10-Q

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

OR

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

For the transition period from __________to ___________

Commission file number:  0-19231

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

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

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

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

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

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

At July 30, 2004, there were 4,947,623 shares of the Registrant’s common stock outstanding.

REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES

Index

                                                                                                                                Page

PART I.          FINANCIAL INFORMATION

         Item 1.   Financial Statements

                        Consolidated Statements of Operations
                        Three and Six Months Ended June 30, 2004 and 2003....................... 3

                        Consolidated Balance Sheets
                        June 30, 2004 and December 31, 2003............................................. 5

                        Consolidated Statements of Cash Flows
                        Six Months Ended June 30, 2004 and 2003....................................... 6

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

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

         Item 3.   Quantitative and Qualitative Disclosures
                        About Market Risk.......................................................................... 40

         Item 4.   Controls and Procedures................................................................. 43

PART II.         OTHER INFORMATION                                                               

         Item 5.   Submission of Matters to a Vote of Security Holders........................ 44

         Item 6.   Exhibits and Reports on Form 8-K.................................................. 45

SIGNATURES...................................................................................................... 46

EXHIBIT INDEX................................................................................................. 47

PART I.  FINANCIAL INFORMATION

Item 1.     Financial Statements

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2004	2003	2004	2003
Interest income:
Interest and fees on loans	$6,343	$6,730	$12,757	$13,136
Interest on investment securities	664	868	1,390	1,991
Interest on federal funds sold	19	10	47	23
Total interest income	7,026	7,608	14,194	15,150
Interest expense:
Interest on deposits	1,087	1,637	2,289	3,381
Interest on other borrowings	427	293	866	561
Total interest expense	1,514	1,930	3,155	3,942
Net interest income	5,512	5,678	11,039	11,208
Provision for loan losses	---	---	---	---
Net interest income after provision for loan losses	5,512	5,678	11,039	11,208
Noninterest income:
Service charges on deposit accounts	266	254	512	522
Merchant draft processing, net	1,308	1,088	2,469	2,217
Loan servicing income	55	43	82	78
Net realized gains on
investment securities available for sale	---	86	---	86
Other income	270	178	544	375
Total noninterest  income	1,899	1,649	3,607	3,278
Noninterest expense:
Salaries and employee benefits	2,615	2,258	5,348	4,542
Occupancy and equipment expense	540	478	1,075	1,092
Other	1,174	1,165	2,328	2,353
Total noninterest expense	4,329	3,901	8,751	7,987
Income before income taxes	3,082	3,426	5,895	6,499
Provision for income taxes	1,231	1,245	2,356	2,302
Net income	$1,851	$2,181	$3,539	$4,197
Total comprehensive income	$1,327	$2,037	$3,104	$3,945
(Continued)

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
(Continued)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2004	2003	2004	2003
Basic earnings per common share:
Net income	$.37	$.43	$.72	$.83
Weighted average shares - basic	4,944,000	5,084,000	4,946,000	5,081,000
Diluted earnings per common share:
Net income	$.36	$.42	$.69	$.80
Weighted average shares - diluted	5,079,000	5,216,000	5,093,000	5,239,000
See Notes to Consolidated Financial Statements.
(Concluded)

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
	June 30,	December 31,
	2004	2003
	(unaudited)
Assets:
Cash and due from banks	$18,827	$19,259
Federal funds sold	5,600	8,600
Cash and cash equivalents	24,427	27,859
Investment securities:
Held to maturity (fair value of $17,213 and $18,041)	17,223	17,566
Available for sale, at fair value (amortized cost of $35,761 and $56,921)	36,300	58,229
Total investment securities	53,523	75,795
Mortgage loans held for sale	5	192
Loans:
Residential real estate mortgage	104,297	108,851
Commercial real estate mortgage	197,954	186,185
Commercial	65,585	55,473
Real estate construction	41,723	51,154
Installment and other	14,862	13,025
Less net deferred loan fees	(335)	(167)
Total portfolio loans	424,086	414,521
Less allowance for loan losses	(7,039)	(7,162)
Net loans	417,047	407,359
Premises and equipment, net	2,191	2,489
Cash surrender value of life insurance	8,832	3,782
Other assets and interest receivable	9,396	11,424
Total assets	$515,421	$528,900
Liabilities and Shareholders' equity:
Deposits:
Noninterest bearing demand deposits	$117,785	$107,359
Interest-bearing transaction accounts	161,212	154,640
Time deposits one hundred thousand and over	74,001	73,262
Other time deposits	100,045	119,521
Total deposits	453,043	454,782
Short-term borrowings	1,939	16,265
Subordinated debentures	20,000	20,000
Other liabilities and interest payable	12,171	10,173
Total liabilities	487,153	501,220
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
none issued and outstanding	---	---
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding: 4,947,623 and 4,950,984 shares	10,520	10,577
Retained earnings	17,424	16,344
Accumulated other comprehensive income, net of tax	324	759
Total shareholders' equity	28,268	27,680
Total liabilities and shareholders' equity	$515,421	$528,900
See Notes to Consolidated Financial Statements.

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
	Six Months Ended
	June 30,
	2004	2003
Cash flows from operating activities:
Net income	$3,539	$4,197
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization, net	237	299
Loans originated for sale	(1,736)	(2,138)
Proceeds from sale of loans held for sale	1,908	1,480
Net realized gains on securities available for sale	---	(86)
Net realized loss on sale of loans held for sale	20	5
Change in other assets and interest receivable	617	(129)
Change in other liabilities and interest payable	1,378	5,575
Total adjustments	2,424	5,006
Net cash from operating activities	5,963	9,203
Cash flows from investing activities:
Net change in loans	(9,494)	(49,620)
Purchases of investment securities available for sale	---	(3,080)
Purchases of investment securities held to maturity	(1,448)	(1,684)
Proceeds from sales of investment securities available for sale	---	9,812
Maturities of investment securities available for sale	13,516	18,956
Maturities or calls of investment securities held to maturity	9,369	2,124
Purchase of company owned life insurance	(2,700)	---
Purchases of premises and equipment, net	(59)	(482)
Net cash from (used in) investing activities	9,184	(23,974)
Cash flows from financing activities:
Net change in noninterest bearing demand deposits	10,426	(4,631)
Net change in interest bearing transaction accounts	6,572	30,134
Net change in time deposits	(18,737)	(11,961)
Net change in short-term borrowings	(14,326)	(7,893)
Repurchases of common stock	(474)	(1,322)
Issuance of common stock	38	541
Cash dividends paid	(2,078)	(1,695)
Net cash (used in) from financing activities	(18,579)	3,173
Net change in cash and cash equivalents	(3,432)	(11,598)
Cash and cash equivalents at beginning of period	27,859	39,337
Cash and cash equivalents at end of period	$24,427	$27,739
(Continued)

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
(Continued)
	Six Months Ended
	June 30,
	2004	2003
Supplemental Disclosures:
Cash paid during the period for:
Interest expense	$3,116	$3,893
Income taxes	2,072	1,790
Noncash transfers:
Transfer of other assets to company owned life insurance	2,200	---
See Notes to Consolidated Financial Statements.
(Concluded)

REDWOOD EMPIRE BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.         Basis of Presentation

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Redwood Empire Bancorp’s 2003 Annual Report to Shareholders.  The statements include the accounts of Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the "Company"), and its wholly owned subsidiaries, National Bank of the Redwoods, Redwood Statutory Trust I (“RSTI”) and Redwood Statutory Trust II (“RSTII”).  In 2002, National Bank of the Redwoods (and with its subsidiary, “NBR”) formed NBR Real Estate Investment Trust, a Maryland Real Estate Investment Trust.  The entity was formed to provide an additional vehicle to raise capital and to better organize and market the origination of real estate secured lending.  However, in July 2004, the Company terminated the REIT due to a December 2003 position announced by the California Franchise Tax Board where certain tax transactions related to REITs would be disallowed.  All significant inter-company balances and transactions have been eliminated. The financial information contained in this report reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.  All such adjustments are of a normal recurring nature.  The results of operations for the three and six months ended June 30, 2004 and cash flows for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

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

2.         Earnings per Share

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

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

3.         Stock-Based Compensation

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

	Three months ended		Six months ended
	June 30, 2004	June 30, 2003	June 30, 2004	June 30, 2003
	(dollars in thousands,
	except per share data)
Net income as reported	$1,851	$2,181	$3,539	$4,197
Deduct: Stock-based compensation expense
determined under fair value based method	(30)	(20)	(58)	(39)
Pro forma net income	$1,821	$2,161	$3,481	$4,158
Basic earnings per share as reported	$.37	$.43	$.72	$.83
Pro forma basic earnings per share	.37	.43	.70	.82
Diluted earnings per share as reported	$.36	$.42	$.69	$.80
Pro forma diluted earnings per share	.36	.41	.68	.79

Pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.  There were 6,000 and 7,500 options granted during the six-month periods ended June 30, 2004 and 2003.

	Three months ended		Six months ended
	June 30, 2004	June 30, 2003	June 30, 2004	June 30, 2003
Risk-free interest rate	4.62%	3.53%	4.62%	3.53%
Expected option life in years	7	10	7	10
Expected stock price volatility	31.40%	31.71%	31.40%	31.81%
Dividend yield	3.4%	3.5%	3.5%	3.2%

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

	Three Months Ended
	June 30,
	2004			2003
	Basic	Diluted		Basic	Diluted
	(in thousands, except per share data)
Earnings per common share:
Net income	$1,851	$1,851		$2,181	$2,181
Earnings per share	.37	.36		.43	.42
Weighted average common shares outstanding	4,944,000	5,079,000	(1)	5,084,000	5,216,000	(1)

(1)  The weighted average common shares outstanding include the dilutive effects of common stock options of 135,000 and 132,000 for the three months ended June 30, 2004 and June 30, 2003, as adjusted for the three-for-two stock split announced July 16, 2003.

	Six Months Ended
	June 30,
	2004			2003
	Basic	Diluted		Basic	Diluted
	(in thousands, except per share data)
Earnings per common share:
Net income	$3,539	$3,539		$4,197	$4,197
Earnings per share	.72	.69		.83	.80
Weighted average common shares outstanding	4,946,000	5,093,000	(1)	5,081,000	5,239,000	(1)

(1)  The weighted average common shares outstanding include the dilutive effects of common stock options of 147,000 and 158,000 for the six months ended June 30, 2004 and June 30, 2003, as adjusted for the three-for-two stock split announced July 16, 2003.

4.         Comprehensive Income

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

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2004	2003	2004	2003
	(in thousands)
Net income as reported	$1,851	$2,181	$3,539	$4,197
Other comprehensive income/(loss) (net of tax):
Change in unrealized holding gain
on available for sale securities	(524)	(94)	(435)	(202)
Reclassification adjustment	---	(50)	---	(50)
Total comprehensive income	$1,327	$2,037	$3,104	$3,945

5.         Subsequent Events - Common Stock Cash Dividend, Termination of REIT and REMIC Payment

On July 7, 2004, the Board of Directors declared a quarterly cash dividend of 21 cents per share on the Company’s Common Stock.  The dividend was paid on July 30, 2004 to shareholders of record on July 15, 2004.

In 2002, the Company formed its REIT subsidiary, which was formed to provide an additional vehicle to raise capital and to better organize and market the origination of real estate secured lending.  With the formation of the REIT, the Company began to recognize state tax benefits in the first quarter of 2002.  During December 2003, the California Franchise Tax Board took the position that certain tax transactions related to REITs and regulated investment companies (RICs) would be disallowed.  Therefore, in July 2004 the Company terminated the REIT.  See “Income Taxes” herein.

In July 2004, notification was received indicating that the Company would be receiving final payment of the outstanding principal of and accrued interest on the REMIC Class B certificates.  See “Investment in REMIC” herein.

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 32,000 merchants throughout the United States.

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

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

	For the quarter ended June 30, 2004
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$7,026	$        ---	$7,026
Total interest expense	1,514	---	1,514
Interest income/(expense) allocation	(126)	126	--
Net interest income	5,386	126	5,512
Provision for loan losses	---	---	---
Total other operating income	591	1,308	1,899
Total other operating expense	3,622	707	4,329
Income before income taxes	2,355	727	3,082
Provision for income taxes	940	291	1,231
Net income	$1,415	$436	$1,851
TotalAverage Assets	$492,889	$22,465	$515,354

	For the quarter ended June 30, 2003
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$7,608	$    ---	$7,608
Total interest expense	1,913	17	1,930
Interest income/(expense) allocation	(245)	245	---
Net interest income	5,450	228	5,678
Provision for loan losses	---	---	---
Total other operating income	561	1,088	1,649
Total other operating expense	3,190	711	3,901
Income before income taxes	2,821	605	3,426
Provision for income taxes	1,026	219	1,245
Net income	$1,795	$386	$2,181
Total Average Assets	$485,739	$37,032	$522,771

	For the six months ended June 30, 2004
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$14,194	$    ---	$14,194
Total interest expense	3,153	2	3,155
Interest income/(expense) allocation	(235)	235	---
Net interest income	10,806	233	11,039
Provision for loan losses	---	---	---
Total other operating income	1,138	2,469	3,607
Total other operating expense	7,337	1,414	8,751
Income before income taxes	4,607	1,288	5,895
Provision for income taxes	1,841	515	2,356
Net income	$2,766	$773	$3,539
Total Average Assets	$496,439	$21,349	$517,788

	For the six months ended June 30, 2003
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$15,150	$    ---		$15,150
Total interest expense	3,920	22		3,942
Interest income/(expense) allocation	(415)	415		---
Net interest income	10,815	393		11,208
Provision for loan losses	---	---		---
Total other operating income	1,061	2,217		3,278
Total other operating expense	6,585	1,402		7,987
Income before income taxes	5,291	1,208		6,499
Provision for income taxes	1,876	426		2,302
Net income	$3,415	$782		$4,197
Total Average Assets	$485,315	$31,416		$516,731

7.         Common Stock Repurchases

In August 2001, the Company announced authorizations to repurchase up to 533,250 common shares, as adjusted for the three-for-two stock splits declared September 20, 2001 and July 16, 2003.  In August 2003, the Company announced an authorization to repurchase an additional 496,500 shares, for a total authorization of 1,029,750 shares.  As of June 30, 2004, 557,987 shares of the Company’s common stock had been repurchased.  In the six months ended June 30, 2004, the Company repurchased 16,939 shares of the Company’s common stock under the program at an average price per share of $28.00.  For the quarter ended June 30, 2004, there were no shares of the Company’s common stock repurchased 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.

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):

      -Competitive pressure in the banking industry and changes in banking or other laws and regulations or governmental fiscal or monetary policies.

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

      -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.

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

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

      -Dividend restrictions.

      -Regulatory discretion.

      -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.

      -Asset/liability repricing risks and liquidity risks.

      -Changes in the securities markets.

      -A decline in the health of the Northern California economy, including the decline in the technology sector and any negative effect of the California state government’s budgetary and fiscal difficulties.

      -Certain operational risks involving data processing systems or fraud.

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

Any forward-looking statements made by the Company are intended to provide investors with additional information with which they may assess the Company’s future potential.  All forward-looking statements are based on assumptions about an uncertain future and are based on information available at the date such statements are issued. The Company undertakes no obligation to update these forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made or to publicly release the results of any revision to these forward-looking statements.  For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and “Certain Important Considerations for Investors” herein.

Executive Summary

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

The following analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of Redwood Empire Bancorp and related notes thereto included in this Report.  The following sections discuss significant changes and trends in financial condition, capital resources and liquidity of the Company from December 31, 2003 to June 30, 2004.  Significant changes and trends in the Company’s results of operations for the three and six months ended June 30, 2004, compared to the same period in 2003, are also discussed.

The Company reported net income of $1,851,000 or $.36 per diluted share for the quarter ended June 30, 2004. This compares to net income of $2,181,000 or $.42 per diluted share for the second quarter of 2003.   For the six months ended June 30, 2004, net income was $3,539,000 or $.69 per diluted share as compared to $4,197,000 or $.80 per diluted share one year ago.  The Company experienced a decline in net income during the three and six months ended June 30, 2004 when compared to the same periods in 2003, primarily due to a decline in the amount of interest income recognized on the available for sale investment portfolio, an increase in the Company’s effective tax rate and higher operating expenses, including a portion related to adding capacity for anticipated future growth.

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

Significant Accounting Policies and Significant Estimates

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

Results of Operations

Net Interest Income

Interest income decreased from $7,608,000 in the second quarter of 2003 to $7,026,000 in the second quarter of 2004, which represents a decrease of $582,000 or 8%. Interest income decreased $956,000, or 6% to $14,194,000 for the six months ended June 30, 2004, as compared to $15,150,000 one year ago.  While the Company experienced growth in average portfolio loans during 2004 as compared to 2003, the continued low interest rate environment and substantial paydown activity within the mortgage-backed securities portfolio both had a negative impact on interest income.  Average portfolio loans totaled $414,332,000 for the second quarter of 2004 as compared to $407,797,000 for the same period one year ago, an increase of $6,535,000 or 2%.  For the six months ended June 30, 2004, average portfolio loans grew $17,150,000, or 4% to $411,603,000 from $394,453,000.  Average investment securities totaled $58,608,000 and $62,727,000 for the three and six months ended June 30, 2004, as compared to $82,136,000 and $90,890,000 for the same periods one year ago.

The Company continues to focus on improving asset mix and growth in the overall loan portfolio, and in particular the commercial real estate portfolio.  Average commercial real estate loans increased $24,639,000 or 15% and $25,364,000 or 16% during the three and six months ended June 30, 2004 when compared to the same periods one year ago.  This loan growth was partially offset by decreases in average residential real estate loans of $11,118,000 or 10% and $969,000 or .9%, and decreases in average construction loans of $6,303,000 or 12% and $797,000 or 2% for the three and six months ended June 30, 2004 as compared to the three and six months ended June 30, 2003.  Average commercial loans increased slightly by $545,000 during the three-month period ended June 30, 2004 when compared to the same period in 2003; however, for the six-month period ended June 30, 2004, average commercial loans decreased by $4,238,000 or 7%. 

Average investment securities totaled $58,608,000 and $62,727,000 for the three and six months ended June 30, 2004, as compared to $82,136,000 and $90,890,000 for the same periods one year ago.  The decline was due to substantial paydown activity within the mortgage-backed securities portfolio throughout the second half of 2003 and the first half of 2004.  Proceeds from such paydown activity facilitated the funding of loan growth.

For the three and six months ended June 30, 2004, interest expense was $1,514,000 and $3,155,000, down $416,000, or 22% and $787,000, or 20% when compared to the same periods in 2003. With the continued low interest rate environment, the Company has been successful in reducing costs associated with interest bearing deposits.  For the three and six months ended June 30, 2004, the cost of average interest bearing deposits was 1.29% and 1.34%, down from 1.80% and 1.88% for the three and six months ended June 30, 2003.  The Company has also improved the current mix of deposits by increasing noninterest bearing demand deposits, while decreasing the balance of higher cost time deposits. 

Net interest income was $5,512,000 for the second quarter of 2004, a decrease of $166,000, or 3% when compared to $5,678,000 for the second quarter of 2003.  The net interest margin was 4.61% for the second quarter of 2004 as compared to 4.62% one year ago.  For the six months ended June 30, 2004, net interest income was $11,039,000, a decrease of $169,000 or 2% from $11,208,000 at June 30, 2003.  Net interest margin was 4.58% for the six months ended June 30, 2004 as compared to 4.62% one year ago.  The Company’s net interest margin was negatively impacted during 2004 due to the additional interest expense incurred with the completion of the Company’s second $10,000,000 trust preferred securities financing in July 2003. Such financing, the proceeds of which have been used for stock repurchases and other corporate matters, bears an annual interest rate of 6.35%.  Total interest expense for both trust preferred securities financing was $414,000 and $827,000 for the three and six months ended June 30, 2004 as compared to $255,000 and $510,000 during the same periods in 2003.

Yield on earning assets decreased to 5.87% for the three months ended June 30, 2004 from 6.19% for the same period one year ago.  Yield on earning assets decreased to 5.89% for the six months ended June 30, 2004 as compared to 6.24% for the same period one year ago.  The decrease in the yield on earning assets for the three- and six-month periods during 2004 was due to the continued low interest rate environment.  Yield paid on interest bearing liabilities decreased to 1.68% and 1.72% for the three-month period ended June 30, 2004 and 2003 from 2.02% and 2.11% for the same period one year ago.  The decrease in interest rates paid on interest bearing liabilities occurred as the Company improved the mix of deposits by increasing noninterest bearing deposits, while decreasing the balance of higher cost time deposits, as well as lowering its deposit product pricing in response to lower short-term rates quoted in the national markets.  The largest decrease in interest expense was experienced in time deposits.  For the three and six months ended June 30, 2004, such expense decreased $521,000 or 41% and $1,147,000 or 42% as compared to the same periods one year ago.

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

	Three months ended			Three months ended
	June 30, 2004			June 30, 2003
	Average		%	Average		%
(dollars in thousands)	Balance	Interest	Yield/Rate	Balance	Interest	Yield/Rate
Residential real estate mortgage loans	$104,967	$1,446	5.54%	$116,085	$1,811	6.26%
Commercial real estate loans	190,266	3,125	6.61	165,627	2,934	7.11
Commercial loans	60,673	848	5.62	60,128	919	6.13
Real estate construction loans	44,761	772	6.94	51,064	901	7.08
Installment and other	13,877	144	4.17	15,182	163	4.31
Deferred loan fees	(213)	---	---	(289)	---	---
Portfolio loans	414,331	6,335	6.15	407,797	6,728	6.62
Mortgage loans held for sale	595	8	5.41	296	3	4.07
Investments	58,608	664	4.56	82,136	867	4.23
Federal funds sold	7,804	19	0.98	3,120	10	1.29
Total earning assets (1)	$481,338	7,026	5.87	$493,349	7,608	6.19
Interest bearing transaction accounts	$155,970	329	0.85	$152,770	358	0.94
Time deposits	181,171	758	1.68	211,463	1,279	2.43
Other borrowings	25,529	427	6.73	18,540	293	6.34
Total interest-bearing liabilities	$362,670	1,514	1.68%	$382,773	1,930	2.02%
Net interest income		$5,512			$5,678
Net interest income to
earning assets			4.61%			4.62%

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

	Six months ended			Six months ended
	June 30, 2004			June 30, 2003
	Average		%	Average		%
(dollars in thousands)	Balance	Interest	Yield/Rate	Balance	Interest	Yield/Rate
Residential real estate mortgage loans	$106,208	$3,009	5.70%	$107,177	$3,430	6.45%
Commercial real estate loans	188,143	6,207	6.63	162,779	5,790	7.17
Commercial loans	56,894	1,594	5.63	61,132	1,875	6.19
Real estate construction loans	47,056	1,641	7.01	47,853	1,708	7.20
Installment and other	13,488	297	4.43	15,928	326	4.13
Deferred loan fees	(186)	---	---	(416)	---	---
Portfolio loans	411,603	12,748	6.23	394,453	13,129	6.71
Mortgage loans held for sale	326	9	5.55	258	7	5.47
Investments	62,727	1,390	4.46	90,890	1,991	4.42
Federal funds sold	10,265	47	0.92	3,658	23	1.27
Total earning assets (1)	$484,921	14,194	5.89	$489,259	15,150	6.24
Interest bearing transaction accounts	$156,696	717	0.92	$145,292	662	0.92
Time deposits	185,597	1,572	1.70	214,268	2,719	2.56
Other borrowings	27,172	866	6.41	18,075	561	6.26
Total interest-bearing liabilities	$369,465	3,155	1.72%	$377,635	3,942	2.11%
Net interest income		$11,039			$11,208
Net interest income to
earning assets			4.58%			4.62%

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

The following table sets forth changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the three and six months ended June 30, 2004 and 2003.  Changes not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate.

	Three months ended
	June 30, 2004 compared to the
	three months ended June 30, 2003
	Volume	Rate	Total
	(in thousands)
Increase/(decrease) in interest income:
Residential real estate mortgage loans	($164)	($201)	($365)
Commercial real estate loans	415	(224)	191
Commercial loans	8	(79)	(71)
Real estate construction loans	(109)	(20)	(129)
Installment and other	(14)	(5)	(19)
Mortgage loans held for sale	4	1	5
Investments	(263)	60	(203)
Federal funds sold	12	(3)	9
Total decrease	(111)	(471)	(582)
Increase/(decrease) in interest expense:
Interest-bearing transaction accounts	7	(36)	(29)
Time deposits	(165)	(356)	(521)
Other borrowings	116	18	134
Total decrease	(42)	(374)	(416)
Decrease in net interest income	($69)	($97)	($166)

	Six months ended
	June 30, 2004 compared to the
	six months ended June 30, 2003
	Volume	Rate	Total
	(in thousands)
Increase/(decrease) in interest income:
Residential real estate mortgage loans	($31)	($390)	($421)
Commercial real estate loans	858	(441)	417
Commercial loans	(125)	(156)	(281)
Real estate construction loans	(28)	(39)	(67)
Installment and other	(52)	23	(29)
Mortgage loans held for sale	2	---	2
Investments	(624)	23	(601)
Federal funds sold	32	(8)	24
Total increase/(decrease)	32	(988)	(956)
Increase/ (decrease) in interest expense:
Interest-bearing transaction accounts	52	3	55
Time deposits	(329)	(818)	(1,147)
Other borrowings	290	15	305
Total increase/ (decrease)	13	(800)	(787)
Increase/(decrease) in net interest income	$19	($188)	($169)

Provision for Loan Losses

Due to the absence of significant net loan charge-offs, little change in loan portfolio asset quality and the balance in the allowance for loan losses, there was no provision for loan losses for the three and six months ended June 30, 2004 and 2003.  For further information, see “Allowance for Loan Losses” and “Nonperforming Assets” in this section.

Noninterest Income and Expense

Noninterest Income

The following tables set forth the components of the Company’s noninterest income for the three and six months ended June 30, 2004, as compared to the same periods in 2003.

	Three Months Ended
	June 30,		$	%
	2004	2003	Change	Change
	(dollars in thousands)
Service charges on deposit accounts	$266	$254	$12	5	%
Merchant draft processing, net	1,308	1,088	220	20
Loan servicing income	55	43	12	28
Net realized gains on investment securities available for sale	---	86	(86)	(100)
Other income	270	178	92	52
Total noninterest income	$1,899	$1,649	$250	15	%

Noninterest income increased $250,000, or 15%, to $1,899,000 for the three months ended June 30, 2004 when compared to $1,649,000 for the same period in 2003.  During this period, such increase was due primarily to an increase of $220,000 in merchant card net revenue and an increase in other income of $92,000, partially offset by an $86,000 decrease in net realized gains on investment securities available for sale.  The increase in merchant card net revenue during the first quarter of 2004 as compared to the same period in 2003 is due to an increase in processing volume.  The increase in other income for the second quarter of 2004 as compared to the same period in 2003 was due to an increase in income associated with the Company’s recent successful implementation of a program to sell investment products and income derived from the purchase of life insurance policies on certain key executives.  The decrease in net realized gains on investment securities available for sale was due to the absence of any investment sales in the quarter.

	Six Months Ended
	June 30,		$	%
	2004	2003	Change	Change
	(dollars in thousands)
Service charges on deposit accounts	$512	$522	($10)		(2)	%
Merchant draft processing, net	2,469	2,217	252		11
Loan servicing income	82	78	4		5
Net realized gains on investment securities available for sale	---	86	(86)		(100)
Other income	544	375	169		45
Total noninterest income	$3,607	$3,278	$329		10	%

Noninterest income increased $329,000, or 10%, to $3,607,000 for the six months ended June 30, 2004 when compared to $3,278,000 for the same period in 2003.  During this period, such increase was primarily due to an increase of $252,000 in merchant card net revenue and an increase in other income of $169,000, partially offset by an $86,000 decrease in net realized gains on investment securities available for sale, for the reasons discussed above.

Noninterest Expense

The following tables set forth the components of the Company’s noninterest expense during the three months ended June 30, 2004, as compared to the same period in 2003.

	Three Months Ended
	June 30,		$	%
	2004	2003	Change	Change
	(dollars in thousands)
Salaries and employee benefits	$2,615	$2,258	$357	16	%
Occupancy and equipment expense	540	478	62	13
Other	1,174	1,165	9	1
Total noninterest expense	$4,329	$3,901	$428	11	%

Noninterest expense increased by $428,000, or 11%, to $4,329,000 during the second quarter of 2004 as compared to $3,901,000 for the second quarter of 2003. The increase in noninterest expense for the three-month period ended June 30, 2004, as compared to the same period in 2003, is attributable to an increase in salaries and employee benefits of $357,000 and an increase in occupancy and equipment expense of $62,000.  The increase in salaries and employee benefits during 2004 was partially due to an increase in the number of full time equivalent employees employed by the Company, the continued impact of increased costs associated with health care and workers compensation insurance and normal annual salary increases.  Additionally, when compared to the three months ended June 30, 2003, salaries and employee benefits expense was negatively impacted during the second quarter of 2004 by an $85,000 decline in contra-salary expense related to Statement of Accounting Standards No. 91, resulting from lower levels of loan originations.  The increase in occupancy and equipment expense during the second quarter of 2004 was due to an increase in building rental costs that occurred as the result of the Company’s sale of a building in which the Company subsequently became a tenant.

Income Taxes

The Company’s effective tax rate varies with changes in the relative amounts of its non-taxable income and nondeductible expenses.  The effective tax rate was 40% for the three and six months ended June 30, 2004 and 36% and 35% for the three and six months ended June 30, 2003. 

As previously disclosed, the Company formed its Real Estate Investment Trust (REIT) subsidiary on January 15, 2002.  With the formation of the REIT, the Company began to recognize state tax benefits in the first quarter of 2002.  During December 2003, the California Franchise Tax Board took the position that certain tax transactions related to REITs and regulated investment companies (RICs) would be disallowed.  Therefore, in July 2004 the Company terminated the REIT.  As previously disclosed, during December 2003 the Company reversed previously recognized net state tax benefits related to the REIT and will not record any related state tax benefits in the future.  Due to the absence of such state tax benefits, the Company’s effective tax rate increased by 4% from 36% to 40% for the three months ended June 30, 2004 when compared to the same period in 2003.  On a year to date basis, the effective tax rate increased by 5% from 35% at December 31, 2003 to 40% at June 30, 2004.  This change in the effective tax rate had a negative impact on net income of $111,000, or $.03 per diluted share, for the second quarter of 2004 and $268,000, or $.05 per diluted share, for the six-month period ended June 30, 2004.

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 32,000 merchants throughout the United States.

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

	For the quarter ended June 30, 2004
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$7,026	$    ---	$7,026
Total interest expense	1,514	---	1,514
Interest income/(expense) allocation	(126)	126	---
Net interest income	5,386	126	5,512
Provision for loan losses	---	---	---
Total other operating income	591	1,308	1,899
Total other operating expense	3,622	707	4,329
Income before income taxes	2,355	727	3,082
Provision for income taxes	940	291	1,231
Net income	$1,415	$436	$1,851
TotalAverage Assets	$492,889	$22,465	$515,354

	For the quarter ended June 30, 2003
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$7,608	$    ---	$7,608
Total interest expense	1,913	17	1,930
Interest income/(expense) allocation	(245)	245	---
Net interest income	5,450	228	5,678
Provision for loan losses	---	---	---
Total other operating income	561	1,088	1,649
Total other operating expense	3,190	711	3,901
Income before income taxes	2,821	605	3,426
Provision for income taxes	1,026	219	1,245
Net income	$1,795	$386	$2,181
Total Average Assets	$485,739	$37,032	$522,771

	For the six months ended June 30, 2004
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$14,194	$    ---	$14,194
Total interest expense	3,153	2	3,155
Interest income/(expense) allocation	(235)	235	---
Net interest income	10,806	233	11,039
Provision for loan losses	---	---	---
Total other operating income	1,138	2,469	3,607
Total other operating expense	7,337	1,414	8,751
Income before income taxes	4,607	1,288	5,895
Provision for income taxes	1,841	515	2,356
Net income	$2,766	$773	$3,539
Total Average Assets	$496,439	$21,349	$517,788

	For the six months ended June 30, 2003
		Merchant
	Community	Card	Total
	Banking	Services	Company
	(in thousands)
Total interest income	$15,150	$    ---	$15,150
Total interest expense	3,920	22	3,942
Interest income/(expense) allocation	(415)	415	---
Net interest income	10,815	393	11,208
Provision for loan losses	---	---	---
Total other operating income	1,061	2,217	3,278
Total other operating expense	6,585	1,402	7,987
Income before income taxes	5,291	1,208	6,499
Provision for income taxes	1,876	426	2,302
Net income	$3,415	$782	$4,197
Total Average Assets	$485,315	$31,416	$516,731

Community Banking

The Community Banking segment’s income before income tax decreased for the three and six months ended June 30, 2004 when compared to the same periods in 2003.  The decrease was primarily due to an increase in noninterest expense, a slight decrease in net interest income and a higher effective tax rate in 2004, which was partially offset by an increase in noninterest income.  The increase in other expense was primarily due to an increase in salaries and employee benefits, as discussed above.  Net interest income decreased $64,000 and $9,000 for the three and six months ended June 30, 2004, when compared to the same periods in 2003, principally due to a decrease in the Company’s net interest margin.  The Company increased its average earning assets by $7,150,000, or 1% and $11,124,000 or 2% for the three and six months ended June 30, 2004 when compared to the same periods one year ago.  Additionally, with the continued low interest rate environment, the Company was able to reduce the cost on interest bearing deposits.

Merchant Card Services

The Company's merchant credit card segment earned $436,000 and $773,000 for the three and six months ended June 30, 2004 compared to $386,000 and $782,000 for the same periods in 2003.  The segment's decrease in net income for the six months ended June 30, 2004, as compared to 2003, is primarily attributable to an increase in noninterest expense, a decrease in net interest income and a higher effective tax rate in 2004, which was partially offset by an increase in noninterest income.  The increase in the segment’s net income for the three months ended June 30, 2004 was primarily due to an increase in merchant draft processing revenues, which was partially offset by a decrease in net interest income.  The bankcard segment’s net interest income is partially determined by the Company’s internal funds transfer pricing systems, which assigns a cost of funds or credit for funds to assets or liabilities based on their type, maturity or repricing characteristics.  The decrease in net interest income for the bankcard segment is due to the continued low interest rate environment and a decrease in the segment’s customer deposit base, which resulted in a decrease in the credit for funds given to the segment.  The merchant bankcard segment’s net income comprised 24% and 22% of the Company's consolidated net income for the three and six months ended June 30, 2004, as compared to 18% and 19% for the three and six months ended June 30, 2003.

The Company bears certain risks associated with its merchant credit card processing business.  Due to a contractual obligation between NBR and Visa and MasterCard, NBR stands in the place of the merchant in the event that a merchant refuses or is unable to pay on charge-backs from cardholders.  Charge-back exposure can also result from fraudulent credit card transactions initiated by merchant customers.  As a result, NBR may incur losses associated with its merchant credit card processing business.  Accordingly, NBR has established a reserve to provide for losses associated with charge-backs.  Such reserve, which totaled $1,379,000 and $1,314,000 as of June 30, 2004 and 2003, was estimated based upon industry loss data as a percentage of transaction volume throughout each year, historical losses incurred by the Company and management’s evaluation regarding merchant and ISO (Independent Sales Organization) risk.  The Company utilizes the services of ISOs to acquire merchants as customers.  The provision for charge-back losses, which is included in the financial statements as a reduction in merchant draft processing income, was $9,000 and $95,000 for the three and six months ended June 30, 2004, as compared to $103,000 and $148,000 for the three and six months ended June 30, 2003.  For further discussion, see “Certain Important Considerations for Investors” in this section.

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

	Three months ended		Six months ended
	June 30,		June 30,
	2004	2003	2004	2003
	(in thousands)
Beginning allowance	$1,376	$1,263	$1,310	$1,261
Provision for losses	9	103	95	148
Recoveries	12	---	16	3
Charge-offs	(18)	(52)	(42)	(98)
Ending allowance	$1,379	$1,314	$1,379	$1,314

Investment Securities

Total investment securities decreased to $53,523,000, as of June 30, 2004, compared to $75,795,000 as of December 31, 2003.  The decrease in the investment securities portfolio from December 31, 2003 was primarily due to the maturity of a $13,516,000 FNMA security and prepayments of the Company’s mortgage-backed securities portfolio.  Such mortgage-backed securities portfolio amounted to $43,101,000 as of December 31, 2003 as compared to $32,244,000 as of June 30, 2004.

Loans

Total loans increased to $424,086,000 at June 30, 2004 compared to $414,521,000 at December 31, 2003.  During the three months ended June 30, 2004, total loans increased $12,841,000, primarily due to an increase of $6,196,000 in commercial loans, an increase of $12,697,000 in commercial real estate loans, partially offset by a decline of $6,723,000 in construction loans.  It is anticipated that the decline in construction loans experienced during the second quarter of 2004 will not continue and that the portfolio will grow during the remainder of 2004.  The Company has hired several additional loan personnel to assist with the loan growth that is expected throughout the remainder of 2004.

The following table summarizes the composition of the loan portfolio at June 30, 2004 and December 31, 2003:

	June 30, 2004			December 31, 2003
	Amount		%	Amount	%
	(dollars in thousands)
Residential real estate mortgage	$104,297	25%		$108,851	27%
Commercial real estate mortgage	197,954	46		186,185	45
Commercial	65,585	15		55,473	13
Real estate construction	41,723	10		51,154	12
Installment and other	14,862	4		13,025	3
Less net deferred loan fees	(335)	---		(167)	---
Total portfolio loans	424,086	100%		414,521	100%
Less allowance for loan losses	(7,039)			(7,162)
Net loans	$417,047			$407,359

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 will occur.  The specific allocations are increased or decreased through management’s reevaluation on a quarterly basis of the status of the particular problem loans.  Loans which do not receive a specific allocation receive an allowance allocation based on a formula, represented by a percentage factor based on underlying collateral, type of loan, historical charge-offs, general economic conditions and other qualitative factors.

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

	Three months ended		Six months ended
	June 30,		June 30,
	2004	2003	2004	2003
	(dollars in thousands)
Beginning allowance for loan losses	$7,177	$7,355	$7,162	$7,400
Provision for loan losses	---	---	---	---
Charge-offs	(170)	---	(170)	(79)
Recoveries	32	137	47	171
Ending allowance for loan losses	$7,039	$7,492	$7,039	$7,492
Net (charge-offs) recoveries to average
loans (annualized)	(0.13%)	0.13%	(0.06%)	0.05%

The allowance for loan losses as a percentage of total loans decreased from 1.73%, at December 31, 2003, to 1.66% at June 30, 2004.  The decrease was due to the increase in the Company’s loan portfolio from $414,521,000 at December 31, 2003 to $424,086,000 at June 30, 2004.  This increase was primarily due to increases in commercial loans and commercial real estate loans.

Nonperforming Assets

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

	June 30,	December 31,
	2004	2003
	(dollars in thousands)
Nonaccrual loans	$1,570	$1,266
Accruing loans past due 90 days or more	---	---
Restructured loans	---	---
Total nonperforming loans	1,570	1,266
Other real estate owned	---	---
Total nonperforming assets	$1,570	$1,266
Nonperforming assets to total assets	0.30%	0.24%

Nonperforming assets have increased from $1,266,000 or .24% of total assets, as of December 31, 2003, to $1,570,000 or .30% of total assets as of June 30, 2004.  This increase was attributable to an increase of $304,000 in nonaccrual loans.

At June 30, 2004, nonperforming loans consisted of loans to 6 borrowers, 4 of which had balances in excess of $100,000. The two largest had recorded balances of $549,000 and $557,000 at June 30, 2004.  One loan is secured by industrial equipment or various other business assets and the other is secured by real estate.  Based on information currently available, management believes that adequate allocations are included in the allowance for loan losses to cover the estimated loss exposure that may result from these loans.

At June 30, 2004, the Company did not have any properties classified as other real estate owned.

Although the volume of nonperforming assets will depend in part on the future economic environment, there are four loan relationships which totaled approximately $4,800,000 as of June 30, 2004, compared to three loan relationships which totaled approximately $2,984,000 at December 31, 2003, about which management has serious doubts as to the ability of the borrowers to comply with the present repayment terms.  These loans are real estate secured and may become nonperforming assets based on the information presently known about possible credit problems of the borrowers.

At June 30, 2004, the Company’s total recorded investment in impaired loans (as defined by SFAS No. 114 and No. 118) was $1,570,000, for which there was a related allowance for loan losses allocation of $138,000.

The Company’s average recorded investment in impaired loans during the six months ended June 30, 2004 and 2003 was $1,285,000 and $2,968,000.  The decrease of $1,683,000 in the average recorded investment in impaired loans during the six months ended June 30, 2004 as compared to the same period one year ago was primarily due to a decrease in nonperforming loans.  There was no interest income recognized during the periods that such loans were impaired for the three and six months ended June 30, 2004 as compared to $0 and $22,000 in interest income recognized during the same periods one year ago.

As of June 30, 2004, there was $1,570,000 of loans on which the accrual of interest had been discontinued as compared to $1,266,000 at December 31, 2003.  During the three and six months ended June 30, 2004, interest due but excluded from interest income on loans placed on nonaccrual status was $29,000 and $80,000 as compared to $66,000 and $135,000 for the same period one year ago.

Mortgage Repurchase Commitments

From time to time, the Company may be required to repurchase mortgage loans from mortgage loan investors as a result of breaches of representations and warranties in the purchase agreement between the investor and the Company.  The Company may also be required to reimburse a mortgage loan investor for losses incurred as a result of liquidating collateral, which had secured a mortgage loan sold by the Company.  Such representations and warranties include the existence of a valid appraisal, legal status of borrower, nature of the collateral and other matters.  The Company expects that it may be required to repurchase loans in the future.  In the first six months of 2004 and 2003, the Company was not required to repurchase any such loans.

Investment in REMIC

In 1995, Allied Savings Bank (“Allied”), formerly a wholly owned subsidiary of the Company which merged into NBR in 1997, sold a COFI indexed ARM mortgage pool whose carrying value was approximately $73,900,000 as part of a transaction that resulted in creating a Real Estate Mortgage Investment Conduit (“REMIC”).  The REMIC issued three classes of mortgage pass-through certificates: A, B and C.  The sale transaction took place as a result of Allied selling its 100% interest in the COFI indexed ARM mortgage pool in exchange for cash of $71,500,000 and a Class B certificate which represented the first loss position with respect to any ultimate losses realized upon the liquidation of defaulted mortgage loans in the pool.  As part of the sale transaction, Allied retained the servicing of the pool.  The Class A and Class B certificates have sequential rights to principal payments, such that Class B certificates shall only receive principal payments after all Class A certificates are retired.  In April 2004, the Class A certificates were retired and the Company began receiving principal payments on the Class B certificates.  Additionally, in July 2004, notification was received indicating that the Company would be receiving final payment of the outstanding principal of and accrued interest on the Class B certificates.

The composition of the original certificate balances along with their respective June 30, 2004 balances are as follows:

	Original	June 30, 2004
	Certificate	Certificate
	Face Value	Face Value
Class A	$73,199,448	$    ---
Class B	3,249,067	2,751,251
Class C	100	100
Total pool	$76,448,615	$2,751,351

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

Contractual Obligations and Commitments

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

	June 30, 2004
	Less Than	One Through	Four Through	After Five
	One Year	Three Years	Five Years	Years	Total
	(in thousands)
Trust preferred securities	$   ---	$    ---	$   ---	$20,000	$20,000
Operating leases (premises)	1,602	3,185	2,747	4,417	11,951
Total long-term debt
and operating leases	$1,602	$3,185	$2,747	$24,417	$31,951
Commitments to extend credit					82,584
Standby letters of credit					5,375
Total contractual obligations
and commitments					$119,910

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 June 30, 2004, Redwood held $2,177,000 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 June 30, 2004, there was no outstanding balance under this line of credit.

Redwood’s current cash dividend to its common shareholders is $.21 per common share per quarter, as adjusted for the three-for-two stock split announced July 16, 2003.  Further, Redwood is required to make semi-annual payments of interest at the rate of 10.2% per annum on $10,000,000 of trust preferred securities issued in 2001 and quarterly payments of interest at the rate of 6.35% per annum for the first five years and then at the three month LIBOR plus 3.1% per annum on $10,000,000 of trust preferred securities issued in July 2003.  Payment of these obligations is ultimately dependent on dividends from NBR to Redwood.  Federal regulatory agencies have the authority to prohibit the payment of dividends by NBR to Redwood if a finding is made that such payment would constitute an unsafe or unsound practice or if NBR would become undercapitalized as a result. If NBR is restricted from paying dividends, Redwood might be unable to pay dividends to its common shareholders.  No assurance can be given as to the ability of NBR to pay dividends to Redwood in the future.   The approval of the Office of the Comptroller of the Currency (“OCC”) is required for the payment of dividends if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock.  Due to this requirement, NBR obtained such approval for its 2004 dividend plan from the OCC in February 2004.

During the first six months of 2004, NBR declared a dividend payable to Redwood of $1,400,000.  Management believes that as of June 30, 2004, the Company’s liquidity position was adequate for the operations of Redwood and NBR.

Although each entity within the consolidated Company manages its own liquidity, the Company’s consolidated cash flow can be divided into three distinct areas: operating, investing and financing.  For the six months ended June 30, 2004, the Company received cash of $5,963,000 from operating activities and $9,184,000 from investing activities, while using $18,579,000 in financing 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.

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 June 30, 2004 and December 31, 2003.

	June 30, 2004			December 31, 2003
		Well-	Minimum		Well-	Minimum
	Actual	Capitalized	Requirement	Actual	Capitalized	Requirement
Company
Leverage	6.82%	5.00%	4.00%	6.47%	5.00%	4.00%
Tier 1 risk-based	8.03	6.00	4.00	7.93	6.00	4.00
Total risk-based	11.86	10.00	8.00	11.94	10.00	8.00
NBR
Leverage	8.24%	5.00%	4.00%	7.59%	5.00%	4.00%
Tier 1 risk-based	9.72	6.00	4.00	9.29	6.00	4.00
Total risk-based	10.97	10.00	8.00	10.55	10.00	8.00

The Company did not repurchase any shares of its common stock during the second quarter of 2004.  In August 2001, the Company announced authorizations to repurchase up to 533,250 common shares, as adjusted for the three-for-two stock splits declared September 20, 2001 and July 16, 2003.  In August 2003, the Company announced an authorization to repurchase an additional 496,500 shares, for a total authorization of 1,029,750.  As of June 30, 2004, 557,987 shares of the Company’s common stock had been repurchased.  In the six months ended June 30, 2004, the Company repurchased 16,939 shares of the Company’s common stock under the program at an average price per share of $28.00.  Under the repurchase program, the Company plans to purchase shares from time to time on the open market and/or in privately negotiated transactions.

Subordinated Debentures/Trust Preferred Securities

On February 22, 2001, Redwood Statutory Trust I (“RSTI”), a wholly owned subsidiary of the Company, closed a pooled offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security.  The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the RSTI Capital Securities.  The sole assets of RSTI are the junior subordinated debentures of the Company and payments thereunder.  The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RSTI under the RSTI Capital Securities.  Distributions on the RSTI Capital Securities are payable semi-annually at the annual rate of 10.2% and are included in interest expense in the consolidated financial statements. At June 30, 2004, due to certain limitations applicable under current regulatory guidelines, the Company had included $8,758,000 of the subordinated debentures as Tier 1 capital.  As of June 30, 2004, the outstanding principal balance of the RSTI Capital Securities was $10,000,000. 

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

On July 22, 2003, Redwood Statutory Trust II (“RSTII”), a wholly owned subsidiary of the Company, closed a financing of 10,000 Capital Securities with a liquidation amount of $1,000 per security.  The proceeds of the financing were loaned to the Company in exchange for junior subordinated debentures with terms similar to the RSTII Capital Securities.  The sole assets of RSTII are the junior subordinated debentures of the Company and payments thereunder.  The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of RSTII under the RSTII Capital Securities.  Distributions on the RSTII Capital Securities, which are payable quarterly at the annual rate of 6.35% for the first five years and then reset to the three month LIBOR plus 3.1% per annum, are included in interest expense in the consolidated financial statements.  While these securities can be considered Tier 1 capital under current regulatory guidelines, as a result of certain limitations applicable, they currently qualify as Tier 2 regulatory capital.  As of June 30, 2004, the outstanding principal balance of the RSTII Capital Securities was $10,000,000. 

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

Prior to December 31, 2003, RSTI and RSTII were consolidated in the Company’s financial statements with the trust preferred securities issued by the trust reported in liabilities as “trust preferred securities” and the subordinated debentures eliminated in consolidation.  Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, RSTI and RSTII are not consolidated with the Company.  Accordingly, the amounts previously reported as “trust preferred securities” in liabilities have been recaptioned “subordinated debentures” and continue to be presented in liabilities on the balance sheet.  At June 30, 2004 and 2003, the amount of the subordinated debentures and trust preferred securities were the same.  The effect of no longer consolidating the trusts does not change the amounts reported as the Company’s assets, liabilities, equity, or interest expense.

Further, as a result of FASB Interpretation No. 46, questions were raised about whether trust preferred securities would still qualify for treatment as Tier 1 capital.  In July 2003, the FRB instructed bank holding companies to continue to include trust preferred securities in Tier 1 capital for regulatory capital purposes, until notice is given to the contrary.  On May 6, 2004, the FRB proposed rules that would allow the continued inclusion of trust preferred securities in Tier 1 capital, subject to tighter quantitative limits and qualitative standards.  At June 30, 2004, due to certain limitations applicable under current regulatory guidelines, the Company had included $8,758,000 of the subordinated debentures as Tier 1 capital.  The subordinated debentures comprised 25% of the Company’s Tier 1 capital as of June 30, 2004.  Under the FRB’s proposed rules, trust preferred securities would be limited to 25% of the Company’s core capital elements, net of goodwill.  Under current rules, the Company is not required to deduct goodwill from core capital elements for the purposes of calculating the 25% limit.  If adopted as proposed, the FRB’s rules would have the effect of reducing the amount of trust preferred securities eligible for Tier 1 capital treatment.

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.

Merchant credit card processing services are highly regulated by credit card associations such as Visa.  In order to participate in the credit card programs, the Company must comply with the credit card association’s rules and regulations that may change from time to time.  If the Company fails to comply with these credit card association standards, the Company’s status as a member service provider and as a certified processor could be suspended or terminated.  During November 1999, Visa adopted several rule changes to reduce risks in high-risk merchant credit card programs and these rule changes affected the Company’s merchant credit card business.  The rule changes went into effect on March 31, 2001.  These changes included a requirement that a processor’s reported fraud ratios be no greater than three times the national average of .1%.  At June 30, 2004 (the most recent period available from Visa), the Company’s overall fraud ratio was less than the Visa maximum.  Other Visa changes included the requirement that total processing volume in certain high-risk categories (as defined by Visa) be less than 20% of total processing volume.  At June 30, 2004, the Company’s total Visa transactions within these certain high-risk categories totaled 3.5% of its total Visa processing volume.  Other changes Visa announced included a requirement that weekly Visa volumes be less than 60% of an institution’s tangible equity capital, as well as a requirement that aggregate charge-backs for the previous six months be less than 5% of the institution’s tangible equity capital or that aggregate charge-backs for the quarter be less than .59% of the interchange count and .95% of the interchange amount.  At June 30, 2004, the Company’s weekly Visa volume was 53% 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 .10% of the interchange count and .21% of the interchange amount.  Merchant bankcard participants, such as the Company, must comply with these Visa rules by filing a compliance plan with Visa.  At June 30, 2004, the Company is in compliance with all rule changes that went into effect on March 31, 2001, based on Visa’s acceptance of the Company’s compliance plan.  Should the Company be unable to comply with these rules, Visa will require collateral of one to four times the shortfall.

In 1996, Wal-Mart Stores, Inc. and several other retailers sued Visa and Mastercard asserting that Visa and Mastercard’s rules regarding uniform acceptance of all Visa and Mastercard credit and debit cards were an illegal tying arrangement.  Prior to trial, Visa and Mastercard agreed to settle these cases.  On January 23, 2004, the Federal District Court for the Eastern District of New York approved this settlement, which became effective January 1, 2004.  Neither the Company nor NBR are a party to these suits, and neither will be directly liable for these settlements.  However, Visa or Mastercard may seek to assess, or assert claims against, their members to fund the settlements.  The merchant credit card segments’ net income comprised approximately 24% and 22% of the Company’s consolidated net income for the three and six months ended June 30, 2004.  We cannot predict the effect that the settlements or any direct claim asserted against members will have on the competitive environment or our future earnings from merchant bankcard operations.

Concentration of Lending Activities.  Concentration of the Company’s lending activities in the real estate sector, including construction loans, could have the effect of intensifying the impact on the Company of adverse changes in the real estate market in the Company’s lending areas.  At June 30, 2004, approximately 81% of the dollar value of the Company’s loans were secured by real estate, of which 54% were secured by commercial real estate, including small office buildings, owner-user office/warehouses, mixed use residential and commercial properties and retail properties.  Substantially all of the properties that secure the Company’s present loans are located in Northern and Central California.  The ability of the Company to continue to originate mortgage, construction and other loans may be impaired by adverse changes in local or regional economic conditions, adverse changes in the real estate market, increasing interest rates, or acts of nature (including earthquakes, floods or wildfires, which may cause uninsured damage and other loss of value to real estate that secures the Company’s loans).  In addition, the long-term impact of the California energy crisis, the decline in the technology sector in Northern California and the California state government’s budgetary and fiscal difficulties may cause adverse changes in the Company's local economy and principal markets.  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.

Fluctuations in Interest Rates.   Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow.  Conversely, further decreases in interest rates could result in an acceleration in the prepayment of loans.  An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations.  If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business.

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

War on Terrorism; Foreign Hostilities.  Acts or threats of terrorism and actions taken by the U.S. or other governments as a result of such acts or threats may result in a downturn in U.S. economic conditions and could adversely affect business and economic conditions in the U.S. generally and in our principal markets.  Deterioration in either the U.S. or the California economy could adversely affect the Company’s financial condition and results of operations.

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

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

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

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

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

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

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

As of June 30, 2004, other than the REIT and the REMIC (discussed elsewhere in this Report), we have not created any special purpose entities to securitize assets or to obtain off-balance sheet funding.  Although we have sold a number of loans in the past two years, those loans have been sold to third parties without recourse, subject to customary representations and warranties.  For more information regarding contractual obligations and commitments, please see “Mortgage Repurchase Commitments”, “Investment in REMIC” and “Contractual Obligations and Commitments” above.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

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

The following table sets forth, as of June 30, 2004, the distribution of repricing opportunities for NBR’s earning assets and interest‑bearing liabilities, the interest rate sensitivity gap, the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e., earning assets divided by interest-bearing liabilities) and the cumulative interest rate sensitivity gap ratio.

		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)
Interest earning assets:
Federal funds sold	$5,600	$    ---	$    ---	$    ---	$    ---	$5,600
Investment securities and other	1,689	1,671	9,749	20,632	19,782	53,523
Mortgage loans held for sale	5	---	---	---	---	5
Loans	116,893	40,755	30,916	159,754	75,768	424,086
Total interest-earning assets	124,187	42,426	40,665	180,386	95,550	483,214
Interest-bearing liabilities:
Interest-bearing transaction accounts	161,212	---	---	---	---	161,212
Time deposits	81,448	35,637	39,509	17,452	---	174,046
Trust preferred securities	---	---	---	---	20,000	20,000
Short-term borrowings	1,939	---	---	---	---	1,939
Total interest-bearing liabilities	244,599	35,637	39,509	17,452	20,000	357,197
Interest rate sensitivity gap	($120,412)	$6,789	$1,156	$162,934	$75,550
Cumulative interest rate sensitivity gap	(120,412)	(113,623)	(112,467)	50,467	126,017
Interest rate sensitivity gap ratio	0.51	1.19	1.03	10.34	4.78
Cumulative interest rate sensitivity gap ratio	0.51	0.59	0.65	1.15	1.35

Interest‑bearing transaction accounts, which consist of money market and savings deposit accounts, are classified as repricing within three months.   Some of these deposits may be repriced at management's option, and therefore a decision not to reprice such deposits could significantly alter NBR’s net interest margin.

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

On a quarterly basis, NBR management prepares an analysis of interest rate risk exposure.  Such analysis calculates the change in net interest income and the theoretical market value of NBR’s equity given a change in general interest rates of 200 basis points up and 200 basis points down.  All changes are measured in dollars and are compared to projected net interest income and the current theoretical market value of NBR’s equity.  This theoretical market value of NBR’s equity is calculated by discounting cash flows associated with NBR’s assets and liabilities.  The following is a summary of interest rate risk exposure as of June 30, 2004 as measured on a net interest income basis and a market value of equity basis, given a change in general interest rates of up to 200 basis points up and 200 basis points down.

June 30, 2004

	Change in Annual	Change in
Change in Interest Rate	Net Interest Income	Market Value of Equity
+200	($362,000)	($8,515,000)
+100	($234,000)	($4,648,000)
-100	($144,000)	$1,738,000
-200	($835,000)	$3,126,000

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

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2004.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.  Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

As of June 30, 2004, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to affect, our internal control over financial reporting.

PART II          OTHER INFORMATION

Item 5. Submission of Matters to a Vote of Security Holders

     a)   The Company held its Annual Meeting of Shareholders on May 18, 2004.

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

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

Nominee                                     For                      Withheld

John H. Brenengen                       4,537,920                   7,097
Stephen A. Fleming                      4,542,191                   2,826
Dana R. Johnson                          4,296,151               248,866
Patrick W. Kilkenny                     4,542,198                   2,819
Mark H. Rodebaugh                     4,416,066               128,951
Gregory J. Smith                           4,200,032               344,985
William B. Stevenson                    4,416,066               128,951
David B. Warner                          4,537,967                   7,050

  The vote for amending the Company’s 2001 Stock Option Plan to increase from 18,000 to 150,000 the maximum number of options that may be granted to an individual employee during any fiscal year was as follows:

For	3,676,159
Against	184,395
Abstain	28,614
Broker Non Vote	655,850

The vote for ratifying the appointment of Crowe Chizek and Company LLP as the Company's independent accountants to audit the Company’s consolidated financial statements for the fiscal year ending December 31, 2004, was as follows:

For	4,495,042
Against	24,538
Abstain	25,437
Broker Non Vote	-0-

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

      a)   Exhibits.

3.2       Amended and restated By-Laws of Redwood dated July 20, 2004.

10.21   Amended and restated option agreement for purchase and sale of real property, dated July 17, 2004, between National Bank of the Redwoods and Upway Properties, LLC.

10.22   Salary Continuation Agreement between Stephen A. Fleming and Redwood dated April 14, 2004. *

10.23   Salary Continuation Agreement between Dana R. Johnson and Redwood dated April 14, 2004. *

10.24   Continuation of certain benefits under the Employment Agreement effective December 1, 2003 between National Bank of the Redwoods and Stephen A. Fleming, as amended March 31, 2004. *

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

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

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

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

            *          Management contract or compensatory plan, contract or arrangement.

      b)   Reports on Form 8-K

            1.   Form 8-K filing dated April 5, 2004 reporting under Item 5 thereof, announcement of declaration of quarterly dividend on Common Stock.

            2.   Form 8-K filing dated April 8, 2004 reporting under Item 5 thereof, amendment to employment agreement between Stephen A. Fleming and National Bank of the Redwoods.

            3.   Form 8-K filing dated April 21, 2004 reporting under Item 12 thereof, announcement of financial results for the first quarter ended March 31, 2004.

SIGNATURES

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

REDWOOD EMPIRE BANCORP

(Registrant)

Date:	8/11/04	By:  /s/ Kim C. McClaran
		Kim C. McClaran
		Vice President and
		Chief Financial Officer

Index of Exhibits

Exhibit Number

3.2	Amended and restated By-Laws of Redwood dated July 20, 2004.
10.21	Amended and restated option agreement for purchase and sale of real property, dated July 17, 2004, between National Bank of the Redwoods and Upway Properties, LLC.
10.22	Salary Continuation Agreement between Stephen A. Fleming and Redwood dated April 14, 2004. *
10.23	Salary Continuation Agreement between Dana R. Johnson and Redwood dated April 20, 2004. *
10.24	Continuation of certain benefits under the Employment Agreement effective December 1, 2003 between National Bank of the Redwoods and Stephen A. Fleming, as amended March 31, 2004. *
31.1	Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

            *  Management contract or compensatory plan, contract or arrangement.

EX-3

BY LAWS

OF

REDWOOD EMPIRE BANCORP

ARTICLE I

Offices

Section 1.  Principal Office.  The Board of Directors (the "Board") shall fix the location of the principal executive office of Redwood Empire Bancorp the ("Corporation") at any place within or outside the State of California.  If the principal executive office is located outside this state, and the Corporation has one or more business offices in this state, the Board shall fix and designate a principal business office in the State of California.

Section 2.  Other Offices.  Branch or other subordinate offices may at any time be established by the Board at such other places as it deems appropriate.

ARTICLE II

Meetings of Shareholders

Section 1.  Place of  Meetings.  Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board.  In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the Corporation.

Section 2.  Annual Meeting.  The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board.  The date so designated shall be within five (5) months after the end of the fiscal year of the Corporation and within fifteen (15) months after the last annual meeting.  At such meeting, Directors shall be elected, and any other proper business within the power of the shareholders may be transacted.

Section 3.  Special Meetings.  Special meetings of the shareholders may be called at any time by the Board, the Chairperson of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting.  If a special meeting is called by any person or persons other than the Board, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or by registered mail to the Chairperson, the President, any Vice President or the Secretary of the Corporation.  The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after receipt of the request.  If the notice is not given within 20 days after receipt of the request, the person or persons requesting the meeting may give the notice.  Nothing in this paragraph shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board may be held.

Section 4.  Notice of Meetings.  Written notice, on accordance with Section 5 of this Article II, of each annual or special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat.  Such notice shall state the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (b) in the case of the annual meeting, those matters which the  Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action.  The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election.

If action is proposed to be taken at any meeting for approval of (a) a contract or transaction in which a Director has a direct or indirect financial interest, pursuant to Section 310 of  the Corporations Code of California, (b) an amendment of the Articles of Incorporation, pursuant to Section 902 of that Code, (c) a reorganization of the Corporation, pursuant to Section 1201 of that Code, (d) a voluntary dissolution of the Corporation, pursuant to Section 1900 of that Code, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal.

Section 5.  Manner of Giving Notice.  Notice of a shareholders’ meeting shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice.  If no such address appears on the Corporation’s books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the Corporation’s principal executive office or if published at least once in a newspaper of general circulation in the county in which that office is located.  Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.  An affidavit of mailing other means of giving any notice in accordance with the above provisions, executed by the Secretary, Assistant Secretary or other transfer agent shall be prima facie evidence of the giving of the notice or report.

Section 6.  Quorum.  The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business.  The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

Section 7.  Adjourned Meeting and Notice Thereof.  Any shareholders’ meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 6 of this Article II) no other business may be transacted at such meeting.

When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken.  However, when any shareholders’ meeting is adjourned for more than 45 days from the date set for the original meeting, or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting.  At any adjourned meeting the Corporation may transact any business which may have been transacted at the original meeting.

Section 8.  Voting.  The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the Corporation on the record date determined in accordance with Section 9 of this Article II.

Voting shall in all cases be subject to the provisions of Sections 702 through 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership).

The shareholders’ vote may be by voice or ballot; provided, however, that any election for Directors must be by ballot if demanded by any shareholder before the voting has begun.  On any matter other than election of Directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal (other than the election of Directors), but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder’s approving vote is with respect to all shares that the shareholder is entitled to vote.  If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of Directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Corporations Code of California or by the Articles of Incorporation.

Subject to the following sentence and the provisions of Section 708 of the Corporations Code of California, every shareholder entitled to vote at any election of Directors may cumulate such shareholder’s votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which the shareholder’s shares are entitled, or distribute the shareholder’s votes on the same principle among as many candidates as the shareholder thinks fit.  No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates’ names have been placed in nomination prior to the voting and the shareholder has given notice, at the meeting and before the voting begins, of the shareholder’s intention to cumulate the shareholder’s votes.  If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination.

In any election of Directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of Directors to be elected, shall be elected.

Section 9.  Record Date.  The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action.  The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action.  When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date.  A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting.  The Board shall fix a new record date if the meeting is adjourned for more than 45 days.

If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, the close of business on the business day next preceding the day on which the meeting is held.  The record date for determining shareholders for any purpose other than as set forth in this Section 9 or Section 11 of this Article II shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later.

Section 10.  Consent of Absentees.  The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof.  All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.  Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Corporations Code of California to be included in the notice but not so included, if such objection is expressly made at the meeting.  Neither the business to be transacted at, nor the purpose of, any regular or special meeting of shareholders need to be specified in any written waiver of notice, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal.

Section 11.  Action by Written Consent Without a Meeting.  Subject to Section 603 of the Corporations Code of California, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, or their proxies.  All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records; provided, however, that (1) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous consent shall be given, as provided by Section 603(b) of the Corporations Code of California, and (2) in the case of election of Directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that subject to applicable law, a Director may be elected at any time to fill a vacancy on the Board that has not been filled by the Directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors.  Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary.

Unless a record date for voting purposes be fixed as provided in Section 9 of this Article II, the record date for determining shareholders entitled to give consent pursuant to this Section 11, when no prior action by the Board has been taken, shall be the day on which the first written consent is given.

Section 12.  Proxies.  Every person entitled to vote shares or execute written consents has the right to do so either in person or by one or more persons authorized by a written proxy executed and dated by such shareholder and filed with the Secretary of the Corporation prior to the convening of any meeting of the shareholders at which any such proxy is to be used or prior to the use of such written consent.  A validly executed proxy which does not state that it is irrevocable continues in full force and effect unless (1) revoked by the person executing it, before the vote pursuant thereto, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy; or (2) written notice of the death or incapacity of the maker of the proxy is received by the Corporation before the vote pursuant thereto is counted; provided, however, that no proxy shall be valid after the expiration of 11 months from the date of its execution unless otherwise provided in the proxy.

Section 13.  Inspectors of Election.  In advance of any meeting of shareholders, the Board may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof.  If  no inspectors of election are so appointed, or if any persons so appointed fail to appear or fail or refuse to act, the Chairperson of any such meeting may, and on the request of any shareholder or shareholder’s proxy shall, appoint inspectors of election at the meeting.  The number of inspectors shall be either one (1) or three (3).  If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present shall determine whether one (1) or three (3) inspectors are to be appointed.

The duties of such inspectors shall be as prescribed by Section 707(b) of the Corporations Code of California and shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and the effect of proxies; receiving votes, ballots or consents hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders.  If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all.

Section 14.  Conduct of Meetings.  The Chairperson shall conduct each such meeting in a business-like and fair manner, but shall not be obligated to follow any technical, formal or parliamentary rules or principles of procedure.  The Chairperson’s rulings on procedural matters shall be conclusive and binding on all shareholders, unless at the time of ruling a request for a vote is made to the shareholders holding shares entitled to vote and which are represented in person or by proxy at the meeting, in which case the decision of a majority of such shares shall be conclusive and binding on all shareholders.  Without limiting the generality of the forgoing, the Chairperson shall have all the powers usually vested in the Chairperson of a meeting of shareholders.

ARTICLE III

Directors

Section 1.  Powers.  Subject to the provisions of the Corporations Code of California and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.  The Board may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board.  Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws:

(a)  to select and remove all the other officers, agents, and employees of the Corporation, prescribe any powers and duties for them that are consistent with law, or with the Articles of Incorporation or these Bylaws, fix their compensation, and require from them security for faithful service;

(b)  to conduct, manage, and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with law, or with the Articles of Incorporation or these Bylaws, as they may deem best;

(c)  to adopt, make, and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best;

(d)  to authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful;

(e)  to borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory and capital notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor and any agreements pertaining thereto;

(f)  to prescribe the manner in which and the person or persons by whom any or all of the checks, drafts, notes, contracts and other corporate instruments shall be executed;

(g)  to appoint and designate, by resolution adopted by a majority of the authorized number of Directors, one or more committees, each consisting of two or more Directors, including the appointment of alternate members of any committee who may replace any absent member at any meeting of the committee; and any number of non-director members.

(h)  generally, to do and perform every act or thing whatever that may pertain to or be authorized by the board of directors of a commercial bank under the laws of this state.

Section 2.  Number and Qualification of Directors.  The authorized number of Directors shall not be less than five (5) nor more than nine (9) until changed by an amendment to this Bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote.  The exact number of directors shall be eight (8), until changed, within the limits specified above, by a Bylaw amending this Section 2, duly adopted by the Board or by the shareholders.

Section 3.  Nominations for Election of Directors.  Nominations for election of members of the Board may be made by the Board or by any holder of any outstanding class of capital stock of the Corporation entitled to vote for the election of Directors.  Notice of Intention to make any nominations (other than for persons named in the Notice of any meeting called for the election of Directors) are required to be made in writing and to be delivered or mailed to the President of the Corporation by the later of:  (i) the close of business 21 days prior to any meeting of shareholders called for election of Directors, or (ii) 10 days after the date of mailing of notice of the meeting to shareholders.  Such notification must contain the following information to the extent known to the notifying shareholder:  (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee;  (c) the number of shares of capital stock of the Corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; (e) the number of shares of capital stock of the Corporation owned by the notifying shareholder; (f) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depository institution owned beneficially by the nominee or by the notifying shareholder and the identities and locations of any such institutions; and (g) whether the proposed nominee has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt.  The notification shall be signed by the nominating shareholder and by each nominee, and shall be accompanied by a written consent to be named as a nominee for election as a Director from each proposed nominee.  Nominations not made in accordance with these procedures shall be disregarded by the chairperson of the meeting, and upon his instructions, the inspectors of election shall disregard all votes cast for each such nominee.  The foregoing requirements do not apply to the nomination of a person to replace a proposed nominee who has become unable to serve as a Director between the last day for giving notice in accordance with this paragraph and the date of election of Directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee.

Section 4.  Election and Term of Office.  The Directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the Directors are not elected thereat, the Directors may be elected at any special meeting of shareholders held for that purpose.  Each Director shall hold office until the next annual meeting and until a successor has been elected and qualified.

Section 5.  Vacancies.  Any Director may resign effective upon giving written notice to the Chairperson of the Board, the President, Secretary, or the Board, unless the notice specifies a later time for the effectiveness of such resignation.  If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective.

Vacancies on the Board may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until the next annual meeting and until such Director’s successor has been elected and qualified; provided, however, that a vacancy on the Board existing as the result of  a removal of a Director may not be filled by the Directors, unless the Articles of Incorporation or a bylaw adopted by the shareholders so provides.

A vacancy or vacancies on the Board shall be deemed to exist in case of the death, resignation, or removal or any Director, or if the authorized number of Directors be increased, or if the shareholders fail, at an annual or special meeting of shareholders at which any Director or Directors are elected, to elect the full authorized number of Directors to be voted for at that meeting.

The Board may declare vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony.

The shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors.  Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote.  If the Board accepts the resignation of a Director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective.

No reduction of the authorized number of directors shall have the effect of removing any Director prior to the expiration of the Director’s term of office.

Section 6.  Place of Meeting.  Regular meetings of the Board shall be held at any place within the State of California which has been designated in the notice of meeting or if their is no notice,  at the principal executive office of the Corporation, or at a place designated by resolution of the Board or by the written consent of the Board.  Any regular or special meeting is valid wherever held if held upon written consent of all members of the Board given either before or after the meeting and filed with the Secretary of the Corporation.

Section 7.  Regular Meetings.  Immediately following each annual meeting of shareholders and at the same place, the Board shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business.  Notice of this meeting shall not be required.

Other regular meetings of the Board shall be held without notice either on the second Tuesday  of each month at the hour of 8:00 a.m., or at such different date and time as the Board may from time to time fix by resolution; provided, however, should said day fall upon a legal holiday observed by the Corporation at its principal office, then said meeting shall be held at the same time and place on the next succeeding full business day.  Call and notice of all regular meetings of the Board are hereby dispensed with.

Section 8.  Special Meetings.  Special meetings of the Board for any purpose or purposes may be called at any time by the Chairperson of the Board, the President, or the Secretary or by any two Directors.

Special meeting of the Board shall be held upon three days written notice by mail or 24 hours notice delivered personally or by telephone or telegraph.  Any such notice shall be addressed or delivered to each Director at such Director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the Director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held.  Such notice may, but need not, specify the purpose of the meeting, nor the place if the meeting is to be held at the principal executive office of the Corporation.  Notice of any meeting of the Board need not be given to any Director who attends the meeting without protesting, either prior thereto or at its commencement, the lack of notice to such Director.

Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid.  Any other written notice to shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission or actually transmitted by the person giving the notice by electronic means, to the recipient.  Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient whom the person giving the notice has reason to believe will promptly communicate it to the recipient.

Section 9.  Quorum.  A majority of the authorized number of Directors constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided.  Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by the Articles of Incorporation and subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a Director has a direct or indirect material financial interest), Section 311 (as to appointment of committees), and Section 317(e) (as to indemnification of directors).  A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for such meeting.

Section 10.  Participation in Meetings by Conference Telephone.  Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another.  Participation in a meeting pursuant to Section 9 constitutes “presence” in person at such a meeting.

Section 11.  Waiver of Notice.  The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof.  All such waivers, consents or approvals shall be filed with the corporate record or made a part of the minutes of the meeting.

Section 12.  Adjournment.  A majority of the Directors present, whether or not a quorum is present, may adjourn any Directors’ meeting to another time and place.  Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 7 of this Article III, to the Directors who were not present at the time of the adjournment.

Section 13.  Action Without Meeting.   Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action.  Such action by written consent shall have the same effect as a unanimous vote of the Board.  Such consent or consents shall be filed with the minutes of the proceedings of the Board.

Section 14.  Fees and Compensation.  Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board.  This Section 14 shall not be construed to preclude any Director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services.

Section 15.  Rights of Inspection.  Every Director of the Corporation shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign.  Such inspection by a Director may be made in person or by agent or attorney and includes the right to copy and obtain extracts.

Section 16.  Unanimous Consent Regarding Subsidiary Bank Matters.  The Board authorizes the Secretary to cite unanimous consent of the Corporation as sole shareholder with respect to wholly-owned bank subsidiary matters which are approved by the Board.

ARTICLE IV

Officers

Section 1.  Officers.  The officers of the Corporation shall be a President, a Vice President, a Secretary, and a Chief Financial Officer.  The Corporation may also have,  at the discretion of the Board, a Chairperson of the Board, a Vice Chairperson of the Board, one or more Vice Presidents, one or more Assistant Financial Officers, one or more Assistant Secretaries and such other officers as may be elected or appointed in accordance with provisions of Section 3 of this Article IV.  One person may hold two or more offices, except those of President and Chief Financial Officer.

Section 2.  Election.  The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article IV, shall be chosen by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected, subject to the rights, if any, of an officer under any contract of employment.

Section 3.  Subordinate Officers.  The Board may elect, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board may from time to time determine.

Section 4.  Removal and Resignation.  Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with our without cause, by the Board at any time, or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board.

Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.  Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 5.  Vacancies.  A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office.

Section 6.  Chairperson of the Board.  The Chairperson of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board and of the shareholders, and exercise and perform such other powers and duties as may be assigned from time to time by the Board.

Section 7.  Vice Chairperson.  The Vice Chairperson of the Board, if there shall be such an officer, shall in the absence of the Chairperson of the Board, preside at all meetings of the Board and of the shareholders, and exercise and perform such other powers and duties as may be assigned from time to time by the Board.

Section 8.  President.  Subject to such powers, if any, as may be given by the Board to the Chairperson of the Board, if there be such an officer, the President is the General Manager and Chief Executive Officer of the Corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the Corporation.  In the absence of both the Chairperson of the Board and Vice Chairperson, or if there be none, the President shall preside at all meetings of the shareholders and at all meetings of the Board.  The President has the general powers and duties of management usually vested in the office of President and General Manager of a corporation and such other powers and duties as may be prescribed by the Board.

Section 9.  Vice Presidents.  In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President.  The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or the Bylaws, and the President or the Chairperson of the Board.

Section 10.  Secretary.  The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present or represented at shareholders’ meetings, and the proceedings thereof.

The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office or business office in accordance with Section 213 of the Corporations Code of California.  The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation’s transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders, of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have other powers and perform such other duties as may be prescribed by the Board.

Section 11.  Assistant Secretary.  The Assistant Secretary of the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary,  or in the event of such officer’s refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board.

Section 12.  Chief Financial Officer.  The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them.  The books of account shall at all times be open to inspection by any Director of the Corporation.

The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board.  The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and Directors, whenever they request it, an account of all transactions engaged in as Treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board.

Section 13.  Assistant Financial Officer.  The Assistant Financial Officer or the Assistant Financial Officers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer’s refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such additional powers and discharge such duties as may be assigned from time to time by the President or by the Board.

Section 14.  Salaries.  The salaries of the officers shall be fixed from time to time by the Board and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a Director of the Corporation.

Section 15.  Officers Holding More Than One Office.  Any two or more offices, except those of President and Chief Financial Officer, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity.

Section 16.  Inability To Act.  In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his or her place, the Board may from time to time delegate the powers or duties of such officer or any other officer, or any Director or other person whom it may select.

ARTICLE V

Other Provisions

Section 1.  Inspection of Corporate Records.  The Corporation shall keep at its principal executive office a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder.  A shareholder or shareholders of the Corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the Corporation may:

(a)  inspect and copy the record of shareholders’ names and addresses and shareholdings during usual business hours upon five business days prior notice demand upon the Corporation; or

(b)  obtain from the transfer agent, if any, for the Corporation, upon five business days prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders’ names and addresses who are entitled to vote for the election of Directors and their shareholdings, as of the most recent record date for which it has been compiled, or as of a date specified by the shareholder subsequent to the date of demand.

Section 2.  Inspection of Bylaws.  The Corporation shall keep in its principal executive office the original or a copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times during office hours.

Section 3.  Endorsement of Documents; Contracts.  Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance, or other instrument in writing and any assignment or endorsements thereof executed or entered into between the Corporation and any other person, when signed by the President or any Vice President, and the Treasurer or any Assistant Treasurer of the Corporation, or when stamped with a facsimile signature of such appropriate officers in the case of share certificates, shall be valid and binding upon the Corporation in the absence of actual knowledge on the part of the other person that the signing officers had not the authority to execute the same.  Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and unless so authorized by the Board, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount.

Section 4.  Certificates of Stock.  Every holder of shares of the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the President or Vice President and by the Chief Financial Officer or Assistant Financial Officer or by the Secretary or Assistant Secretary, or a facsimile signature of such persons stamped thereon, certifying the number of shares and the class or series of shares owned by the shareholder.  The signatures on the certificates may be facsimile signatures.  If any officer, transfer agent, or registrar who has signed a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent, or registrar at the date of issue.

Except as provided in this Section 4, no new certificates for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time.  The Board may, however, in case any certificate for shares is alleged to have been lost, stolen, or destroyed, authorize the issuance of a new certificate in lieu thereof, and the Corporation may require that the Corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it  (including expense or liability) on account of the alleged loss, theft, or destruction of such certificate or the issuance of  such new certificate.

Prior to the due presentment for registration of transfer in the stock transfer book of the Corporation, the registered owner shall be treated as the person exclusively entitled vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California.

Section 5.  Representation of Shares of Other Corporations.  The President or any other officer or officers authorized by the Board or the President are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation.  The authority herein granted may be exercised by any such officer in person or by any other person authorized to do so by proxy or power of attorney duly executed by said officer.

Section 6.  Seal.  The corporate seal of the Corporation shall consist of two concentric circles, between which shall be the name of the Corporation, and in the center shall be inscribed the word “Incorporated” and the date of its incorporation.

Section 7.  Fiscal Year.  The fiscal year of the Corporation shall begin on the first day of January and end on the 31st day of  December of each year.

Section 8.  Construction and Definitions.  Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the Corporations Code of California shall govern the construction of these Bylaws.  Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

Section 9.  Bylaw Provisions Contrary to or Inconsistent with Provisions of Law.  Any article, section, subsection, subdivision, sentence, clause or phrase of these Bylaws which, upon being construed in the manner provided in this Section 9, shall be contrary to or inconsistent with any applicable provision of the Accountancy Corporation Board of the State of California or other applicable law of the State of California or of the United States shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity of applicability of any other portions of these Bylaws, it being hereby declared that these Bylaws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal.

ARTICLE VI

Indemnification

Section 1.  Definitions.  For the purposes of this article VI, “agent” includes any person who is or was a Director, officer, employee, or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation of another enterprise at the request of such predecessor corporation; “Proceeding” includes any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative arbitration or investigative (other than an action by or in the right of the Corporation); and “Expenses” includes, without limitation, attorneys’ fees and any expenses of establishing a right to indemnification pursuant to law.

Section 2.  Extent of Indemnification.  The Corporation shall, to the maximum extent permitted by the Corporations Code of California, advance expenses to and indemnify each of its agents against Expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any Proceeding arising by reason of the fact any such person is or was an agent of the Corporation.

Section 3.  Insurance.  The Corporation shall have power to purchase and maintain insurance on behalf of any agent of the Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such whether or not the Corporation would have the power to indemnify the agent against such liability under the provisions of this Article VI.

ARTICLE VII

Amendments

Section 1.  Amendment by Shareholders.  New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the Corporation set forth the number of authorized Directors of the Corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation.

Section 2.  Amendment by Directors.  Subject to the rights of the shareholders as provided in Section 1 of this Article VII, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the authorized number of Directors, may be adopted, amended or repealed by the Board.

EX-10

Exhibit 10.21

AMENDED AND RESTATED OPTION AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY

This AMENDED AND RESTATED OPTION AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY (hereinafter referred to as “Agreement”) is made on July 14, 2004 and entered into by and between UPWAY PROPERTIES, LLC, A California Limited Liability Corporation, (hereinafter referred to as “Optionor”) and the NATIONAL BANK OF THE REDWOODS, a California Corporation (hereinafter referred to as “Optionee”).

WHEREAS, Optionor is the owner of a certain improved parcel of real property, consisting of a 4-story office building with an underground parking garage located at 111 Santa Rosa Avenue, Santa Rosa, California, County of Sonoma (and together with all rights, easements, improvements placed thereon and appurtenances belonging thereto, hereinafter collectively referred to as the “Property”), identified in red in Exhibit “A” attached hereto and incorporated herein by this reference; and;

Optionor desires to sell the Property to Optionee and Optionee desires to purchase the Property from Optionor; and;

The provisions in the numbered sections of this Agreement are only in effect upon Optionor’s exercise of Optionor’s sole right to require Optionee to purchase the property.  Optionee must close escrow based on the terms and conditions as outlined herein, including a) that the Optionor gives written notification to Optionee that Optionor is exercising it’s PUT Option no later than October 1, 2005 and (b) the Optionor obtains a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated no later than October 1, 2005.

Only in the event that the Optionor performs the items above and then the Optionee fails to purchase the property and at the Optionor’s sole discretion, the Standard Office Lease- Full Service Gross (1984 American Industrial Real Estate Association) entered into by and between Upway Properties, LLC (Lessor) and National Bank of the Redwoods (Lessee) dated as of June 1, 1999 and as Amended (“The Lease”)  may be terminated, 60 days after Optionee’s failure to purchase, without any further liability to Optionee by Optionor. Notwithstanding anything to the contrary, if the Optionor fails to obtain a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated no later than October 1, 2005, then the Optionor’s right to terminate the lease and to require Optionee to purchase the Property shall automatically terminate.

Notwithstanding the terms of the Lease, the Optionee’s obligation thereunder to provide the following loan terms to Optionor that will be guaranteed until January 4, 2005 to replace Lessor’s existing loan:

1)	A principal loan balance of $6,000,000
2)	30 Year amortization;
3)	Interest rate Fixed-Years 1-5- 5.25%, Years 6-10- 6.25%;
4)	½ loan point to borrower;
5)	Option for additional 5 years with both parties to share the interest risk by agreeing to a margin and index;

is contingent upon the Optionor having obtained a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated on or before January 4, 2005.

NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the parties hereby acknowledge the receipt, adequacy and sufficiency of which hereto, Optionor and Optionee do hereby covenant and agree as follows:

1.            Agreement to Sell and Purchase.  Optionor hereby agrees to sell to Optionee and

Optionee hereby agrees to purchase from Optionor, upon the terms and conditions hereinafter set forth, the Property.

2.            Purchase Price.  The Purchase price to be paid by Optionee to Optionor at close of escrow for the Property shall be FIFTEEN MILLION SIX HUNDRED AND EIGHTY NINE THOUSAND and NO/100 Dollars ($15,689,000), hereinafter referred to as the “Purchase Price”, all payable in cash, except that Optionee shall either assume the existing loan or pay any required prepayment penalties on such loan.

3.            Deposit.  Optionee has delivered to Escrow Holder (as that term is hereinafter defined) a check in the amount of TWENTY FIVE THOUSAND and NO/100 Dollars ($25,000.00) (the aforesaid amount together with all interest earned thereon as hereinafter provided for, called collectively the "Deposit"). The proceeds of the aforesaid check and all subsequent increases in the Deposit shall be promptly deposited by Escrow Holder into an interest bearing account and shall be disbursed by Escrow Holder in accordance with the terms and provisions of this Agreement. All deposits shall be applicable to the purchase price.

If the Optionor obtains a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated no later than October 1, 2005 and Optionor timely exercises its right to require Optionee to purchase the Property, then if Optionee elects to purchase the Property, the Optionee shall within 3 business days of its receipt of said document(s) deliver an additional check to the Escrow Holder in the amount of TWO HUNDRED AND TWENTY FIVE THOUSAND and NO/100 Dollars ($225,000.00), which amount, together with monies previously delivered to the Escrow Holder, including interest earned thereon, to be referred to collectively as the "Deposit" for a total deposit of TWO HUNDRED AND FIFTY THOUSAND and NO/100 Dollars ($250,000.00)and shall become non refundable to the benefit of the Optionor, subject to Liquidated Damages as per Section 16.a. and applicable to the purchase price. In the event Optionor has satisfied the foregoing conditions and Optionee fails to purchase the Property, whether Optionee has deposited the additional Deposit or not, Optionor shall have the right to terminate the lease, as described in the WHEREAS clauses above.

4.             Escrow.  Following full execution of this Agreement an escrow shall be opened to consummate the transaction contemplated by this Agreement at the offices of FIRST AMERICAN TITLE 400 E Street Santa Rosa, Ca. 95401 Attn: Dona Robertson, (the "Escrow Holder").  Said Escrow Holder shall also provide title insurance and hereinafter may also be referred to as the "Title Company".

5.         Title.  Optionor shall convey to Optionee a good, marketable and insurable title to the Property free and clear of all liens, encumbrances, tenants at will, encroachments, restrictions, covenants, assessments (except for assessments that are recorded against the Property, payable over a period of time, billed with the property tax statements from Sonoma County and not yet due and payable), charges, agreements, taxes (except for current year taxes which are not yet due and payable) and easements, except as otherwise approved in writing by Optionee in its sole discretion.

The Optionee has reviewed and removed contingencies related to the property titleand which removal is contingent on no material changes occurring in the accuracy of such information between the end of the Inspection Period and the close of escrow.

6.             Property Reports and Leases.  Promptly following the execution of this Agreement by Optionor, but in no event more than five (5) days following such execution, Optionor shall deliver to Optionee complete and legible copies of the following documents, leases and reports pertaining to the Property that are in Optionor's possession or reasonably accessible to Optionor:

            a)   The fully executed leases and related Addendum’s and Exhibits with the tenants and all Service Contracts in Effect;

            b)      Optionor must provide all property reports, including all Environmental Reports and including the Indemnity Agreement from the prior Owners;

            c)      Preliminary Title Report and copies of all exceptions, including the Property Tax Statement;

            d)      Complete working Drawings any other pertinent Plans and Specifications related to the building;

            e)   The existing loan documents, including the promissory note and Deed of Trust;

            f)    The assignment of the existing indemnity agreement that Optionor is to provide Optionee for the environmental condition that exists at the property;

            g)      Any other document in Optionor's possession that would reasonably facilitate Optionee's inspection and analysis of the Property and its operation.

Optionor represents and warrants such documents to be true and correct copies of the underlying instrument, and makes no other representation or warranty except as provided elsewhere herein, unless said documents were prepared by a third party, in which case the Optionee shall look to their own review of the document(s) to determine the validity of each document, without Optionor representation or warranty.

The Optionee has reviewed and removed contingencies related to the property Reports and Leases, contingent on no material changes occurring in the accuracy of such information between the end of the Inspection Period and the close of escrow.

7.             Inspections.  Optionee shall have five business (5) days following his receipt of all the documents described in Section #6 and the Title Review Documents described in Section #5 to inspect and examine the Property and the documents provided by Optionor, and to perform any studies, reviews or tests concerning the Property that Optionee may desire (the "Inspection Period"). On or before the expiration of the Inspection Period, Optionee shall, in its sole discretion, advise Optionor and Escrow Holder in writing of its desire to proceed with the transaction contemplated by this Agreement; provided, however, in the event such written notice is not so provided, this Agreement shall be deemed null and void, Optionee shall be entitled to an immediate return of the Deposit, and the parties hereto shall have no further obligations hereunder except for the return of said Deposit to Optionee.

Optionee, its employees, agents and engineers shall prior to the close of escrow have the privilege of going upon the Property from time-to-time during normal business hours as needed to inspect, examine and survey the Property and other engineering tests and studies, all at Optionee's sole cost and expense; provided, however, Optionee shall first notify and receive approval for such entries from Optionor, such approval not to be unreasonably withheld, and further provided, that Optionee shall hold Optionor harmless from any damages and claims of damages incurred through the exercise of such privilege by Optionee.

The Optionee has reviewed and removed contingencies related to the property Inspections, except for the environmental condition of the property, contingent on no material changes occurring in the accuracy of such information between the end of the Inspection Period and the close of escrow.

8.            Financing Contingency.  None, the purchase will be all payable in cash, except that Optionee shall pay any required prepayment penalties on the current loan of Optionor and secured by the Property as disclosed to Optionee and as existing on the date of this Agreement, provided that the Optionor obtains a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated no later than October 1, 2005.

9.         Close of Escrow.  Close of Escrow to occur within 90 days from Optionor’s written notification to Optionee of Optionor’s exercise of its right to require the Optionee to purchase the property under the terms and conditions contained herein (the "Closing Date"), in the offices of the Escrow Holder in Santa Rosa, CA.

10.            Covenants of Optionor.

            (a)   So long as this Agreement remains in full force and effect, commencing upon the date of this Agreement and extending through the close of escrow, Optionor shall not make any changes to, or otherwise modify, any of the improvements of the property without the written consent of the Optionee.

            (b)   Except as provided in this Agreement, Optionor shall not terminate or modify the Lease without the prior written consent of Optionee.

11.            Representations and Warranties of Optionor.  Optionor hereby represents and warrants as follows, which representations and warranties shall be true and correct in all material respects as of the close escrow, shall survive the close of escrow and the truth of which, as of the close of escrow, shall be a condition precedent to Optionee's obligation to complete the transaction contemplated by this Agreement:

            (a)   To the best of Optionor's actual knowledge there are no material defects in the physical condition of the Property;

            (b)            Except for the environmental condition described in the Indemnity Agreement and except for the environmental conditions that are the subject of the pending litigation between the previous owner, 137 Santa Rosa Group Partnership and PG & E and the Administrative Liability between 137 Santa Rosa Group Partnership and the California Regional Water Quality Control Board, North Coast Region  and disclosed by Optionor to Optionee, to the best of Optionor's actual knowledge the Property and the ground water below the surface of the Land, is free of all contaminants and hazardous substances as such terms are commonly understood and defined;

            (c)   To the best of Optionor's actual knowledge Optionor knows of no public improvements, which have been ordered to be made and which have not hereto been completed, assessed and paid for;

            (d)            To the best of Optionor's actual knowledge there are no unrecorded liens for overdue taxes, state or federal, income, property or otherwise;

            (e)   To the best of Optionor's actual knowledge there are no actions, suits or proceedings of any kind or nature whatsoever, legal or equitable, pending or threatened against Optionor or the Property, except for the pending litigation between the previous owner, 137 Santa Rosa Group Partnership and PG & E and the Administrative Liability between 137 Santa Rosa Group Partnership and the California Regional Water Quality Control Board, North Coast Region or any portion or portions thereof, or relating to or arising out of the ownership, management or operations of the Property, in any court or before or by any federal, state, county or municipal department, commission, board, bureau or agency or other governmental instrumentality;

            (f)   To the best of Optionor's actual knowledge Optionor has no knowledge of any pending or threatened condemnation or eminent domain proceedings, which would affect any of the Property.

            (g)   No right to the property or any interest therein has been granted to any other party than Optionee other than as disclosed in writing to Optionee.

12.            Covenants of Optionee.

            (a)   Optionee has inspected the Property, reviewed all reports and has satisfied all conditions for the benefit of Optionee, except for the environmental condition of the property, contingent on no material changes occurring in the Property or the accuracy of such information between the end of the Inspection Period and the close of escrow.

            (b)   Optionee shall provide the necessary funds required to complete the successful close of this transaction.

13.             Representations and Warranties of Optionee.  Optionee hereby represents and warrants to Optionor as follow:

            (a)   The individual(s) executing this Agreement on behalf of Optionee have the right, power, legal capacity, and authority to enter into this Agreement on behalf of Optionee and to execute all other documents and perform all other acts as may be necessary to complete the transaction contemplated herein;

            (b)   Optionee acknowledges and agrees that this Agreement constitutes a legal, valid and binding obligation of Optionee, enforceable against Optionee in accordance with its terms and provisions, except as may be otherwise limited by laws affecting the rights of creditors. The Optionee, upon receipt of notice by Optionor exercising Optionor’s PUT Option, agrees to close the purchase of the property under the terms and conditions as set forth in this Agreement. If the Optionee defaults and fails to close the escrow, the Optionor can terminate the Optionee’s lease Amendment # 2 at the property, without any liability or obligation to the Optionee.

14.            Documents. At least ten (10) business days prior to the close of escrow, Optionor shall execute and deliver to Escrow Holder the following:

            (a)     a grant deed duly executed by Optionor, and in form for recording, conveying marketable, and fee simple title to the Property;

            (b)   an assignment in favor of Optionee of the leases, including the balance of security deposit related to such lease held by Optionor, in respect of the use and/or occupancy of any portion of the Property;

            (c)     a bill of sale conveying, assigning and otherwise transferring to Optionee (i) that personal property of Optionor located at the Property as of the date of this Agreement, and (ii) third party warranties and guaranties in respect of equipment and/or work performed by contractors on behalf of the Tenant and pursuant to the maintenance and repair of the Property, if any;

            (d)   Estoppel certificate(s) signed by the tenants entitled to possession of the Property, such estoppel certificates to be in form and content acceptable to Optionee and Optionee's lender, these estoppel(s) to be delivered to Optionee from Optionor no later than ten (10) days prior to the close of escrow. Among other things, the estoppel certificates shall contain an acknowledgment as to the date of the current lease, whether or not there have been any lease amendments, and if so, the date and nature of such amendments, the amount of monthly rent currently being paid, the amount of security deposits previously paid and the nature of any unresolved disputes or claimed defaults between tenant and Optionor;

            (e)   Optionor shall acquire Subordination, Attornment and Non Disturbance Agreement(s) (SNDA) from the Tenants;

            (f)   all other documents as the Escrow Holder may reasonably require to complete the transaction contemplated by this Agreement;

15.       Costs and Prorations.

            (a)   Attorney's Fees. Optionee and Optionor shall be responsible for fees and charges of their respective attorneys in connection with the closing of the transaction contemplated by this Agreement.

            (b)   Title Insurance. Optionee pays for cost of Owner’s policy of Title insurance and;

            (c)   Escrow Fees. Escrow fees shall be paid by Optionee and;

            (d)   Transfer Taxes. Transfer taxes and any sales taxes shall be paid by Optionor and;

            (e)   Other Closing Costs. All other closing costs, including but not limited to, recording fees, notary fees and document preparation shall be shared equally between Optionee and Optionor.

            (f)   Prorations.  Real property and ad valorem taxes and other state or local taxes, charges and assessments (all of which appear on the County Tax Statement) affecting the Property, rent, interest and insurance, if any, shall be prorated as of the date of the close of escrow.

            (g)   Assessment.  Optionor shall not be required to pay all assessments against the Property unpaid as of the close of escrow; because such assessments are recorded against the Property, payable over a period of time and billed with property tax statements from Sonoma County and are part of the Operating Expenses of the property, Optionor shall only be required to pay those assessments that delinquent as of the close of escrow and those taxes not paid by Tenant pursuant to the lease, if any.

            (h)   Security Deposits.  Optionee shall be credited at the close of escrow in an amount equal to the balance of any security deposit(s) related to the Leases held by Optionor.

16.            Default and Remedies.

            (a)            By Optionee Liquidated Damages. In the event the (i) Optionor has complied with each and every obligation of Optionor hereunder, (ii) each and every condition precedent to Optionee's obligations hereunder is satisfied, and (iii) Optionee shall fail to perform Optionee's obligation to purchase the Property at the close of escrow in accordance with the terms, provisions and conditions of this Agreement, Optionor shall be entitled to terminate this Agreement by giving written notice of such termination to Optionee and Escrow Holder, whereupon the Deposit will be paid to Optionor as full and complete liquidated damages for the default of Optionee pursuant to California Civil Code Sections 1671, 1676 and 1677. The parties expressly acknowledge and agree, as indicated by the initialing of this paragraph, that the liquidated damages are intended to compensate Optionor for any and all damages suffered by reason of any default by Optionee, such damages being impossible of calculation, and further, that the payment of the Deposit is not intended as a penalty, but as full and complete liquidated damages. Optionor's right to the deposit as liquidated damages shall be part of Optionor's exclusive right and remedy, and Optionor waives, relinquishes and releases all other rights, and remedies, including, but not limited to, any right to sue Optionee for any element of damages or for specific performance under this Agreement. Notwithstanding anything to the contrary, the Optionor may also, at Optionor’s sole option, terminate the Optionee existing lease Amendment #2 for the property as further Liquidated Damages, without any further obligation or liability to Optionee.

_/s/ Paul Louie________________	__/s/ Patrick Kilkenny____________
Optionor	Optionee

            (b)            By Optionor. In the event Optionor defaults in the performance or compliance with any of the obligations, covenants or agreements to be performed or any of the conditions to be complied with by Optionor under the terms and provisions of this Agreement or if any of the representations or warranties of Optionor contained herein are untrue at the close of escrow and not waived by Optionee, Optionee shall, as Optionee's sole and exclusive remedy, be entitled to, (i) initiate an action against Optionor for the specific performance by Optionor of the terms and provisions of this Agreement, or (ii) terminate this Agreement by giving written notice of such termination to Optionor and Escrow Holder, whereupon Escrow Holder shall promptly refund to Optionee all Deposit monies paid hereunder and Optionor shall promptly reimburse Optionee for the actual, and reasonable, expenses incurred by Optionee in Optionee's exercise of its efforts to satisfy conditions inserted for the benefit of Optionee.

_/s/ Paul Louie________________	__/s/ Patrick Kilkenny____________
Optionor	Optionee

17.             Condemnation.  In the event the Property or any portions thereof shall be taken or condemned by any governmental authority or other entity having power of eminent domain or Optionor shall receive a notice of proposed taking prior to the close of escrow, Optionor shall immediately notify Optionee to said effect and Optionee shall have the option of either terminating this Agreement by giving written notice thereof to Optionor within twenty (20) days after Optionor's notice of such proposed taking, in which event Optionee shall be entitled to a refund of all of the Deposit or of consummating the transaction provided for herein without reduction of the Purchase Price and requiring Optionor to assign, transfer and set over to Optionee at the close of escrow all of Optionor's right, title and interest in and to any awards that my be made by reason of such condemnation. In the event Optionee fails to notify Optionor within said twenty (20) day period of Optionee's election to terminate this Agreement, then it shall be conclusively presumed that Optionee has elected to consummate the transaction provided for herein, without abatement of the Purchase Price and to receive all of Optionor's right, title and interest in and to any awards that may be made by reason of such condemnation.

18.       Risk of Loss.  Prior to the close of escrow all risk of loss to the Property, from any casualty or otherwise, shall remain upon Optionor. In the event of any damage or destruction of any portion of the Property prior to the close of escrow, Optionee shall decide, at its sole discretion, and so advise Optionor in writing, either (i) to accept an assignment of all insurance proceeds and make the repairs to the Property at its sole cost and expense, or (ii) to require that Optionor make the repairs to the Property at its sole cost and expense. Notwithstanding the foregoing, in the event the estimated cost of repairs to the Property, as determined from quotations obtained by Optionor from reputable contractors experienced in making such repairs, shall exceed fifty percent (50%) of the Purchase Price, then either the Optionor or Optionee shall have the right to terminate this Agreement by serving written notice on the other party within ten (10) days of receipt by both parties of the above described estimated cost of repairs. In the event of such termination, the Deposit shall be returned to the Optionee, and neither party shall have any further obligation or liability, one to the other.

19.       Time.  Time is of the essence of this Agreement.

20.            California Law.  This Agreement is made and entered into as a contract for the purchase and sale of real property to be interpreted under and governed and enforced according to the laws of the State of California.

21.            Severability.  In the event any term, covenant, condition, agreement, section or provision shall be deemed invalid or unenforceable by a court of competent and final jurisdiction, this Agreement shall not terminate or be deemed void or voidable, but shall continue in full force and effect and there shall be substituted for such stricken provision a like, but legal and enforceable, provision which most nearly accomplishes the intention of the parties hereto and if no such provision is available, the remainder of this Agreement shall be enforced.

22.            Possession.  Optionor shall deliver possession of the Property to Optionee at the close of escrow subject only to the existing leases and those exceptions to title approved by Optionee pursuant to the provisions of Paragraph 5 hereof.

23.       Other Assurances.  From time to time, either before or after the close of escrow, and as an obligation of the parties which shall survive the close of escrow and not be merged with the execution and delivery of the grant deed, either party, upon the reasonable request of the other party, shall, without charge, furnish such other instruments, documents, material and information, and obtain and deliver to the requesting party such other consents, approvals, estoppel certificates and affidavits as may be reasonably requested by such party in order to effectuate the transaction contemplated by this Agreement and the operation of the Property.

24.            Notices. All notices required, necessary or desired to be given pursuant to this Agreement, including a change of address for purposes of notice, shall be in writing and shall be deemed effective and given (i) upon personal delivery, (ii) upon delivery if sent by Federal Express or similar private courier company that maintains records of its deliveries, (iii) upon transmission by facsimile machine to the facsimile number listed herein, or (iv) upon deposit in the United States Mail, certified, return receipt requested, postage prepaid and addressed as follows:

OPTIONOR:	UPWAY PROPERTIES, LLC
	Attn: Paul Louie
	(510) 791-1333
	(510) 791-      Fax

OPTIONEE:	National Bank of the Redwoods
	Attn: Pat Kilkenny
	111 Santa Rosa Avenue, Suite 100
	Santa Rosa, CA 95401
	(707)
	Fax # (707)

Copy to:	CATALYST COMMERICAL GROUP, INC
	111 Healdsburg Avenue Suite C
	Healdsburg, CA 95448
	(707) 431-3510
	Fax # (707) 431-3513
	Attn: Paul Gonzalez

Escrow Holder:	FIRST AMERICAN TITLE
	400 E Street
	Santa Rosa, CA 95401
	Attn: Dona Robertson, Escrow Officer
	Facsimile: (707) 523-
	Phone:  (707) 523-3902

25.            Assignment.  At any and all times prior to the close of escrow Optionee shall, without the prior consent of Optionor, have the right to assign its rights, interest, duties and obligations under this Agreement to any entity in which Optionee retains an ownership interest or has the financial ability to close the transaction under the terms contained herein. An assignment of Optionee's rights, interest and duties and obligations under this Agreement to any other person or entity shall require the prior written approval of Optionor, such approval not to be unreasonably withheld or delayed.

26.            Binding Effects.  The terms, covenants and conditions of this Agreement shall be binding upon and shall enure to the benefit of Optionee and Optionor and their respective successors, assigns, heirs and legal representatives.

27.            Modification and Amendment.  This Agreement may not be modified, altered or amended except by a written instrument executed by both Optionee and Optionor.

28.       Entire Agreement. This Agreement, including all attached Exhibits, constitutes the entire and complete agreement of Optionee and Optionor with respect to the transaction contemplated hereby, and conversations, undertakings, representations, promises, inducements, warranties or statements not reduced to writing and expressly set forth herein shall be of no force or effect whatsoever.

29.       Broker and Commissions. Optionee and Optionor represent and warrant to each other that no broker, agent, salesperson, or finder has been engaged with respect to, or is in any way entitled to, a commission or other fee in connection with the transaction contemplated hereunder, except for Paul Gonzalez of CATALYST COMMERCIAL GROUP, INC., of Santa Rosa, CA, hired by the Optionor as it’s sole consultant (the "Broker"). Optionor agrees to pay a real estate commission equal to Two percent (2%) of the purchase price to be paid Paul Gonzalez, Optionor’s Agent upon the close of escrow. Said commission to be paid out of the Optionor’s proceeds, in escrow, through escrow.

In the event of a claim for any commission or fee by any other broker, agent, salesperson or finder, Optionee and Optionor hereby agree to indemnify and hold each other harmless from any and all such claims and any and all demands, costs, expenses, and causes of action therewith.  The Optionor shall pay any legal fees to the Broker, if required to collect Brokers commissions. The parties acknowledge and consent that Paul Gonzalez is acting as a dual agent in this transaction.

Both parties have been advised by the Broker to have the attorney review and approve this Option Agreement. Unless either party objects to the use of this Option Agreement prior to ratification, this Option Agreement shall be deemed approved and the Broker shall not have any liability for the preparation of this Option Agreement as to the legal content and legal sufficiency of the Option Agreement.

Optionor’s Initial_/s/ PL________                        Optionee’s Initial_/s/ PK_______

30.            Survival of Agreement.  All of the terms and provisions of this Agreement shall survive the close of escrow and not merge with the execution and delivery of the grant deed contemplated herein.

31.            Agreements Affecting the Property.  Optionor hereby covenants and agrees with Optionee that so long as this Agreement remains in full force and effect, Optionor shall not sell, assign, convey (absolutely or as security), grant a security interest in, or otherwise encumber or dispose of, any portion of the Property or any interest or rights therein, and shall not modify any existing lease(s) or enter into any new lease(s) without the prior written consent of Optionee. Optionee is aware that an existing loan encumbering the property is currently in place, the property is pledged as security and the loan is due on October 1, 2004. If the Optionee pays the loan prior to October 1 2004, the Optionee will pay the prepayment penalty.

32.            Headings.  The paragraph and subparagraph headings throughout this Agreement are for convenience and reference only, and the words contained therein shall not be held to expand, modify, amplify or aid in the interpretation, construction or meaning of this Agreement.

33.            Mediation of Disputes.  Optionee and Optionor agree that in the event a dispute arises as to the meaning, interpretation or performance of any provision of this Agreement, that Optionee and Optionor shall submit such dispute to mediation before resorting to binding arbitration.  Either party  may initiate the mediation process by serving written notice on the other party, and unless both parties agree otherwise, the dispute shall be submitted to a Judicial Arbitration and Mediation Service with offices in either San Francisco or Santa Rosa California.  Prior to commencement of the mediation, Optionee and Optionor agree to execute a document limiting the admissibility in arbitration or any civil action of anything said, any admission made, and any documents prepared, in the course of the mediation. The mediator, whose fee shall be shared equally between Optionee and Optionor, shall not be empowered to impose a settlement on either party.

34.            Binding Arbitration.  Intentionally deleted.

35.            Attorneys' Fees.  All fees and expenses of attorneys or other advisors retained by Optionor or Optionee pursuant to this Agreement and the completion of the transaction contemplated thereby shall be the sole responsibility of the party engaging the services of such attorney or advisor; except, however, if following a decision pursuant to binding arbitration either party hereto shall institute any action or proceeding to enforce the award rendered said party shall be entitled to recover, from the other, reasonable attorneys' fees and costs for services provided in such proceeding.

36.       Tax Deferred Exchange.  In the event Optionor wishes to enter into a tax deferred exchange for the Property, or if Optionee wishes to enter into a tax deferred exchange with respect to property owned by Optionee in connection with this transaction, each of the parties agrees to cooperate with the other party in connection with such exchange, including, without limitation, the execution of such documents as may be reasonably necessary to effectuate the same. Such obligations shall, however, be subject to the following conditions: (i) the party not initiating the exchange shall not be obligated to advance or delay the closing; (ii) all additional costs in connection with the exchange, if any, shall be borne by the party initiating the exchange; (iii) the party not initiating the exchange shall not be obligated to execute any note, contract, or other document providing for any personal liability; and (iv) the party initiating the exchange shall indemnify and hold the other party harmless from and against any and all claims and liabilities in any way arising out of or resulting from the indemnified party's participation in such exchange.

37.            Conditions Precedent.  Optionee's obligation to complete the transaction contemplated by this Agreement shall be conditional on the following event:

That the Optionor obtains a closure letter for the existing environmental condition of the property from the California Regional Water Quality Control Board, North Coast Region indicating that all contamination issues have been remediated, no later than October 1, 2005.

38.            Foreign Person affidavit.  At the close of escrow, Optionor shall deliver to Optionee an affidavit pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended, sworn to under the penalty of perjury setting forth Optionor's U.S. taxpayer identification number and stating that Optionor is not a foreign person, and is a "United States Person" as defined in the Code. In lieu of furnishing such nonforeign affidavit, Optionor may deliver to Optionee a qualifying statement issued by the United States Treasury, such statement to be in accordance with the rules and provisions as contained in Section 1445 of the Internal Revenue Code.

39.            Documents required for Closing in form and content acceptable to Optionor and Optionee.

            (a) a grant deed duly executed by Optionor, and in form for recording, conveying marketable, and fee simple title to the Property;

            (b) an assignment in favor of Optionee of the leases, including the balance of security deposit related to such leases held by Optionor, in respect of the use and/or occupancy of any portion of the Property;

            (c) a bill of sale conveying, assigning and otherwise transferring to Optionee (i) that personal property of Optionor located at the Property as of the date of this Agreement, and (ii) third party warranties and guaranties in respect of equipment and/or work performed by contractors on behalf of the Tenant and pursuant to the maintenance and repair of the Property, if any;

            (d) Estoppel certificate(s) signed by the tenants entitled to possession of the Property, such estoppel certificates to be in form and content acceptable to Optionee and Optionee's lender, this estoppel to be delivered to Optionee from Optionor no later than ten (10) days prior to the close of escrow. Among other things, the estoppel certificate shall contain an acknowledgment as to the date of the current lease, whether or not there have been any lease amendments, and if so, the date and nature of such amendments, the amount of monthly rent currently being paid, the amount of security deposits previously paid and the nature of any unresolved disputes or claimed defaults between tenant and Optionor;

            (e) Optionor shall acquire Subordination, Non Disturbance and Attornment Agreements (SNDA) from the Tenants;

            (f) All other documents as the Escrow Holder may reasonably require to complete the transaction contemplated by this Agreement;

40.            Extension to Next Business Day.  In the event a date for the end of a period, delivery of notice or the close of escrow shall fall on a Saturday, Sunday or legal holiday, then such date shall be postponed to the next business day immediately following such date.

41.            Exhibits.  The following attached exhibits are incorporated herein by this reference:

Exhibit A - Site Plan Exhibit B - Agency Disclosure

42.            Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Optionee has caused this Agreement to be executed as an offer to Optionor to purchase the Property upon the terms and conditions set forth herein, which offer shall remain open for acceptance by Optionor until 5:00 o'clock PM California time on the 20th day of July 2004. If Optionor has not delivered two (2) fully executed copies of this Agreement to Optionee or Broker by such point in time, said offer might be terminated by either party. Upon mutual ratification of this revised PUT Option Agreement by Optionor and Optionee, this document shall replace the previous PUT Option Agreement which shall terminate and be null and void.

The date of this Agreement shall be deemed to be the next business day following the latest date on which this Agreement shall be executed by any of the parties.

OPTIONEE:

By:  /s/ Patrick Kilkenny	Date:    7/21/04
National Bank of the Redwoods
Its: _Chairman_____________________

OPTIONOR:

By:  /s/ Paul Louie	Date:    7/18/04
Paul Louie, Managing Partner
Upway Properties, LLC

EX-10

Exhibit 10.22

NATIONAL BANK OF THE REDWOODS

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this 14th day of April, 2004, by and between NATIONAL BANK OF THE REDWOODS, a nationally-chartered commercial bank located in Santa Rosa, California (the "Company"), and STEPHEN A. FLEMING (the "Executive").

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

The Company and the Executive agree as provided herein.

Article 1

Definitions

         Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1            “Accrual Balance” means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (”GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate.  Any one of a variety of amortization methods may be used to determine the Accrual Balance.  However, once chosen, the method must be consistently applied.  The Accrual Balance shall be reported by the Company to the Executive on Schedule A. 

1.2            “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3            “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan Administrator to designate one or more Beneficiaries.

1.4            “Change of Control” means:

            (a)   the Company is a party to a merger, consolidation,  sale of assets or other reorganization, or a proxy contest, as a consequence of which more than fifty-one percent (51%) of the outstanding stock of the Company changes hands to an unrelated entity; or

            (b) a sale of substantially all of the assets of the Company.

Notwithstanding the above, a Change of Control will not be deemed to have occurred either (i) solely  because  of the acquisition  of securities of (or any reporting requirement under the Exchange Act relating thereto) by an the Executive benefit plan maintained by the Company or any of its affiliates for its Executives or (B) if any shareholder of the Company holding more than twenty-five percent (25%) of the combined voting power of the Company’s outstanding securities as of the Effective Date increases its holding to more than fifty-one percent (51%) of such combined voting power.

In addition, transfers between and among persons and entities to and from whom ownership is attributed under Section 318 of the Code shall not be deemed to contribute to a Change of Control under this Section 1.4.

1.5       “Code” means the Internal Revenue Code of 1986, as amended.

1.6            “Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the insurance carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the insurance carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.7            “Discount Rate” means the rate used by the Plan Administrator for determining the Accrual Balance.  The initial Discount Rate is six percent (6%).  However, the Plan Administrator, in its sole discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to GAAP.

1.8       “Early Retirement”means the Executive’s voluntary termination in writing of the Executive’s employment with the company after attaining Early Retirement Age for reasons other than an approved leave of absence, Termination for Cause, Disability, or following a Change of Control.

1.9       “Early Retirement Age”means the Executive attaining age forty-eight (48).

1.10     “Early Retirement Date”means the month, day, and year in which the Termination of Employment due to Early Retirement occurs.

1.11     “Early Termination”means that the Executive, prior to Early Retirement Age, has been notified in writing that employment with the Company is terminated for reasons other than an approved leave of absence, Termination for Cause, Disability, or following a Change of Control. 

1.12            “Effective Date” means January 1, 2004.

1.13            “Normal Retirement Age” means the Executive’s sixty-fifth (65^th) birthday.

1.14            “Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.15     “Plan Administrator” means the plan administrator described in Article 8.

1.16     “Plan Year” means a twelve-month period commencing on January 1 and ending on December 31 of each year.  The initial Plan Year shall commence on the Effective Date of this Agreement.

1.17            “Termination for Cause” has that meaning set forth in Article 5.

1.18            “Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

1.19     “Years of Service” means the total number of calendar years during which the Executive is employed on a full-time basis by the Company, or any of its affiliates or subsidiaries, with a minimum of 1,000 hours in any calendar year, inclusive of any approved leaves of absence, beginning on the Executive’s date of hire.

Article 2

Benefits During Lifetime

2.1       Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

            2.1.1            Amount of Benefit.  The annual benefit under this Section 2.1 is $155,000 (One Hundred Fifty-Five Thousand Dollars).

            2.1.2            Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2       Early Retirement Benefit.  Upon Termination of Employment following the Early Retirement Date, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

            2.2.1            Amount of Benefit.  The annual benefit under this Section 2.2 is the Early Retirement Benefit set forth on Schedule A for the Plan Year during which the Early Retirement Date occurs.  This benefit is determined by vesting the Executive in the Normal Retirement Benefit described in Section 2.1.1., subject to the following vesting schedule:

Age at Early Retirement	Percent Vested in Normal Retirement Benefit
48	10%
50	25%
52	35%
55	50%
57	60%
60	75%
62	85%
65	100%

            2.2.2            Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Early Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.3       Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

            2.3.1 Amount of Benefit.   The annual benefit under this Section 2.3 is the Early Termination Benefit set forth on Schedule A for the Plan Year during which Termination of Employment occurs.  This benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance. Any increase in the annual benefit under Section 2.1.1 shall require the recalculation of this benefit on Schedule A.

            2.3.2 Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Termination of Employment.

2.4 Disability Benefit.  Upon Termination of Employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

            2.4.1            Amount of Benefit.  The benefit under this Section 2.4 is the Disability Benefit set forth on Schedule A for the Plan Year during which the Termination of Employment occurs.  This benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance. 

            2.4.2 Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following Termination of Employment due to Disability.

2.5       Change of Control Benefit.  Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.5 in lieu of any other benefit under this Article.

            2.5.1            Amount of Benefit. The benefit under this Section 2.4 is the greater of: a) the amount determined under section 2.4; or b) the amount determined by vesting the Executive in ten percent (10%) of the Normal Retirement Benefit for every completed year of employment commencing as of the Executive’s date of hire until the Executive is one hundred percent (100%) vested in the Normal Retirement Benefit.

            2.5.2            Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within thirty (30) days following the Change of Control.

Article 3

Death Benefits

3.1       Death During Active Service.  If the Executive dies while in the active service of the Company, no benefit shall be payable under this Agreement.

3.2       Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3       Death After Termination of Employment But Before Payment of a Benefit Commences. If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4

Beneficiaries

4.1            Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Company in which the Executive participates. 

4.2            Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive's Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3            Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4       No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive's estate.

4.5       Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5

General Limitations

5.1            Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive's employment for:

            (a)            Gross negligence or gross neglect of duties to the Company;

            (b)            Commission of a felony or other crime involving moral turpitude, fraud or dishonesty;

            (c)            Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Company;

            (d)            Disclosure to any third party by the Executive, without authority or permission, of any secret or confidential information of the Company; or

            (e)            Issuance of an order for removal of the Executive by the Company’s banking regulators.

5.2       Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the maximum benefit that would not result in any such excise tax.

Article 6

Claims And Review Procedures

6.1       Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

            6.1.1            Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

            6.1.2            Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

            6.1.3            Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)            The specific reasons for the denial;

                        (b)            A reference to the specific provisions of the Agreement on which the denial is based;

                        (c)            A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

                        (d)            An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

                        (e)            A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2       Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

            6.2.1            Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

            6.2.2            Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

            6.2.3            Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

            6.2.4            Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

            6.2.5            Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)            The specific reasons for the denial;

                        (b)            A reference to the specific provisions of the Agreement on which the denial is based;

                        (c)            A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

                        (d)            A statement of the claimant’s right to bring a civil action under ERISA Section 502(a). 

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees, as that phrase applies to ERISA, for reasons other than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Notwithstanding the previous paragraph, the Company may amend or terminate the plan at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits).

Article 8

Administration of Agreement

8.1       Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2       Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3       Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.  No Executive or Beneficiary shall be deemed to have any right, vested or nonvested, regarding the continued use of any previously adopted assumptions, including but not limited to the Discount Rate.

8.4            Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5            Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the date and circum­stances of the retirement, Disability, death, or Termina­tion of Employment of the Executive, and such other pertinent information as the Plan Administrator may reasonably require.

8.6       Annual Statement. The Plan Administrator shall provide to the Executive, within 120 days after the end of each Plan Year, a statement setting forth the benefits payable under this Agreement.

Article 9

Miscellaneous

9.1       Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2       No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.

9.3       Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4       Tax Withholding.  The Company shall withhold any taxes that, in its reasonable judgment, are required to be withheld from the benefits provided under this Agreement.  The Executive acknowledges that the Company’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).

9.5            Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6            Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive's life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7            Reorganization.  The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8       Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9            Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10            Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11            Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12            Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13     Notice.  Any notice or filing required or permitted to be given to the Company or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

111 Santa Rosa Avenue

Santa Rosa, CA  95402

            Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

            Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

         IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:	COMPANY:
	National Bank of the Redwoods
/s/ Stephen A. Fleming	By:  /s/ Patrick Kilkenny
Stephen A. Fleming
	Title  Chairman

NATIONAL BANK OF THE REDWOODS

SPLIT DOLLAR AGREEMENT

         THIS AGREEMENT is adopted this  _14th_ day of _April__________, 20_04, by and between NATIONAL BANK OF THE REDWOODS, located in Santa Rosa, California (the "Company"), and STEPHEN A. FLEMING (the "Executive").  This Agreement shall append the Split Dollar Endorsement entered into on even date herewith or as subsequently amended, by and between the aforementioned parties.

INTRODUCTION

         To encourage the Executive to remain an employee of the Company, the Company is willing to divide the death proceeds of a life insurance policy on the Executive's life.  The Company will pay life insurance premiums from its general assets.

AGREEMENT

         The Company and the Executive agree as follows:

Article 1

General Definitions

The following terms shall have the meanings specified:

         1.1         “Insured” means the Executive.

         1.2      “Insurer” means each life insurance carrier in which there is a Split Dollar Policy Endorsement attached to this Agreement.

         1.3         “Normal Retirement Age” means the Executive attaining sixty-five (65) years of age.

         1.4         “Policy” means the specific life insurance policy or policies issued by the Insurer.

         1.5      “Salary Continuation Agreement” means that Salary Continuation Agreement between the Company and the Executive on even date herewith or as subsequently amended.

         1.6         “Termination for Cause”  shall be defined as set forth in Article 7.

         1.7      “Termination of Employment”  means that the Executive ceases to be employed by the Company for any reason, other than by reason of a leave of absence approved by the Company.

Article 2

Policy Ownership/Interests

2.1      Company Ownership.  The Company is the sole owner of the Policy and shall have the right to exercise all incidents of ownership.  The Company shall be the beneficiary of the remaining death proceeds of the Policy after the Interest of the Executive or the Executive’s transferee has been paid according to Section 2.2 below.

2.2      Executive's Interest.  The Executive, or the Executive’s assignee, shall have the right to designate the Beneficiary of an amount of death proceeds equal to $1,538,324 (One Million Five Hundred Thirty-Eight Thousand Three Hundred Twenty-Four Dollars), subject to:

                  (a)         Forfeiture of Executive’s Interest in the Policy and Executive’s rights under this Agreement upon Termination of Employment;

                  (b)         Termination of the Agreement and the corresponding forfeiture of rights in accordance with Article 7 hereof; or

                  (c)         Forfeiture of the Executive’s rights and interest hereunder that the Company may reasonably consider necessary to conform with applicable law (including the Sarbanes-Oxley Act of 2002).

         2.3       Option to Purchase.  The Company shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving the Executive or the Executive’s transferee the option to purchase the Policy by one of the methods specified below for a period of sixty (60) days from written notice of such intention.   This provision shall not impair the right of the Company to terminate this Agreement.

                  2.3.1      Full Policy Purchase.   If the Company elects to terminate the Agreement the Executive or his/her transferee shall have the right to purchase the Policy from the Company.  The purchase price shall be an amount equal to the cash surrender value of the Policy.  Upon receipt of such purchase price, the Company shall assign ownership of the Policy to the Executive or his/her transferee and relinquish all existing rights to the Policy.

                  2.3.2      Net Death Proceeds Purchase.   If the Company elects to terminate the Agreement the Executive or his/her transferee shall have the right to purchase the Executive’s Interest in the Policy as identified in Section 2.2 above.  The Company shall withdraw the Policy’s cash surrender value and assign ownership of the Policy to the Executive or his/her transferee.  The Executive or his/her transferee shall thereafter assume responsibility for any fees and/or cost of insurance charges (the “Policy Expenses”) as necessary to sustain the Policy.  If the Executive or his/her transferee incurs Policy Expenses, the Company shall annually reimburse the Executive or his/her transferee an amount equal to the annual Policy Expenses divided by one minus the Executive’s combined marginal income tax rate for the calendar year immediately preceding such payment.  The Company’s reimbursement payment shall be made within 30 days following receipt by the Company of evidence of the payment of the Policy Expenses.  The Company’s obligation to make reimbursement payments will automatically terminate upon the Executive’s forfeiture of rights under Section 2.2 above, otherwise payments shall continue until the Executive’s death.

         2.4      Comparable Coverage.  Nothing herein negates the Company’s right to amend or terminate this Agreement under Article 7.   The Company is not obligated to provide any additional resources to maintain the Policy in full force and effect.  In addition, the Company may replace each Policy with a comparable insurance policy to cover the benefit provided under this Agreement and the Company and the Executive shall execute a new Split-Dollar Policy Endorsement for each new Policy.  The cash surrender value and any additional death proceeds exclusive of those designated in Section 2.2 above for each new Policy or any comparable policy shall be subject to the claims of the Company’s creditors.  In the event that the Company decides to maintain the Policy after the Executive’s Termination of Participation in the Agreement, the Company shall be the direct beneficiary of the entire death proceeds of the Policy.

Article 3

Premiums

3.1         Premium Payment.  The Company shall pay any premiums due on the Policy.

         3.2      Economic Benefit.  The Company shall determine the economic benefit attributable to the Executive based on the amount of the current term rate for the Executive's age multiplied by the aggregate death benefit payable to the Executive's beneficiary.  The "current term rate" is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.

         3.3      Imputed Income.      The Company shall impute the economic benefit to the Executive on an annual basis.

Article 4

Assignment

         The Executive may assign without consideration all of the Executive’s interests in the Policy and in this Agreement to any person, entity or trust.  In the event the Executive transfers all of the Executive’s interest in the Policy, then all of the Executive's interest in the Policy and in the Agreement shall be vested in the Executive’s transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in the Policy or in this Agreement.

Article 5

Insurer

         The Insurer shall be bound only by the terms of the Policy.  Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons.  The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement.

Article 6

Claims and Review Procedure

         6.1      Claims Procedure.  Any person or entity who has not received benefits under the Plan that he or she believes should be paid (the “claimant”) shall make a claim for such benefits as follows:

                  6.1.1      Initiation – Written Claim.  The claimant initiates a claim by submitting to the Company a written claim for the benefits. 

                  6.1.2      Timing of Company Response.  The Company shall respond to such claimant within 90 days after receiving the claim.  If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 

                  6.1.3      Notice of Decision.  If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial.  The Company shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)      The specific reasons for the denial,

                        (b)      A reference to the specific provisions of this Agreement on which the denial is based,

                        (c)      A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,

                        (d)      An explanation of this Agreement’s review procedures and the time limits applicable to such procedures, and

                        (e)      A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) (29 United States Code section 1132(a)) following an adverse benefit determination on review.

         6.2      Review Procedure.  If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:

                  6.2.1      Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review. 

                  6.2.2      Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits. 

                  6.2.3      Considerations on Review.  In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 

                  6.2.4      Timing of Company Response.  The Company shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 

                  6.2.5      Notice of Decision.  The Company shall notify the claimant in writing of its decision on review.  The Company shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)         The specific reasons for the denial,

                        (b)         A reference to the specific provisions of this Agreement on which the denial is based,

                        (c)         A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and

                        (d)         A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7

Amendments and Termination

         7.1    The Company may amend or terminate this Agreement at any time prior to the Executive’s death.  Such amendment or termination shall be by written notice to the Executive.  In the event the Company decides to maintain the Policy after termination of the Agreement—subject to the provisions of Section 2.3 of this Agreement—the Company shall be the direct beneficiary of the entire death proceeds of the Policy.

       7.2      Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive's employment for:

                  (a)         Gross negligence or gross neglect of duties to the Company;

                  (b)         Commission of a felony or crime involving moral turpitude, fraud or dishonesty;

                  (c)         Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in a material adverse effect on the Company;

                  (d)         Disclosure to any third party by the Executive, without authority or permission, of any secret or confidential information of the Company; or

                  (e)         Issuance of an order for removal of the Executive by the Company’s banking regulators.

         7.3      Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on an employment application or resume provided to the Company, or on any application for any benefits provided by the Company to the Executive.

Article 8

Miscellaneous

8.1      Binding Effect.  This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.

         8.2    No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.

8.3      Applicable Law.  The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of California , except to the extent preempted by the laws of the United States of America.

         8.4      Reorganization.  The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company.

         8.5      Notice.  Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Company.  The date of such mailing shall be deemed the date of such mailed notice, consent or demand.

         8.6      Entire Agreement.  This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

         8.7      Administration.  The Company shall have powers which are necessary to administer this Agreement, including but not limited to:

                  (a)         Interpreting the provisions of this Agreement;

                  (b)         Establishing and revising the method of accounting for this Agreement;

                  (c)         Maintaining a record of benefit payments; and

                  (d)         Establishing rules and prescribing any forms necessary or desirable to administer this Agreement.

         8.8   Named Fiduciary.  The Company shall be the named fiduciary and plan administrator under the Agreement.  The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.

         IN WITNESS WHEREOF, the Executive and the Company consent to this Agreement on the date above written.

EXECUTIVE:	COMPANY:
	National Bank of the Redwoods
/s/ Stephen A. Fleming ___________	By:  /s/ Patrick Kilkenny ___________
Stephen A. Fleming
	Title  Chairman___________________

EX-10

Exhibit 10.23

REDWOOD EMPIRE BANCORP

SALARY CONTINUATION AGREEMENT

THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this 20th day of April, 2004, by and between REDWOOD EMPIRE BANCORP, a holding company located in Santa Rosa, California (the "Company"), and DANA R. JOHNSON (the "Executive").

The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company.  This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.  The Company will pay the benefits from its general assets.

The Company and the Executive agree as provided herein.

Article 1
Definitions

         Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1            “Accrual Balance” means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (”GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate.  Any one of a variety of amortization methods may be used to determine the Accrual Balance.  However, once chosen, the method must be consistently applied.  The Accrual Balance shall be reported by the Company to the Executive on Schedule A. 

1.2            “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.3            “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan Administrator to designate one or more Beneficiaries.

1.4            “Change of Control” means:

            (a)   the Company is a party to a merger, consolidation,  sale of assets or other reorganization, or a proxy contest, as a consequence of which more than fifty-one percent (51%) of the outstanding stock of the Company changes hands to an unrelated entity; or

            (b) a sale of substantially all of the assets of the Company.

Notwithstanding the above, a Change of Control will not be deemed to have occurred either (i) solely  because  of the acquisition  of securities of (or any reporting requirement under the Exchange Act relating thereto) by an the Executive benefit plan maintained by the Company or any of its affiliates for its Executives or (B) if any shareholder of the Company holding more than twenty-five percent (25%) of the combined voting power of the Company’s outstanding securities as of the commencement date increases its holding to more than fifty-one percent (51%) of such combined voting power.

In addition, certain transfers are permitted within Section 318 of the Code and such transfers shall not be deemed a Change of Control under this Section 1.4.

1.5       “Code” means the Internal Revenue Code of 1986, as amended.

1.6            “Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the insurance carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled.  The Executive must submit proof to the Plan Administrator of the insurance carrier’s or Social Security Administration’s determination upon the request of the Plan Administrator.

1.7            “Discount Rate” means the rate used by the Plan Administrator for determining the Accrual Balance.  The initial Discount Rate is six percent (6%).  However, the Plan Administrator, in its sole discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to GAAP.

1.8       “Early Retirement”means the Executive’s Voluntary Early Termination after attaining Early Retirement Age.

1.9       “Early Retirement Age”means the Executive attaining age fifty-five (55) and completing fifteen (15) Years of Service.

1.10     “Early Retirement Date”means the month, day, and year in which the Termination of Employment due to Early Retirement occurs.

1.11     “Early Termination”means that the Executive, prior to Normal Retirement Age, has been notified in writing that employment with the Company is terminated for reasons other than an approved leave of absence, Termination for Cause, Disability, or within 24 months following a Change of Control. 

1.12            “Effective Date” means January 1, 2004.

1.13            “Normal Retirement Age” means the Executive’s sixty-second (62^nd) birthday.

1.14            “Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.15     “Plan Administrator” means the plan administrator described in Article 8.

1.16     “Plan Year” means a twelve-month period commencing on January 1 and ending on December 31 of each year.  The initial Plan Year shall commence on the Effective Date of this Agreement.

1.17            “Termination for Cause” has that meaning set forth in Article 5.

1.18            “Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.

1.19     “Years of Service” means the total number of calendar years during which the Executive is employed on a full-time basis by the Company, or any of its affiliates or subsidiaries, with a minimum of 1,000 hours in any calendar year, inclusive of any approved leaves of absence, beginning on the Executive’s date of hire.

Article 2
Benefits During Lifetime

2.1       Normal Retirement Benefit.  Upon Termination of Employment on or after the Normal Retirement Agefor reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

            2.1.1            Amount of Benefit.  The annual benefit under this Section 2.1 is $80,000 (Eighty Thousand Dollars).Commencing on the first anniversary of the first benefit payment following Termination of Employment, and continuing on each subsequent anniversary, the Company's Board of Directors shall increase this benefit by two percent (2%) from the previous anniversary date.

            2.1.2            Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Normal Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.

2.2       Early Retirement Benefit.  Upon Termination of Employment following the Early Retirement Date, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

            2.2.1            Amount of Benefit.  The annual benefit under this Section 2.2 is the Early Retirement Benefit set forth on Schedule A for the Plan Year during which the Early Retirement Date occurs.  This benefit is determined by vesting the Executive in the Normal Retirement Benefit described in Section 2.1.1., subject to the following vesting schedule:

Age at Early Retirement	Percent Vested in Normal Retirement Benefit
55	40%
56	50%
57	60%
58	70%
60	80%
61	90%
62	100%

            2.2.2            Payment of Benefit.  The Company shall pay the annual benefit to the Executive in twelve (12) equal monthly installments commencing on the first day of the month following the Executive’s Early Retirement Date.  The annual benefit shall be paid to the Executive for fifteen (15) years.           

2.3       Early Termination Benefit.  Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

            2.3.1 Amount of Benefit.  The annual benefit under this Section 2.3 is the Early Termination Benefit set forth on Schedule A for the Plan Year during which Termination of Employment occurs.  This benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance. Any increase in the annual benefit under Section 2.1.1 shall require the recalculation of this benefit on Schedule A.

            2.3.2 Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following the Termination of Employment.

2.4 Disability Benefit.  Upon Termination of Employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

            2.4.1            Amount of Benefit.  The benefit under this Section 2.4 is the Disability Benefit set forth on Schedule A for the Plan Year during which the Termination of Employment occurs.  This benefit is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance. 

            2.4.2 Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following Termination of Employment due to Disability.

2.5       Change of Control Benefit.  Upon a Change of Control followed within twenty-four (24) months by the Executive’s Termination of Employment, the Company shall pay to the Executive the benefit described in this Section 2.5 in lieu of any other benefit under this Article.

            2.5.1            Amount of Benefit.  The benefit under this Section 2.5 is the greater of: a)  $400,000 (Four Hundred Thousand Dollar); or b) the Change of Control Benefit set forth on Schedule A for the Plan Year during which Termination of Employment occurs which is determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance.

            2.5.2            Payment of Benefit.  The Company shall pay the benefit to the Executive in a lump sum within ninety (90) days following Termination of Employment

Article 3
Death Benefits

3.1       Death During Active Service.  If the Executive dies while in the active service of the Company, no benefit shall be payable under this Agreement.

3.2       Death During Payment of a Benefit.  If the Executive dies after any benefit payments have commenced under Article 2 of this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3       Death After Termination of Employment But Before Payment of a Benefit Commences. If the Executive is entitled to any benefit payments under Article 2 of this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the same benefit payments to the Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.

Article 4
Beneficiaries

4.1            Beneficiary Designation.  The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under this Agreement upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Company in which the Executive participates. 

4.2            Beneficiary Designation: Change.  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent.  The Executive's Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3            Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4       No Beneficiary Designation.  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive's estate.

4.5       Facility of Payment.  If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person.  The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.

Article 5
General Limitations

5.1            “Termination for Cause.  Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company’s Board of Directors terminates the Executive's employment for:

            (a)            Gross negligence or gross neglect of duties to the Company;

            (b)            Commission of a felony or of a gross misdemeanor involving moral turpitude;

            (c)            Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Company; or

            (d)            Issuance of an order for removal of the Executive by the Company’s banking regulators.

5.2       Excess Parachute Payment.  Notwithstanding any provision of this Agreement to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Agreement to the maximum benefit that would not result in any such excise tax.

Article 6
Claims And Review Procedures

6.1       Claims Procedure.  An Executive or Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

            6.1.1            Initiation – Written Claim.  The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits.

            6.1.2            Timing of Plan Administrator Response.  The Plan Administrator shall respond to such claimant within 90 days after receiving the claim.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

            6.1.3            Notice of Decision.  If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.   The notification shall set forth:

                        (a)            The specific reasons for the denial;

                        (b)            A reference to the specific provisions of the Agreement on which the denial is based;

                        (c)            A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed;

                        (d)            An explanation of the Agreement’s review procedures and the time limits applicable to such procedures; and

                        (e)            A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

6.2       Review Procedure.  If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows:

            6.2.1            Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Plan Administrator’s notice of denial, must file with the Plan Administrator a written request for review.

            6.2.2            Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.

            6.2.3            Considerations on Review.  In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

            6.2.4            Timing of Plan Administrator Response.  The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision.

            6.2.5            Notice of Decision.  The Plan Administrator shall notify the claimant in writing of its decision on review.  The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)            The specific reasons for the denial;

                        (b)            A reference to the specific provisions of the Agreement on which the denial is based;

                        (c)            A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits; and

                        (d)            A statement of the claimant’s right to bring a civil action under ERISA Section 502(a). 

Article 7
Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Provided, however, if the Company’s Board of Directors determines that the Executive is no longer a member of a select group of management or highly compensated employees, as that phrase applies to ERISA, for reasons other than death, Disability or retirement, the Company may amend or terminate this Agreement.  Upon such amendment or termination the Company shall pay benefits to the Executive as if Early Termination occurred on the date of such amendment or termination, regardless of whether Early Termination actually occurs.

Notwithstanding the previous paragraph, the Company may amend or terminate the plan at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits).

Article 8
Administration of Agreement

8.1       Plan Administrator Duties.  This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint.  The Executive may be a member of the Plan Administrator.  The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administra­tion of this Agreement and (ii) decide or resolve any and all ques­tions including interpretations of this Agreement, as may arise in connection with the Agreement.

8.2       Agents.  In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

8.3       Binding Effect of Decisions.  The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.  No Executive or Beneficiary shall be deemed to have any right, vested or nonvested, regarding the continued use of any previously adopted assumptions, including but not limited to the Discount Rate.

8.4            Indemnity of Plan Administrator.  The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

8.5            Company Information.  To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the date and circum­stances of the retirement, Disability, death, or Termina­tion of Employment of the Executive, and such other pertinent information as the Plan Administrator may reasonably require.

8.6       Annual Statement. The Plan Administrator shall provide to the Executive, within 120 days after the end of each Plan Year, a statement setting forth the benefits payable under this Agreement.

Article 9
Miscellaneous

9.1       Binding Effect.  This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

9.2       No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.

9.3       Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

9.4       Tax Withholding.  The Company shall withhold any taxes that, in its reasonable judgment, are required to be withheld from the benefits provided under this Agreement.  The Executive acknowledges that the Company’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).

9.5            Applicable Law.  The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.

9.6            Unfunded Arrangement.  The Executive and Beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement.  The benefits represent the mere promise by the Company to pay such benefits.  The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.  Any insurance on the Executive's life is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.

9.7            Reorganization.  The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.  Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.

9.8       Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9            Interpretation.  Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.

9.10            Alternative Action.  In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company.

9.11            Headings.  Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.

9.12            Validity.  In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.

9.13     Notice.  Any notice or filing required or permitted to be given to the Company or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:                  COMPANY:

                                 REDWOOD EMPIRE BANCORP

/s/ Dana R. Johnson                     By: /s/ Patrick Kilkenny

Dana R. Johnson                                 

                                                Title:  President & CEO

REDWOOD EMPIRE BANCORP
SPLIT DOLLAR AGREEMENT

THIS AGREEMENT is adopted this 20th day of April, 2004, by and between REDWOOD EMPIRE BANCORP, located in Santa Rosa, California (the "Company"), and DANA R. JOHNSON (the "Executive").  This Agreement shall append the Split Dollar Endorsement entered into on even date herewith or as subsequently amended, by and between the aforementioned parties.

INTRODUCTION

To encourage the Executive to remain an employee of the Company, the Company is willing to divide the death proceeds of a life insurance policy on the Executive's life.  The Company will pay life insurance premiums from its general assets.

AGREEMENT

The Company and the Executive agree as follows:

Article 1

General Definitions

The following terms shall have the meanings specified:

1.1            “Insured” means the Executive.

1.2            “Insurer” means each life insurance carrier in which there is a Split Dollar Policy Endorsement attached to this Agreement.

1.3            “Normal Retirement Age” means the Executive attaining sixty-two (62) years of age.

1.4            “Policy” means the specific life insurance policy or policies issued by the Insurer.

1.5       “Salary Continuation Agreement” means that Salary Continuation Agreement between the Company and the Executive on even date herewith or as subsequently amended.

1.6            “Termination for Cause”  shall be defined as set forth in Article 7.

1.7            “Termination of Employment”  means that the Executive ceases to be employed by the Company for any reason, other than by reason of a leave of absence approved by the Company.

Article 2
Policy Ownership/Interests

2.1            Company Ownership.  The Company is the sole owner of the Policy and shall have the right to exercise all incidents of ownership.  The Company shall be the beneficiary of the remaining death proceeds of the Policy after the Interest of the Executive or the Executive’s transferee has been paid according to Section 2.2 below.

2.2            Executive's Interest.  The Executive, or the Executive’s assignee, shall have the right to designate the Beneficiary of an amount of death proceeds equal to $895,500 (Eight Hundred Ninety-Five Thousand Five Hundred Dollars), subject to:

            (a)   Forfeiture of Executive’s rights upon Termination of Employment;

            (b)   Termination of the Agreement and the corresponding forfeiture of rights in accordance with Article 7 hereof; or

            (c)   Forfeiture of the Executive’s rights and interest hereunder that the Company may reasonably consider necessary to conform with applicable law (including the Sarbanes-Oxley Act of 2002).

2.3       Option to Purchase.  The Company shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving the Executive or the Executive’s transferee the option to purchase the Policy by one of the methods specified below for a period of sixty (60) days from written notice of such intention.  This provision shall not impair the right of the Company to terminate this Agreement.

            2.3.1      Full Policy Purchase.   If the Company elects to terminate the Agreement the Executive or his/her transferee shall have the right to purchase the Policy from the Company.  The purchase price shall be an amount equal to the cash surrender value of the Policy.  Upon receipt of such purchase price, the Company shall assign ownership of the Policy to the Executive or his/her transferee and relinquish all existing rights to the Policy.

            2.3.2      Net Death Proceeds Purchase.   If the Company elects to terminate the Agreement the Executive or his/her transferee shall have the right to purchase the Executive’s Interest in the Policy as identified in Section 2.2 above.  The Company shall withdraw the Policy’s cash surrender value and assign ownership of the Policy to the Executive or his/her transferee.  The Executive or his/her transferee shall thereafter assume responsibility for any fees and/or cost of insurance charges (the “Policy Expenses”) as necessary to sustain the Policy.  If the Executive or his/her transferee incurs Policy Expenses, the Company shall annually reimburse the Executive or his/her transferee an amount equal to the annual Policy Expenses divided by one minus the Executive’s combined marginal income tax rate for the calendar year immediately preceding such payment.  The Company’s reimbursement payment shall be made within 30 days following receipt by the Company of evidence of the payment of the Policy Expenses.  The Company’s obligation to make reimbursement payments will automatically terminate upon the Executive’s forfeiture of rights under Section 2.2 above, otherwise payments shall continue until the Executive’s death.

2.4            Comparable Coverage.  Nothing herein negates the Company’s right to amend or terminate this Agreement under Article 7.   The Company is not obligated to provide any additional resources to maintain the Policy in full force and effect.  In addition, the Company may replace each Policy with a comparable insurance policy to cover the benefit provided under this Agreement and the Company and the Executive shall execute a new Split-Dollar Policy Endorsement for each new Policy.  The cash surrender value and any additional death proceeds exclusive of those designated in Section 2.2 above for each new Policy or any comparable policy shall be subject to the claims of the Company’s creditors.  In the event that the Company decides to maintain the Policy after the Executive’s Termination of Participation in the Agreement, the Company shall be the direct beneficiary of the entire death proceeds of the Policy.

Article 3
Premiums

3.1            Premium Payment.  The Company shall pay any premiums due on the Policy.

3.2            Economic Benefit.  The Company shall determine the economic benefit attributable to the Executive based on the amount of the current term rate for the Executive's age multiplied by the aggregate death benefit payable to the Executive's beneficiary.  The "current term rate" is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.

3.3            Imputed Income.  The Company shall impute the economic benefit to the Executive on an annual basis.

Article 4
Assignment

The Executive may assign without consideration all of the Executive’s interests in the Policy and in this Agreement to any person, entity or trust.  In the event the Executive transfers all of the Executive’s interest in the Policy, then all of the Executive's interest in the Policy and in the Agreement shall be vested in the Executive’s transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in the Policy or in this Agreement.

Article 5
Insurer

The Insurer shall be bound only by the terms of the Policy.  Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons.  The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement.

Article 6
Claims and Review Procedure

6.1       Claims Procedure.  Any person or entity who has not received benefits under the Plan that he or she believes should be paid (the “claimant”) shall make a claim for such benefits as follows:

            6.1.1            Initiation – Written Claim.  The claimant initiates a claim by submitting to the Company a written claim for the benefits. 

            6.1.2            Timing of Company Response.  The Company shall respond to such claimant within 90 days after receiving the claim.  If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 

            6.1.3            Notice of Decision.  If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial.  The Company shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)   The specific reasons for the denial,

                        (b)   A reference to the specific provisions of this Agreement on which the denial is based,

                        (c)   A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,

                        (d)   An explanation of this Agreement’s review procedures and the time limits applicable to such procedures, and

                        (e)   A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) (29 United States Code section 1132(a)) following an adverse benefit determination on review.

6.2       Review Procedure.  If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:

            6.2.1            Initiation – Written Request.  To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review. 

            6.2.2            Additional Submissions – Information Access.  The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim.  The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits. 

            6.2.3            Considerations on Review.  In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. 

            6.2.4            Timing of Company Response.  The Company shall respond in writing to such claimant within 60 days after receiving the request for review.  If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period that an additional period is required.  The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision. 

            6.2.5            Notice of Decision.  The Company shall notify the claimant in writing of its decision on review.  The Company shall write the notification in a manner calculated to be understood by the claimant.  The notification shall set forth:

                        (a)   The specific reasons for the denial,

                        (b)   A reference to the specific provisions of this Agreement on which the denial is based,

                        (c)   A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and

                        (d)   A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

Article 7
Amendments and Termination

7.1       The Company may amend or terminate this Agreement at any time prior to the Executive’s death.  Such amendment or termination shall be by written notice to the Executive.  In the event the Company decides to maintain the Policy after termination of the Agreement—subject to the provisions of Section 2.3 of this Agreement—the Company shall be the direct beneficiary of the entire death proceeds of the Policy.

7.2            Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive's employment for:

            (a)   Willful breach of duty in the course of employment or habitual neglect of employment responsibilities and duties;

            (b)   Conviction of any felony or crime involving moral turpitude, fraud or dishonesty;

            (c)   Willful violation of any state or federal banking or securities law, the rules or regulations of any banking agency, or any material Company rule, policy or resolution resulting in an adverse effect on the Company; or

            (d)   Disclosure to any third party by the Executive, without authority or permission, of any secret or confidential information of the Company.

7.3       Suicide or Misstatement.  The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement.  In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on an employment application or resume provided to the Company, or on any application for any benefits provided by the Company to the Executive.

Article 8
Miscellaneous

8.1            Binding Effect.  This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.

8.2       No Guarantee of Employment.  This Agreement is not an employment policy or contract.  It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive.  It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.

8.3            Applicable Law.  The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of California , except to the extent preempted by the laws of the United States of America.

8.4            Reorganization.  The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company.

8.5       Notice.  Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Company.  The date of such mailing shall be deemed the date of such mailed notice, consent or demand.

8.6       Entire Agreement.  This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof.  No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

8.7            Administration.  The Company shall have powers which are necessary to administer this Agreement, including but not limited to:

            (a)   Interpreting the provisions of this Agreement;

            (b)   Establishing and revising the method of accounting for this Agreement;

            (c)   Maintaining a record of benefit payments; and

            (d)   Establishing rules and prescribing any forms necessary or desirable to administer this Agreement.

8.8       Named Fiduciary.  The Company shall be the named fiduciary and plan administrator under the Agreement.  The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.

IN WITNESS WHEREOF, the Executive and the Company consent to this Agreement on the date above written.

EXECUTIVE:                                 COMPANY:

                                                   REDWOOD EMPIRE BANCORP

_/s/ Dana R. Johnson____________________   By_/s/ Patrick W. Kilkenny__________________

Dana R. Johnson

                                                   Title _President ___________________________

EX-10

Exhibit 10.24

Continuation of certain benefits under the Employment Agreement

effective December 1, 2003 between National Bank of the Redwoods

and Stephen A. Fleming, as amended March 31, 2004

The Compensation Committee of the Board of Directors of the Registrant has approved an extension of Mr. Fleming’s housing allowance of $1,800 per month through November 2004, subject to the terms and conditions of Mr. Fleming’s Employment Agreement.  This extension was not set forth in a formal written agreement.  Pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K, the Registrant has filed this description of the extension as an exhibit.

EX-31

Exhibit 31.1

Certification of Chief Executive Officer

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 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 report;

3.  Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b.  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 3, 2004

By:  /s/ Patrick Kilkenny

       -------------------------

       Patrick Kilkenny

       Chief Executive Officer

EX-31

Exhibit 31.2

Certification of Chief Financial Officer

I, Kim McClaran, certify that:

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

2.  Based on my knowledge, this 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 report;

3.  Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b.  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 3, 2004

By:  /s/ Kim C. McClaran

       Kim C. McClaran

       Chief Financial Officer

EX-32

EXHIBIT 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER

UNDER 18 U.S.C. SECTION 1350

            With reference to the quarterly Report of Redwood Empire Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2004  (the “Report”), I, Patrick W. Kilkenny, President and Chief Executive Officer of the Company, certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Patrick W. Kilkenny

Patrick W. Kilkenny

President and Chief Executive Officer

Date:  August 3, 2004

EX-32

EXHIBIT 32.2

STATEMENT OF CHIEF FINANCIAL OFFICER

UNDER 18 U.S.C. SECTION 1350

            With reference to the Quarterly Report of Redwood Empire Bancorp (the "Company") on Form 10-Q for the period ending June 30, 2004  (the “Report”), I, Kim C. McClaran, Vice President and Chief Financial Officer of the Company, certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Kim C. McClaran               

Kim C. McClaran

Vice President and Chief Financial Officer

Date:  August 3, 2004