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

                                    FORM 10-Q

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

                      For the quarterly period ended March 31, 2004

                                       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 __

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

At May 1, 2004,  there were 4,939,045  shares of the  Registrant's  common stock
outstanding.


                        This page is page 1 of 41 pages.

<PAGE>





<TABLE>
<CAPTION>
                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index



                                                                                              Page
PART I.  FINANCIAL INFORMATION

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

                  Consolidated Statements of Operations
                  Three Months Ended March 31, 2004 and 2003....................................3

                  Consolidated Balance Sheets
                  March 31, 2004 and December 31, 2003..........................................5

                  Consolidated Statements of Cash Flows
                  Three Months Ended March 31, 2004 and 2003....................................6

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


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

       Item 3.    Quantitative and Qualitative Disclosures
                  About Market Risk............................................................36

       Item 4.    Controls and Procedures......................................................38


PART II. OTHER INFORMATION

       Item 6.    Exhibits and Reports on Form 8-K.............................................39


SIGNATURES.....................................................................................40

EXHIBIT INDEX..................................................................................41
</TABLE>

                          This is page 2 of 41 pages.
<PAGE>




PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements


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

                                                                          Three Months Ended
                                                                               March 31,
                                                                              2004      2003
                                                                         ----------------------
<S>                                                                           <C>       <C>
Interest income:
  Interest and fees on loans                                                  $6,414    $6,406
  Interest on investment securities                                              726     1,123
  Interest on federal funds sold                                                  28        13
                                                                         ----------------------
Total interest income                                                          7,168     7,542

Interest expense:
  Interest on deposits                                                         1,202     1,744
  Interest on other borrowings                                                   439       268
                                                                         ----------------------
Total interest expense                                                         1,641     2,012
                                                                         ----------------------

Net interest income                                                            5,527     5,530
Provision for loan losses                                                        ---       ---
                                                                         ----------------------

Net interest income after provision for loan losses                            5,527     5,530

Noninterest income:
  Service charges on deposit accounts                                            246       268
  Merchant draft processing, net                                               1,161     1,129
  Loan servicing income                                                           27        35
  Other income                                                                   274       197
                                                                         ----------------------
Total noninterest  income                                                      1,708     1,629

Noninterest expense:
  Salaries and employee benefits                                               2,733     2,284
  Occupancy and equipment expense                                                535       614
  Other                                                                        1,154     1,188
                                                                         ----------------------
Total noninterest expense                                                      4,422     4,086
                                                                         ----------------------

Income before income taxes                                                     2,813     3,073
Provision for income taxes                                                     1,125     1,057
                                                                         ----------------------


Net income                                                                    $1,688    $2,016
                                                                         ======================

Total comprehensive income                                                    $1,777    $1,908
                                                                         ======================

                                   (Continued)
</TABLE>







                        This page is page 3 of 41 pages.
<PAGE>


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


                                                                     Three Months Ended
                                                                          March 31,
                                                                      2004         2003
                                                                 ----------------------------

<S>                                                                   <C>          <C>
Basic earnings per common share:
  Net income                                                               $.34         $.40
  Weighted average shares - basic                                     4,949,000    5,077,500

Diluted earnings per common share:
  Net income                                                               $.33         $.38
  Weighted average shares - diluted                                   5,107,000    5,260,500

See Notes to Consolidated Financial Statements.
</TABLE>


                                   (Concluded)












                        This page is page 4 of 41 pages.
<PAGE>




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

                                                                         March 31,      December 31,
                                                                           2004             2003
                                                                      ---------------------------------
                                                                        (unaudited)
<S>                                                                         <C>             <C>
Assets:
Cash and due from banks                                                      $20,767         $19,259
Federal funds sold                                                            11,800           8,600
                                                                      ---------------------------------
  Cash and cash equivalents                                                   32,567          27,859
Investment securities:
  Held to maturity (fair value of $18,604 and $18,041)                        17,931          17,566
  Available for sale, at fair value (amortized cost of $40,738
    and $56,921)                                                              42,151          58,229
                                                                      ---------------------------------
    Total investment securities                                               60,082          75,795

Mortgage loans held for sale                                                     130             192

Loans:
    Residential real estate mortgage                                         106,275         108,851
    Commercial real estate mortgage                                          185,257         186,185
    Commercial                                                                59,389          55,473
    Real estate construction                                                  48,446          51,154
    Installment and other                                                     11,994          13,025
    Less net deferred loan fees                                                 (116)           (167)
                                                                      ---------------------------------
        Total portfolio loans                                                411,245         414,521
    Less allowance for loan losses                                            (7,177)         (7,162)
                                                                      ---------------------------------
       Net loans                                                            404,068         407,359

Premises and equipment, net                                                    2,354           2,489
Cash surrender value of life insurance                                         7,909           3,782
Other assets and interest receivable                                           9,279          11,424
                                                                      ---------------------------------
     Total assets                                                           $516,389        $528,900
                                                                      =================================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                       $103,697        $107,359
  Interest-bearing transaction accounts                                      163,303         154,640
  Time deposits one hundred thousand and over                                 72,784          73,262
  Other time deposits                                                        113,923         119,521
                                                                      ---------------------------------
    Total deposits                                                           453,707         454,782

Short-term borrowings                                                          3,915          16,265
Subordinated debentures                                                       20,000          20,000
Other liabilities and interest payable                                        10,788          10,173
                                                                      ---------------------------------
     Total liabilities                                                       488,410         501,220

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: 4,939,045 and 4,950,984 shares                  10,520          10,577
  Retained earnings                                                           16,611          16,344
  Accumulated other comprehensive income, net of tax                             848             759
                                                                      ---------------------------------
     Total shareholders' equity                                               27,979          27,680
                                                                      ---------------------------------
     Total liabilities and shareholders' equity                             $516,389        $528,900
                                                                      =================================

See Notes to Consolidated Financial Statements.
</TABLE>

                        This page is page 5 of 41 pages.
<PAGE>







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

                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                   2004           2003
                                                                              ------------------------------
<S>                                                                                <C>            <C>
Cash flows from operating activities:


  Net income                                                                        $1,688         $2,016

Adjustments to reconcile net income to net cash
  from operating activities:
  Depreciation and amortization, net                                                    94            122
  Loans originated for sale                                                           (221)        (1,296)
  Proceeds from sale of loans held for sale                                            277            971
  Net realized loss on sale of loans held for sale                                       6              3
  Change in other assets and interest receivable                                      (101)           274
  Change in other liabilities and interest payable                                     615          6,003
                                                                              ------------------------------
  Total adjustments                                                                    670          6,077
                                                                              ------------------------------

  Net cash from operating activities                                                 2,358          8,093

Cash flows from investing activities:
  Net change in loans                                                                3,410        (32,319)
  Purchases of investment securities available for sale                                ---         (3,081)
  Purchases of investment securities held to maturity                                 (577)           (21)
  Maturities of investment securities available for sale                            13,516          9,057
  Maturities or calls of investment securities held to maturity                      2,847          1,112
  Purchase of company owned life insurance                                          (1,900)           ---
  Purchases of premises and equipment, net                                             (44)          (193)
                                                                              ------------------------------
    Net cash from investing activities                                              17,252        (25,445)

Cash flows from financing activities:
  Net change in noninterest bearing demand deposits                                 (3,662)         6,018
  Net change in interest bearing transaction accounts                                8,663         32,059
  Net change in time deposits                                                       (6,076)        (8,809)
  Net change in short-term borrowings                                              (12,350)        (7,735)
  Repurchases of common stock                                                         (474)        (1,322)
  Issuance of common stock                                                              38            162
  Cash dividends paid                                                               (1,041)          (851)
                                                                              ------------------------------
    Net cash from financing activities                                             (14,902)        19,522
                                                                              ------------------------------

Net change in cash and cash equivalents                                              4,708          2,170
Cash and cash equivalents at beginning of period                                    27,859         39,337
                                                                              ------------------------------

Cash and cash equivalents at end of period                                         $32,567        $41,507
                                                                              ==============================

                                                (Continued)
</TABLE>




                        This page is page 6 of 41 pages.
<PAGE>



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

                                                                                   Three Months Ended
                                                                                       March 31,
                                                                                      2004     2003
                                                                                 ---------------------

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

Cash paid during the period for:
  Interest expense                                                                   $1,782    $1,968
  Income taxes                                                                        1,247       650

Noncash transfers:
  Transfer of other assets to company owned life insurance                            2,200       ---



See Notes to Consolidated Financial Statements.


                                             (Concluded)
</TABLE>








                        This page is page 7 of 41 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 2003 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, Redwood Statutory Trust I ("RSTI") and Redwood Statutory
Trust II ("RSTII"). In 2002, National Bank of the Redwoods (and with its
subsidiary, "NBR") formed NBR Real Estate Investment Trust, a Maryland Real
Estate Investment Trust. The entity was formed to provide an additional vehicle
to raise capital and to better organize and market the origination of real
estate secured lending. 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 for the three months
ended March 31, 2004 and cash flows for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.

         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 July 16, 2003, the Company announced a three-for-two stock split of
its outstanding shares of common stock payable on August 13, 2003 to common
shareholders of record on July 28, 2003. Earnings per share information for all
periods presented give effect to the stock split.


                        This page is page 8 of 41 pages.
<PAGE>



3.       Stock-Based Compensation

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


<TABLE>
<CAPTION>
                                                      Three months ended
                                              March 31, 2004     March 31, 2003
                                            --------------------------------------
                                                   (dollars in thousands,
                                                   except per share data)

<S>                                                     <C>                <C>
 Net income as reported                                 $1,688             $2,016
 Deduct: Stock-based compensation expense
   determined under fair value based method                (28)               (19)
                                            --------------------------------------
 Pro forma net income                                   $1,660             $1,997
                                            ======================================

 Basic earnings per share as reported                     $.34               $.40
 Pro forma basic earnings per share                        .34                .39

 Diluted earnings per share as reported                   $.33               $.38
 Pro forma diluted earnings per share                      .33                .38
</TABLE>


         Pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. There were no options
granted during the three-month periods ended March 31, 2004 and 2003.


                                                 Three months ended
                                         March 31, 2004     March 31, 2003
                                       --------------------------------------
 Risk-free interest rate                            3.53%              3.82%
 Expected option life in years                          7                 10
 Expected stock price volatility                   31.54%             32.44%
 Dividend yield                                      3.5%               2.8%




                        This page is page 9 of 41 pages.
<PAGE>


         The following table reflects the Company's earnings per share data.


<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                        March 31,
                                                           2004                           2003
                                                ----------------------------   ----------------------------
                                                    Basic        Diluted            Basic       Diluted
                                                ----------------------------   ----------------------------
                                                          (in thousands, except per share data)
<S>                                                 <C>           <C>               <C>          <C>
Earnings per common share:

 Net income                                            $1,688        $1,688            $2,016       $2,016
 Earnings per share                                       .34           .33               .40          .38

 Weighted average common shares outstanding         4,949,000     5,107,000(1)      5,078,000    5,261,000(1)
</TABLE>


1)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 158,000 and 183,000 for the three months ended
     March 31, 2004 and March 31, 2003, as adjusted for the three-for-two stock
     split announced July 16, 2003.



4.       Comprehensive Income


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



                                                  Three Months Ended
                                                       March 31,
                                                    2004        2003
                                                ------------------------
                                                    (in thousands)

Net income as reported                             $1,688      $2,016
Other comprehensive income/(loss) (net of tax):
  Change in unrealized holding gain
     on available for sale securities                  89        (108)
                                                ------------------------
Total comprehensive income                         $1,777      $1,908
                                                ========================

5.       Subsequent Events - Common Stock Cash Dividend

         On April 2, 2004, the Board of Directors declared a quarterly cash
dividend of 21 cents per share on the Company's Common Stock. The dividend was
paid on April 30, 2004 to shareholders of record on April 15, 2004.


6.       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



                       This page is page 10 of 41 pages.
<PAGE>



card settlement services for approximately 33,000 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 March 31, 2004
                                                           -------------------------------------------------
                                                                                 Merchant
                                                                Community          Card          Total
                                                                 Banking         Services       Company
                                                           -------------------------------------------------
                                                                            (in thousands)

<S>                                                             <C>                <C>           <C>
Total interest income                                             $7,168           $    ---        $7,168
Total interest expense                                             1,639                  2         1,641
Interest income/(expense) allocation                                (109)               109           ---
                                                           -------------------------------------------------
Net interest income                                                5,420                107         5,527
Provision for loan losses                                            ---                ---           ---
Total other operating income                                         547              1,161         1,708
Total other operating expense                                      3,715                707         4,422
                                                           -------------------------------------------------
Income before income taxes                                         2,252                561         2,813
Provision for income taxes                                           901                224         1,125
                                                           -------------------------------------------------
Net income                                                        $1,351               $337        $1,688
                                                           =================================================
Total Average Assets                                            $499,780            $20,227      $520,007
                                                           =================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                 For the quarter ended March 31, 2003
                                                          ---------------------------------------------------
                                                                                 Merchant
                                                               Community           Card           Total
                                                                Banking          Services        Company
                                                          ---------------------------------------------------
                                                                            (in thousands)

<S>                                                            <C>                 <C>            <C>
Total interest income                                            $7,542            $    ---         $7,542
Total interest expense                                            2,007                   5          2,012
Interest income/(expense) allocation                               (170)                170            ---
                                                          ---------------------------------------------------
Net interest income                                               5,365                 165          5,530
Provision for loan losses                                           ---                 ---            ---
Total other operating income                                        500               1,129          1,629
Total other operating expense                                     3,395                 691          4,086
                                                          ---------------------------------------------------
Income before income taxes                                        2,470                 603          3,073
Provision for income taxes                                          850                 207          1,057
                                                          ---------------------------------------------------
Net income                                                       $1,620                $396         $2,016
                                                          ===================================================
Total Average Assets                                           $484,888             $25,723       $510,611
                                                          ===================================================
</TABLE>


                       This page is page 11 of 41 pages.
<PAGE>


7.         Common Stock Repurchases

         In August 2001, the Company announced authorizations to repurchase up
to 533,250 common shares, as adjusted for the three-for-two stock splits
declared September 20, 2001 and July 15, 2003. In August 2003, the Company
announced an authorization to repurchase an additional 496,500 shares, for a
total authorization of 1,029,750. To date, 557,987 shares of the Company's
common stock have been repurchased. In the quarter ended March 31, 2004, the
Company purchased 16,939 shares of the Company's common stock under the program
at an average price per share of $28.00. Under the repurchase program, the
Company plans to purchase shares from time to time on the open market and/or in
privately negotiated transactions.

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 Exchange Act of 1934,
as amended. These forward-looking statements (which involve, among other things,
the Company's plans, beliefs and goals, refer to estimates, 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 banking or
         other laws and regulations or governmental fiscal or monetary policies.

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

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

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

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

    o    Dividend restrictions.

    o    Regulatory discretion.


                       This page is page 12 of 41 pages.
<PAGE>

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

    o    Asset/liability repricing risks and liquidity risks.

    o    Changes in the securities markets.

    o    A decline in the health of the Northern California economy, including
         the decline in the technology sector and any negative effect of the
         recent budgetary crisis and continuing fiscal difficulties of the State
         of California.

    o    Certain operational risks involving data processing systems or fraud.

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

         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
update these forward-looking statements to reflect facts, circumstances,
assumptions or events that occur after the date the forward-looking statements
are made or to 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, 2003 and
"Certain Important Considerations for Investors" herein.

Executive Summary

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

         The following analysis of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements of Redwood Empire Bancorp and related notes thereto included in this
Report. The following sections discuss significant changes and trends in
financial condition, capital resources and liquidity of the Company from
December 31, 2003 to March 31, 2004. Significant changes and trends in the
Company's results of operations for the three months ended March 31, 2004,
compared to the same period in 2003, are also discussed.



                       This page is page 13 of 41 pages.
<PAGE>

         The Company reported net income of $1,688,000 ($.33 per diluted share)
for the three months ended March 31, 2004 as compared to $2,016,000 ($.38 per
diluted share) for the same period in 2003, a decrease of $328,000 or 16% in net
income. This decrease is primarily due to the combined impact of the additional
interest expense incurred with the July 2003 completion of the Company's second
$10,000,000 trust preferred securities financing, and the increase of 6% in the
Company's effective tax rate and higher operating expense related to the
implementation of strategies to position the Company for growth.

         On July 16, 2003, the Company announced a three-for-two stock split of
its outstanding shares of common stock payable on August 13, 2003 to common
shareholders of record on July 28, 2003. Earnings per share information for all
periods presented give effect to the stock split.

Significant Accounting Policies and Significant Estimates

         Note B to the Consolidated Financial Statements in Redwood Empire
Bancorp's 2003 Annual Report on Form 10-K contains a summary of the Company's
significant accounting policies. Certain of the these policies as well as
estimates made by management are considered to be important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments and estimates, some of which may
relate to matters that are inherently uncertain.

Results of Operations

         Net Interest Income

         Interest income decreased from $7,542,000 in the first quarter of 2003
to $7,168,000 in the first quarter of 2004, which represents a decrease of
$374,000 or 5%. While the Company experienced modest average earning asset
growth during the first quarter of 2004 as compared to the first quarter of
2003, the continued low interest rate environment had a negative impact on
interest income. Average earning assets increased slightly by $3,379,000 or .7%
from $485,170,000 for the quarter ended March 31, 2003 to $488,549,000 for the
quarter ended March 31, 2004. The largest component of the increase in average
earning assets was growth in the Company's loan portfolio, which was partially
offset by a decline in the investment securities portfolio. Average portfolio
loans increased $27,893,000 or 7% during the first quarter of 2004, when
compared to the same quarter in 2003. The Company continues to focus on growth
in the overall loan portfolio, and in particular the commercial real estate
portfolio. Average commercial real estate loans increased $24,834,000 or 16%,
average residential real estate loans increased $10,034,000 or 10% and average
construction loans increased $5,267,000 or 12%, offset by a decline of
$9,014,000, or 15% in average commercial loans for the three months ended March
31, 2004 as compared to the three months ended March 31, 2003. Average
investment securities declined by $32,925,000 or 33% to $66,839,000 for the
quarter ended March 31, 2004 when compared to $99,764,000 for the same quarter
in 2003. The decline was due to substantial paydown activity within the
mortgage-backed securities portfolio. Proceeds from such paydown activity
facilitated the funding of loan growth.

         Interest expense for the first quarter of 2004 was $1,641,000, down
$371,000, or 18%



                       This page is page 14 of 41 pages.
<PAGE>

from $2,012,000 in the first quarter of 2003. With the continued low interest
rate environment discussed above, the Company has been successful in reducing
costs associated with interest bearing deposits. For the quarter ended March 31,
2004 the cost of average interest bearing deposits was 1.39%, down from 1.99%
for the quarter ended March 31, 2003.

         Net interest income was $5,527,000 for the first quarter of 2004, a
decrease of $3,000, or .05% percent when compared to $5,530,000 for the first
quarter of 2003. The net interest margin was 4.55% for the first quarter of 2004
as compared to 4.62% for the same quarter in 2003. The Company's net interest
margin has been negatively impacted during 2004 due to the additional interest
expense incurred with the completion of the Company's second $10,000,000 trust
preferred securities financing in July 2003. Such financing, which has been used
for stock repurchases and other corporate matters, bears an annual interest rate
of 6.35% and at March 31, 2004, had a negative impact on net interest margin of
14 basis points. Total interest expense for both trust preferred securities
financing was $414,000 during the first quarter of 2004 as compared to $236,000
in interest expense for the first trust preferred securities financing during
the first quarter of 2003.

         Yield on earning assets decreased to 5.90% for the three months ended
March 31, 2004 from 6.30% for the same period one year ago. The decrease in the
yield on earning assets for the three-month period during 2004 is due to a
decline in the general interest rate environment. Yield paid on interest bearing
liabilities decreased to 1.75% for the three-month period ended March 31, 2004
from 2.19% for the same period one year ago. The decrease in interest rates paid
on interest bearing liabilities occurred as the Company lowered its deposit
product pricing in response to lower short-term rates quoted in the national
markets. The largest decrease was experienced in time deposits. For the three
months ended March 31, 2004, such expense decreased $626,000 or 43% as compared
to the same period one year ago.






                       This page is page 15 of 41 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
                                                   March 31, 2004                        March 31, 2003
                                        -------------------------------------  -----------------------------------

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

<S>                                        <C>         <C>            <C>         <C>        <C>            <C>
Residential real estate mortgage loans     $108,190    $1,562         5.81%        $98,156   $1,621         6.70%
Commercial real estate loans                184,749     3,085         6.72         159,915    2,855         7.24
Commercial loans                             53,119       745         5.64          62,133      956         6.24
Real estate construction loans               49,860       870         7.02          44,593      807         7.34
Installment and other                        13,094       151         4.64          16,707      163         3.96
Deferred loan fees                             (159)      ---          ---            (544)     ---          ---
                                        -----------------------                ----------------------
  Portfolio loans                           408,853     6,413         6.31         380,960    6,402         6.82

Mortgage loans held for sale                     54         1         7.45             220        4         7.37
Investments                                  66,839       726         4.37          99,764    1,123         4.57
Federal funds sold                           12,803        28         0.88           4,226       13         1.25
                                        -----------------------                ----------------------
  Total earning assets (1)                 $488,549     7,168         5.90        $485,170    7,542         6.30
                                        =============                          ============

Interest bearing transaction accounts      $157,509       388         0.99        $137,760      304         0.89
Time deposits                               190,018       814         1.72         217,091    1,440         2.69
Other borrowings                             28,761       439         6.14          17,606      268         6.17
                                        -----------------------                ----------------------

   Total interest-bearing liabilities      $376,288     1,641         1.75%       $372,457    2,012         2.19%
                                        =============                          ============

                                                    -----------                           -----------
Net interest income                                    $5,527                                $5,530
                                                    ===========                           ===========
Net interest income to
  earning assets                                                      4.55%                                 4.62%
</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 16 of 41 pages.
<PAGE>


         The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-bearing
liability, and the amount of change attributable to volume and rate changes for
the three months ended March 31, 2004 and 2003. Changes not solely attributable
to rate or volume have been allocated proportionately to the change due to
volume and the change due to rate.


<TABLE>
<CAPTION>
                                                             Three months ended
                                                        March 31, 2004 compared to the
                                                      three months ended March 31, 2003
                                                  ------------------------------------------
                                                      Volume         Rate         Total
                                                  ------------------------------------------
                                                                (in thousands)
<S>                                                      <C>           <C>           <C>
Increase/(decrease) in interest income:
  Residential real estate mortgage loans                 $156          ($215)        ($59)
  Commercial real estate loans                            423           (193)         230
  Commercial loans                                       (131)           (80)        (211)
  Real estate construction loans                           93            (30)          63
  Installment and other                                   (39)            27          (12)
  Mortgage loans held for sale                             (3)           ---           (3)
  Investments                                            (359)           (38)        (397)
  Federal funds sold                                       20             (5)          15
                                                  ------------------------------------------
Total increase/(decrease)                                 160           (534)        (374)
                                                  ------------------------------------------

Increase/(decrease) in interest expense:
  Interest-bearing transaction accounts                    46             38           84
  Time deposits                                          (163)          (463)        (626)
  Other borrowings                                        170              1          171
                                                  ------------------------------------------
Total increase/(decrease)                                  53           (424)        (371)

Increase/(decrease) in net interest income               $107          ($110)         ($3)
                                                  ==========================================
</TABLE>


         Provision for Loan Losses

         Due to the absence of significant net loan charge-offs, little change
in loan portfolio asset quality and the balance in the allowance for loan
losses, there was no provision for loan losses for the three months ended March
31, 2004 and 2003. For further information, see "Allowance for Loan Losses" and
"Nonperforming Assets" in this section.





                       This page is page 17 of 41 pages.
<PAGE>


         Noninterest Income and Expense

                  Noninterest Income

         The following tables set forth the components of the Company's
noninterest income for the three months ended March 31, 2004, as compared to the
same period in 2003.



<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                     March 31,                $         %
                                                            ---------------------------
                                                                2004          2003         Change     Change
                                                            -------------  ------------  ----------------------
                                                              (dollars in thousands)


<S>                                                             <C>           <C>             <C>        <C>
Service charges on deposit accounts                               $246          $268          ($22)       (8)%
Merchant draft processing, net                                   1,161         1,129            32         3
Loan servicing income                                               27            35            (8)      (23)
Other income                                                       274           197            77        39
                                                            -------------  ------------  -----------
Total noninterest income                                        $1,708        $1,629           $79         5 %
                                                            =============  ============  ===========
</TABLE>


         Noninterest income increased $79,000, or 5%, to $1,708,000 for the
three months ended March 31, 2004 when compared to $1,629,000 for the same
period in 2003. During this period, such increase was due to an increase of
$32,000 in merchant card net revenue and an increase in other income of $77,000,
partially offset by a $22,000 decrease in service charges on deposit accounts
and a decrease in loan servicing income of $8,000. The increase in merchant card
net revenue during the first quarter of 2004 as compared to the same period in
2003 is due to an increase in processing volume. The increase in other income
for the first quarter of 2004 as compared to the same period in 2003 is due to
an increase in income associated with the Company's recent successful
implementation of a program to sell investment products. The decrease in loan
servicing income is due to a decline in loans serviced by the Company. The
decrease in service charges on deposit accounts is due to a decline in the fees
charged customers for certain products and services.

                  Noninterest Expense

         The following tables set forth the components of the Company's
noninterest expense during the three months ended March 31, 2004, as compared to
the same period in 2003.


<TABLE>
<CAPTION>
                                            Three Months Ended
                                                March 31,                 $             %
                                       ----------------------------
                                           2004          2003          Change         Change
                                       ------------- --------------  ---------------------------
                                         (dollars in thousands)

<S>                                          <C>            <C>         <C>             <C>
Salaries and employee benefits               $2,733         $2,284      $449             20 %
Occupancy and equipment expense                 535            614       (79)           (13)
Other                                         1,154          1,188       (34)            (3)
                                       -------------  -------------  ---------
Total noninterest expense                    $4,422         $4,086      $336              8 %
                                       =============  =============  =========
</TABLE>



                          This is page 18 of 41 pages.
<PAGE>

         Noninterest expense increased by $336,000, or 8%, to $4,422,000 during
the first quarter of 2004 as compared to $4,086,000 for the first quarter of
2003. The increase in noninterest expense for the three-month period ended March
31, 2004, as compared to the same period ended March 31, 2003, is attributable
to an increase in salaries and employee benefits of $449,000, which was
partially offset by a decrease in occupancy and equipment expense of $79,000 and
a decrease in other expense of $34,000. The increase in salaries and employee
benefits during 2004 was partially due to an increase of 4 full time equivalent
employees employed by the Company, the continued impact of increased costs
associated with health care and workers compensation insurance and normal annual
salary increases. The decrease in occupancy and equipment expense was due to
costs incurred during 2003 in relation to the February 2003 move of the
Company's operations center. The decrease in other expense is due to general
cost control measures.


         Income Taxes

         The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible expenses. The effective tax
rate was 40% and 34% for the three months ended March 31, 2004 and 2003.

         As previously disclosed, the Company formed its Real Estate Investment
Trust (REIT) subsidiary on January 15, 2002. With the formation of the REIT, the
Company then began to recognize state tax benefits in the first quarter of 2002.
During the fourth quarter of 2003, the California Franchise Tax Board took the
position that certain tax transactions related to REITs and regulated investment
companies (RICs) will be disallowed. Therefore the Company has decided to
terminate the REIT. As previously announced, during December 2003 the Company
reversed previously recognized net state tax benefits related to the REIT and
will not record any related state tax benefits in the future. Due to the absence
of such state tax benefits, the Company's effective tax rate increased by 6%
from 34% to 40% in 2004. This change in the effective tax rate had a negative
impact on net income of $169,000, or $.03 per diluted share.


         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 33,000 merchants
throughout the United States.





                       This page is page 19 of 41 pages.
<PAGE>


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


<TABLE>
<CAPTION>
                                                               For the quarter ended March 31, 2004
                                                          -----------------------------------------------
                                                                               Merchant
                                                              Community          Card         Total
                                                               Banking         Services      Company
                                                          -----------------------------------------------
                                                                          (in thousands)

<S>                                                            <C>               <C>           <C>
Total interest income                                            $7,168          $    ---        $7,168
Total interest expense                                            1,639                 2         1,641
Interest income/(expense) allocation                               (109)              109           ---
                                                          -----------------------------------------------
Net interest income                                               5,420               107         5,527
Provision for loan losses                                           ---               ---           ---
Total other operating income                                        547             1,161         1,708
Total other operating expense                                     3,715               707         4,422
                                                          -----------------------------------------------
Income before income taxes                                        2,252               561         2,813
Provision for income taxes                                          901               224         1,125
                                                          -----------------------------------------------
Net income                                                       $1,351              $337        $1,688
                                                          ===============================================
Total Average Assets                                           $499,780           $20,227      $520,007
                                                          ===============================================
</TABLE>


<TABLE>
<CAPTION>
                                                                For the quarter ended March 31, 2003
                                                          -------------------------------------------------
                                                                                Merchant
                                                              Community           Card          Total
                                                               Banking          Services       Company
                                                          -------------------------------------------------
                                                                           (in thousands)

<S>                                                            <C>               <C>             <C>
Total interest income                                            $7,542          $    ---          $7,542
Total interest expense                                            2,007                 5           2,012
Interest income/(expense) allocation                               (170)              170             ---
                                                          -------------------------------------------------
Net interest income                                               5,365               165           5,530
Provision for loan losses                                           ---               ---             ---
Total other operating income                                        500             1,129           1,629
Total other operating expense                                     3,395               691           4,086
                                                          -------------------------------------------------
Income before income taxes                                        2,470               603           3,073
Provision for income taxes                                          850               207           1,057
                                                          -------------------------------------------------
Net income                                                       $1,620              $396          $2,016
                                                          =================================================
Total Average Assets                                           $484,888           $25,723        $510,611
                                                          =================================================
</TABLE>


         Community Banking

         The Community Banking segment's income before income tax decreased for
the three months ended March 31, 2004 when compared to the same period in 2003.
The decrease was primarily due to an increase in noninterest expense, which was
partially offset by an increase in net interest income and an increase in
noninterest income. The increase in other expense was primarily due to an
increase in salaries and employee benefits, as discussed previously. Net
interest income increased $55,000 for the three months ended March 31, 2004,
when compared to the same period in 2003, principally due to a slight increase
in average earning assets, offset by a decline in the Company's net interest
margin. The Company increased its average earning assets by $3,379,000, or .7%
from $485,170,000 at March 31, 2003 to $488,549,000 at March 31, 2004.
Additionally, with the continued low interest rate environment, the Company was
able to reduce the cost on interest bearing deposits.


                       This page is page 20 of 41 pages.
<PAGE>


         Merchant Card Services

         The Company's merchant credit card segment earned $337,000 for the
three months ended March 31, 2004 compared to $396,000 for the same period in
2003. The decrease in the segment's net income for the quarter ended March 31,
2004 was primarily due to an increase in noninterest expense, a decrease in net
interest income, all partially offset by an increase in merchant draft
processing revenues. The bankcard segment's net interest income is partially
determined by the Company's internal funds transfer pricing systems, which
assigns a cost of funds or credit for funds to assets or liabilities based on
their type, maturity or repricing characteristics. The decrease in net interest
income for the bankcard segment is due to a decline in the general interest rate
environment and a decrease in the segment's customer deposit base and thus, a
decrease in the credit for funds given to the segment. The increase in the
unit's salaries and employee benefits expense is due to a build-up in sales
development personnel. The merchant credit card segment's net income comprised
approximately 20% of the Company's consolidated net income for the three months
March 31, 2004 and 2003.

         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 on charge-backs from cardholders.
Charge-back exposure can also result from fraudulent credit card transactions
initiated by merchant customers. As a result, 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-backs. Such
reserve, which totaled $1,357,000 and $1,263,000 as of March 31, 2004 and 2003,
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 (Independent Sales
Organization) 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 $64,000 for the three months ended March 31, 2004, as compared to $44,000
for the three months ended March 31, 2003. For further discussion, see "Certain
Important Considerations for Investors" in this section.

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



                                       Three months ended
                                            March 31,
                                            2004 2003
                                  --------------------------
                                        (in thousands)

          Beginning allowance          $1,310       $1,261
          Provision for losses             73           44
          Recoveries                       15            3
          Charge-offs                     (22)         (45)
                                  --------------------------
          Ending allowance             $1,376       $1,263
                                  ==========================



                        This page is page 21 of 41 pages.
<PAGE>


         Investment Securities

         Total investment securities decreased to $60,082,000, as of March 31,
2004, compared to $75,795,000 as of December 31, 2003. The decrease in the
investment securities portfolio from December 31, 2003 was primarily due to the
maturity of a $13,516,000 FNMA security and prepayments of the Company's
mortgage backed securities portfolio. Such mortgage-backed securities portfolio
amounted to $38,787,000 as of December 31, 2003 as compared to $35,897,000 as of
March 31, 2004.

         Loans

         Total loans decreased slightly to $411,245,000 at March 31, 2004
compared to $414,521,000 at December 31, 2003. During the first quarter of 2004,
the Company experienced normal paydown activity. The Company has recently hired
additional loan personnel to assist with increased net loan growth expected
throughout the remainder of the year.

         The following table summarizes the composition of the loan portfolio at
March 31, 2004 and December 31, 2003:




<TABLE>
<CAPTION>
                                             March 31, 2004                December 31, 2003
                                      -----------------------------   -----------------------------
                                            Amount          %              Amount           %
                                      -----------------------------   -----------------------------
                                                         (dollars in thousands)
<S>                                         <C>               <C>           <C>              <C>
 Residential real estate mortgage           $106,275           26%          $108,851          27%
 Commercial real estate mortgage             185,257           45            186,185          45
 Commercial                                   59,389           14             55,473          13
 Real estate construction                     48,446           12             51,154          12
 Installment and other                        11,994            3             13,025           3
 Less net deferred loan fees                    (116)         ---               (167)        ---
                                      -----------------------------   -----------------------------
     Total portfolio loans                   411,245          100%           414,521         100%
                                                       ============                   =============
 Less allowance for loan losses               (7,177)                         (7,162)
                                      ------------------              -----------------
     Net loans                              $404,068                        $407,359
                                      ==================              =================
</TABLE>


Allowance for Loan Losses

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




                       This page is page 22 of 41 pages.
<PAGE>

         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 indicate the probability that a loss will 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:




                                             Three months ended
                                                  March 31,
                                          --------------------------
                                             2004         2003
                                          --------------------------
                                           (dollars in thousands)

Beginning allowance for loan losses            $7,162        $7,400
Provision for loan losses                         ---           ---
Charge-offs                                       ---          (79)
Recoveries                                         15            34
                                          --------------------------
Ending allowance for loan losses               $7,177        $7,355
                                          ==========================


Net (charge-offs) recoveries to average
   loans (annualized)                           0.01%       (0.05%)


         The allowance for loan losses as a percentage of total loans increased
from 1.73%, at December 31, 2003, to 1.75% at March 31, 2004. The increase was
due to the decrease in the Company's loan portfolio from $414,521,000 at
December 31, 2003 to $411,245,000 at March 31, 2004. This decrease was primarily
due to decreases in commercial real estate loans, residential real estate loans
and construction loans.



                       This page is page 23 of 41 pages.
<PAGE>


         Nonperforming Assets

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

<TABLE>
<CAPTION>
                                                       March 31,       December 31,
                                                         2004              2003
                                                    ----------------  ---------------
                                                         (dollars in thousands)
<S>                                                          <C>              <C>
Nonaccrual loans                                             $1,583           $1,266
Accruing loans past due 90 days or more                         ---              ---
Restructured loans                                              ---              ---
                                                    ----------------  ---------------
Total nonperforming loans                                     1,583            1,266
Other real estate owned                                         ---              ---
                                                    ----------------  ---------------
Total nonperforming assets                                   $1,583           $1,266
                                                    ================  ===============



Nonperforming assets to total assets                          0.31%            0.24%
</TABLE>


         Nonperforming assets have increased from $1,266,000 or .24% of total
assets, as of December 31, 2003, to $1,583,000 or .31% of total assets as of
March 31, 2004. This increase was attributable to an increase of $317,000 in
nonaccrual loans.

         At March 31, 2004, nonperforming loans consisted of loans to 7
borrowers, 4 of which have balances in excess of $100,000. The two largest have
recorded balances of $604,000 and $569,000. One loan js secured by industrial
equipment or various other business assets and the other is secured by real
estate. Based on information currently available, management believes that
adequate allocations are included in the allowance for loan losses to cover the
estimated loss exposure that may result from these loans.

         At March 31, 2004, 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 are two loan relationships which total
approximately $3,472,000 as of March 31, 2004, compared to three loan
relationships totaling approximately $2,984,000 at December 31, 2003, about
which management has serious doubts as to the ability of the borrowers to comply
with the present repayment terms. These loans may become nonperforming assets
based on the information presently known about possible credit problems of the
borrower.

         At March 31, 2004, the Company's total recorded investment in impaired
loans (as defined by SFAS No. 114 and No. 118) was $1,583,000, for which there
is a related allowance for loan losses allocation of $266,000.




                       This page is page 24 of 41 pages.
<PAGE>

         The Company's average recorded investment in impaired loans during the
three months ended March 31, 2004 and 2003 was $1,480,000 and $2,968,000. The
decrease of $1,488,000 in the average recorded investment in impaired loans
during the three months ended March 31, 2004 as compared to the same period one
year ago was primarily due to a decrease in nonperforming loans. There was no
interest income recognized during the periods that such loans were impaired for
the three months ended March 31, 2004 and March 31, 2003.

         As of March 31, 2004, there was $1,583,000 of loans on which the
accrual of interest had been discontinued as compared to $1,266,000 at December
31, 2003. During the three months ended March 31, 2004, interest due but
excluded from interest income on loans placed on nonaccrual status was $55,000
as compared to $76,000 for the same period one year ago.

         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, legal status of borrower, nature of the
collateral and other matters. The Company expects that it may be required to
repurchase loans in the future. In the first three months of 2004 and 2003, the
Company was not required to repurchase any such loans.

         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 indexed 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 certificates:
A, B and C. The sale transaction took place as a result of Allied selling its
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 25 of 41 pages.
<PAGE>


         The composition of the original certificate balances along with their
respective March 31, 2004 balances are as follows:


                                Original         March 31, 2004
                               Certificate        Certificate
                               Face Value          Face Value
                             ------------------------------------

         Class A                $73,199,448           $1,038,107
         Class B                  3,249,067            3,196,478
         Class C                        100                  100
                             ------------------------------------
            Total pool          $76,448,615           $4,234,685
                             ====================================

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


         Contractual Obligations and Commitments


         The following table presents 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>
                                                              March 31, 2004
                                 -------------------------------------------------------------------------
                                   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             $ ---           $ ---            $ ---      $20,000       $20,000
 Operating leases (premises)            1,611           3,179            2,861        4,856        12,507
                                 -------------------------------------------------------------------------
     Total long-term debt
         and operating leases          $1,611          $3,179           $2,861      $24,856       $32,507
                                 ===========================================================


 Commitments to extend credit                                                                      81,612
 Standby letters of credit                                                                          5,375
                                                                                           ---------------
      Total contractual obligations
         and commitments                                                                         $119,494
                                                                                           ===============
</TABLE>



                       This page is page 26 of 41 pages.
<PAGE>


         Liquidity

         Redwood's primary source of liquidity is dividends from NBR. Redwood's
primary uses of liquidity have historically been common stock repurchases,
dividend payments made to common shareholders, 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 March 31, 2004, Redwood held $2,950,000 in deposits at NBR. In
addition, the Company has a $2,500,000 unsecured line of credit with a major
financial institution, which bears an interest rate equal to the federal funds
rate plus 1.50%. As of March 31, 2004, there was no outstanding balance under
this line of credit.

         Redwood's current cash dividend to its common shareholders is $.21 per
common share per quarter, as adjusted for the three-for-two stock split
announced July 16, 2003. Further, Redwood is required to make semi-annual
payments of interest at the rate of 10.2% per annum on $10,000,000 of trust
preferred securities issued in 2001 and quarterly payments of interest at the
rate of 6.35% per annum for the first five years and then at the three month
LIBOR plus 3.1% per annum on $10,000,000 of trust preferred financing issued in
July 2003. 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 2004 dividend plan from the OCC in February 2004.

         During the first three months of 2004, NBR has not declared a dividend
payable to Redwood. Management believes that as of March 31, 2004, 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 three months ended
March 31, 2004, the Company received cash of $670,000 from operating activities
and $17,252,000 from investing activities, while using $14,902,000 from
financing activities.



                       This page is page 27 of 41 pages.
<PAGE>


         Capital Resources

         A strong capital base is essential to the Company's continued ability
to service the needs of its customers. Capital protects depositors and the 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.

         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 (the "FRB") 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 of the
Company and the capital ratios of NBR at March 31, 2004 and December 31, 2003.


<TABLE>
<CAPTION>
                               March 31, 2004                       December 31, 2003
                    -------------------------------------  -------------------------------------
                                    Well-       Minimum                     Well-       Minimum
                         Actual  Capitalized  Requirement        Actual  Capitalized  Requirement
                    -------------------------------------  -------------------------------------
<S>                       <C>         <C>         <C>            <C>        <C>          <C>
 Company
   Leverage                6.52%       5.00%      4.00%           6.47%      5.00%       4.00%
   Tier 1 risk-based       7.99        6.00       4.00            7.93       6.00        4.00
   Total risk-based       11.97       10.00       8.00           11.94      10.00        8.00

 NBR
   Leverage                8.05%       5.00%      4.00%           7.59%      5.00%       4.00%
   Tier 1 risk-based       9.79        6.00       4.00            9.29       6.00        4.00
   Total risk-based       11.05       10.00       8.00           10.55      10.00        8.00
</TABLE>



                       This page is page 28 of 41 pages.
<PAGE>


         The following table sets forth information regarding the Company's
purchases of its common shares during each of the three months ended March 31,
2004:


<TABLE>
<CAPTION>
                                                                 Total Number of             Maximum Number (or
                                                                Shares (or Units)            Approximate Dollar
                         Total Number                           Purchased as Part        Value) of Shares (or Units)
                     of Shares (or Units)    Average Price    of Publicly Announced       that May Yet Be Purchased
                           Purchased        Paid Per Share       Plan or Programs        Under to Plans or Programs
                   ---------------------------------------------------------------------------------------------------

<S>                         <C>                 <C>                  <C>                          <C>
January 2004                  -                   -                     -                         488,702

February 2004               16,939              $28.00               16,939                       471,763

March 2004                    -                   -                     -                         471,763
                   ---------------------------------------------------------------------------------------------------

Total                       16,939              $28.00               16,939                       471,763
                   ===================================================================================================
</TABLE>

         In August 2001, the Company announced authorizations to repurchase up
to 533,250 common shares, as adjusted for the three-for-two stock splits
declared September 20, 2001 and July 15, 2003. In August 2003, the Company
announced an authorization to repurchase an additional 496,500 shares, for a
total authorization of 1,029,750. To date, 557,987 shares of the Company's
common stock have been repurchased. In the quarter ended March 31, 2004, the
Company purchased 16,939 shares of the Company's common stock under the program
at an average price per share of $28.00. Under the repurchase program, the
Company plans to purchase shares from time to time on the open market and/or in
privately negotiated transactions.

         Subordinated Debentures/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 RSTI 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 RSTI Capital Securities. Distributions on the
RSTI Capital Securities are payable semi-annually at the annual rate of 10.2%
and are included in interest expense in the consolidated financial statements.
At March 31, 2004, due to certain limitations applicable under current
regulatory guidelines, the Company had included $8,462,000 of the subordinated
debentures as Tier 1 capital. As of March 31, 2004, the outstanding principal
balance of the RSTI Capital Securities was $10,000,000.




                       This page is page 29 of 41 pages.
<PAGE>

         The junior subordinated debentures are subject to mandatory redemption,
in whole or in part, upon repayment of the RSTI Capital Securities at maturity
or their earlier redemption at the liquidation amount. Subject to the Company
having received prior approval of the FRB, if then required, the RSTI 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; 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 RSTI Capital Securities from time to time for a period not to exceed 10
consecutive semi-annual periods.

         On July 22, 2003, Redwood Statutory Trust II ("RSTII"), a wholly owned
subsidiary of the Company, closed a financing of 10,000 Capital Securities with
a liquidation amount of $1,000 per security. The proceeds of the financing were
loaned to the Company in exchange for junior subordinated debentures with terms
similar to the RSTII Capital Securities. The sole assets of RSTII 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 RSTII under the RSTII Capital Securities. Distributions on the RSTII Capital
Securities, which are payable quarterly at the annual rate of 6.35% for the
first five years and then reset to the three month LIBOR plus 3.1% per annum,
are included in interest expense in the consolidated financial statements. While
these securities can be considered Tier 1 capital under current regulatory
guidelines, as a result of certain limitations applicable, they currently
qualify as Tier 2 regulatory capital. As of March 31, 2004, the outstanding
principal balance of the RSTII Capital Securities was $10,000,000.

         The junior subordinated debentures are subject to mandatory redemption,
in whole or in part, upon repayment of the RSTII Capital Securities at maturity
or their earlier redemption at the liquidation amount. Subject to the Company
having received prior approval of the FRB, if then required, the RSTII Capital
Securities are redeemable prior to the maturity date of July 22, 2033, at the
option of the Company; on or after July 22, 2008 at par; or upon occurrence of
specific events defined within the trust indenture. The Company has the option
to defer distributions on the RSTII Capital Securities from time to time for a
period not to exceed 10 consecutive semi-annual periods.

         Prior to December 31, 2003, RSTI and RSTII were consolidated in the
Company's financial statements with the trust preferred securities issued by the
trust reported in liabilities as "trust preferred securities" and the
subordinated debentures eliminated in consolidation. Under new accounting
guidance, FASB Interpretation No. 46, as revised in December 2003, RSTI and
RSTII are not consolidated with the Company. Accordingly, the amounts previously
reported as "trust preferred securities" in liabilities have been recaptioned
"subordinated debentures" and continue to be presented in liabilities on the
balance sheet. At March 31, 2004 and 2003, the amount of the subordinated
debentures and trust preferred securities were the same. The effect of no longer
consolidating the trusts does not change the amounts reported as the Company's
assets, liabilities, equity or interest expense.




                        This page is page 30 of 41 pages
<PAGE>

         Further, as a result of FASB's Interpretation No. 46, questions were
raised about whether trust preferred securities would still qualify for
treatment as Tier 1 capital. In July of 2003, the FRB instructed bank holding
companies to continue to include trust preferred securities in Tier 1 capital
for regulatory capital purposes, until notice is given to the contrary. At March
31, 2004, due to certain limitations applicable under current regulatory
guidelines, the Company had included $8,462,000 of the subordinated debentures
as Tier 1 capital. The Company does not expect the final rules, when
implemented, will result in the immediate elimination of these subordinated
debentures as Tier 1 capital. The subordinated debentures comprised 25% of the
Company's Tier 1 capital as of March 31, 2004.

         Certain Important Considerations for Investors

         Merchant Credit Card Processing. The Company's profitability can be
negatively impacted should one of the Company's merchant credit card customers
be unable to pay on charge-backs from cardholders. Due to contractual
obligations between the Company and Visa and Mastercard, NBR stands in the place
of the merchant in the event that a merchant refuses, or is unable due to
bankruptcy or other reasons, to pay on charge-backs from cardholders. Management
has taken certain actions to decrease the risk of merchant bankruptcy associated
with its merchant credit card business. These steps include the discontinuance
of high-risk accounts. 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 growing proprietary accounts.



                       This page is page 31 of 41 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 affected the
Company's merchant credit card business. The rule changes went into effect on
March 31, 2001. These changes included a requirement that a processor's reported
fraud ratios be no greater than three times the national average of .1%. At
March 31, 2004 (the most recent period available from Visa), the Company's
overall fraud ratio was less than the Visa maximum. Other Visa changes included
the requirement that total processing volume in certain high-risk categories (as
defined by Visa) be less than 20% of total processing volume. At March 31, 2004,
the Company's total Visa transactions within these certain high-risk categories
totaled 3.5% of its total Visa processing volume. Other changes Visa announced
included a requirement that weekly Visa volumes be less than 60% of an
institution's tangible equity capital, as well as a requirement that aggregate
charge-backs for the previous six months be less than 5% of the institution's
tangible equity capital or that aggregate charge-backs for the quarter be less
than .59% of the interchange count and .95% of the interchange amount. At March
31, 2004, the Company's weekly Visa volume was 44.5% of the Company's tangible
equity capital, and aggregate charge-backs for the previous six months were
2.76% of tangible equity capital and the aggregate charge-backs for the quarter
were .11% of the interchange count and .21% of the interchange amount. Merchant
bankcard participants, such as the Company, must comply with these Visa rules by
filing a compliance plan with Visa. At March 31, 2004, the Company is in
compliance with all rule changes that went into effect on March 31, 2001, based
on Visa's acceptance of the Company's compliance plan. Should the Company be
unable to comply with these rules, Visa will require collateral of one to four
times the shortfall.

         In 1996, Wal-Mart Stores, Inc. and several other retailers sued Visa
and Mastercard asserting that Visa and Mastercard's rules regarding uniform
acceptance of all Visa and Mastercard credit and debit cards were an illegal
tying arrangement. Prior to trial, Visa and Mastercard agreed to settle these
cases. On January 23, 2004, the Federal District Court for the Eastern District
of New York approved this settlement, which became effective January 1, 2004.
Neither the Company nor NBR are a party to these suits, and neither will be
directly liable for these settlements. However, Visa or Mastercard may seek to
assess, or assert claims against, their members to fund the settlements. The
merchant credit card segments' net income comprised approximately 20% of the
Company's consolidated net income at March 31, 2004. We cannot predict the
effect that the settlements or any direct claim asserted against members will
have on the competitive environment or our future earnings from merchant
bankcard operations.



                       This page is page 32 of 41 pages.
<PAGE>

         Concentration of Lending Activities. Concentration of the Company's
lending activities in the real estate sector, including construction loans,
could have the effect of intensifying the impact on the Company of adverse
changes in the real estate market in the Company's lending areas. At March 31,
2004, approximately 83% of the dollar value of the Company's loans were secured
by real estate, of which 53% 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,
construction and other loans may be impaired by adverse changes in local or
regional economic conditions, adverse changes in the real estate market,
increasing interest rates, or acts of nature (including earthquakes, floods or
wildfires, which may cause uninsured damage and other loss of value to real
estate that secures the Company's loans). In addition, the long-term impact of
the California energy crisis, the decline in the technology sector in Northern
California and the recent budgetary crisis and continuing fiscal difficulties in
the California state government may cause adverse changes in the Company's local
economy. Due to the concentration of the Company's real estate collateral in
California, such events could have a significant adverse impact on the value of
such collateral or the Company's earnings.

         California Economic Conditions and Governmental Fiscal Crisis. A
substantial majority of our assets, deposits and fee income are generated in
California. As a result, poor economic conditions in California may cause us to
incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. Economic conditions in California are subject to
various uncertainties at this time, including the decline in the technology
sector, and the California state government's recent budgetary crisis and
continuing fiscal difficulties. If economic conditions in California decline, we
expect that our level of problem assets could increase. California's state
government has undergone serious fiscal and budget crises in the recent past.
The State of California is also a customer of the Company and NBR. While the
California electorate on March 2, 2004, approved various ballot measures aimed
at addressing this situation, including a $15 billion bond issue, the long-term
impact of this situation on the California economy and the Company's markets
cannot be predicted. These events could have an adverse effect on the demand for
new loans, the ability of borrowers to repay outstanding loans, the value of
real estate and other collateral securing loans and, as a result, on the
Company's financial condition and results of operations.

         War on Terrorism; Foreign Hostilities. Acts or threats of terrorism and
actions taken by the U.S. or other governments as a result of such acts or
threats may result in a downturn in U.S. economic conditions and could adversely
affect business and economic conditions in the U.S. generally and in our
principal markets. The war in Iraq has also generated various political and
economic uncertainties affecting the global and U.S. economies. Deterioration in
either the U.S. or the California economy could adversely affect the Company's
financial condition and results of operations.




                       This page is page 33 of 41 pages.
<PAGE>

         Government Regulation. Redwood and its subsidiaries are subject to
extensive federal and state governmental supervision, regulation and control,
and future legislation and government policy could adversely affect the
financial industry. Although the full impact of such legislation and regulation
cannot be predicted, future changes may alter the structure of and competitive
relationship among financial institutions. The Company's business may be
adversely affected by any future changes in laws, regulations, policies or
interpretations, including legislative and regulatory reactions to the terrorist
attack on September 11, 2001, and future acts of terrorism, and the Enron
Corporation, WorldCom, Inc. and other major U.S. corporate bankruptcies and
reports of accounting irregularities at public companies, including various
large and publicly traded companies. Additionally, the Company's business is
affected significantly by the fiscal and monetary policies of the federal
government and its agencies, particularly the FRB, which regulates the supply of
money and credit in the U.S. Among the instruments of monetary policy available
to the FRB are (a) conducting open market operations in U.S. government
securities, (b) changing the discount rates of borrowings by depository
institutions, and (c) imposing or changing reserve requirements against certain
borrowings by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits.
The policies of the FRB may have a material effect on our business, financial
condition and results of operations.

         Competition from Other Financial Institutions. NBR competes for
deposits and loans principally with major commercial banks, other independent
banks, savings and loan associations, savings banks, thrift and loan
associations, credit unions, mortgage companies, insurance companies, mutual
funds and other lending institutions. With respect to deposits, additional
significant competition arises from corporate and governmental debt securities,
as well as money market mutual funds. Banks, securities firms and insurance
companies can also now combine as a "financial holding company". Financial
holding companies can offer virtually any type of financial service, including
banking, securities underwriting, insurance (both agency and underwriting), and
merchant banking. Several of the nation's largest savings and loan associations
and commercial banks have a significant number of branch offices in the areas in
which NBR conducts operations. Among the advantages possessed by the larger of
these institutions are their ability to make larger loans, finance extensive
advertising campaigns, access international money markets and generally allocate
their investment assets to regions of highest yield and demand. In addition,
such large financial institutions may have greater access to capital at a lower
cost than NBR, which may adversely affect NBR's ability to compete effectively.

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



                       This page is page 34 of 41 pages.
<PAGE>

         Critical Accounting Policies. The Company's financial statements are
presented in accordance with accounting principles generally accepted in the
United States of America (US GAAP). The financial information contained within
our financial statements is, to a significant extent, financial information that
is based on approximate measures of the financial effects of transactions and
events that have already occurred. A variety of factors could affect the
ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability.

         The Company's accounting policies are fundamental to understanding
management's discussion and analysis of financial condition and results of
operations. The most significant accounting policies followed by the Company are
presented in Note B to the Consolidated Financial Statements in Redwood's 2003
Annual Report on Form 10-K. The Company has identified its policy on the
allowance for loan losses to be critical because management has to make
subjective and/or complex judgments about matters that are inherently uncertain
and could be subject to revision as new information becomes available. Along
with other factors, we use historical loss factors to determine the inherent
loss that may be present in our loan and lease portfolio. Actual loses could
differ significantly from the historical loss factors that we use. The loan
portfolio represents the largest asset type on the Consolidated Statement of
Condition. Note B to the Consolidated Financial Statements in Redwood's 2003
Annual Report on Form 10-K describes the methodology used to determine the
allowance for loan losses and a discussion of the factors driving changes in the
amount of the allowance for loan losses is included in "Allowance for Loan
Losses" above and in "Management's Discussion and Analysis of Financial
Condition and Results of Operation" in Item 7 in Redwood's 2003 Annual Report on
Form 10-K.

         Other estimates that we use are fair value of our securities and
expected useful lives of our depreciable assets. We have not entered into
derivative contracts for our customers or for ourselves, which relate to
interest rate, credit, equity, commodity, energy, or weather-related indices. US
GAAP itself may change from one previously acceptable method to another method.
Although the economics of our transactions would be the same, the timing of
events that would impact our transactions could change. Accounting standards and
interpretations currently affecting the Company and its subsidiaries may change
at any time, and the Company's financial condition and results of operations may
be adversely affected.

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

         As of March 31, 2004, other than the REIT and the REMIC (discussed
elsewhere in this Report), 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.
For more information regarding contractual obligations and commitments, please
see "Mortgage Repurchase Commitments", "Investment in REMIC" and "Contractual
Obligations and Commitments" above.



                       This page is page 35 of 41 pages.
<PAGE>


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 NBR'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 NBR (or in its
wholly owned subsidiary), all of the Company's interest rate risk exposure lies
at the NBR level. As a result, all significant interest rate risk management
procedures are performed at the NBR level. Based upon the nature of its
operations, NBR is not subject to foreign currency exchange or commodity price
risk. NBR's real estate loan portfolio, concentrated primarily within Northern
and Central 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. NBR's profitability is dependent to a large
extent upon its net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and securities, and
its interest expense on interest-bearing liabilities, such as deposits and
borrowings. NBR, like other financial institutions, is subject to interest rate
risk to the degree that its interest-earning assets reprice differently than its
interest-bearing liabilities. NBR manages its mix of assets and liabilities with
the goals of limiting its exposure to interest rate risk, ensuring adequate
liquidity, and coordinating its sources and uses of funds.

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



                       This page is page 36 of 41 pages.
<PAGE>


        The following table sets forth, as of March 31, 2004, the distribution
of repricing opportunities for NBR'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                              $11,800    $    ---    $    ---    $    ---   $    ---     $11,800
Investment securities and other                   4,620       2,554      10,736      24,908     17,264      60,082
Mortgage loans held for sale                        130         ---         ---         ---        ---         130
Loans                                            90,839      33,795      46,849     149,399     90,363     411,245
                                             ------------------------------------------------------------------------
   Total interest-earning assets                107,389      36,349      57,585     174,307    107,627     483,257
                                             ------------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts           163,303         ---         ---         ---        ---     163,303
Time deposits                                    59,838      75,975      41,558       9,336        ---     186,707
Trust preferred securities                          ---         ---         ---         ---     20,000      20,000
Short-term borrowings                             3,915         ---         ---         ---        ---       3,915
                                             ------------------------------------------------------------------------
  Total interest-bearing liabilities            227,056      75,975      41,558       9,336     20,000     373,925
                                             ------------------------------------------------------------------------
Interest rate sensitivity gap                 ($119,667)   ($39,626)    $16,027    $164,971    $87,627
                                             ============================================================
Cumulative interest rate sensitivity gap       (119,667)   (159,293)   (143,266)     21,705    109,332

Interest rate sensitivity gap ratio                0.47        0.48        1.39       18.67       5.38

Cumulative interest rate sensitivity gap ratio     0.47        0.47        0.58        1.06       1.29
</TABLE>


         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 NBR's net
interest margin.

         In a declining interest rate environment, generally it is expected that
net interest margin would decline, and, in an increasing interest rate
environment, net interest margin would increase. During 2003 NBR had experienced
greater fixed rate, long-term mortgage lending activity through mortgage
refinancings and the financing of new home purchases as rates declined. The
impact of such lending activity may cause a decrease in the net interest margin
in an increasing rate environment if more traditional commercial bank lending
does not become a higher percentage of the overall earning assets mix. There can
be no assurance, however, that under such circumstances NBR will experience the
described relationships to declining or increasing interest rates.



                       This page is page 37 of 41 pages.
<PAGE>

         On a quarterly basis, NBR management prepares an analysis of interest
rate risk exposure. Such analysis calculates the change in net interest income
and the theoretical market value of NBR'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 NBR's equity. This theoretical market value
of NBR's equity is calculated by discounting cash flows associated with NBR's
assets and liabilities. The following is a summary of interest rate risk
exposure as of March 31, 2004 as measured on a net interest income basis and a
market value of equity basis, given a change in general interest rates of up to
200 basis points up and 200 basis points down.


<TABLE>
<CAPTION>
         March 31, 2004
         --------------
                                             Change in Annual                        Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity
         -----------------------            -------------------                 ----------------------

<S>             <C>                             <C>                                <C>
               +200                             ($642,000)                         ($10,470,000)
               +100                             ($414,000)                          ($5,648,000)
               -100                              $120,000                            $2,483,000
               -200                             ($692,000)                           $4,372,000
</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.


Item 4.    Controls and Procedures

a)   Evaluation  of  Disclosure  Controls and  Procedures.  Our Chief  Executive
     Officer   (principal   executive   officer)  and  Chief  Financial  Officer
     (principal  financial officer) have concluded that the design and operation
     of our  disclosure  controls and  procedures  are effective as of March 31,
     2004.  This  conclusion  is  based on an  evaluation  conducted  under  the
     supervision and with the participation of management.  Disclosure  controls
     and  procedures  are  those  controls  and  procedures  which  ensure  that
     information  required to be  disclosed  in this filing is  accumulated  and
     communicated  to  management  and is recorded,  processed,  summarized  and
     reported in a timely manner and in accordance  with Securities and Exchange
     Commission rules and regulations.

b)   Changes in  Internal  Controls.  During the quarter  ended March 31,  2004,
     there were no changes in our internal control over financial reporting that
     materially  affected,  or are  reasonably  likely to affect,  our  internal
     control over financial reporting.


                       This page is page 38 of 41 pages.
<PAGE>

PART II    OTHER INFORMATION

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

a) Exhibits.

     10.20    Amendment 1 dated March 31, 2004 to the Employment Agreement,
              effective December 1, 2003, between National Bank of the Redwoods
              and Stephen A. Fleming.*

     31.1     Certification of the Chief Executive Officer pursuant to Rule
              13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to
              Section 302 of the Sarbanes-Oxley Act of 2002.

     31.2     Certification of the Chief Financial Officer pursuant to Rule
              13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to
              Section 302 of the Sarbanes-Oxley Act of 2002.

     32.1     Certification of the Chief Executive Officer Under Section 906 of
              the Sarbanes-Oxley Act of 2002.

     32.2     Certification of the Chief Financial Officer Under Section 906 of
              the  Sarbanes-Oxley Act of 2002.

     *        Filed as Exhibit 99 to our Current Report on Form 8-K dated April
              8, 2004, and by this reference incorporated herein.


b) Reports on Form 8-K

     1.           Form 8-K filing dated January 9, 2004 reporting under Item 5
                  thereof, announcement of increase in quarterly dividend and
                  declaration of quarterly dividend payable.

     2.           Form 8-K filing dated January 23, 2004 reporting under Item 12
                  thereof, announcement of financial results for the fourth
                  quarter of 2003.

     3.           Form 8-K filing dated March 23, 2004 reporting under Item 5
                  thereof, announcement of National Bank of the Redwoods' Board
                  of Directors appointing Kim C. McClaran to Chief Financial
                  Officer.



                       This page is page 39 of 41 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:  5/12/04              By: /s/ Kim C. McClaran
       -------                  ---------------------------
                                Kim C. McClaran
                                Vice President and
                                Chief Financial Officer




                       This page is page 40 of 41 pages.
<PAGE>


                                Index of Exhibits



Exhibit Number

10.20    Amendment 1 dated March 31, 2004 to the Employment Agreement, effective
         December 1, 2003, between National Bank of the Redwoods and Stephen A.
         Fleming. *

31.1     Certification of the Chief Executive Officer under Section 302 of the
         Sarbanes-Oxley Act of 2002.

31.2     Certification of the Chief Financial Officer under Section 302 of the
         Sarbanes-Oxley Act of 2002.

32.1     Certification of the Chief Executive Officer under Section 906 of the
         Sarbanes-Oxley Act of 2002.

32.2     Certification of the Chief Financial Officer under Section 906 of the
         Sarbanes-Oxley Act of 2002.

*        Filed as Exhibit 99 to our Current Report on Form 8-K dated April 8,
         2004, and by this reference incorporated herein.








                       This page is page 41 of 41 pages.