================================================================================
                                  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 June 30, 2002

                                       or

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

                         Commission file number: 0-19231

                             REDWOOD EMPIRE BANCORP
             (Exact name of registrant as specified in its charter)

        California                                       68-0166366
(State or other jurisdiction of                         (IRS Employer
incorporation or organization)                       Identification No.)

111 Santa Rosa Avenue, Santa Rosa, California             95404-4905
  (Address of principal executive offices)                (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No _



At August 7, 2002, there were 3,489,840 shares of the Registrant's  common stock
outstanding.



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<PAGE>

<TABLE>
<CAPTION>
                                                        REDWOOD EMPIRE BANCORP
                                                                  AND
                                                             SUBSIDIARIES

                                                                 Index


                                                                                             Page
PART I.  FINANCIAL INFORMATION

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

                  Consolidated Statements of Operations
                  Three and Six Months Ended June 30, 2002 and 2001.............................3

                  Consolidated Balance Sheets
                  June 30, 2002 and December 31, 2001...........................................5

                  Consolidated Statements of Cash Flows
                  Six Months Ended June 30, 2002 and 2001.......................................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............................................................35


PART II. OTHER INFORMATION

       Item 2.  Changes in Securities and Use of Proceeds......................................38

       Item 4.  Submission of Matters to a Vote of Security Holders............................38

       Item 6.  Exhibits and Reports on Form 8-K...............................................38



SIGNATURES.....................................................................................40
</TABLE>

                        This page is page 2 of 40 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          Six Months Ended
                                                                       June 30,                   June 30,
                                                                  2002           2001         2002         2001
                                                            --------------------------------------------------------
<S>                                                              <C>             <C>          <C>          <C>
Interest income:
  Interest and fees on loans                                     $6,486          $6,967       $12,703      $14,356
  Interest on investment securities                               1,128           1,212         2,216        2,599
  Interest on federal funds sold                                    120             263           224          540
                                                            --------------------------------------------------------
Total interest income                                             7,734           8,442        15,143       17,495

Interest expense:
  Interest on deposits                                            2,132           3,333         4,294        6,933
  Interest on other borrowings                                      279             283           537          435
                                                            --------------------------------------------------------
Total interest expense                                            2,411           3,616         4,831        7,368
                                                            --------------------------------------------------------

Net interest income                                               5,323           4,826        10,312       10,127
Provision for loan losses                                           ---             ---           ---          ---
                                                            --------------------------------------------------------
Net interest income after provision for loan losses               5,323           4,826        10,312       10,127

Noninterest income:
  Service charges on deposit accounts                               308             266           622          535
  Merchant draft processing, net                                  1,197           1,019         2,376        1,832
  Loan servicing income                                              81              80           135          157
  Net realized gains on
    investment securities available for sale                        ---             ---            35          ---
  Other income                                                      207             187           443          393
                                                            --------------------------------------------------------
Total noninterest  income                                         1,793           1,552         3,611        2,917

Noninterest expense:
  Salaries and employee benefits                                  2,302           1,989         4,348        4,221
  Occupancy and equipment expense                                   533             503         1,057          992
  Other                                                           1,069             940         2,237        1,869
                                                            --------------------------------------------------------
Total noninterest expense                                         3,904           3,432         7,642        7,082
                                                            --------------------------------------------------------

Income before income taxes                                        3,212           2,946         6,281        5,962
Provision for income taxes                                        1,187           1,178         2,309        2,407
                                                            --------------------------------------------------------

Net income                                                       $2,025          $1,768        $3,972       $3,555
                                                            ========================================================

Total comprehensive income                                       $2,697          $1,754        $4,409       $4,009
                                                            ========================================================
</TABLE>

                                       (Continued)


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<PAGE>


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


                                                               Three Months Ended              Six Months Ended
                                                                    June 30,                       June 30,
                                                              2002             2001           2002          2001
                                                        --------------------------------------------------------------

<S>                                                             <C>             <C>           <C>           <C>
Basic earnings per common share:
   Net income                                                        $.58            $.49         $1.14          $.92
  Weighted average shares - basic                               3,491,000       3,621,000     3,495,000     3,850,500

Diluted earnings per common share:
   Net income                                                        $.56            $.47         $1.10          $.90
  Weighted average shares - diluted                             3,617,000       3,733,500     3,624,000     3,967,500

See Notes to Consolidated Financial Statements.


                                       (Concluded)

</TABLE>

















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<PAGE>


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

                                                                         June 30,       December 31,
                                                                           2002             2001
                                                                     ----------------- -----------------
                                                                       (unaudited)
Assets:
<S>                                                                          <C>              <C>
Cash and due from banks                                                      $22,714          $19,596
Federal funds sold                                                            34,863            4,653
                                                                     ----------------- -----------------
  Cash and cash equivalents                                                   57,577           24,249
Investment securities:
  Held to maturity (fair value of $16,797 and $17,635)                        16,326           17,402
  Available for sale, at fair value (amortized cost of $57,484 and
    $46,433)                                                                  59,227           47,573
                                                                     ----------------- ----------------
    Total investment securities                                               75,553           64,975

Mortgage loans held for sale                                                     313              ---

Loans:
    Residential real estate mortgage                                          93,698          101,175
    Commercial real estate mortgage                                          140,020          121,456
    Commercial                                                                69,464           70,438
    Real estate construction                                                  43,152           46,501
    Installment and other                                                     12,223           12,567
    Less net deferred loan fees                                                 (695)            (488)
                                                                     ----------------- -----------------
        Total portfolio loans                                                357,862          351,649
    Less allowance for loan losses                                            (7,586)          (7,580)
                                                                     ----------------- -----------------
        Net loans                                                            350,276          344,069

Premises and equipment, net                                                    2,960            2,636
Mortgage servicing rights, net                                                     4                4
Cash surrender value of life insurance                                         3,530            3,443
Other assets and interest receivable                                          10,346            9,366
                                                                     ----------------- -----------------
     Total assets                                                           $500,559         $448,742
                                                                     ================= =================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                       $106,578          $86,969
  Interest-bearing transaction accounts                                      120,020          121,457
  Time deposits one hundred thousand and over                                 91,816          112,638
  Other time deposits                                                        126,737           76,348
                                                                     ----------------- -----------------
    Total deposits                                                           445,151          397,412

Short-term borrowings                                                          5,823            3,870
Trust preferred securities                                                    10,000           10,000
Other liabilities and interest payable                                        11,038           10,773
                                                                     ----------------- -----------------
     Total liabilities                                                       472,012          422,055

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
      none issued and outstanding                                                ---              ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 3,494,840 and 3,530,135 shares                  12,193           12,373
  Retained earnings                                                           15,256           13,653
  Accumulated other comprehensive income, net of tax                           1,098              661
                                                                     ----------------- -----------------
     Total shareholders' equity                                               28,547           26,687
                                                                     ----------------- -----------------
     Total liabilities and shareholders' equity                             $500,559         $448,742
                                                                     ================= =================

See Notes to Consolidated Financial Statements.
</TABLE>

                        This page is page 5 of 40 pages.

<PAGE>




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

                                                                                      Six Months Ended
                                                                                          June 30,
                                                                                    2002            2001
                                                                              ---------------------------------
<S>                                                                                   <C>           <C>
Cash flows from operating activities:

  Net income                                                                           $3,972        $3,555

Adjustments to reconcile net income to net cash
  from operating activities:
  Depreciation and amortization, net                                                       45            33
  Loans originated for sale                                                              (608)          ---
  Proceeds from sale of loans held for sale                                               300           ---
  Net realized gains on securities available for sale                                     (35)          ---
  Net realized gains on sale of loans held for sale                                        (5)          ---
  Change in other assets and interest receivable                                       (1,240)         (467)
  Change in other liabilities and interest payable                                        265           395
  Other, net                                                                              ---            30
                                                                              ---------------------------------
  Total adjustments                                                                    (1,278)           (9)
                                                                              ---------------------------------

  Net cash from operating activities                                                    2,694         3,546

Cash flows from investing activities:
  Net change in loans                                                                  (5,952)      (10,134)
  Purchases of investment securities available for sale                               (24,255)      (18,758)
  Purchases of investment securities held to maturity                                    (358)       (1,326)
  Proceeds from sales of investment securities available for sale                       5,079           ---
  Maturities of investment securities available for sale                                8,101        19,965
  Maturities or calls of investment securities held to maturity                         1,561        11,256
  Purchases of premises and equipment, net                                               (685)         (267)
  Proceeds from sale of other real estate owned                                           ---           512
                                                                              ---------------------------------
    Net cash from investing activities                                                (16,509)        1,248

Cash flows from financing activities:
  Net change in noninterest bearing demand deposits                                    19,609        (2,921)
  Net change in interest bearing transaction accounts                                  (1,437)       (4,595)
  Net change in time deposits                                                          29,567        (1,017)
  Net change in short-term borrowings                                                   1,953         1,842
  Issuance of trust preferred securities                                                  ---        10,000
  Repurchases of common stock                                                          (1,146)      (14,451)
  Cash dividends paid                                                                  (1,403)         (371)
                                                                              ---------------------------------
    Net cash from financing activities                                                 47,143       (11,513)
                                                                              ---------------------------------

Net change in cash and cash equivalents                                                33,328        (6,719)
Cash and cash equivalents at beginning of period                                       24,249        43,927

                                                                              ---------------------------------
Cash and cash equivalents at end of period                                            $57,577       $37,208
                                                                              =================================

                                                 (Continued)
</TABLE>



                        This page is page 6 of 40 pages.

<PAGE>


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

                                                                             Six Months Ended
                                                                                 June 30,
                                                                         2002                2001
                                                                    ----------------    ---------------

Supplemental Disclosures:

Cash paid during the period for:
<S>                                                                          <C>                <C>
  Interest expense                                                           $4,701             $6,965
  Income taxes                                                                2,393              2,535






See Notes to Consolidated Financial Statements.


                                             (Concluded)


</TABLE>










                        This page is page 7 of 40 pages.

<PAGE>






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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements should be read
in  conjunction  with the  consolidated  financial  statements and related notes
contained in Redwood Empire  Bancorp's 2001 Annual Report to  Shareholders.  The
statements  include the accounts of Redwood Empire Bancorp  ("Redwood," and with
its subsidiaries,  the "Company"),  and its wholly owned subsidiaries,  National
Bank of the  Redwoods  ("NBR"  or the  "Bank")  and  Redwood  Statutory  Trust I
("RSTI").  All significant  inter-company  balances and  transactions  have been
eliminated.  The  financial  information  contained in this report  reflects all
adjustments,  which,  in the opinion of  management,  are  necessary  for a fair
presentation of the results of the interim periods.  All such adjustments are of
a normal recurring nature.  The results of operations and cash flows for the six
months ended June 30, 2002 are not  necessarily  indicative  of the results that
may be expected for the year ending December 31, 2002.

     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 40 pages.

<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      June 30,
                                                          2002                         2001
                                                --------------------------   -------------------------
                                                    Basic       Diluted          Basic      Diluted
                                                ------------ -------------   ----------- -------------
                                                        (in thousands, except per share data)
 Earnings per common share:

<S>                                                <C>          <C>             <C>         <C>
 Net income                                           $2,025       $2,025          $1,768      $1,768
 Earnings per share                                      .58          .56             .49         .47

 Weighted average common shares outstanding        3,491,000    3,617,000(1)    3,621,000   3,733,500(1)


1)   The weighted average common shares outstanding include the dilutive effects
     of common  stock  options of 126,000 and 112,500 for the three months ended
     June 30, 2002 and June 30, 2001.
</TABLE>


<TABLE>
<CAPTION>
                                                                   Six Months Ended
                                                                      June 30,
                                                          2002                         2001
                                                --------------------------   -------------------------
                                                    Basic       Diluted          Basic      Diluted
                                                ------------ -------------   ----------- -------------
                                                        (in thousands, except per share data)
<S>                                                <C>          <C>             <C>         <C>
 Earnings per common share:

 Net income                                           $3,972       $3,972          $3,555      $3,555
 Earnings per share                                     1.14         1.10             .92         .90

 Weighted average common shares outstanding        3,495,000    3,624,000(1)    3,850,500   3,967,500(1)

1)   The weighted average common shares outstanding include the dilutive effects
     of common  stock  options of 129,000 and  117,000 for the six months  ended
     June 30, 2002 and June 30, 2001.

</TABLE>


3.   Comprehensive Income


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



<TABLE>
<CAPTION>
                                                    Three Months Ended        Six Months Ended
                                                         June 30,                 June 30,
                                                     2002       2001          2002       2001
                                                  ------------------------------------------------
                                                                  (in thousands)

<S>                                                  <C>       <C>            <C>        <C>
         Net income as reported                      $2,025    $1,768         $3,972     $3,555
         Other comprehensive income (net of tax):
           Change in unrealized holding
         gain/(losses)
              on available for sale securities          672       (14)           459        454
           Reclassification adjustment                  ---       ---            (22)       ---
                                                  -----------------------  -----------------------
         Total comprehensive income                  $2,697    $1,754         $4,409     $4,009
                                                  =======================  =======================
</TABLE>

                        This page is page 9 of 40 pages.

<PAGE>

4.   Subsequent Event - Common Stock Dividend

     On July 8, 2002, the Board of Directors  declared a quarterly cash dividend
of 20 cents per share on the Company's Common Stock. The dividend was payable on
July 30, 2002 to shareholders of record on July 18, 2002.

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 treasury  and  depository  activities.  The
Company's  merchant card services industry group provides credit card settlement
services for approximately 48,000 merchants throughout the United States.

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

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



<TABLE>
<CAPTION>
                                                               For the quarter ended June 30, 2002
                                                          -----------------------------------------------
                                                                             Merchant
                                                             Community         Card           Total
                                                              Banking        Services        Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                            <C>              <C>           <C>
Total interest income                                            $7,734         $   ---         $7,734
Total interest expense                                            2,395              16          2,411
Interest income/(expense) allocation                               (176)            176            ---
                                                          -----------------------------------------------
Net interest income                                               5,163             160          5,323
Provision for loan losses                                           ---             ---            ---
Total other operating income                                        596           1,197          1,793
Total other operating expense                                     3,261             643          3,904
                                                          -----------------------------------------------
Income before income taxes                                        2,498             714          3,212
Provision for income taxes                                          923             264          1,187
                                                          -----------------------------------------------
Net income                                                       $1,575            $450         $2,025
                                                          ===============================================

Total Average Assets                                           $455,964         $27,906       $483,870
                                                          ===============================================

</TABLE>


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<PAGE>
<TABLE>
<CAPTION>
                                                                For the quarter ended June 30, 2001
                                                           ----------------------------------------------
                                                                             Merchant
                                                              Community        Card           Total
                                                               Banking       Services        Company
                                                           ----------------------------------------------
                                                                          (in thousands)
<S>                                                              <C>            <C>            <C>
Total interest income                                              $8,442       $   ---          $8,442
Total interest expense                                              3,614             2           3,616
Interest income/(expense) allocation                                 (263)          263             ---
                                                           ----------------------------------------------
Net interest income                                                 4,565           261           4,826
Provision for loan losses                                             ---           ---             ---
Total other operating income                                          533         1,019           1,552
Total other operating expense                                       2,896           536           3,432
                                                           ----------------------------------------------
Income before income taxes                                          2,202           744           2,946
Provision for income taxes                                            880           298           1,178
                                                           ----------------------------------------------
Net income                                                         $1,322          $446          $1,768
                                                           ==============================================

Total Average Assets                                             $418,208       $25,653        $443,861
                                                           ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                             For the six months ended June 30, 2002
                                                          ----------------------------------------------
                                                                             Merchant
                                                             Community         Card          Total
                                                              Banking        Services       Company
                                                          ----------------------------------------------
                                                                         (in thousands)
<S>                                                             <C>              <C>          <C>
Total interest income                                            $15,143         $   ---       $15,143
Total interest expense                                             4,813              18         4,831
Interest income/(expense) allocation                                (332)            332           ---
                                                          ----------------------------------------------
Net interest income                                                9,998             314        10,312
Provision for loan losses                                            ---             ---           ---
Total other operating income                                       1,235           2,376         3,611
Total other operating expense                                      6,349           1,293         7,642
                                                          ----------------------------------------------
Income before income taxes                                         4,884           1,397         6,281
Provision for income taxes                                         1,797             512         2,309
                                                          ----------------------------------------------
Net income                                                        $3,087            $885        $3,972
                                                          ==============================================

Total Average Assets                                            $449,566         $27,310      $476,876
                                                          ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                             For the six months ended June 30, 2001
                                                          ----------------------------------------------
                                                                             Merchant
                                                             Community         Card          Total
                                                              Banking        Services       Company
                                                          ----------------------------------------------
                                                                         (in thousands)
<S>                                                             <C>              <C>          <C>
Total interest income                                            $17,495         $   ---       $17,495
Total interest expense                                             7,363               5         7,368
Interest income/(expense) allocation                                (574)            574           ---
                                                          ----------------------------------------------
Net interest income                                                9,558             569        10,127
Provision for loan losses                                            ---             ---           ---
Total other operating income                                       1,085           1,832         2,917
Total other operating expense                                      5,999           1,083         7,082
                                                          ----------------------------------------------
Income before income taxes                                         4,644           1,318         5,962
Provision for income taxes                                         1,875             532         2,407
                                                          ----------------------------------------------
Net income                                                        $2,769            $786        $3,555
                                                          ==============================================

Total Average Assets                                            $418,849         $25,125      $443,974
                                                          ==============================================
</TABLE>

                        This page is page 11 of 40 pages.
<PAGE>

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, 102,686 shares
have been repurchased,  as adjusted for the three-for-two  stock split announced
September 20, 2001. Under the repurchase program,  the Company plans to purchase
shares  from  time to time on the open  market  and/or in  privately  negotiated
transactions.  The first two repurchase  authorizations were funded in part with
proceeds received from a $10,000,000 pooled trust preferred  securities offering
concluded  on February 22,  2001.  The  financing,  which  qualifies  for tier 1
capital treatment, for up to 25% of total tier 1 capital, bears an interest rate
of  10.20%  and is due in 30 years.  Debt  issuance  costs,  which  amounted  to
approximately $300,000, are being amortized over the life of the offering.


7.   Real Estate Investment Trust

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


8.   New Accounting Pronouncements

     The Financial  Accounting  Standards Board (FASB) recently issued Statement
of  Financial  Accounting  Standards  (SFAS) No. 145 and No.  146.  SFAS No. 145
applies for years beginning  after May 14, 2002 and may be adopted sooner.  SFAS
No. 145 covers  extinguishments  of debt and  leases,  and  includes  some minor
technical corrections.  Under previous accounting guidance, gains or losses from
extinguishments  of debt were always treated as extraordinary  items. Under SFAS
No.  145 they will no longer be  considered  extraordinary,  except  under  very
limited  conditions.  Upon  adoption of SFAS No. 145, any prior gains and losses
from  extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating lease,
it will be  accounted  for as a  sale-leaseback,  by  following  the  accounting
guidance of SFAS No. 98, instead of being accounted for as a new lease. SFAS No.
146  covers  accounting  for  costs  associated  with exit or  long-lived  asset
disposal  activities,  such  as  restructurings,  consolidation  or  closing  of
facilities,  lease termination costs or employee  relocation or severance costs.
SFAS No. 146  replaces  Emerging  Issues Task Force  (EITF)  94-3,  and is to be
applied  prospectively to exit or disposal  activities  initiated after December
31, 2002,  and may be adopted  sooner.  A company may not restate its previously
issued  financial  statements.  SFAS No. 146 requires exit or  long-lived  asset
disposal costs to be recognized as an expense when the liability is incurred and
can be measured at fair value, rather than at the date of making a commitment to
an exit or disposal plan.  Management  does not expect the effects of the future
adoptions  of SFAS No.


                        This page is page 12 of 40 pages.

<PAGE>

145 and SFAS No. 146 to be  material  to the  Company's  consolidated  financial
position or results of operations.


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

Forward-Looking Information

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

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

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

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

     o    Uncertainty   regarding  the  economic  outlook   resulting  from  the
          terrorist attacks on September 11, 2001.

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

     o    Dividend restrictions.

     o    Regulatory discretion.

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

     o    Asset/liability repricing risks and liquidity risks.

     o    Changes in the securities markets.


                        This page is page 13 of 40 pages.

<PAGE>


     o    A decline in the health of the Northern California economy as a result
          of shortages of electrical power or increases in energy costs.

     o    Certain operational risks involving data processing systems or fraud.


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

     The following sections discuss  significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 2001
to June 30, 2002.  Significant  changes and trends in the  Company's  results of
operations  for the three and six months  ended June 30,  2002,  compared to the
same period in 2001, are also discussed.


Summary of Financial Results

     The Company  reported net income of $2,025,000 ($.56 per diluted share) for
the three months ended June 30, 2002 as compared to $1,768,000 ($.47 per diluted
share) for the same  period in 2001,  an  increase  of $257,000 in net income or
15%. This increase is due to an increase of $241,000 in  noninterest  income and
an increase of $497,000 in net interest income,  partially offset by an increase
of $472,000 in noninterest  expense. In addition,  net income increased due to a
decline in the  Company's  effective  tax rate from 39.99% for the quarter ended
June 30,  2001 to 36.96%  for the  quarter  ended  June 30,  2002.  For  further
information, see "Income Taxes" in this section.

     Net income for the six months ended June 30, 2002 was $3,972,000 ($1.10 per
diluted  share) as compared to $3,555,000  ($.90 per diluted share) for the same
period in 2001,  an increase of $417,000 in net income or 12%.  This increase is
due to an increase of $694,000 in noninterest income and an increase of $185,000
in  net  interest  income,  partially  offset  by an  increase  of  $560,000  in
noninterest expense.

     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 14 of 40 pages.

<PAGE>

Net Interest Income

     Net interest income increased from $4,826,000 in the second quarter of 2001
to $5,323,000  in the second  quarter of 2002,  which  represents an increase of
$497,000 or 10%. The  increase in net interest  income was driven by an increase
in average earning assets of $38,282,000 from $415,645,000 for the quarter ended
June 30, 2001 to  $453,927,000  for the  quarter  ended June 30,  2002.  The net
interest margin for the second quarter of 2002 also improved to 4.70% from 4.66%
one year ago.

     Net interest income for the six months ended June 30, 2002 was $10,312,000,
which  represents  an increase of $185,000  when compared to the same period one
year ago.  The  Company's  net  interest  margin  decreased to 4.64% for the six
months ended June 30,  2002,  as compared to 4.91% for the six months ended June
30, 2001. The decline in net interest margin during the six-month period of 2002
is due to the lower interest rate  environment  and the full six month impact of
the Company's  February 22, 2001 trust  preferred  debt  financing.  For further
discussion of this matter, see 'Trust Preferred Securities' in this section.

     For the three months ended June 30, 2002, yield on earning assets decreased
to 6.83% from 8.15% for the same period one year ago.  The  decrease in yield on
earning  assets is due to a decline in the general  interest  rate  environment.
Despite  the  decline in  interest  rates,  average  portfolio  loans  increased
$32,509,000  or  10%,  when  compared  to the  same  quarter  in  2001.  Average
commercial  real  estate  loans   increased   $29,196,000  or  29%  and  average
installment  and other loans  increased  $3,372,000  or 33% for the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001.

     For the six months ended June 30, 2002,  yield on earning assets  decreased
to 6.82% as compared to 8.48% for the six months ended June 30, 2001.  While the
Company has seen average earning assets grow to $447,790,000  for the six months
ended June 30, 2002, as compared to  $416,066,000  for the six months ended June
30, 2001, the decline in yield on earning assets is  attributable to the decline
in the general  interest rate  environment.  Average  portfolio  loans increased
$31,065,000 or 10% when compared to the same period in 2001.  Average commercial
real estate loans increased $26,940,000 or 27% and average installment and other
loans  increased  $4,241,000  or 45% for the six months  ended June 30,  2002 as
compared to the six months ended June 30, 2001.

     Yield paid on interest bearing liabilities decreased to 2.78% and 2.82% for
the three and six months  ended June 30, 2002 as compared to 4.51% and 4.65% for
the same periods one year ago. This decline is  attributable to a lower interest
rate environment as discussed above.

     With the  increase  in  average  earning  assets in the first six months of
2002, the Company's  funding levels also increased as average  interest  bearing
liabilities  increased $25,390,000 or 8% as compared to the same period one year
ago. The average balance of time deposits increased $21,789,000 during the first
six months of 2002 as compared  to the same  period one year ago.  The growth in
time deposits in 2002 is a result of the Company's efforts to fund earning asset
growth  and build its  deposit  portfolio.  In  addition  to growth in  interest
bearing  deposits,  average  non  interest  bearing  demand  deposits  increased
$11,684,000 or 13% for the quarter ended June 30, 2002 when compared to the same
quarter one year ago.

                       This page is page 15 of 40 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
                                            June 30, 2002                         June 30, 2001
                                 ------------------------------------- ------------------------------------

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

<S>                               <C>            <C>           <C>      <C>           <C>           <C>
Commercial loans                   $70,320      $1,204         6.87%     $73,152      $1,664        9.12%
Real estate-mortgage loans          93,107       1,673         7.21       93,736       1,923        8.23
Real estate-commercial loans       131,313       2,542         7.76      102,117       2,263        8.89
Construction loans                  43,499         902         8.32       40,294         934        9.30
Installment and other               13,743         163         4.76       10,371         183        7.08
Deferred loan fees                    (659)        ---          ---         (856)        ---         ---
                                 -----------------------               ----------------------
  Portfolio loans                  351,323       6,484         7.40      318,814       6,967        8.77


Mortgage loans held for sale           147           2         5.46          ---         ---         ---
Investments                         76,050       1,128         5.95       74,546       1,212        6.52
Federal funds sold                  26,407         120         1.82       22,285         263        4.73
                                 -----------------------               ----------------------
  Total earning assets (1)        $453,927       7,734         6.83     $415,645       8,442        8.15
                                 =============                         =============

Interest bearing transaction
  accounts                        $122,311        $446         1.46     $123,727         782        2.54
Time deposits                      211,333       1,686         3.20      184,540       2,551        5.54
Other borrowings                    13,960         279         8.02       13,211         283        8.59
                                 -----------------------               ----------------------
  Total interest-bearing
    liabilities                   $347,604       2,411         2.78%    $321,478       3,616        4.51%
                                 =============                         =============

                                             -----------                           ----------
Net interest income                             $5,323                                $4,826
                                             ===========                           ==========
Net interest income to
  earning assets                                               4.70%                                4.66%

</TABLE>



                       This page is page 16 of 40 pages.

<PAGE>


<TABLE>
<CAPTION>
                                          Six months ended                    Six months ended
                                           June 30, 2002                       June 30, 2001
                                 ----------------------------------- -----------------------------------

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

<S>                                  <C>         <C>          <C>        <C>         <C>          <C>
Commercial loans                      $69,838    $2,402       6.94%       $70,773    $3,409       9.71%
Real estate-mortgage loans             95,087     3,382       7.17         95,820     3,932       8.28
Real estate-commercial loans          127,225     4,835       7.66        100,285     4,452       8.95
Construction loans                     44,547     1,765       7.99         43,300     2,202      10.26
Installment and other                  13,683       316       4.66          9,442       361       7.71
Deferred loan fees                       (591)      ---       ---            (896)      ---     ---
                                 ------------------------            ------------------------
  Portfolio loans                     349,789    12,700       7.32        318,724    14,356       9.08


Mortgage loans held for sale               91         3       6.65            ---       ---     ---
Investments                            72,523     2,216       6.16         76,235     2,599       6.87
Federal funds sold                     25,387       224       1.78         21,107       540       5.16
                                 ------------------------            ------------------------
  Total earning assets (1)           $447,790    15,143       6.82       $416,066    17,495       8.48
                                 ==============                      ==============

Interest bearing transaction
  accounts                           $123,343       868       1.42       $123,907     1,630       2.65
Time deposits                         207,837     3,426       3.32        186,048     5,303       5.75
Other borrowings                       14,064       537       7.70          9,899       435       8.86
                                 ------------------------            ------------------------
  Total interest-bearing
    liabilities                      $345,244     4,831       2.82%      $319,854     7,368       4.65%
                                 ==============                      ==============

                                              -----------                         -----------
Net interest income                             $10,312                             $10,127
                                              ===========                         ===========
Net interest income to
  earning assets                                             4.64%                                4.91%

</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 40 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 six  months  ended  June 30,  2002 and 2001.  Changes  not  solely
attributable to rate or volume have been allocated proportionately to the change
due to volume and the change due to rate.


<TABLE>
<CAPTION>
                                                            Three months ended
                                                       June 30, 2002 compared to the
                                                     three months ended June 30, 2001
                                                  ----------------------------------------
                                                     Volume        Rate         Total
                                                  ----------------------------------------
                                                               (in thousands)
<S>                                                      <C>        <C>          <C>
Increase/(decrease) in interest income:
  Commercial loans                                       ($62)       ($398)       ($460)
  Real estate-mortgage loans                              (13)        (237)        (250)
  Real estate-commercial loans                            590         (311)         279
  Construction loans                                       71         (103)         (32)
  Installment and other                                    50          (70)         (20)
  Mortgage loans held for sale                              2          ---            2
  Investments                                              24         (108)         (84)
  Federal funds sold                                       42         (185)        (143)
                                                  ----------------------------------------
Total increase/(decrease)                                 704       (1,412)        (708)
                                                  ----------------------------------------

Increase/(decrease) in interest expense:
  Interest-bearing transaction accounts                    (9)        (327)        (336)
  Time deposits                                           330       (1,195)        (865)
  Other borrowings                                         16          (20)          (4)
                                                  ----------------------------------------
Total increase/decrease)                                  337       (1,542)      (1,205)
                                                  ----------------------------------------

Increase/(decrease) in net interest income               $367         $130         $497
                                                  ========================================
</TABLE>

<TABLE>
<CAPTION>
                                                      Six months ended June 30, 2002
                                                            compared to the six
                                                        months ended June 30, 2001
                                                  ----------------------------------------
                                                     Volume        Rate         Total
                                                  ----------------------------------------
                                                               (in thousands)
<S>                                                     <C>         <C>          <C>
Increase/(decrease) in interest income:
  Commercial loans                                       ($44)       ($963)     ($1,007)
  Real estate-mortgage loans                              (30)        (520)        (550)
  Real estate-commercial loans                          1,084         (701)         383
  Construction loans                                       62         (499)        (437)
  Installment and other                                   128         (173)         (45)
  Mortgage loans held for sale                              3          ---            3
  Investments                                            (122)        (261)        (383)
  Federal funds sold                                       93         (409)        (316)
                                                  ----------------------------------------
Total increase/(decrease)                               1,174       (3,526)      (2,352)
                                                  ----------------------------------------

Increase/ (decrease) in interest expense:
  Interest-bearing transaction accounts                    (7)        (755)        (762)
  Time deposits                                           564       (2,441)      (1,877)
  Other borrowings                                        165          (63)         102
                                                  ----------------------------------------
Total increase/ (decrease)                                722       (3,259)      (2,537)
                                                  ----------------------------------------

Increase/(decrease) in net interest income               $452        ($267)        $185
                                                  ========================================
</TABLE>



                       This page is page 18 of 40 pages.
<PAGE>


Provision for Loan Losses

     Due to the absence of significant  net loan  charge-offs,  little change in
loan  portfolio  asset quality and the balance in the allowance for loan losses,
there was no  provision  for loan losses for the three and six months ended June
30, 2002 and 2001. 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 six months ended June 30, 2002, as compared to the same
period in 2001.



<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                   June 30,                  $            %
                                                      ------------------------------
                                                         2002              2001            Change      Change
                                                      ------------     -------------    --------------------------
                                                         (dollars in thousands)

<S>                                                      <C>              <C>                <C>           <C>
Service charges on deposit accounts                        $308             $266              $42          16%
Merchant draft processing, net                            1,197            1,019              178          17
Loan servicing income                                        81               80                1           1
Other income                                                207              187               20          11
                                                      ------------     -------------    -------------
Total noninterest income                                 $1,793           $1,552             $241          16%
                                                      ============     =============    =============

</TABLE>

     Noninterest income increased $241,000,  or 16%, to $1,793,000 for the three
months ended June 30, 2002 when  compared to  $1,552,000  for the same period in
2001.  During this period,  such  increase was  primarily  due to an increase of
$178,000 in merchant  card net  revenue,  and an increase in service  charges of
$42,000.  The  increase  in  merchant  card net revenue is due to an increase in
processing  revenue brought about by the Company's  efforts to build its overall
merchant  card  services  business  through  direct  marketing  efforts  and new
independent sales organization (ISO) relationships.


<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                                  June 30,                   $            %
                                                      ------------------------------
                                                         2002              2001           Change        Change
                                                      ------------      ------------   ----------------------------
                                                         (dollars in thousands)

<S>                                                      <C>               <C>              <C>           <C>
Service charges on deposit accounts                        $622              $535            $87           16%
Merchant draft processing, net                            2,376             1,832            544           30
Loan servicing income                                       135               157            (22)         (14)
Net realized gains on investment securities
  available for sale                                         35               ---             35          ---
Other income                                                443               393             50           13
                                                      ------------      ------------   --------------
Total noninterest income                                 $3,611            $2,917           $694           24%
                                                      ============      ============   ==============
</TABLE>



                       This page is page 19 of 40 pages.

<PAGE>

     Noninterest  income increased  $694,000,  or 24%, to $3,611,000 for the six
months ended June 30, 2002 when  compared to  $2,917,000  for the same period in
2001.  During this period,  such  increase was  primarily  due to an increase of
$544,000 in merchant card net revenue, an increase in service charges of $87,000
and an increase in other income of $50,000.  The  increase in merchant  card net
revenue is due to an increase in processing revenue, as discussed above.


Noninterest Expense

     The following tables set forth the components of the Company's  noninterest
expense  during the three and six months ended June 30, 2002, as compared to the
same period in 2001.


<TABLE>
<CAPTION>
                                          Three Months Ended
                                               June 30,             $         %
                                      -------------------------
                                          2002         2001       Change    Change
                                      ------------ ------------ ---------------------
                                        (dollars in thousands)

<S>                                          <C>          <C>        <C>        <C>
Salaries and employee benefits               $2,302       $1,989     $313       16 %
Occupancy and equipment expense                 533          503       30        6
Other                                         1,069          940      129       14
                                      -------------- ------------ -----------
Total noninterest expense                    $3,904       $3,432     $472       14 %
                                      ============== ============ ===========
</TABLE>


     Noninterest expense increased by $472,000, or 14%, to $3,904,000 during the
second quarter of 2002 as compared to $3,432,000 for the second quarter of 2001.
The increase in noninterest  expense for the  three-month  period ended June 30,
2002,  as  compared  to the same  period  ended  June 30,  2001,  was  primarily
attributable to an increase in salaries and employee benefits of $313,000 and an
increase in other  expense of  $129,000.  The  increase in salaries and employee
benefits was primarily due to an increase in the number of full time  equivalent
employees  employed by the Company.  At June 30,  2002,  the number of full time
equivalent  employees  totaled 155 as compared  to 145 at June 30,  2001.  Other
expenses  increased  during the period  partially as a result of computer system
improvements and expenses incurred in association with NBR Real Estate Trust, as
described below.


<TABLE>
<CAPTION>
                                         Six Months Ended
                                              June 30,             $         %
                                      ------------------------
                                         2002        2001        Change    Change
                                      ------------ -----------  ---------------------
                                      (dollars in thousands)

<S>                                        <C>         <C>           <C>         <C>
Salaries and employee benefits             $4,348      $4,221        $127         3%
Occupancy and equipment expense             1,057         992          65         7
Other                                       2,237       1,869         368        20
                                      ------------ ------------ -----------
Total noninterest expense                  $7,642      $7,082        $560         8%
                                      ============ ============ ===========
</TABLE>


     Noninterest expense increased by $560,000,  or 8%, to $7,642,000 during the
six months ended June 30, 2002 as compared to $7,082,000 for the same period one
year ago. The increase in noninterest expense was due to an increase in salaries
and employee  benefits of $127,000 and

                       This page is page 20 of 40 pages.

<PAGE>

an increase in other expense of $368,000.  The increase in salaries and employee
benefits was primarily due to the increase in the number of full time equivalent
employees, as described above. Other expenses increased during 2002 partially as
a result of technological  improvements made to the Company's  internal computer
systems and  expenses  incurred in  association  with the  formation of NBR Real
Estate Investment Trust.

Income Taxes

     The  Company's  effective  tax rate  varies  with  changes in the  relative
amounts of its non-taxable income and nondeductible  expenses. The effective tax
rate was 36.96% and 36.76% for the three and six months ended June 30, 2002,  as
compared to 39.99% and 40.37% for the same periods in 2001. On January 15, 2002,
NBR formed NBR Real Estate  Investment  Trust, a Maryland Real Estate Investment
Trust.  The entity was formed to hold  NBR's real  estate  secured  loans and to
better organize NBR's marketing and origination of real estate secured  lending.
In addition,  the  favorable  state  income tax  treatment on the income of this
trust resulted in a reduction of the Company's effective tax rate.


Business Segments

     The Company  operates in two  principal  product  and service  lines:  core
community  banking  and  merchant  credit  card  services.  The  Company's  core
community   banking  segment  includes   commercial,   commercial  real  estate,
construction  and  permanent   residential   lending  along  with  treasury  and
depository  activities.  The Company's  merchant card  services  industry  group
provides  credit card settlement  services for  approximately  48,000  merchants
throughout the United States.

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



<TABLE>
<CAPTION>
                                                               For the quarter ended June 30, 2002
                                                          -----------------------------------------------
                                                                               Merchant
                                                              Community          Card         Total
                                                               Banking         Services      Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                               <C>             <C>          <C>
Total interest income                                               $7,734        $   ---        $7,734
Total interest expense                                               2,395             16         2,411
Interest income/(expense) allocation                                  (176)           176           ---
                                                          -----------------------------------------------
Net interest income                                                  5,163            160         5,323
Provision for loan losses                                              ---            ---           ---
Total other operating income                                           596          1,197         1,793
Total other operating expense                                        3,261            643         3,904
                                                          -----------------------------------------------
Income before income taxes                                           2,498            714         3,212
Provision for income taxes                                             923            264         1,187
                                                          -----------------------------------------------
Net income                                                          $1,575           $450        $2,025
                                                          ===============================================

Total Average Assets                                              $455,964        $27,906      $483,870
                                                          ===============================================
</TABLE>


                       This page is page 21 of 40 pages.

<PAGE>
<TABLE>
<CAPTION>
                                                                For the quarter ended June 30, 2001
                                                          ------------------------------------------------
                                                                               Merchant
                                                              Community          Card          Total
                                                               Banking         Services       Company
                                                          ------------------------------------------------
                                                                          (in thousands)
<S>                                                               <C>             <C>         <C>
Total interest income                                               $8,442        $   ---       $8,442
Total interest expense                                               3,614              2        3,616
Interest income/(expense) allocation                                  (263)           263          ---
                                                          ------------------------------------------------
Net interest income                                                  4,565            261        4,826
Provision for loan losses                                              ---            ---          ---
Total other operating income                                           533          1,019        1,552
Total other operating expense                                        2,896            536        3,432
                                                          ------------------------------------------------
Income before income taxes                                           2,202            744        2,946
Provision for income taxes                                             880            298        1,178
                                                          ------------------------------------------------
Net income                                                          $1,322           $446       $1,768
                                                          ================================================

Total Average Assets                                              $418,208        $25,653     $443,861
                                                          ================================================
</TABLE>

<TABLE>
<CAPTION>
                                                             For the six months ended June 30, 2002
                                                          ----------------------------------------------
                                                                             Merchant
                                                             Community         Card          Total
                                                              Banking        Services       Company
                                                          ----------------------------------------------
                                                                         (in thousands)
<S>                                                             <C>              <C>          <C>
Total interest income                                            $15,143         $   ---       $15,143
Total interest expense                                             4,813              18         4,831
Interest income/(expense) allocation                                (332)            332           ---
                                                          ----------------------------------------------
Net interest income                                                9,998             314        10,312
Provision for loan losses                                            ---             ---           ---
Total other operating income                                       1,235           2,376         3,611
Total other operating expense                                      6,349           1,293         7,642
                                                          ----------------------------------------------
Income before income taxes                                         4,884           1,397         6,281
Provision for income taxes                                         1,797             512         2,309
                                                          ----------------------------------------------
Net income                                                        $3,087            $885        $3,972
                                                          ==============================================

Total Average Assets                                            $449,566         $27,310      $476,876
                                                          ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                             For the six months ended June 30, 2001
                                                          ----------------------------------------------
                                                                             Merchant
                                                             Community         Card          Total
                                                              Banking        Services       Company
                                                          ----------------------------------------------
                                                                         (in thousands)
<S>                                                             <C>              <C>          <C>
Total interest income                                            $17,495         $   ---       $17,495
Total interest expense                                             7,363               5         7,368
Interest income/(expense) allocation                                (574)            574           ---
                                                          ----------------------------------------------
Net interest income                                                9,558             569        10,127
Provision for loan losses                                            ---             ---           ---
Total other operating income                                       1,085           1,832         2,917
Total other operating expense                                      5,999           1,083         7,082
                                                          ----------------------------------------------
Income before income taxes                                         4,644           1,318         5,962
Provision for income taxes                                         1,875             532         2,407
                                                          ----------------------------------------------
Net income                                                        $2,769            $786        $3,555
                                                          ==============================================

Total Average Assets                                            $418,849         $25,125      $443,974
                                                          ==============================================
</TABLE>

                       This page is page 22 of 40 pages.
<PAGE>

     Community Banking

     The Community  Banking segment's income before income tax increased for the
three and six months  ended June 30,  2002 when  compared  to the same period in
2001. The increase was primarily due to an increase in net interest income.  Net
interest  income  increased  $598,000  and $440,000 for the three and six months
ended June 30, 2002, principally due to an increase in earning assets, offset by
a decline in the general  interest rate  environment  and the issuance of pooled
trust  preferred  debt  securities,  which  have  been  fully  allocated  to the
Community  Banking segment.  The Company increased its loan portfolio during the
first six months of 2002  through  renewed  marketing  efforts.  For the quarter
ended June 30, 2002,  total average  portfolio loans were  $351,323,000,  up 10%
from $318,814,000 for the quarter ended June 30, 2001.

     Merchant Card Services

     The Company's merchant credit card segment earned $450,000 and $885,000 for
the three and six months  ended June 30, 2002  compared to $446,000 and $786,000
for the same  periods in 2001.  The increase in the unit's net income was due to
an increase in processing  revenue  brought  about by the  Company's  efforts to
build its overall  merchant  card services  business  through  direct  marketing
efforts and new independent sales organization (ISO) relationships. The merchant
credit card segment's net income  comprised  approximately  22% of the Company's
consolidated  net  income for the three and six  months  ended June 30,  2002 as
compared to 25% and 22% for the same periods one year ago.

     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
refuses or 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
$1,251,000 and $1,240,000 as of June 30, 2002 and 2001, was estimated based upon
industry loss data as a percentage of transaction  volume  throughout each year,
historical losses incurred by the Company and management's  evaluation regarding
merchant  and ISO risk.  The Company  utilizes  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 $49,000 and $108,000  for the three and six months  ended June 30, 2002,  as
compared to $54,000 and $74,000 for the same periods  ended June 30,  2001.  For
further discussion, see "Certain Important Considerations for Investors" in this
section.


                       This page is page 23 of 40 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        Six months ended
                                                     June 30,                 June 30,
                                                 2002        2001         2002        2001
                                             --------------------------------------------------
                                                              (in thousands)

<S>                                               <C>         <C>           <C>        <C>
                     Beginning allowance          $1,233      $1,266        $1,212     $1,276
                     Provision for losses             49          54           108         74
                     Recoveries                        3          33            11         79
                     Charge-offs                     (34)       (113)          (80)      (189)
                                             ------------------------- ------------------------
                     Ending allowance             $1,251      $1,240        $1,251     $1,240
                                             ========================= ========================
</TABLE>


Investment Securities

     Total investment securities increased to $75,553,000,  as of June 30, 2002,
compared to $64,975,000 as of December 31, 2001. The Company's  average  federal
funds sold position was $25,387,000 for the first six months of 2002 as compared
to $21,107,000 for the same period in 2001. Growth of the investment  securities
portfolio and the Company's overnight investment position was driven by the need
to invest proceeds from the Company's deposit growth.

Loans

     Total  loans  increased  to  $357,862,000  at June  30,  2002  compared  to
$351,649,000 at December 31, 2001. The Company's  residential loan portfolio has
experienced  substantial  paydown  activity during the first six months of 2002.
Despite this paydown  activity,  the Company continues to focus on growth in the
overall loan  portfolio  through  marketing  efforts and a general  expansion of
businesses  within the  Company's  market  area.  Commercial  real estate  loans
increased   $18,564,000  to  $140,020,000,   at  June  30,  2002,   compared  to
$121,456,000 at December 31, 2001.

     The following  table  summarizes  the  composition of the loan portfolio at
June 30, 2002 and December 31, 2001:


<TABLE>
<CAPTION>
                                       June 30, 2002                December 31, 2001
                                ----------------------------   -----------------------------
                                      Amount          %              Amount          %
                                ----------------------------   -----------------------------
                                                  (dollars in thousands)
<S>                                     <C>           <C>             <C>           <C>
 Residential real estate mortgage        $93,698       26%            $101,175       29%
 Commercial real estate mortgage         140,020       40              121,456       34
 Commercial                               69,464       19               70,438       20
 Real estate construction                 43,152       12               46,501       13
 Installment and other                    12,223        3               12,567        4
 Less net deferred loan fees                (695)     ---                 (488)     ---
                                ----------------------------   -----------------------------
     Total portfolio loans               357,862      100%             351,649      100%
                                                  ==========                    ============
 Less allowance for loan losses           (7,586)                       (7,580)
                                -------------------            ------------------
     Net loans                          $350,276                      $344,069
                                ===================            ==================
</TABLE>

                       This page is page 24 of 40 pages.

<PAGE>

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.

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



<TABLE>
<CAPTION>
                                                          Three months ended          Six months ended
                                                               June 30,                    June 30
                                                       -------------------------  --------------------------
                                                           2002        2001           2002         2001
                                                       -------------------------  --------------------------
                                                                      (dollars in thousands)

<S>                                                        <C>         <C>             <C>         <C>
              Beginning allowance for loan losses          $7,549      $7,696          $7,580      $7,674
              Provision for loan losses                       ---         ---             ---         ---
              Charge-offs                                     ---          (2)            (45)         (2)
              Recoveries                                       37          10              51          32
                                                       -------------------------  --------------------------
              Ending allowance for loan losses             $7,586      $7,704          $7,586      $7,704
                                                       =========================  ==========================


              Net charge-offs/(recoveries) to average
                 loans (annualized)                        (0.04%)      (0.01%)        (0.01%)      (0.02%)
</TABLE>


     The  allowance  for loan losses as a  percentage  of total loans  decreased
slightly from 2.16%, at December 31, 2001, to 2.12% at June 30, 2002. The growth
in the Company's loan portfolio is primarily comprised of commercial real estate
loans that  generally bear a lower credit risk than  construction  or commercial
loans.  Accordingly,  under the Company's  loan loss reserve  methodology,  such
loans  generally  receive a lower loan loss  reserve  allocation  as compared to
commercial or construction loans.


                       This page is page 25 of 40 pages.

<PAGE>

Nonperforming Assets

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



<TABLE>
<CAPTION>
                                                       June 30,        December 31,
                                                         2002              2001
                                                    ----------------  ---------------
                                                         (dollars in thousands)
<S>                                                          <C>              <C>
Nonaccrual loans                                             $1,765           $2,892
Accruing loans past due 90 days or more                         616              ---
Restructured loans                                              280              284
                                                    ----------------  ---------------
Total nonperforming loans                                     2,661            3,176
Other real estate owned                                         ---              ---
                                                    ----------------  ---------------
Total nonperforming assets                                   $2,661           $3,176
                                                    ================  ===============



Nonperforming assets to total assets                          0.53%            0.71%

</TABLE>

     Nonperforming  assets have  decreased  slightly from  $3,176,000 or .71% of
total assets,  as of December 31, 2001, to $2,661,000 or .53% of total assets as
of June 30, 2002. The decrease was  attributable  to a decrease of $1,127,000 in
nonaccrual loans during this period.

     At June 30, 2002,  nonperforming loans consist of loans to 12 borrowers,  4
of which have  balances in excess of  $100,000.  The two largest  have  recorded
balances of $632,000 and $463,000.  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 June 30, 2002,  the Company did not have any  properties  classified  as
other real estate owned.

     Although  the volume of  nonperforming  assets  will  depend in part on the
future  economic  environment,  there  is one  loan  relationship  which  totals
approximately $947,000 as of June 30, 2002, compared to three loan relationships
totaling  approximately  $1,921,000 at December 31, 2001, about which management
has serious  doubts as to the ability of the borrower to comply with the present
repayment  terms.  This  loan may  become  a  nonperforming  asset  based on the
information presently known about possible credit problems of the borrower.

     At June 30, 2002, the Company's total recorded investment in impaired loans
(as defined by SFAS 114 and 118) was $2,661,000,  of which $2,381,000 relates to
the recorded investment in loans for which there is a related allowance for loan
losses of $243,000.  The remaining  $280,000 in impaired loans did not require a
specific allowance for loan losses.



                       This page is page 26 of 40 pages.

<PAGE>

     The Company's average recorded  investment in impaired loans during the six
months ended June 30, 2002 and 2001 was $2,056,000 and $1,358,000.  The increase
of $698,000 in the average recorded  investment in impaired loans during the six
months  ending  June  30,  2002  compared  to the same  period  one year ago was
primarily  due to growth in  nonperforming  loans.  Interest  income  recognized
during the periods  that such loans were  impaired for the six months ended June
30, 2002 was  $32,000,  as compared to $15,000 and $44,000 for the three and six
months ended June 30, 2001. There was no interest income  recognized  during the
three months ended June 30, 2002.

     As of June 30, 2002,  there was $1,765,000 of loans on which the accrual of
interest had been  discontinued  as compared to $2,892,000 at December 31, 2001.
During the three and six months ended June 30,  2002,  interest due but excluded
from  interest  income on loans  placed on  nonaccrual  status was  $11,000  and
$47,000,  as compared to $23,000 and $41,000 for the same  periods one year ago.
There was no interest income  received on nonaccrual  loans during the three and
six months  ended June 30,  2002,  as compared  to $2,000 and $5,000  during the
three and six months ended June 30, 2001.

Mortgage Repurchase Commitments

     From time to time the Company may be required to repurchase  mortgage loans
from  mortgage  loan  investors as a result of breaches of  representations  and
warranties in the purchase  agreement between the investor and the Company.  The
Company may also be required to  reimburse a mortgage  loan  investor for losses
incurred  as a result of  liquidating  collateral,  which had secured a mortgage
loan sold by the  Company.  Such  representations  and  warranties  include  the
existence of a valid  appraisal,  status of borrower or fraud.  In the first six
months of 2002, the Company was not required to repurchase  any such loans.  The
Company  maintains  a reserve for  management's  estimate  of  potential  losses
associated  with the repurchase of previously  sold mortgage  loans.  During the
first  quarter of 2002,  the  Company  agreed to pay  $33,000  for a  settlement
related to disputed title issues. Reserves for such losses totaled $60,000 as of
June 30, 2002 and $93,000 as of December 31, 2001.  The Company  expects that it
may be required to repurchase loans in the future.

Investment in REMIC

     In 1995, Allied Savings Bank ("Allied"), formerly a wholly owned subsidiary
of the Company  which  merged into NBR in 1997,  sold a COFI ARM  mortgage  pool
whose carrying value was approximately $73,900,000 as part of a transaction that
resulted in creating a Real Estate Mortgage  Investment Conduit  ("REMIC").  The
REMIC issued three classes of mortgage pass-through mortgage certificates:  A, B
and C. The sale  transaction  took  place as a result  of  Allied  selling  100%
interest  in the  COFI  indexed  ARM  mortgage  pool  in  exchange  for  cash of
$71,500,000 and a Class B certificate  which represented the first loss position
with respect to any ultimate  losses  realized upon the liquidation of defaulted
mortgage loans in the pool. As part of the sale transaction, Allied retained the
servicing  of the pool.  The Class A and Class B  certificates  have  sequential
rights to principal payments,  such that Class B certificates shall only receive
principal payments after all Class A certificates are retired.


                       This page is page 27 of 40 pages.

<PAGE>

     The  composition  of the  original  certificate  balances  along with their
respective June 30, 2002 balances are as follows:

                  Original   June 30, 2002
                Certificate    Certificate
                 Face Value    Face Value
               ------------------------------

 Class A         $73,199,448      $3,192,642
 Class B           3,249,067       3,196,478
 Class C                 100             100
               ------------------------------
    Total pool   $76,448,615      $6,389,220
               ==============================

     Since inception the pool has realized losses of $52,590,  which reduced the
original  face value of the Class B  certificate.  Management  believes that the
difference  between the carrying amount of the Class B certificate of $3,172,374
and its face value of $3,196,478  is  sufficient  to absorb any future  realized
losses in the pool.


Contractual Obligations and Commitments


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


<TABLE>
<CAPTION>
                                                             June 30, 2002
                                 ----------------------------------------------------------------------
                                   Less Than    One Through    Four Through   After Five
                                   One Year     Three Years     Five Years       Years       Total
                                 ----------------------------------------------------------------------
                                                            (in thousands)

<S>                                     <C>             <C>             <C>       <C>          <C>
 Trust preferred securities             $ ---           $ ---           $ ---     $10,000      $10,000
 Operating leases (premises)            1,362           1,467             429         273        3,531
                                 ----------------------------------------------------------------------
     Total long-term debt
         and operating leases          $1,362          $1,467            $429     $10,273      $13,531
                                 =========================================================


 Commitments to extend credit                                                                   75,004
 Standby letters of credit                                                                         373
                                                                                         --------------
     Total contractual obligations
         and commitments                                                                       $88,908
                                                                                         ==============

</TABLE>




                       This page is page 28 of 40 pages.

<PAGE>

Liquidity

     Redwood's  primary  source of liquidity is  dividends  from NBR.  Redwood's
primary uses of liquidity have  historically  been  associated with common stock
repurchases,  dividend payments made to common stock holders,  interest payments
relating to Redwood's trust preferred  securities and operating expenses.  It is
Redwood's  general  policy to  maintain  liquidity  at the  parent  level  which
management  believes  to be  consistent  with the  safety and  soundness  of the
Company as a whole.  As of June 30, 2002,  Redwood held  $198,000 in deposits at
NBR.

     Redwood's  current  cash  dividend to its common  shareholders  is $.20 per
common  share per  quarter.  Further,  Redwood is required  to make  semi-annual
payments of  interest  at 10.2% on  $10,000,000  of trust  preferred  securities
issued  in 2001.  Payment  of  these  obligations  is  ultimately  dependent  on
dividends from NBR to Redwood. Federal regulatory agencies have the authority to
prohibit  the payment of  dividends  by NBR to Redwood if a finding is made that
such  payment  would  constitute  an unsafe or unsound  practice or if NBR would
become undercapitalized as a result. If NBR is restricted from paying dividends,
Redwood  might  be  unable  to pay  dividends  to its  common  shareholders.  No
assurance  can be given as to the ability of NBR to pay  dividends to Redwood in
the  future.  The  approval  of the Office of the  Comptroller  of the  Currency
("OCC"),  is required for the payment of dividends if the total of all dividends
declared by a national  bank in any calendar  year would exceed the total of its
net  profits of that year  combined  with its  retained  net  profits of the two
preceding  years,  less any  required  transfers  to  surplus  or a fund for the
retirement of any preferred  stock. Due to this  requirement,  NBR obtained such
approval for its 2002 dividend plan from the OCC in January 2002.

     During the first six  months of 2002,  NBR  declared a dividend  payable to
Redwood  of  $3,400,000.  Management  believes  that as of June  30,  2002,  the
Company's liquidity position was adequate for the operations of Redwood and NBR.

     Although  each  entity  within the  consolidated  Company  manages  its own
liquidity,  the  Company's  consolidated  cash flow can be  divided  into  three
distinct  areas:  operating,  investing and financing.  For the six months ended
June 30, 2002, the Company received cash of $2,694,000 from operating activities
and $47,143,000 from financing activities,  while using $16,509,000 in investing
activities.


Capital Resources

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



                       This page is page 29 of 40 pages.

<PAGE>

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

     Under the risk-based capital standard,  assets reported on an institution's
balance  sheet  and  certain  off-balance  sheet  items  are  assigned  to  risk
categories, each of which is assigned a risk weight. This standard characterizes
an  institution's  capital as being  "Tier 1" capital  (defined  as  principally
comprising  shareholders' equity, trust preferred  securities,  for up to 25% of
total tier 1 capital,  and  noncumulative  preferred stock) and "Tier 2" capital
(defined  as   principally   comprising   the  allowance  for  loan  losses  and
subordinated debt).

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

     The following  table  summarizes  the  consolidated  capital ratios and the
capital ratios of the principal  subsidiaries  at June 30, 2002 and December 31,
2001.



<TABLE>
<CAPTION>
                                     June 30, 2002                        December 31, 2001
                         --------------------------------------   -----------------------------------
                                          Well-      Minimum                    Well-      Minimum
                             Actual    Capitalized  Requirement      Actual  Capitalized Requirement
                         --------------------------------------   -----------------------------------
<S>                            <C>          <C>           <C>          <C>        <C>         <C>
      Company
        Leverage                7.40%        5.00%        4.00%         7.46%      5.00%      4.00%
        Tier 1 risk-based       9.24         6.00         4.00          9.52       6.00       4.00
        Total risk-based       10.71        10.00         8.00         11.16      10.00       8.00

      NBR
        Leverage                7.47%        5.00%        4.00%         7.69%      5.00%      4.00%
        Tier 1 risk-based       9.31         6.00         4.00          9.82       6.00       4.00
        Total risk-based       10.57        10.00         8.00         11.08      10.00       8.00
</TABLE>


     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, 102,686 shares
have been repurchased,  as adjusted for the three-for-two  stock split announced
September 20, 2001. Under the repurchase program,  the Company plans to purchase
shares  from  time to time on the open  market  and/or in  privately  negotiated
transactions.  The first two repurchase  authorizations were funded in part with
proceeds received from a $10,000,000 pooled trust preferred  securities offering
which concluded on February 22, 2001.


                       This page is page 30 of 40 pages.

<PAGE>


Trust Preferred Securities

     On February 22, 2001,  Redwood  Statutory Trust I ("RSTI"),  a wholly owned
subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities
with a liquidation  amount of $1,000 per security.  The proceeds of the offering
were loaned to the Company in exchange for junior  subordinated  debentures with
terms similar to the Capital Securities.  The sole assets of RSTI are the junior
subordinated  debentures  of the Company  and  payments  thereunder.  The junior
subordinated   debentures  and  the  back-up  obligations,   in  the  aggregate,
constitute a full and unconditional  guarantee by the Company of the obligations
of RSTI under the Capital  Securities.  Distributions on the Capital  Securities
are  payable  semi-annually  at the  annual  rate of 10.2% and are  included  in
interest expense in the consolidated financial statements.  These securities are
considered Tier 1 capital (with certain  limitations  applicable)  under current
regulatory guidelines. As of June 30, 2002, the outstanding principal balance of
the Capital  Securities was  $10,000,000.  The principal  balance of the Capital
Securities   constitutes  the  trust  preferred   securities  in  the  financial
statements.

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

Certain Important Considerations for Investors

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



                       This page is page 31 of 40 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 April 30,
2002 (the most recent period available from Visa),  the Company's  overall fraud
ratio  was less than the Visa  requirement.  Other  Visa  changes  included  the
requirement that total  processing  volume in certain  high-risk  categories (as
defined by Visa) be less than 20% of total processing  volume. At June 30, 2002,
the Company's total Visa transactions within these certain high-risk  categories
were  3.33% 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 June
30, 2002 the Company's  weekly Visa volume was 50.39% of the Company's  tangible
equity  capital,  and  aggregate  charge-backs  for the previous six months were
5.33% of tangible equity capital and the aggregate  charge-backs for the quarter
were .39% of the interchange count and .45% of the interchange amount.  Merchant
credit card participants,  such as the Company,  must comply with these new Visa
rules by filing a compliance plan with Visa. At June 30, 2002, the Company is in
compliance with all rule changes that went into effect on March 31, 2001,  based
on Visa's  acceptance of the Company's  compliance  plan.  Should the Company be
unable to comply with these rule changes, Visa will require collateral of one to
four times the shortfall.

     Concentration of Lending Activities. Concentration of the Company's lending
activities in the real estate sector,  including  construction loans, could have
the effect of  intensifying  the impact on the Company of adverse changes in the
real  estate  market  in  the  Company's   lending  areas.  At  June  30,  2002,
approximately  77% of the Company's loans were secured by real estate,  of which
51% 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 32 of 40 pages.

<PAGE>

     Events of September 11. The terrorist attacks on the World Trade Center and
the  Pentagon on  September  11, 2001,  have  resulted in increased  uncertainty
regarding the economic outlook. Past experience suggests that shocks to American
society of far less severity  have resulted in a temporary  loss of consumer and
business  confidence and a reduction in the rate of economic  growth.  It is not
possible at this time to project the ultimate  economic  impact of these events.
However,  any  deterioration in either the U.S. or the California  economy could
adversely affect the Company's financial condition and results of operations.

     California Energy Crisis. Due to problems  associated with the deregulation
of the electrical power industry in California,  California  utilities and other
energy industry  participants have experienced  difficulties with the supply and
price of  electricity  and natural gas. As a consequence  of this  situation,  a
major California public utility in the gas and power business became the subject
of a voluntary bankruptcy proceeding.  The California energy situation continues
to be fluid and  subject  to many  uncertainties  and a number of  lawsuits  and
regulatory  proceedings  have been commenced  concerning  various aspects of the
current  energy  situation.  Although the  situation  has  stabilized  recently,
customers of the  utilities  were faced at times in 2001 with  increased gas and
electric  prices,  power shortages and, in some cases,  rolling  blackouts.  The
long-term impact of the energy crisis in California on the Company's markets and
business cannot be predicted,  but could result in an economic  slow-down.  This
could  have an  adverse  effect on the  demand  for new  loans,  the  ability of
borrowers  to repay  outstanding  loans,  the  value of real  estate  and  other
collateral securing loans and, as a result, on the Company's financial condition
and results or operations.

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

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



                       This page is page 33 of 40 pages.

<PAGE>

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

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

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

     As of June 30, 2002,  other than  previously  disclosed on page 27, we have
not created  any special  purpose  entities  to  securitize  assets or to obtain
off-balance  sheet funding.  Although we have sold a number of loans in the past
two years, those loans have been sold to third parties without recourse, subject
to customary representations and warranties.

     Impact of New  Accounting  Standards.  The Financial  Accounting  Standards
Board (FASB) recently issued Statement of Financial  Accounting Standards (SFAS)
No. 145 and No. 146. SFAS No. 145 applies for years beginning after May 14, 2002
and may be  adopted  sooner.  SFAS No. 145  covers  extinguishments  of debt and
leases, and includes some minor technical corrections. Under previous accounting
guidance,  gains or losses from  extinguishments  of debt were always treated as
extraordinary  items.  Under  SFAS No.  145 they will no  longer  be  considered
extraordinary,  except under very limited conditions.  Upon adoption of SFAS No.
145,  any  prior  gains  and  losses  from   extinguishments  of  debt  must  be
reclassified  as  ordinary  gains and  losses.  Under SFAS No. 145, if a capital
lease is modified to become an operating  lease,  it will be accounted  for as a
sale-leaseback,  by following the accounting guidance of SFAS No. 98, instead of
being  accounted for as a new lease.  SFAS No. 146 covers  accounting  for costs
associated  with  exit  or  long-lived  asset  disposal   activities,   such  as
restructurings,  consolidation or closing of facilities, lease termination costs
or employee relocation or severance costs. SFAS No. 146 replaces Emerging Issues
Task Force (EITF) 94-3, and is to be applied  prospectively  to exit or disposal
activities  initiated  after  December 31, 2002,  and may be adopted  sooner.  A
company may not restate its previously issued financial statements. SFAS No. 146
requires exit or long-lived  asset disposal costs to be recognized as an

                       This page is page 34 of 40 pages.

<PAGE>

expense when the liability is incurred and can be measured at fair value, rather
than at the date of making a commitment to an exit or disposal plan.  Management
does not expect the effects of the future adoptions of SFAS No. 145 and SFAS No.
146 to be material to the Company's  consolidated  financial position or results
of operations.



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

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



Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     As a financial institution,  the Company's primary component of market risk
is interest  rate  volatility.  Fluctuation  in interest  rates will  ultimately
impact both the level of income and expense  recorded on a large  portion of the
Bank's  assets and  liabilities,  and the market value of all  interest  earning
assets and interest bearing liabilities,  other than those which possess a short
term  to  maturity.  Since  virtually  all of  the  Company's  interest  bearing
liabilities and all of the Company's  interest earning assets are located at the
Bank  (or in  its  wholly-owned  subsidiary),  virtually  all  of the  Company's
interest rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management  procedures are performed at the Bank level. Based
upon the nature of its operations,  the Bank is not subject to foreign  currency
exchange  or  commodity  price risk.  The Bank's  real  estate  loan  portfolio,
concentrated   primarily  within  Northern  California,   is  subject  to  risks
associated with the local economy. The Company does not own any trading assets.

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




                       This page is page 35 of 40 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 June 30, 2002, the  distribution of
repricing  opportunities for the Company's  earning assets and  interest-bearing
liabilities,  the interest rate  sensitivity  gap, the cumulative  interest rate
sensitivity gap, the interest rate  sensitivity gap ratio (i.e.,  earning assets
divided  by  interest-bearing  liabilities)  and the  cumulative  interest  rate
sensitivity gap ratio.



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

                                                                (Dollars in thousands)
<S>                                       <C>           <C>        <C>        <C>          <C>         <C>
Interest earning assets:
Federal funds sold                         $34,863      $   ---    $   ---    $    ---       $ ---     $34,863
Investment securities and other              2,892        6,857     11,197      39,943      14,664      75,553
Mortgage loans held for sale                   313          ---        ---         ---         ---         313
Loans                                      108,477       51,954     40,758     124,561      32,112     357,862
                                        -----------------------------------------------------------------------
   Total interest-earning assets           146,545       58,811     51,955     164,504      46,775     468,591
                                        -----------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts      120,020          ---        ---         ---         ---     120,020
Time deposits                              101,410       56,085     54,101       6,957         ---     218,553
Trust preferred securities                     ---          ---        ---         ---      10,000      10,000
Short-term borrowings                        5,823          ---        ---         ---         ---       5,823
                                        -----------------------------------------------------------------------
  Total interest-bearing liabilities       227,253       56,085     54,101       6,957      10,000     354,396
                                        -----------------------------------------------------------------------

Interest rate sensitivity gap             ($80,708)      $2,726    ($2,146)   $157,548     $36,775
                                        ===========================================================
Cumulative interest rate sensitivity gap   (80,708)     (77,982)   (80,128)     77,420     114,196

Interest rate sensitivity gap ratio            0.64       1.05         0.96     23.65         4.68
Cumulative interest rate sensitivity
  gap ratio                                    0.64       0.72         0.76      1.22         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 36 of 40 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  interest rate  environment,  the Company's net interest margin would
tend to increase.  The Company has experienced greater mortgage lending activity
through  mortgage  refinancings  and  financing  new  home  purchases  as  rates
declined,  and may  increase  its net  interest  margins in an  increasing  rate
environment  if more  traditional  commercial  bank  lending  becomes  a  higher
percentage  of the  overall  earning  assets  mix.  There  can be no  assurance,
however, that under such circumstances the Company will experience the described
relationships to declining or increasing interest rates.

     On a quarterly basis, NBR management  prepares an analysis of interest rate
risk exposure.  Such analysis  calculates the change in net interest  income and
the  theoretical  market  value of the Bank's  equity  given a change in general
interest rates of 200 basis points up and 200 basis points down. All changes are
measured in dollars and are  compared to projected  net interest  income and the
current  theoretical market value of the Bank's equity.  This theoretical market
value of the Bank's equity is calculated by  discounting  cash flows  associated
with the  Company's  assets  and  liabilities.  The  following  is a summary  of
interest  rate risk  exposure as of June 30, 2002 as measured on a net  interest
income  basis and a market  value of  equity  basis,  given a change in  general
interest rates of up to 200 basis points up and 200 basis points down.


<TABLE>
<CAPTION>
         June 30, 2002
         -------------
                                             Change in Annual                         Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity
         -----------------------            -------------------                 ----------------------

<S>            <C>                             <C>                                  <C>
               +200                               $616,000                          ($8,050,000)
               +100                               $390,000                          ($3,771,000)
               -100                              ($734,000)                          $1,157,000
               -200                            ($2,224,000)                          $1,709,000
</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 37 of 40 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 4. Submission of Matters to a Vote of Security Holders

     a)   The Company held its Annual Meeting of Shareholders on May 21, 2002.

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

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

                  Nominee                     For                      Withheld
                  -------                     ---                      --------

          John H. Brenengen                 2,913,361                    5,498
          Dana R. Johnson                   2,916,375                    2,484
          Patrick W. Kilkenny               2,867,594                   51,265
          Gregory J. Smith                  2,916,116                    2,743
          William B. Stevenson              2,916,239                    2,620

          The vote for ratifying the appointment of Crowe Chizek and Company LLP
          as the Company's independent auditors was as follows:

                  For                       2,909,941
                  Against                       4,781
                  Abstain                       4,137
                  Broker Non-Vote             566,898


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

     a)   Exhibits.

          None




                       This page is page 38 of 40 pages.

<PAGE>


     b)   Reports on Form 8-K

          1.   Form 8-K filing  dated April 18, 2002  announcing  first  quarter
               2002 results.

          2.   Form 8-K filing  dated April 5, 2002  announcing  declaration  of
               quarterly dividend.


















                       This page is page 39 of 40 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.





                             REDWOOD EMPIRE BANCORP
                                  (Registrant)




Date:  8/8/02               By:  /s/ James E. Beckwith
       ------                    ---------------------------------
                                 James E. Beckwith
                                 Executive Vice President,
                                 Chief Financial Officer and
                                 Chief Operating Officer
                                 (Principal Financial Officer and
                                 Duly Authorized Officer)






                       This page is page 40 of 40 pages.