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

                                  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, 2003

                                       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 5, 2003,  there were 3,375,323  shares of the  Registrant's  common stock
outstanding.


                        This page is page 1 of 40 pages.

<PAGE>






<TABLE>
<CAPTION>
                             REDWOOD EMPIRE BANCORP
                                       AND
                                  SUBSIDIARIES

                                      Index

<S>    <C>        <C>                                                                        <C>

                                                                                             Page
PART I.  FINANCIAL INFORMATION

       Item 1.    Financial Statements

                  Consolidated Statements of Operations
                  Three Months Ended March 31, 2003 and 2002....................................3

                  Consolidated Balance Sheets
                  March 31, 2003 and December 31, 2002..........................................5

                  Consolidated Statements of Cash Flows
                  Three Months Ended March 31, 2003 and 2002....................................6

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


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

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

       Item 4.    Controls and Procedures......................................................34


PART II. OTHER INFORMATION

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


SIGNATURES.....................................................................................36

CERTIFICATIONS.................................................................................37
</TABLE>

                        This page is page 2 of 40 pages.
<PAGE>




PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements





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

                                                                  Three Months Ended
                                                                       March 31,
                                                                  2003           2002
                                                            --------------------------------
<S>                                                              <C>             <C>
Interest income:
  Interest and fees on loans                                     $6,406          $6,217
  Interest on investment securities                               1,123           1,088
  Interest on federal funds sold                                     13             104
                                                            --------------------------------
Total interest income                                             7,542           7,409

Interest expense:
  Interest on deposits                                            1,744           2,162
  Interest on other borrowings                                      268             258
                                                            --------------------------------
Total interest expense                                            2,012           2,420
                                                            --------------------------------

Net interest income                                               5,530           4,989
Provision for loan losses                                           ---             ---
                                                            --------------------------------

Net interest income after provision for loan losses               5,530           4,989

Noninterest income:
  Service charges on deposit accounts                               268             314
  Merchant draft processing, net                                  1,129           1,179
  Loan servicing income                                              35              54
  Net realized gains on
    investment securities available for sale                        ---              35
  Other income                                                      197             236
                                                            --------------------------------
Total noninterest  income                                         1,629           1,818

Noninterest expense:
  Salaries and employee benefits                                  2,284           2,046
  Occupancy and equipment expense                                   614             524
  Other                                                           1,188           1,168
                                                            --------------------------------
Total noninterest expense                                         4,086           3,738
                                                            --------------------------------

Income before income taxes                                        3,073           3,069
Provision for income taxes                                        1,057           1,122
                                                            --------------------------------


Net income                                                       $2,016          $1,947
                                                            ================================

Total comprehensive income                                       $1,997          $1,910
                                                            ================================

                                        (Continued)
</TABLE>



                        This page is page 3 of 40 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,
                                                               2003            2002
                                                        ----------------------------------

<S>                                                              <C>            <C>
Basic earnings per common share:
  Net income                                                          $.60           $.56
  Weighted average shares - basic                                3,385,000      3,499,000

Diluted earnings per common share:
  Net income                                                          $.57           $.54
  Weighted average shares - diluted                              3,507,000      3,632,000

See Notes to Consolidated Financial Statements.

</TABLE>

                                       (Concluded)












                        This page is page 4 of 40 pages.
<PAGE>



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

                                                                                  March 31,       December 31,
                                                                                     2003             2002
                                                                               -----------------------------------
                                                                                 (unaudited)
<S>                                                                                   <C>              <C>
Assets:
Cash and due from banks                                                                $22,286          $21,837
Federal funds sold                                                                      19,221           17,500
                                                                               -----------------------------------
  Cash and cash equivalents                                                             41,507           39,337
Investment securities:
  Held to maturity (fair value of $16,155 and $17,268)                                  15,648           16,764
  Available for sale, at fair value (amortized cost of $75,047 and $81,092)             76,910           83,157
                                                                               -----------------------------------
    Total investment securities                                                         92,558           99,921

Mortgage loans held for sale                                                               322              ---

Loans:
    Residential real estate mortgage                                                   109,210           87,764
    Commercial real estate mortgage                                                    166,378          158,018
    Commercial                                                                          60,443           62,958
    Real estate construction                                                            49,307           42,749
    Installment and other                                                               12,538           14,260
    Less net deferred loan fees                                                           (362)            (673)
                                                                               -----------------------------------
        Total portfolio loans                                                          397,514          365,076
    Less allowance for loan losses                                                      (7,355)          (7,400)
                                                                               -----------------------------------
        Net loans                                                                      390,159          357,676

Premises and equipment, net                                                              2,765            2,760
Cash surrender value of life insurance                                                   3,662            3,620
Other assets and interest receivable                                                     9,643            9,867
                                                                               -----------------------------------
     Total assets                                                                     $540,616         $513,181
                                                                               ===================================

Liabilities and Shareholders' equity:
Deposits:
  Noninterest bearing demand deposits                                                 $109,502         $103,484
  Interest-bearing transaction accounts                                                160,351          128,292
  Time deposits one hundred thousand and over                                           68,385           69,000
  Other time deposits                                                                  144,123          152,317
                                                                               -----------------------------------
    Total deposits                                                                     482,361          453,093

Short-term borrowings                                                                    4,621           12,356
Trust preferred securities                                                              10,000           10,000
Other liabilities and interest payable                                                  14,928            8,925
                                                                               -----------------------------------
     Total liabilities                                                                 511,910          484,374

Shareholders' equity:
  Preferred stock, no par value; authorized 2,000,000 shares;
      none issued and outstanding                                                          ---              ---
  Common stock, no par value; authorized 10,000,000 shares;
      issued and outstanding: 3,373,523 and 3,404,890 shares                            10,751           10,853
  Retained earnings                                                                     16,763           16,654
  Accumulated other comprehensive income, net of tax                                     1,192            1,300
                                                                               -----------------------------------
     Total shareholders' equity                                                         28,706           28,807
                                                                               -----------------------------------
     Total liabilities and shareholders' equity                                       $540,616         $513,181
                                                                               ===================================

See Notes to Consolidated Financial Statements.
</TABLE>



                        This page is page 5 of 40 pages.
<PAGE>




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

                                                                                      Three Months Ended
                                                                                           March 31,
                                                                                     2003             2002
                                                                               ----------------------------------
<S>                                                                                    <C>            <C>
Cash flows from operating activities:

  Net income                                                                            $2,016         $1,947

Adjustments to reconcile net income to net cash from operating activities:
  Depreciation and amortization, net                                                       122             50
  Loans originated for sale                                                             (1,296)           ---
  Proceeds from sale of loans held for sale                                                971            ---
  Net realized gains on securities available for sale                                      ---            (35)
  Net realized loss on sale of loans held for sale                                           3            ---
  Change in other assets and interest receivable                                           274           (628)
  Change in other liabilities and interest payable                                       6,003            865
                                                                               ----------------------------------
  Total adjustments                                                                      6,077            252
                                                                               ----------------------------------

  Net cash from operating activities                                                     8,093          2,199

Cash flows from investing activities:
  Net change in loans                                                                  (32,319)            77
  Purchases of investment securities available for sale                                 (3,081)       (14,279)
  Purchases of investment securities held to maturity                                      (21)           ---
  Proceeds from sales of investment securities available for sale                          ---          5,079
  Maturities of investment securities available for sale                                 9,057          5,681
  Maturities or calls of investment securities held to maturity                          1,112            931
  Purchases of premises and equipment, net                                                (193)          (361)
                                                                               ----------------------------------
    Net cash from investing activities                                                 (25,445)        (2,872)

Cash flows from financing activities:
  Net change in noninterest bearing demand deposits                                      6,018         13,550
  Net change in interest bearing transaction accounts                                   32,059          2,894
  Net change in time deposits                                                           (8,809)        23,100
  Net change in short-term borrowings                                                   (7,735)           155
  Repurchases of common stock                                                           (1,322)        (1,206)
  Issuance of common stock                                                                 162            ---
  Cash dividends paid                                                                     (851)          (705)
                                                                               ----------------------------------
   Net cash from financing activities                                                   19,522         37,788
                                                                               ----------------------------------

Net change in cash and cash equivalents                                                  2,170         37,115
Cash and cash equivalents at beginning of period                                        39,337         24,249

                                                                               ----------------------------------
Cash and cash equivalents at end of period                                             $41,507        $61,364
                                                                               ==================================

</TABLE>
                                   (Continued)



                        This page is page 6 of 40 pages.

<PAGE>

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

                                                                            Three Months Ended
                                                                                March 31,
                                                                         2003                2002
                                                                    ----------------    ---------------

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

Cash paid during the period for:
  Interest expense                                                           $1,968             $2,807
  Income taxes                                                                  650                614

</TABLE>





See Notes to Consolidated Financial Statements.


                                             (Concluded)









                        This page is pae 7 of 40 pages.
<PAGE>





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


1.   Basis of Presentation

     The accompanying unaudited consolidated financial statements should be read
in  conjunction  with the  consolidated  financial  statements and related notes
contained in Redwood Empire  Bancorp's 2002 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 and Redwood Statutory Trust I ("RSTI").  In 2002,  National
Bank of the Redwoods  (and with its  subsidiary,  "NBR")  formed NBR Real Estate
Investment Trust, a Maryland Real Estate Investment Trust. The entity was formed
to hold NBR's real estate secured loans and to better  organize NBR's  marketing
and origination of real estate secured  lending.  All significant  inter-company
balances  and  transactions  have been  eliminated.  The  financial  information
contained in this report  reflects  all  adjustments,  which,  in the opinion of
management,  are necessary for a fair presentation of the results of the interim
periods.  All such adjustments are of a normal recurring nature.  The results of
operations  and cash flows for the three  months  ended  March 31,  2003 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2003.

     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.




                        This page is page 8 of 40 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 fair value recognition  provisions of FASB Statement No. 123,
Accounting of Stock-Based Compensation.



<TABLE>
<CAPTION>
                                                March 31, 2003      March 31, 2002
                                               --------------------------------------
                                                      (dollars in thousands,
                                                      except per share data)

<S>                                                    <C>                 <C>
 Net income as reported                                $2,016              $1,947
 Deduct: Stock-based compensation expense
   determined under fair value based method               (19)                (37)
                                               ------------------  ------------------
 Pro forma net income                                  $1,997              $1,910
                                               ==================  ==================

 Basic earnings per share as reported                       $.60                $.56
 Pro forma basic earnings per share                          .59                 .55

 Diluted earnings per share as reported                     $.57                $.54
 Pro forma diluted earnings per share                        .57                 .53
</TABLE>

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


<TABLE>
<CAPTION>
                                                March 31, 2003     March 31, 2002
                                               ------------------------------------

<S>                                                       <C>               <C>
 Risk-free interest rate                                   3.82%             5.41%
 Expected option life in years                                10                10
 Expected stock price volatility                          32.44%            33.25%
 Dividend yield                                             2.8%              2.1%
</TABLE>







                        This page is page 9 of 40 pages.
<PAGE>


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

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                          2003                         2002
                                                --------------------------   -------------------------
                                                    Basic       Diluted          Basic      Diluted
                                                --------------------------   -------------------------
                                                        (in thousands, except per share data)
<S>                                                <C>          <C>             <C>         <C>
 Earnings per common share:

 Net income                                           $2,016       $2,016          $1,947      $1,947
 Earnings per share                                      .60          .57             .56         .54

 Weighted average common shares outstanding        3,385,000    3,507,000(1)    3,499,000   3,632,000(1)
</TABLE>


1)   The weighted average common shares outstanding include the dilutive effects
     of common stock options of 122,000 and 133,000 for the three months ended
     March 31, 2003 and March 31, 2002.



4.   Comprehensive Income


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



<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                         March 31,
                                                      2003        2002
                                                  -------------------------
                                                       (in thousands)

<S>                                                  <C>         <C>
         Net income as reported                      $2,016      $1,947
         Other comprehensive income (net of tax):
           Change in unrealized holding gain
              on available for sale securities         (108)       (215)
           Reclassification adjustment                  ---         (20)
                                                  -------------------------
         Total comprehensive income                  $1,908      $1,712
                                                  =========================
</TABLE>



5.   Subsequent Event - Common Stock Cash Dividend

     On April 4, 2003, the Board of Directors declared a quarterly cash dividend
of 25 cents per share on the Company's Common Stock. The dividend was payable on
April 29, 2003 to shareholders of record on April 17, 2003.

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 card settlement
services for approximately 37,000 merchants throughout the United States.



                       This page is page 10 of 40 pages.
<PAGE>

     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, 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>

<TABLE>
<CAPTION>

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

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

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

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

7.   Common Stock Repurchases and Trust Preferred Issuance

     In August  2001,  the Company  announced  an  authorization  to  repurchase
355,500 common shares, as adjusted for the  three-for-two  stock split announced
September 20, 2001. To date,  237,003 shares have been repurchased,  as adjusted
for the three-for-two  stock split announced  September 20, 2001. In the quarter
ended March 31, 2003, the Company  purchased 46,367 shares at an average cost of
$28.52 under the program.  Under the  repurchase  program,  the Company plans to
purchase  shares  from  time to time on the  open  market  and/or  in  privately
negotiated transactions.


8.   Real Estate Investment Trust

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


9.   New Accounting Pronouncements

     New accounting  standards for asset retirement  obligations,  restructuring
activities and exit costs,  operating leases,  and early  extinguishment of debt
were adopted as of January 1, 2003.  Management has determined that the adoption
of  these  new  accounting  standards  did not  have a  material  impact  on the
Company's financial condition or results of operations.


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

Forward-Looking Information

     This  Quarterly  Report on Form 10-Q includes  forward-looking  information
which is subject to the "safe harbor"  created by Section 27A of the  Securities
Act of 1933, as amended, and Section 21E of the Securities 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.


                        This page is pae 12 of 40 pages.

<PAGE>

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

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

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

     o    Dividend restrictions.

     o    Regulatory discretion.

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

     o    Asset/liability repricing risks and liquidity risks.

     o    Changes in the securities markets.

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

     o    Certain operational risks involving data processing systems or fraud.

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

     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, 2002 and "Certain  Important
Considerations for Investors" herein.


                       This page is page 13 of 40 pages.

<PAGE>

     The following sections discuss  significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 2002
to March 31, 2003.  Significant  changes and trends in the Company's  results of
operations  for the three  months  ended  March 31,  2003,  compared to the same
period in 2002, are also discussed.


Summary of Financial Results

     The Company  reported net income of $2,016,000 ($.57 per diluted share) for
the three  months  ended  March 31, 2003 as  compared  to  $1,947,000  ($.54 per
diluted share) for the same period in 2002, an increase of $69,000 in net income
or 4%. This  increase is due to an increase of $541,000 in net interest  income,
partially  offset by an  increase  of  $348,000  in  noninterest  expense  and a
decrease  of $189,000  in other  noninterest  income.  In  addition,  net income
increased  due to a decline in the  Company's  effective tax rate from 36.6% for
the quarter  ended March  31,2002 to 34.4% for the quarter ended March 31, 2003.
For further information, see "Income Taxes" in this section.


Net Interest Income

     Net interest income  increased from $4,989,000 in the first quarter of 2002
to  $5,530,000  in the first  quarter of 2003,  which  represents an increase of
$541,000 or 11%. The increase in net interest income was driven by a substantial
increase in average  earning assets of  $43,529,000  from  $441,641,000  for the
quarter  ended March 31, 2002 to  $485,170,000  for the quarter  ended March 31,
2003. The largest  component of the increase in earning assets was growth in the
Company's loan portfolio.  Average portfolio loans increased  $32,689,000 or 9%,
when  compared to the same  quarter in 2002.  The Company  continues to focus on
growth in the overall loan  portfolio,  and in particular  the  commercial  real
estate  portfolio,   through  marketing  efforts  and  a  general  expansion  of
businesses  within the Company's  market area.  Average  commercial  real estate
loans  increased  $36,784,000  or 30% and  average  installment  and other loans
increased  $3,085,000  or 23%,  offset by a  decline  of  $7,211,000,  or 10% in
average  commercial  loans for the three months ended March 31, 2003 as compared
to the three months ended March 31, 2002.

     The Company's  net interest  margin also  increased  slightly to 4.62% from
4.58% one year ago. For the three months ended March 31, 2003,  yield on earning
assets  decreased  to 6.30%  from 6.80% for the same  period  one year ago.  The
decrease in yield on earning assets is due to a decline in the general  interest
rate environment.  Yield paid on interest bearing liabilities decreased to 2.19%
for the three  months  ended  March 31,  2003 as  compared to 2.86% for the same
period one year ago.  This  decline is  attributable  to a lower  interest  rate
environment and the downward repricing of interest bearing deposits.


                       This page is page 14 of 40 pages.
<PAGE>


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


<TABLE>
<CAPTION>
                                                 Three months ended                   Three months ended
                                                   March 31, 2003                       March 31, 2002
                                        ------------------------------------- ------------------------------------

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

<S>                                      <C>           <C>            <C>      <C>           <C>           <C>
Real estate-mortgage loans                $98,156      $1,621         6.70%     $97,077      $1,722        7.19%
Real estate-commercial loans              159,915       2,855         7.24      123,131       2,282        7.52
Commercial loans                           62,133         956         6.24       69,344       1,197        7.00
Real estate construction loans             44,593         807         7.34       45,620         863        7.67
Installment and other                      16,707         163         3.96       13,622         153        4.56
Deferred loan fees                           (544)        ---          ---         (523)        ---         ---
                                        -----------------------               ----------------------
  Portfolio loans                         380,960       6,402         6.82      348,271       6,217        7.24


Mortgage loans held for sale                  220           4         7.37          ---         ---         ---
Investments                                99,764       1,123         4.57       68,941       1,088        6.40
Federal funds sold                          4,226          13         1.25       24,429         104        1.73
                                        -----------------------                           ----------
  Total earning assets (1)               $485,170       7,542         6.30     $441,641       7,409        6.80
                                        =============                         =============

Interest bearing transaction accounts    $137,760         304         0.89     $124,386         423        1.38
Time deposits                             217,091       1,440         2.69      204,335       1,739        3.45
Other borrowings                           17,606         268         6.17       14,174         258        7.38
                                        -----------------------                           ----------
   Total interest-bearing liabilities    $372,457       2,012         2.19%    $342,895       2,420        2.86%
                                        =============                         =============

                                                    -----------                           ----------
Net interest income                                    $5,530                                $4,989
                                                    ===========                           ==========
Net interest income to
  earning assets                                                      4.62%                                4.58%

</TABLE>

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



                        Tis page is page 15 of 40 pages.
<PAGE>



     The  following  table sets forth  changes in interest  income and  interest
expense for each major category of interest-earning  asset and  interest-bearing
liability,  and the amount of change attributable to volume and rate changes for
the three months ended March 31, 2003 and 2002. 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, 2003 compared to the
                                                     three months ended March 31, 2002
                                                  ----------------------------------------
                                                     Volume        Rate         Total
                                                  ----------------------------------------
                                                               (in thousands)
<S>                                                      <C>         <C>          <C>
Increase/(decrease) in interest income:
  Real estate-mortgage loans                              $19        ($120)       ($101)
  Real estate-commercial loans                            659          (86)         573
  Commercial loans                                       (118)        (123)        (241)
  Real estate construction loans                          (19)         (37)         (56)
  Installment and other                                    32          (22)          10
  Mortgage loans held for sale                              4          ---            4
  Investments                                             401         (366)          35
  Federal funds sold                                      (68)         (23)         (91)
                                                  ----------------------------------------
Total increase/(decrease)                                 910         (777)         133
                                                  ----------------------------------------

Increase/(decrease) in interest expense:
  Interest-bearing transaction accounts                    42         (161)        (119)
  Time deposits                                           103         (402)        (299)
  Other borrowings                                         56          (46)          10
                                                  ----------------------------------------
Total increase/(decrease)                                 201         (609)        (408)
                                                  ----------------------------------------

Increase/(decrease) in net interest income               $709        ($168)        $541
                                                  ========================================
</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, 2003
and  2002.  For  further  information,  see  "Allowance  for  Loan  Losses"  and
"Nonperforming Assets" in this section.





                       This page is page 16 of 40 pages.
<PAGE>


Noninterest Income and Expense

Noninterest Income

     The following table sets forth the components of the Company's  noninterest
income for the three months ended March 31, 2003, as compared to the same period
in 2002.



<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,              $         %
                                                      --------------------------
                                                          2003          2002       Change     Change
                                                      -------------  ----------- ----------------------
                                                       (dollars in thousands)

<S>                                                      <C>            <C>          <C>          <C>
Service charges on deposit accounts                        $268           $314        ($46)       (15)%
Merchant draft processing, net                            1,129          1,179         (50)        (4)
Loan servicing income                                        35             54         (19)       (35)
Net realized gains on investment securities
  available for sale                                        ---             35         (35)      (100)
Other income                                                197            236         (39)       (17)
                                                      -------------  ----------- ------------
Total noninterest income                                 $1,629         $1,818       ($189)       (10)%
                                                      =============  =========== ============
</TABLE>


     Noninterest income decreased $189,000,  or 10%, to $1,629,000 for the three
months ended March 31, 2003 when compared to  $1,818,000  for the same period in
2002.  During this  period,  such  decrease was  primarily  due to a decrease of
$50,000 in merchant card net revenue,  a $46,000  decrease in service charges on
deposit  accounts and a decrease in net realized gains on investment  securities
available for sale of $35,000.  The decrease in merchant card net revenue is due
to a decrease in  processing  revenue.  The  decrease in net  realized  gains on
investment securities available for sale is the result of the sale of $5,079,000
of corporate debt  securities  during 2002. Such securities were sold to improve
the risk profile of the Company's investment portfolio.


Noninterest Expense

     The following table sets forth the components of the Company's  noninterest
expense  during the three months  ended March 31, 2003,  as compared to the same
period in 2002.


<TABLE>
<CAPTION>
                                          Three Months Ended
                                              March 31,             $         %
                                      ---------------------------
                                          2003         2002       Change    Change
                                      -----------------------------------------------
                                        (dollars in thousands)

<S>                                          <C>          <C>        <C>        <C>
Salaries and employee benefits               $2,284       $2,046     $238       12 %
Occupancy and equipment expense                 614          524       90       17
Other                                         1,188        1,168       20        2
                                      -------------------------------------
Total noninterest expense                    $4,086       $3,738     $348        9 %
                                      =====================================
</TABLE>


         Noninterest expense increased by $348,000, or 9%, to $4,086,000 during
the first quarter of 2003 as compared to $3,738,000 for the first quarter of
2002. The increase in noninterest


                        This page is page 17 of 40 pages
<PAGE>

expense for the three-month period ended March 31, 2003, as compared to the same
period  ended  March 31,  2002,  was  primarily  attributable  to an increase in
salaries  and  employee  benefits of  $238,000.  The  increase  in salaries  and
employee benefits was primarily due to an increase in sales personnel.  At March
31, 2003, the number of full time equivalent  employees  totaled 156 as compared
to 154 at March 31, 2002.


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 34.4% for the three months  ended March 31, 2003,  as compared to 36.6%
for the same period in 2002. The primary reason for the Company's  effective tax
rate  being  significantly  lower than the  statutory  rate of 41% is due to the
January 15, 2002 formation of NBR Real Estate  Investment Trust, a Maryland Real
Estate Investment Trust. The entity was formed to hold NBR's real estate secured
loans and to better  organize  NBR's  marketing and  origination  of real estate
secured lending.

Business Segments

     The Company  operates in two  principal  product  and service  lines:  core
community  banking  and  merchant  credit  card  services.  The  Company's  core
community   banking  segment  includes   commercial,   commercial  real  estate,
construction  and  permanent   residential   lending  along  with  treasury  and
depository  activities.  The Company's  merchant card  services  industry  group
provides  credit card settlement  services for  approximately  37,000  merchants
throughout the United States.

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



<TABLE>
<CAPTION>
                                                               For the quarter ended 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 18 of 40 pages.
<PAGE>



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

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

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




     Community Banking

     The Community  Banking segment's income before income tax increased for the
three months ended March 31, 2003 when compared to the same period in 2002.  The
increase was primarily due to an increase in net interest  income.  Net interest
income increased $530,000 for the three months ended March 31, 2003, principally
due to an  increase  in earning  assets,  offset  partially  by a decline in the
general  interest rate  environment.  The Company  increased its loan  portfolio
during the first three months of 2003 through marketing efforts. For the quarter
ended March 31, 2003,  total average  portfolio loans were  $380,960,000,  up 9%
from $348,271,000 for the quarter ended March 31, 2002.

     Merchant Card Services

     The Company's  merchant  credit card segment earned  $396,000 for the three
months  ended March 31, 2003  compared to $435,000  for the same period in 2002.
The  decrease  in the unit's net  income  was due to a  decrease  in  processing
revenue and an increase in salary and benefits  expenses.  The  merchant  credit
card  segment's  net  income  comprised   approximately  20%  of  the  Company's
consolidated net income for the three months ended March 31, 2003 as compared to
22% for the same period one year ago.

     The Company bears certain risks  associated  with its merchant  credit card
processing  business.  Due to a contractual  obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
refuses  or is  unable  to pay 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-back  losses. Such reserve,
which  totaled  $1,263,000  and  $1,233,000  as of March 31, 2003 and 2002,  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





                       This page is page 19 of 40 pages.
<PAGE>

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 $44,000 for the three months  ended March 31,  2003,  as compared to $58,000
for the three months ended March 31, 2002. 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,
                                                    2003         2002
                                             --------------------------
                                                   (in thousands)

                     Beginning allowance          $1,261       $1,212
                     Provision for losses             44           58
                     Recoveries                        3            8
                     Charge-offs                     (45)         (45)
                                             --------------------------
                     Ending allowance             $1,263       $1,233
                                             ==========================


Investment Securities

     Total investment securities decreased to $92,558,000, as of March 31, 2003,
compared to  $99,921,000 as of December 31, 2002. The decrease in the investment
securities  portfolio from December 31, 2002 was primarily due to prepayments of
the Company's mortgage backed securities  portfolio.  Such portfolio amounted to
$79,794,000  as of December 31, 2002 as compared to  $74,450,000 as of March 31,
2003.  The average  federal  funds sold balance for the quarter  ended March 31,
2003 of $4,226,000  was  substantially  lower than  $24,429,000  for the quarter
ended March 31, 2002. This decrease was due to the Company's  increased focus on
greater growth in the Company's loan portfolio.

Loans

     Total  loans  increased  to  $397,514,000  at March 31,  2003  compared  to
$365,076,000  at December 31, 2002. The Company  continues to focus on growth in
the overall loan portfolio  through marketing efforts and a general expansion of
businesses  within the  Company's  market  area.  Commercial  real estate  loans
increased   $8,360,000  to  $166,378,000,   at  March  31,  2003,   compared  to
$158,018,000 at December 31, 2002.  Residential  real estate mortgage loans also
increased $21,446,000 to $109,210,000 at March 31, 2003, compared to $87,764,000
at December 31, 2002.


                       This page is page 20 of 40 pages.
<PAGE>


     The following  table  summarizes  the  composition of the loan portfolio at
March 31, 2003 and December 31, 2002:


<TABLE>
<CAPTION>
                                      March 31, 2003                December 31, 2002
                                ----------------------------   -----------------------------
                                      Amount          %              Amount          %
                                ----------------------------   -----------------------------
                                                  (dollars in thousands)
<S>                                     <C>           <C>             <C>           <C>
 Residential real estate mortgage       $109,210       27%             $87,764       24%
 Commercial real estate mortgage         166,378       43              158,018       43
 Commercial                               60,443       15               62,958       17
 Real estate construction                 49,307       12               42,749       12
 Installment and other                    12,538        3               14,260        4
 Less net deferred loan fees                (362)     ---                 (673)     ---
                                ----------------------------   -----------------------------
     Total portfolio loans               397,514      100%             365,076      100%
                                                  ==========                    ============
 Less allowance for loan losses           (7,355)                       (7,400)
                                -------------------            ------------------
     Net loans                          $390,159                      $357,676
                                ===================            ==================
</TABLE>


Allowance for Loan Losses

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

     The  Company's  allowance  for loan losses is based on specific and formula
allocations  to  the  Company's  loan  portfolio.  Specific  allocations  of the
allowance for loan losses are made to identified  problem loans where management
has identified  significant conditions or circumstances related to a given loan,
which  management  believes  indicate the probability that a loss may occur. The
specific   allocations   are   increased  or  decreased   through   management's
reevaluation on a quarterly basis of the status of the particular problem loans.
Loans which do not receive a specific allocation receive an allowance allocation
based on a formula,  represented  by a  percentage  factor  based on  underlying
collateral,  type of loan, historical  charge-offs,  general economic conditions
and other qualitative factors.


                       This page is page 21 of 40 pages.
<PAGE>


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



<TABLE>
<CAPTION>
                                                           Three months ended
                                                                March 31,
                                                        --------------------------
                                                            2003         2002
                                                        ------------- ------------

                                                         (dollars in thousands)

<S>                                                         <C>          <C>
              Beginning allowance for loan losses           $7,400       $7,580
              Provision for loan losses                        ---          ---
              Charge-offs                                      (79)         (45)
              Recoveries                                        34           14
                                                        ------------- ------------
              Ending allowance for loan losses              $7,355       $7,549
                                                        ============= ============


              Net charge-offs to average
                 loans (annualized)                          0.05%          0.04%
</TABLE>


     The allowance for loan losses as a percentage of total loans decreased from
2.03%,  at December  31,  2002,  to 1.85% at March 31,  2003.  The growth in the
Company's loan portfolio  resulted  primarily from  commercial real estate loans
and  residential  real estate loans that generally bear a lower credit risk than
construction  or commercial  loans.  Accordingly,  under the Company's loan loss
reserve  methodology,  such loans  generally  receive a lower loan loss  reserve
allocation as compared to commercial or construction loans.


Nonperforming Assets

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



<TABLE>
<CAPTION>
                                                       March 31,       December 31,
                                                         2003              2002
                                                    ----------------  ---------------
                                                         (dollars in thousands)
<S>                                                          <C>              <C>
Nonaccrual loans                                             $2,983           $2,516
Accruing loans past due 90 days or more                         ---                6
Restructured loans                                              272              272
                                                    ----------------  ---------------
Total nonperforming loans                                     3,255            2,794
Other real estate owned                                         ---              ---
                                                    ----------------  ---------------
Total nonperforming assets                                   $3,255           $2,794
                                                    ================  ===============



Nonperforming assets to total assets                          0.60%            0.54%
</TABLE>

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

     Nonperforming  assets  have  increased  from  $2,794,000  or .54% of  total
assets,  as of December 31, 2002,  to  $3,255,000  or .60% of total assets as of
March 31,  2003.  The increase  was  attributable  to an increase of $467,000 in
nonaccrual loans during this period.

     At March 31, 2003,  nonperforming loans consist of loans to 17 borrowers, 9
of which have  balances in excess of  $100,000.  The two largest  have  recorded
balances  of  $1,355,000  and  $378,000.  Both loans are  secured by  industrial
equipment or various business assets. 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, 2003,  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 three loan  relationships  which total
approximately   $2,500,000  as  of  March  31,  2003,  compared  to  eight  loan
relationships  totaling  approximately  $1,244,000  at December 31, 2002,  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, 2003,  the  Company's  total  recorded  investment in impaired
loans  (as  defined  by SFAS  No.  114 and No.  118)  was  $3,255,000,  of which
$2,983,000  relates to the  recorded  investment  in loans for which  there is a
related allowance for loan losses allocation of $825,000. The remaining $272,000
in  impaired  loans  did not  require  a  specific  allowance  for  loan  losses
allocation.

     The Company's  average  recorded  investment  in impaired  loans during the
three months ended March 31, 2003 and 2002 was  $2,968,000 and  $3,220,000.  The
decrease of $252,000 in the average recorded investment in impaired loans during
the three months  ending March 31, 2003 compared to the same period one year ago
was primarily due to the 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, 2003 and March 31, 2002.

     As of March 31, 2003, there was $2,983,000 of loans on which the accrual of
interest had been  discontinued  as compared to $2,516,000 at December 31, 2002.
During the three  months ended March 31,  2003,  interest due but excluded  from
interest income on loans placed on nonaccrual status was $76,000, as compared to
$36,000 for the same period one year ago. There was no interest  income received
on  nonaccrual  loans during the three months ended March 31, 2003 and March 31,
2002.


                       This page is page 23 of 40 pages.
<PAGE>



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 2003, the Company
was not required to repurchase any such loans. During the first quarter of 2002,
the Company paid $33,000 for a settlement related to disputed title issues.

Investment in REMIC

     In 1995, Allied Savings Bank ("Allied"), formerly a wholly owned subsidiary
of the Company  which  merged into NBR in 1997,  sold a COFI ARM  mortgage  pool
whose carrying value was approximately $73,900,000 as part of a transaction that
resulted in creating a Real Estate Mortgage  Investment Conduit  ("REMIC").  The
REMIC issued three classes of mortgage pass-through mortgage certificates:  A, B
and C. The sale  transaction  took place as a result of Allied  selling 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.

     The  composition  of the  original  certificate  balances  along with their
respective March 31, 2003 balances are as follows:


                  Original   March 31, 2003
                Certificate    Certificate
                 Face Value    Face Value
               ------------------------------

 Class A         $73,199,448      $2,264,009
 Class B           3,249,067       3,196,478
 Class C                 100             100
               ------------------------------
    Total pool   $76,448,615      $5,460,587
               ==============================

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



                       This page is page 24 of 40 pages.
<PAGE>


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, 2003
                                 ----------------------------------------------------------------------
                                   Less Than    One Through    Four Through    After Five
                                   One Year     Three Years     Five Years       Years        Total
                                 ----------------------------------------------------------------------
                                                            (in thousands)

<S>                                     <C>             <C>             <C>        <C>         <C>
 Trust preferred securities             $ ---           $ ---           $ ---      $10,000     $10,000
 Operating leases (premises)            1,345           1,655           1,134          523       4,657
                                 ----------------------------------------------------------------------
     Total long-term debt
         and operating leases          $1,345          $1,655          $1,134      $10,523     $14,657
                                 ==========================================================


 Commitments to extend credit                                                                   74,305
 Standby letters of credit                                                                       5,414
                                                                                          -------------
   Total contractual obligations
         and commitments                                                                       $94,376
                                                                                          =============
</TABLE>


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,  2003,  Redwood  held  $21,000 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, 2003,  there was $2,000,000  outstanding  under
this line of credit.



                       This page is page 25 of 40 pages.
<PAGE>

     Redwood's  current  cash  dividend to its common  shareholders  is $.25 per
common  share per  quarter.  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. 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 2003 dividend plan from the OCC in January 2003.

     During the first three months of 2003,  NBR declared a dividend  payable to
Redwood  of  $1,600,000.  Management  believes  that as of March 31,  2003,  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,  2003,  the  Company  received  cash  of  $8,093,000  from  operating
activities and $19,522,000 from financing activities, while using $25,445,000 in
investing activities.


Capital Resources

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

     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.



                       This page is page 26 of 40 pages.

<PAGE>

     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, 2003 and December 31, 2002.



<TABLE>
<CAPTION>
                                       March 31, 2003                       December 31, 2002
                         --------------------------------------   -----------------------------------
                                          Well-      Minimum                    Well-       Minimum
                              Actual   Capitalized  Requirement      Actual  Capitalized  Requirement
                         --------------------------------------   -----------------------------------
<S>                            <C>          <C>           <C>          <C>        <C>         <C>
      Company
        Leverage                6.99%        5.00%        4.00%         6.96%      5.00%      4.00%
        Tier 1 risk-based       8.61         6.00         4.00          9.18       6.00       4.00
        Total risk-based       10.13        10.00         8.00         10.72      10.00       8.00

      NBR
        Leverage                7.50%        5.00%        4.00%         7.35%      5.00%      4.00%
        Tier 1 risk-based       9.24         6.00         4.00          9.68       6.00       4.00
        Total risk-based       10.50        10.00         8.00         10.94      10.00       8.00
</TABLE>


     In August  2001,  the Company  announced  an  additional  authorization  to
repurchase  355,500 of common shares,  as adjusted for the  three-for-two  stock
split  announced   September  20,  2001.  To  date,  237,003  shares  have  been
repurchased.  Under the repurchase program, the Company plans to purchase shares
from  time  to  time  on  the  open  market   and/or  in  privately   negotiated
transactions.




                       This page is page 27 of 40 pages.
<PAGE>


Trust Preferred Securities

     On February 22, 2001,  Redwood  Statutory Trust I ("RSTI"),  a wholly owned
subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities
with a liquidation  amount of $1,000 per security.  The proceeds of the offering
were loaned to the Company in exchange for junior  subordinated  debentures with
terms similar to the Capital Securities.  The sole assets of RSTI are the junior
subordinated  debentures  of the Company  and  payments  thereunder.  The junior
subordinated   debentures  and  the  back-up  obligations,   in  the  aggregate,
constitute a full and unconditional  guarantee by the Company of the obligations
of RSTI under the Capital  Securities.  Distributions on the Capital  Securities
are  payable  semi-annually  at the  annual  rate of 10.2% and are  included  in
interest expense in the consolidated financial statements.  These securities are
considered Tier 1 capital (with certain  limitations  applicable)  under current
regulatory  guidelines.  As of March 31, 2003, the outstanding principal balance
of the Capital Securities was $10,000,000.  The principal balance of the Capital
Securities constitutes the trust preferred securities in the Company's financial
statements.

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

Certain Important Considerations for Investors

     Merchant  Credit  Card  Processing.  The  Company's  profitability  can  be
negatively  impacted should 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 28 of 40 pages.


<PAGE>

     Merchant  credit card  processing  services are highly  regulated by credit
card  associations  such as Visa.  In order to  participate  in the credit  card
programs,  the Company must comply with the credit card association's  rules and
regulations  that may change from time to time.  If the Company  fails to comply
with these credit card association  standards,  the Company's status as a member
service provider and as a certified  processor could be suspended or terminated.
During  November  1999,  Visa  adopted  several  rule changes to reduce risks in
high-risk  merchant  credit card  programs and these rule  changes  affected the
Company's  merchant  credit card business.  The rule changes went into effect on
March 31, 2001. These changes included a requirement that a processor's reported
fraud ratios be no greater than three times the  national  average.  At December
31, 2002 (the most recent period  available  from Visa),  the Company's  overall
fraud ratio was less than the Visa requirement.  Other Visa changes included the
requirement that total  processing  volume in certain  high-risk  categories (as
defined by Visa) be less than 20% of total processing volume. At March 31, 2003,
the Company's total Visa transactions within these certain high-risk  categories
were 1.70% 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, 2003,  the Company's  weekly Visa volume was 55% of the  Company's  tangible
equity  capital,  and  aggregate  charge-backs  for the previous six months were
6.39% of tangible equity capital and the aggregate  charge-backs for the quarter
were .41% of the interchange count and .44% 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,  2003,  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.

     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,  2003,
approximately  82% of the dollar  value of the  Company's  loans were secured by
real estate,  of which 50% 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 or floods,
which may cause  uninsured  damage and other loss of value to real  estate  that
secures  the  Company's  loans).  In  addition,  the  long-term  impact  of  the
California  energy crisis and the decline in the  technology  sector in Northern
California 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.


                       This page is page 29 of 40 pages.
<PAGE>

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

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

     Government  Regulation.  The  Company and its  subsidiaries  are subject to
extensive federal and state  governmental  supervision,  regulation and control.
Future  legislation and government  policy could adversely  affect the financial
industry.  Although the full impact of such legislation and regulation cannot be
predicted,   future  changes  may  alter  the  structure  of,  and   competitive
relationship  among,  financial  institutions.  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  and WorldCom  Inc.  bankruptcies  and recent  reports of accounting
irregularities  at public  companies,  including  various  large  and  seemingly
well-regarded  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  of  depository  institutions,  (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.


                       This page is page 30 of 40 pages.

<PAGE>

     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 in a new type of financial  services firm,  called a "financial
holding  company".  Financial  holding companies can offer virtually any type of
financial service, including banking,  securities underwriting,  insurance (both
agency and underwriting),  and merchant banking. Several of the nation's largest
savings and loan associations and commercial banks have a significant  number of
branch offices in the areas in which the Company conducts operations.  Among the
advantages  possessed by the larger of these  institutions  are their ability to
make larger loans, finance extensive advertising campaigns, access international
money  markets and  generally  allocate  their  investment  assets to regions of
highest yield and demand.  In addition,  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.

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


                       This page is page 31 of 40 pages.
<PAGE>

     As of March 31, 2003,  other than NBR Real Estate  Investment Trust 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.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     As a financial institution,  the Company's primary component of market risk
is interest  rate  volatility.  Fluctuation  in interest  rates will  ultimately
impact both the level of income and expense  recorded on a large  portion of the
Bank's  assets and  liabilities,  and the market value of all  interest  earning
assets and interest bearing liabilities,  other than those which possess a short
term  to  maturity.  Since  virtually  all of  the  Company's  interest  bearing
liabilities and all of the Company's  interest earning assets are located at the
Bank (or in its wholly owned  subsidiary),  all of the  Company's  interest rate
risk exposure lies at the Bank level. As a result, all significant interest rate
risk  management  procedures  are  performed  al the Bank level.  Based upon the
nature of its operations,  the Bank is not subject to foreign currency  exchange
or commodity  price risk.  The Bank's real estate loan  portfolio,  concentrated
primarily within Northern 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.  The Bank's  profitability  is dependent to a
large extent upon its net interest income,  which is the difference  between its
interest income on interest-earning  assets,  such as loans and securities,  and
its  interest  expense on  interest-bearing  liabilities,  such as deposits  and
borrowings. The Bank, like other financial institutions,  is subject to interest
rate risk to the degree that its  interest-earning  assets  reprice  differently
than its  interest-bearing  liabilities.  The Bank manages its mix of assets and
liabilities  with the goals of limiting  its  exposure  to  interest  rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.

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



                       This page is page 32 of 40 pages.
<PAGE>


     The following table sets forth,  as of March 31, 2003, the  distribution of
repricing  opportunities  for the Bank'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                              $19,221     $    ---   $    ---    $    ---     $   ---     $19,221
Investment securities                             7,237        6,171     15,778      47,769      15,603      92,558
Mortgage loans held for sale                        322          ---        ---         ---         ---         322
Loans                                           121,169       36,701     40,910     157,146      41,588     397,514
                                             -----------------------------------------------------------------------
   Total interest-earning assets                147,949       42,872     56,688     204,915      57,191     509,615
                                             -----------------------------------------------------------------------

Interest-bearing liabilities:
Interest-bearing transaction accounts           160,351          ---        ---         ---         ---     160,351
Time deposits                                    72,657       95,817     35,530       8,504         ---     212,508
Trust preferred securities                          ---          ---        ---         ---      10,000      10,000
Short-term borrowings                             4,621          ---        ---         ---         ---       4,621
                                             -----------------------------------------------------------------------
  Total interest-bearing liabilities            237,629       95,817     35,530       8,504      10,000     387,480
                                             -----------------------------------------------------------------------

Interest rate sensitivity gap                  ($89,680)    ($52,945)   $21,158    $196,411     $47,191
                                             ===========================================================
Cumulative interest rate sensitivity gap        (89,680)    (142,625)  (121,467)     74,944     122,135

Interest rate sensitivity gap ratio                0.62       0.45         1.60     24.10         5.72
Cumulative interest rate sensitivity gap ratio     0.62       0.57         0.67      1.20         1.32
</TABLE>


     The Bank's  gap  position  is  substantially  dependent  upon the volume of
mortgage loans held in the  portfolio.  These loans  generally  have  maturities
greater than five years;  however,  these loans have a repricing frequency of at
least  quarterly and  therefore  are  classified in the above table as repricing
within three months. Additionally,  interest-bearing transaction accounts, which
consist  of money  market  and  savings  deposit  accounts,  are  classified  as
repricing  within  three  months.  Some of these  deposits  may be  repriced  at
management's option, and therefore a decision not to reprice such deposits could
significantly alter the Bank's net interest margin.

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



                       This page is page 33 of 40 pages.
<PAGE>

     On a  quarterly  basis,  the Bank's  management  prepares  an  analysis  of
interest rate risk exposure. Such analysis calculates the change in net interest
income and the  theoretical  market value of the Bank's equity given a change in
general  interest  rates of 200 basis points up and 200 basis  points down.  All
changes are  measured in dollars and are  compared  to  projected  net  interest
income and the  current  theoretical  market  value of the Bank's  equity.  This
theoretical  market value of the Bank's equity is calculated by discounting cash
flows  associated  with the Bank's  assets and  liabilities.  The following is a
summary of interest rate risk exposure as of March 31, 2003 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, 2003
         --------------
                                            Change in Annual                          Change in
         Change in Interest Rate            Net Interest Income                 Market Value of Equity
         -----------------------            -------------------                 ----------------------

<S>            <C>                            <C>                                 <C>
               +200                              $479,000                         ($12,964,000)
               +100                              $362,000                          ($5,662,000)
               -100                           ($1,594,000)                          $1,387,000
               -200                           ($3,665,000)                          $3,564,000
</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.  Based on their
          evaluation  as of March 31, 2003,  the Company's  principal  executive
          officer  and  principal  financial  officer  have  concluded  that the
          Company's  disclosure  controls  and  procedures  (as defined in Rules
          13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
          "Exchange Act")) are effective to ensure that information  required to
          be disclosed by the Company in reports that it files or submits  under
          the  Exchange  Act is  recorded,  processed,  summarized  and reported
          within  the  time  periods   specified  in  Securities   and  Exchange
          Commission rules and forms.

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



                       This page is page 34 of 40 pages.
<PAGE>



PART II  OTHER INFORMATION

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

     a)   Exhibits.

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

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

     b)   Reports on Form 8-K

          1.   Form 8-K  filing  dated  January 7, 2003  reporting  under Item 5
               thereof, an increase in quarterly cash dividend.

          2.   Form 8-K filing  dated  January 22, 2003  reporting  under Item 5
               thereof, fourth quarter and full year 2002 results.
















                       This page is page 35 of 40 pages.
<PAGE>



                                   SIGNATURES



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





                             REDWOOD EMPIRE BANCORP
                                  (Registrant)




Date:   5/13/2003            By:  /s/ James E. Beckwith
        ---------                 ----------------------------------
                                  James E. Beckwith
                                  Executive Vice President,
                                  Chief Financial Officer and
                                  Chief Operating Officer
                                  (Principal Financial Officer and
                                  Duly Authorized Officer)







                       This page is page 36 of 40 pages.
<PAGE>


                                  CERTIFICATION


I, Patrick Kilkenny, certify that:

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

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

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

4)   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly  report (the  "Evaluation  Date");  and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5)   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):
     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and



                       This page is page 37 of 40 pages.
<PAGE>



6)   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date: May 6, 2003

/s/ Patrick Kilkenny
--------------------------------------------
Patrick Kilkenny, President/CEO









                       This page is page 38 of 40 pages.
<PAGE>


                                  CERTIFICATION

I, James Beckwith, certify that:

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

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

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

4)   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5)   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):
     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and




                       This page is page 39 of 40 pages.
<PAGE>



6)   The registrant's other certifying officers and I have indicated in this
     quarterly report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date: May 6, 2003

/s/ James Beckwith
--------------------------------------------
James Beckwith, EVP/COO/CFO






















                       This page is page 40 of 40 pages.