the same
periods in 2000. For further discussion see "Certain Important Considerations
for Investors" in this section.



                       This page is page 23 of 37 pages.
<PAGE>


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

<TABLE>
<CAPTION>
                                           Three months ended         Nine months ended
                                              September 30,             September 30,
                                             2001       2000           2001        2000
                                         ------------------------  -------------------------
                                             (in thousands)

<S>                                           <C>         <C>           <C>         <C>
                 Beginning allowance          $1,240      $1,145        $1,276        $908
                 Provision for losses            ---         417            74         654
                 Recoveries                       25         ---           104         ---
                 Charge-offs                     (52)       (296)         (241)       (296)
                                         ------------------------  -------------------------
                 Ending allowance             $1,213      $1,266        $1,213      $1,266
                                         ========================  =========================
</TABLE>


Investment Securities

         Total investment securities declined to $75,062,000, as of September
30, 2001, compared to $85,210,000 as of December 31, 2000. This decrease is
primarily due to $27,000,000 in investment securities being called by their
issuer during the first nine months of 2001. The Company's average federal funds
sold position was $20,464,000 for the first nine months of 2001 as compared to
$6,009,000 for the same period in 2000. This was primarily due to the single
family residential loan sale in the fourth quarter of 2000 and the called
investment securities referred to above. As proceeds from these transactions are
redeployed into the loan portfolio, the Company anticipates that its average
federal funds sold position will decline in the future.


Loans

         Total loans increased $27,810,000, or 9%, to $342,911,000 at September
30, 2001 compared to $315,101,000 at December 31, 2000. The increase in
portfolio loans during this period is primarily attributable to the Company's
marketing efforts and a general expansion of businesses within the Company's
market area. Commercial real estate loans increased $17,608,000 to $110,699,000,
at September 30, 2001, compared to $93,091,000 at December 31, 2000. Commercial
loans increased $12,040,000 to $78,685,000, at September 30, 2001, compared to
$66,645,000 at December 31, 2000. During the fourth quarter of 2000, the Company
sold $21,205,000 in single family residential loans and securitized another
$17,949,000 as part of an asset repositioning strategy. The Company anticipates
that the funds received from the loan sale will be used to fund growth in higher
yielding, relationship-based commercial and commercial real estate loans.


                       This page is page 24 of 37 pages.
<PAGE>



         The following table summarizes the composition of the loan portfolio at
September 30, 2001 and December 31, 2000:


<TABLE>
<CAPTION>
                                              September 30, 2001              December 31, 2000
                                          ----------------------------   -----------------------------
                                                 Amount          %             Amount           %
                                          ----------------------------   -----------------------------
                                             (dollars in thousands)         (dollars in thousands)
<S>                                              <C>             <C>             <C>           <C>
       Residential real estate mortgage          $101,460         30%            $98,914        31%
       Commercial real estate mortgage            110,699         32              93,091        29
       Commercial                                  78,685         23              66,645        21
       Real estate construction                    41,897         12              49,460        16
       Installment and other                       10,636          3               7,900         3
       Less deferred loan fees                       (466)         0                (909)        0
                                         -----------------------------  ------------------------------
           Total portfolio loans                  342,911        100%            315,101       100%
                                                             =========                     =========
       Less allowance for loan losses              (7,609)                        (7,674)
                                          ------------------             -----------------
           Net loans                             $335,302                       $307,427
                                          ==================             =================
</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 25 of 35 pages.
<PAGE>



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


<TABLE>
<CAPTION>
                                                 Three months ended            Nine months ended
                                                    September 30                 September 30
                                              --------------------------   --------------------------
                                                  2001         2000            2001         2000
                                              --------------------------   --------------------------
                                                              (dollars in thousands)

<S>                                                 <C>          <C>             <C>          <C>
     Beginning allowance for loan losses            $7,704       $8,099          $7,674       $7,931
     Provision for loan losses                         ---          ---             ---          150
     Charge-offs                                      (127)        (118)           (129)        (265)
     Recoveries                                         32           83              64          248
                                              --------------------------   --------------------------
     Ending allowance for loan losses               $7,609       $8,064          $7,609       $8,064
                                              ==========================   ==========================


     Net charge-offs to average
        loans (annualized)                            0.12%       0.04%           0.03%        0.01%
</TABLE>


         The allowance for loan losses as a percentage of portfolio loans
decreased from 2.44%, at December 31, 2000, to 2.22% at September 30, 2001. This
decrease is primarily due to growth in the Company's loan portfolio. 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>

                                                         September 30,      December 31,
                                                              2001              2000
                                                         ---------------   ----------------
                                                              (dollars in thousands)
<S>                                                             <C>               <C>
     Nonaccrual loans                                           $3,186              $908
     Accruing loans past due 90 days or more                       ---               ---
     Restructured loans                                            289               295
                                                         ---------------   ----------------
     Total nonperforming loans                                   3,475             1,203
     Other real estate owned                                       ---               757
                                                         ---------------   ----------------
     Total nonperforming assets                                 $3,475            $1,960
                                                         ===============   ================



     Nonperforming assets to total assets                        0.77%             0.43%
</TABLE>

                       This page is page 26 of 37 pages.
<PAGE>

         Nonperforming assets have increased from $1,960,000 or .43% of total
assets, as of December 31, 2000, to $3,475,000 or .77% of total assets as of
September 30, 2001. The increase is attributable to an increase of $2,278,000 in
nonaccrual loans during this period. This increase in nonaccrual loans is
primarily due to a $1,000,000 commercial loan that was paid down substantially
subsequent to September 30, 2001 and returned to full accrual status in October
2001. After consideration of this, nonperforming assets would have been
$2,475,000 or .55% of total assets.

         Nonperforming loans consist of loans to 14 borrowers, nine of which
have balances in excess of $100,000. The two largest have recorded balances of
$1,000,000 and $784,000. 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 September 30, 2001, the Company did not have any loans 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 $693,000 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 September 30, 2001, the Company's total recorded investment in
impaired loans (as defined by SFAS 114 and 118) was $3,475,000 of which
$3,186,000 relates to the recorded investment for which there is a related
allowance for loan losses of $698,000. The remaining $289,000 in impaired loans
did not require a valuation allowance.

         The Company's average recorded investment in impaired loans during the
nine months ended September 30, 2001 and 2000 was $2,127,000 and $1,653,000. The
increase of $474,000 in the average recorded investment of impaired loans at
September 30, 2001 compared to the same period one year ago is primarily due to
a $1,000,000 commercial loan that was paid down substantially subsequent to
September 30, 2001 and returned to full accrual status in October 2001. The
related amount of interest income recognized during the periods that such loans
were impaired was $30,000 and $75,000 for the three and nine months ended
September 30, 2001, and $13,000 and $49,000 for the three and nine months ended
September 30, 2000.

         As of September 30, 2001 there was $3,186,000 of loans on which the
accrual of interest had been discontinued as compared to $908,000 at December
31, 2000. During the first three and nine months of 2001 interest due but
excluded from interest income on loans placed on nonaccrual status was $3,000
and $43,000, and interest income received on nonaccrual loans was $119,000 and
$124,000.


                        This page is page 27 of 37 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
nine months of 2001 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. Such reserve amounted to
$93,000 as of September 30, 2001 and $93,000 as of December 31, 2000. The
Company expects that it may be required to repurchase loans in the future.

Liquidity

         Redwood's primary source of liquidity is dividends from NBR. Redwood's
primary uses of liquidity have historically been associated with cash payments
made to subordinated debt holders, dividend payments made to common stock
holders, repurchases of Company stock 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
September 30, 2001, Redwood held $29,000 in deposits at NBR.

           Prior to June 30, 2001, Redwood paid a cash dividend to its common
stockholders at a quarterly rate of $.10 per share, as adjusted for the three-
for-two stock split. Such quarterly dividend rate was increased to $.13 in May
2001, as adjusted for the three-for-two stock split. 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 could 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.

         During the first nine months of 2001, NBR declared a dividend of
$4,200,000. Management believes that as of September 30, 2001, 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 nine months ended
September 30, 2001, the Company received cash of $516,000 from operating
activities, while using $16,481,000 in investing activities and $10,717,000 in
financing activities.


                       This page is page 28 of 37 pages.
<PAGE>



Capital Resources

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

         The Company and NBR are required to maintain minimum capital ratios
defined by various federal government regulatory agencies. The 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 and noncumulative preferred stock)
and "Tier 2" capital (defined as principally comprising the allowance for loan
losses and subordinated debt).

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

         The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at September 30, 2001 and December
31, 2000.

<TABLE>
<CAPTION>
                                 September 30, 2001                      December 31, 2000
                       ---------------------------------------  -------------------------------------
                                      Well-        Minimum                     Well-       Minimum
                          Actual   Capitalized    Requirement       Actual  Capitalized   Requirement
                       ---------------------------------------  -------------------------------------
<S>                       <C>         <C>             <C>           <C>        <C>             <C>
 Company
   Leverage                7.18%       5.00%          4.00%          7.72%      5.00%          4.00%
   Tier 1 risk-based       8.76        6.00           4.00           9.99       6.00           4.00
   Total risk-based       10.48       10.00           8.00          11.25      10.00           8.00

 NBR
   Leverage                7.66%       5.00%          4.00%          7.29%      5.00%          4.00%
   Tier 1 risk-based       9.33        6.00           4.00           9.44       6.00           4.00
   Total risk-based       10.59       10.00           8.00          10.70      10.00           8.00
</TABLE>



                       This page is page 29 of 37 pages.
<PAGE>


         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, 53,308 shares have been
repurchased, as adjusted for the three-for-two stock split announced September
20, 2001. Under the repurchase programs, the Company repurchased shares on the
open market or through privately negotiated transactions. The repurchased shares
were funded in part with proceeds received from a $10,000,000 pooled trust
preferred securities offering which concluded on February 22, 2001. The Company
accounted for this repurchase program by reducing common stock by $3,111,000, or
20% of the repurchase cost, with the remaining 80% of the repurchase cost, or
$12,444,000, reducing retained earnings.


Trust Preferred Securities

         In February 2001 the Company completed its $10,000,000 participation in
a pooled trust preferred securities offering. The financing, which qualifies for
tier 1 capital treatment, bears an interest rate of 10.2% and is due in 30
years. Debt issuance costs amounted to approximately $300,000 and are being
amortized over the life of the securities. The funds have been, and will
continue to be, used for stock repurchases and other general corporate purposes.
Cash required to service this debt on a semi-annual basis is approximately
$510,000.

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 30 of 37 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 May 31,
2001 (the most recent period available from VISA), the Company's overall fraud
ratio was equal to the VISA requirement. Other VISA changes included the
requirement that total processing volume in certain high-risk categories (as
defined by VISA) be less than 20% of total processing volume. At September 30,
2001, the Company's total VISA transactions within these certain high-risk
categories were 8% 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
Septebmer 30, 2001 the Company's weekly VISA volume was 40.7% of the Company's
tangible equity capital, and aggregate charge-backs for the previous six months
were 6.2% of tangible equity capital and the aggregate charge-backs for the
quarter were .56% of the interchange count and .68% 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. Such plan has been filed
by the Company and accepted by VISA. At September 30, 2001, the Company is in
compliance with all rule changes that went into effect on March 31, 2001. 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 September
30, 2001, approximately 74% of the Company's loans were secured by real estate,
of which 44% 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 31 of 37 pages.
<PAGE>

         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.

         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.

         Risks Arising from the California Energy Crisis. Due to problems
associated with the deregulation of the electrical power industry in California,
two California utilities have publicly announced that their financial situation
is grave. One of these utilities filed for bankruptcy protection in April 2001.
In addition, customers of these utilities have been faced 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 markets and
businesses served by the Company cannot be predicted but could result in an
economic slowdown. 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 the demand for merchant
processing services, and as a result, on the financial condition and results of
operations of the Company and the market value of its common stock.


                       This page is page 32 of 37 pages.
<PAGE>


         Impact of New Accounting Standards. In June 2001, the Financial
Accounting Standards Board "FASB" issued Statement of Financial Accounting
Standards "SFAS" No. 141, "Business Combinations". SFAS No. 141 requires all
business combinations within its scope to be accounted for using the purchase
method, rather than the pooling-of-interests method. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001. The
adoption of this statement will only have an impact on our financial statements
if we enter into a business combination.

         Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses the accounting for such assets arising from
prior and future business combinations. Upon the adoption of this statement,
goodwill arising from business combinations will no longer be amortized, but
rather will be assessed regularly for impairment, with any such impairment
recognized as a reduction to earnings in the period identified. Other identified
intangible assets, such as core deposit intangible assets, will continue to be
amortized over their estimated useful lives. We are required to adopt this
statement on January 1, 2002, and early adoption is not permitted. Management
has not yet determined the impact of the adoption of this statement.


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, virtually all of the Company's interest rate risk exposure lies at the
Bank level. As a result, all significant interest rate risk management
procedures are performed at the Bank level. Based upon the nature of its
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's real estate loan portfolio, concentrated primarily within
Northern California, is subject to risks associated with the local economy. The
Company does not own any trading assets. See "Asset Quality".

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

                       This page is page 33 of 37 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 September 30, 2001, the distribution of
repricing opportunities for the Company's earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio (i.e., earning assets
divided by interest-bearing liabilities) and the cumulative interest rate
sensitivity gap ratio.

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

                                                                            (Dollars in thousands)
<S>                                                <C>          <C>          <C>           <C>        <C>         <C>
Interest earning assets:
Federal funds sold                                   $2,490     $    ---     $    ---      $   ---    $    ---      $2,490
Investment securities and other                       1,006        2,032        5,494       17,005      49,525      75,062
Mortgage loans held for sale                            ---          ---          ---          ---         ---         ---
Loans                                               176,078       29,651       14,386       65,906      56,890     342,911
                                                  ----------------------------------------------------------------------------
   Total interest-earning assets                    179,574       31,683       19,880       82,911     106,415     420,463
                                                  ----------------------------------------------------------------------------

Interest-bearing liabilities:

Interest-bearing transaction accounts               122,567          ---          ---          ---         ---     122,567
Time deposits                                        78,750       57,670       37,804        9,150           1     183,375
Trust preferred                                         ---          ---          ---          ---      10,000      10,000
Short-term borrowings                                 3,415          ---          ---          ---         ---       3,415
                                                  ----------------------------------------------------------------------------
  Total interest-bearing liabilities                204,732       57,670       37,804        9,150      10,001    $319,357
                                                  ----------------------------------------------------------------------------

Interest rate sensitivity gap                      ($25,158)    ($25,987)    ($17,924)      73,761     $96,414
                                                  ===============================================================
Cumulative interest rate sensitivity gap            (25,158)     (51,145)     (69,069)       4,692     101,106

Interest rate sensitivity gap ratio                        .88         0.55         0.53         9.06       10.64
Cumulative interest rate sensitivity gap ratio             .88         0.81         0.77         1.02        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 34 of 37 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 100 basis points up and 100 basis points down. All changes are
measured in dollars and are compared to projected net interest income and the
current theoretical market value of the Bank's equity. This theoretical market
value of the Bank's equity is calculated by discounting cash flows associated
with the Company's assets and liabilities. The following is a summary of
interest rate risk exposure as of September 30, 2001 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>
         September 30, 2001
         ------------------
                                             Change in Annual                         Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity

<S>            <C>                             <C>                                  <C>
               +200                               $425,000                          ($8,773,000)
               +100                               $292,000                          ($4,109,000)
               -100                              ($538,000)                            $957,000
               -200                            ($1,669,000)                          $1,949,000
</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 35 of 37 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 July 18, 2001 announcing second
                      quarter 2001 results.

                2.    Form 8-K filing dated August 22, 2001 announcing a new
                      share repurchase program and the declaration of a
                      quarterly cash dividend of $0.20 per common share.

                3.    Form 8-K filing dated September 21, 2001 announcing
                      three-for-two stock split.




                       This page is page 36 of 37 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:  11/13/01              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 37 of 37 pages.