================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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 Incorporated 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. May 1, 2000: 3,275,890 REDWOOD EMPIRE BANCORP AND SUBSIDIARIES Index Page PART I. Financial Information Item 1. Financial Statements Consolidated Statements of Operations Three Months ended March 31, 2000..............................3 Consolidated Balance Sheets March 31, 2000 and December 31, 1999...........................5 Consolidated Statements of Cash Flows Three Months Ended March 31, 2000..............................6 Notes to Consolidated Financial Statements.....................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............12 Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................................27 PART II. Other Information Item 6. Exhibits and Reports on Item 8-K..............................28 SIGNATURES ..............................................................30 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 March 31, 2000 1999 ----------------------------------- Interest income: Interest and fees on loans $6,766 $6,094 Interest on investment securities 1,250 956 Interest on federal funds sold 143 178 ----------------------------------- Total interest income 8,159 7,228 Interest expense: Interest on deposits 3,171 2,327 Interest on subordinated notes --- 142 Interest on other borrowings 49 --- ----------------------------------- Total interest expense 3,220 2,469 ----------------------------------- Net interest income 4,939 4,759 Provision for loan losses 100 300 ----------------------------------- Net interest income after loan loss provision 4,839 4,459 Noninterest income: Service charges on deposit accounts 277 255 Merchant draft processing, net 897 779 Loan servicing income 40 16 Net realized (loss)/gain on sale of investment securities available for sale (1) 14 Other income 198 261 ----------------------------------- Total noninterest income 1,411 1,325 Noninterest expense: Salaries and employee benefits 2,150 2,158 Occupancy and equipment expense 501 532 Other 1,207 1,115 ----------------------------------- Total noninterest expense 3,858 3,805 ----------------------------------- Income from continuing operations before income taxes and extraordinary item 2,392 1,979 Provision for income taxes 972 768 ----------------------------------- Income from continuing operations before extraordinary item 1,420 1,211 Discontinued Operations: Income from discontinued operations (less applicable income taxes of $41) --- 83 ----------------------------------- Income before extraordinary item 1,420 1,294 Extraordinary item --- 459 Income tax benefit --- (183) ----------------------------------- Total extraordinary item, net of tax --- 276 ----------------------------------- Net income $1,420 $1,018 =================================== (Continued) REDWOOD EMPIRE BANCORP AND SUBSIDIARIES Consolidated Statements of Operations (dollars in thousands except per share data) (unaudited) (Continued) Three Months Ended March 31, 2000 1999 ----------------------------------- Basic earnings per common share: Income from continuing operations before extraordinary item $0.44 $0.36 Income from discontinued operations 0.00 0.02 Income before extraordinary item 0.44 0.38 Net income 0.44 0.30 Weighted average shares 3,252,000 3,372,000 Diluted earnings per common share and common equivalent share: Income from continuing operations before extraordinary item $0.43 $0.35 Income from discontinued operations 0.00 0.02 Income before extraordinary item 0.43 0.37 Net income 0.43 0.29 Weighted average shares 3,269,000 3,463,000 See Notes to Consolidated Financial Statements. (Concluded) REDWOOD EMPIRE BANCORP AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands) March 31, December 31, 2000 1999 ------------------ ------------------- (unaudited) Assets: Cash and due from banks $15,780 $19,058 Federal funds sold and repurchase agreements 6,545 1,497 ------------------ ------------------- Cash and cash equivalents 22,325 20,555 Investment securities: Held to maturity (market value of $32,321 and $31,923) 33,468 32,967 Available for sale, at market (amortized cost of $47,477 and $44,667) 46,361 43,738 ------------------ ------------------- Total investment securities 79,829 76,705 Mortgage loans held for sale --- --- Loans: Residential real estate mortgage 132,047 130,504 Commercial real estate mortgage 85,143 79,476 Commercial 58,908 61,165 Real estate construction 42,435 40,059 Installment and other 4,416 4,624 Less deferred loan fees (1,358) (1,383) ------------------ ------------------- Total portfolio loans 321,591 314,445 Less allowance for loan losses (7,980) (7,931) ------------------ ------------------- Net loans 313,611 306,514 Premises and equipment, net 3,059 3,045 Mortgage servicing rights 30 32 Other real estate owned 2,041 2,363 Cash surrender value of life insurance 3,226 3,187 Other assets and interest receivable 11,009 10,645 ------------------ ------------------- Total assets $435,130 $423,046 ================== =================== Liabilities and Shareholders' equity: Deposits: Noninterest bearing demand deposits $79,272 $77,753 Interest-bearing transaction accounts 129,474 124,357 Time deposits $100,000 and over 72,740 69,294 Other time deposits 102,152 98,105 ------------------ ------------------- Total deposits 383,638 369,509 Other borrowings 845 4,695 Subordinated notes --- --- Other liabilities and interest payable 11,522 11,398 ------------------ ------------------- Total liabilities 396,005 385,602 Shareholders' equity: Preferred stock, no par value; authorized 2,000,000 shares; issued and outstanding: no shares --- --- Common stock, no par value; authorized 10,000,000 shares; issued and outstanding: 3,275,890 and 3,228,771 shares 22,732 22,033 Retained earnings 17,040 15,950 Accumulated other comprehensive loss, net (647) (539) ------------------ ------------------- Total shareholders' equity 39,125 37,444 ------------------ ------------------- Total liabilities and shareholders' equity $435,130 $423,046 ================== =================== See Notes to Consolidated Financial Statements. REDWOOD EMPIRE BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, 2000 1999 ------------- -------------- Cash flows from operating activities: Net income $1,420 $1,018 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net 254 349 Net realized loss (gains) on securities available for sale 1 (14) Loans originated for sale --- (101,880) Proceeds from sale of loans held for sale --- 108,230 Gain on sale of loans and loan servicing --- (704) Provision for loan losses 100 300 Change in other assets and interest receivable (319) 3,255 Change in other liabilities and interest payable 125 7,371 Other, net 14 16 ------------- -------------- Total adjustments 175 16,923 ------------- -------------- Net cash provided by operating activities 1,595 17,941 ------------- -------------- Cash flows from investing activities: Net change in loans (7,665) (15,304) Proceeds from sales of loans in portfolio --- --- Purchases of investment securities available for sale (3,943) (5,017) Purchases of investment securities held to maturity (801) (6,150) Proceeds from sales of investment securities available for sale 1,000 --- Maturities of investment securities available for sale 129 3,015 Maturities of investment securities held to maturity 334 647 Premises and equipment, net (268) (289) Proceeds from sale of other real estate owned 992 786 ------------- -------------- Net cash used in investment activities (10,222) (22,312) ------------- -------------- Cash flows from financing activities: Change in noninterest bearing transaction accounts 1,519 11,787 Change in interest bearing transaction accounts 5,116 (2,976) Change in subordinated debt --- (12,000) Change in time deposits 7,494 423 Change in other borrowings (3,850) 8,476 Issuance of stock 448 59 Dividends paid (330) (135) ------------- -------------- Net cash provided by financing activities 10,397 5,634 ------------- -------------- Net change in cash and cash equivalents 1,770 1,263 Cash and cash equivalents at beginning of period 20,555 42,187 ------------- -------------- Cash and cash equivalents at end of period $22,325 $43,450 ============= ============== (Continued) REDWOOD EMPIRE BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (Continued) Three Months Ended March 31, 2000 1999 -------------- -------------- Supplemental Disclosures: Cash paid during the period for: Interest expense 3,054 2,910 Income taxes 1,084 --- Noncash investing and financing activities: Transfers from loans to other real estate owned 670 232 Dividend declared 330 135 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 financial statements and related notes contained in Redwood Empire Bancorp's 1999 Annual Report to Shareholders. The statements include the accounts of Redwood Empire Bancorp ("Redwood"), and its wholly owned subsidiary, National Bank of the Redwoods ("NBR"). All significant inter-company balances and transactions have been eliminated. The financial information contained in this report reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal recurring nature. The results of operations and cash flows for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. In September 1999 the Company successfully completed the divestiture of its mortgage brokerage and mortgage banking units, Valley Financial and Allied Diversified Credit. The Company has disclosed the operations of these units as well as the after tax loss on disposition as discontinued operations. Accordingly, historical financial information has been recast to present the operating results of Valley Financial and Allied Diversified Credit as discontinued operations. Certain reclassifications were made to prior period financial statements to conform to current period presentations. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements with original maturities of 90 days or less. Federal funds sold and repurchase agreements are generally for one day periods. 2. Earnings per Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company's pertinent earnings per share data is as follows (in thousands, except per share data): Three Months Ended March 31, 2000 1999 ----------------------- ----------------------- Basic Diluted Basic Diluted ---------- ---------- ---------- ---------- Earnings per common share: Income from continuing operations before extraordinary item $1,420 $1,420 $1,211 $1,211 Earnings per share from income from continuing operations before extraordinary item $0.44 $0.43 $0.36 $0.35 Income from discontinued operations, net of tax $--- $--- $83 $83 Earnings per share from income from discontinued operations $0.00 $0.00 $0.02 $0.02 Income before extraordinary item $1,420 $1,420 $1,294 $1,294 Earnings per share before extraordinary item $0.44 $0.43 $0.38 $0.37 Net income $1,420 $1,420 $1,018 $1,018 Net income per share $0.44 $0.43 $0.30 $0.29 Weighted average common shares outstanding 3,252 3,269 (1) 3,372 3,463 (1) ========== ========== ========== ========== (1) The weighted average common shares outstanding include the dilutive effects of common stock options. 3. Comprehensive Income The Company's total comprehensive earnings presentation is as follows: Three Months Ended March 31, ------------------------------- 2000 1999 -------------- -------------- (in thousands) Net income $1,420 $1,018 Other comprehensive income (net of tax): Change in unrealized holding losses on available for sale securities (108) (182) Reclassification adjustment - - (8) -------------- -------------- Total comprehensive income $1,312 $828 ============== ============== 4. Common Stock Dividend On February 15, 2000 the Board of Directors declared a quarterly cash dividend of 10 cents per share on the Company's Common Stock. The dividend was paid on April 14, 2000 to shareholders of record on March 31, 2000. 5. Divestiture of Mortgage Banking and Mortgage Brokerage Units On September 10, 1999 the Company divested itself of its subprime mortgage brokerage and mortgage banking units, Allied Diversified Credit and Valley Financial. The divestiture took the form of an asset sale and employee transfer to Valley Financial Funding, Inc., whose shareholders include senior management of Valley Financial and Allied Diversified Credit. As a result of the divestiture, the Company lost ninety-five employees of which sixty-three were transferred to Valley Financial Funding, Inc, while thirty-two were terminated by the Company. As a result of its divestiture the Company recorded an after-tax loss of $167,000 which is primarily comprised of termination benefits. The Company has disclosed the operations of these units as well as the after tax loss on disposition as discontinued operations. Accordingly, historical financial information regarding changes due to overhead and interest allocation for all segments has been recast to present the operating results of Valley Financial and Allied Diversified Credit as discontinued operations. Revenue from discontinued operations was $2,128,000 for the three months ended March 31, 1999. There was no such revenue recognized in 2000. As of March 31, 2000 there are no assets and $42,000 in liabilities on the Company's consolidated balance sheet related to the divested operations. The liability balance is related to potential repurchases of previously sold mortgage loans. 6. Extraordinary Item In the first quarter of 1999 the Company recorded an extraordinary charge of $276,000, net of tax. Such charge is comprised of the unamortized debt issuance costs associated with the Company's $12,000,000 subordinated debt, which was early redeemed in the first quarter of 1999. In the first quarter of 1999 Redwood obtained funding for the early redemption through an $8.0 million dividend from NBR, the redemption of a $3.0 million note from NBR and $1.0 million from Redwood's general corporate funds. 7. Business Segments Through September 10, 1999, the Company operated in four principal industry segments: core community banking, merchant card services, sub prime lending, and residential mortgage banking and brokerage. The Company's core community banking segment includes commercial, commercial real estate, construction, and permanent residential lending along with all depository activities. The Company's merchant card services industry group provides credit card settlement services for 93,000 merchants throughout the United States. The Company's sub prime lending unit, known as Allied Diversified Credit and the Company's residential mortgage banking and brokerage arm, known as Valley Financial were divested on September 10, 1999. The divestiture took the form of an asset sale and employee transfer. The Company has disclosed the operations of these units as well as the after tax loss on disposition as discontinued operations. Accordingly, historical financial information regarding segments has been restated to reflect only those segments associated with continuing operations. 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. Information related to the internal allocation of interest expense and overhead to segments presented in previous periods has been restated to present such amounts consistent with standards for accounting for discontinued operations. These standards do not allow the allocation of general corporate overhead to discontinued operations and generally require that the allocation of interest to discontinued operations be based on the marginal interest expense that would not have been incurred were it not for the discontinued operations. Summary financial data by industry segment follows: For the quarter ended March 31, 2000 --------------------------------------- Community Total Banking Bankcard Company --------------------------------------- (in thousands) Total Interest Income $8,159 $ --- $8,159 Total Interest Expense 3,220 --- 3,220 Interest income/(expense) allocation (295) 295 --- --------------------------------------- Net Interest Income 4,644 295 4,939 Provision for Loan Losses 100 --- 100 Total other Operating Income 514 897 1,411 Total other Operating Expense 3,409 449 3,858 --------------------------------------- Income from continuing operations before income taxes and extraordinary item 1,649 743 2,392 Provision for income taxes 670 302 972 --------------------------------------- Income from continuing operations before extraordinary item $979 $441 $1,420 ======================================= Total Average Assets $405,445 $23,939 $429,384 ======================================= For the quarter ended March 31, 1999 --------------------------------------- Community Total Banking Bankcard Company --------------------------------------- (in thousands) Total Interest Income $7,228 $ --- $7,228 Total Interest Expense 2,466 3 2,469 Interest income/(expense) allocation (137) 137 --- --------------------------------------- Net Interest Income 4,625 134 4,759 Provision for Loan Losses 300 --- 300 Total other Operating Income 546 779 1,325 Total other Operating Expense 3,482 323 3,805 --------------------------------------- Income from continuing operations before income taxes and extraordinary item 1,389 590 1,979 Provision for income taxes 542 226 768 --------------------------------------- Income from continuing operations before $847 $364 $1,211 extraordinary item ======================================= Total Average Assets $339,825 $10,147 $349,972 ======================================= 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 the Securities Act of 1933 and Securities Act of 1934. These forward-looking statements (which involve the Company's plans, beliefs and goals, refer to estimates 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: - - Competitive pressure in the banking industry and changes in the regulatory environment. - - Changes in the interest rate environment and volatility of rate sensitive loans and deposits. - - The health of the economy declines 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. - - 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 card holder fraud or merchant business failure. - - Asset/liability repricing risks and liquidity risks. - - Changes in the securities markets. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and Certain Important Considerations for Investors. The following sections discuss significant changes and trends in financial condition, capital resources and liquidity of the Company from December 31, 1999 to March 31, 2000. Significant changes and trends in the Company's results of operations for the three months ended March 31, 2000, compared to the same period in 1999 are also discussed. Summary of Financial Results On September 10, 1999 the Company divested itself of its mortgage brokerage and mortgage banking units, Valley Financial and Allied Diversified Credit. The divestiture took the form of an asset sale and employee transfer to Valley Financial Funding, Inc., whose shareholders include senior management of Valley Financial and Allied Diversified Credit. As a result of the divestiture, the Company lost ninety-five employees of which sixty-three were transferred to Valley Financial Funding, Inc, while thirty-two were terminated by the Company. The Company has disclosed the operations of these units as well as the after tax loss on disposition as discontinued operations. Accordingly, historical financial information has been recast to present the operating results of Valley Financial and Allied Diversified Credit as discontinued operations. Revenue from discontinued operations was $2,128,000 for the three months ended March 31, 1999. There was no revenue recognized for the three months ended March 31, 2000. The Company reported income from continuing operations of $1,420,000 ($.43 per diluted share) for the three months ended March 31, 2000 and $1,211,000 ($.35 per diluted share) for the same period in 1999. The Company did not recognize any income or loss associated with its discontinued operations during the first quarter of 2000, as compared to income of $83,000 ($.02 per diluted share) during the first quarter of 1999. Net income was $1,420,000 ($.43 per diluted share) for the quarter ended March 31, 2000 and $1,018,000 ($.29 per diluted share) for the same period one year ago. Net income from continuing operations for the first three months of 2000 increased $209,000, or 17%, as compared to the same period in 1999. This increase is due to an increase of $180,000 in net interest income, an increase of $86,000 in noninterest income, and a decrease in the provision for loan losses of $200,000 offset by an increase of $53,000 in noninterest expense. Net Interest Income Net interest income from continuing operations increased from $4,759,000 during the first quarter of 1999 to $4,939,000 in the first quarter of 2000, which represents an increase of $180,000 or 4%. While the Company's net interest margin decreased to 4.96% for the three months ended March 31, 2000 from 5.51% for the three months ended March 31, 1999, it was the Company's growth in earning assets that fueled the increase in net interest income. Average earning assets from continuing operations, which excludes mortgage loans held for sale, increased $50,752,000 from $349,972,000 for the quarter ended March 31, 1999 to $400,724,000 for the quarter ended March 31, 2000. Factors that will affect the Company's interest margin include the earning asset mix, competitive factors affecting loan and deposit pricing and retention and the general interest rate environment. For the first three months of 2000, the yield on earning assets decreased from 8.38% to 8.19% primarily due to a change in the mix of the Company's earning assets. Average commercial and residential real estate loans, which bear a yield lower than other portfolio loan types, increased $45,537,000. Yield paid on interest bearing liabilities increased as such yield was 4.28% for the three months ended March 31, 2000 as compared to 4.00% in the same period in 1999. Average earning assets from continuing operations, which excludes mortgage loans held for sale, increased in the first quarter of 2000 to $400,724,000 as compared to $349,972,000 for the three months ended March 31, 1999. The increase during the first three months of 2000 when compared to 1999 is primarily due to an increase in average portfolio loans of $41,129,000 and investment securities of $14,197,000 partially offset by a decline in federal funds sold of $4,574,000. Further contributing to the decline in the Company's net interest margin was a change in the Company's funding mix. Total average interest bearing liabilities increased from $250,634,000 in the first quarter of 1999 to $302,437,000 for the same period in 2000, which represents an increase of $51,803,000. This increase was coupled with a decrease in average noninterest bearing transaction accounts of $11,993,000. This decrease in noninterest bearing transaction accounts is a result of a decrease in balances deposited by one of the Company's large customers. The following is an analysis of the net interest margin: Three months ended Three months ended March 31, 2000 March 31, 1999 ---------------------------------------- ---------------------------------------- Average % Average % (dollars in thousands) Balance Interest Yield Balance Interest Yield ---------------------------------------- ---------------------------------------- Earning assets (1) $400,724 $8,159 8.19 $349,972 $7,228 8.38 Interest-bearing liabilities 302,437 3,220 4.28 250,634 2,469 4.00 ------------- -------------- Net interest income $4,939 $4,759 ============= ============== Net interest income to earning assets 4.96 5.51 (1) Nonaccrual loans are included in the calculation of the average balance of earning assets, and 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 months ended March 31, 2000 and 1999. Changes not solely attributable to rate or volume have been allocated to rate. Three months ended March 31, 2000 over March 31, 1999 -------------------------------------------------- Volume Rate Total -------------------------------------------------- (in thousands) Increase (decrease) in interest income: Portfolio loans $933 ($261) $672 Investment securities 218 76 294 Federal funds sold (57) 22 (35) -------------------------------------------------- Total increase (decrease) 1,094 (163) 931 -------------------------------------------------- Increase (decrease) in interest expense: Interest-bearing transaction accounts (60) 38 (22) Time deposits 780 86 866 Other borrowings (27) (66) (93) -------------------------------------------------- Total increase (decrease) 693 58 751 -------------------------------------------------- Increase in net interest income $401 ($221) $180 ================================================== Provision for Loan Losses The provision for loan losses for the three months ended March 31, 2000 was $100,000 as compared to $300,000 in the same quarter in the previous year. For further discussion see Allowance for Loan Losses and Nonperforming Loans. Noninterest Income and Expense and Income Taxes Noninterest Income The following table sets forth the components of the Company's noninterest income from continuing operations for the three months ended March 31, 2000, as compared to the same period in 1999. Three Months Ended March 31, -------------------------- $ % 2000 1999 Change Change ----------- ---------- ----------------------- (dollars in thousands) Service charges on deposit accounts $277 $255 $22 9 Merchant draft processing, net 897 779 118 15 Loan servicing income 40 16 24 150 Gain (loss) on securities (1) 14 (15) (107) Other income 198 261 (63) (24) ----------- ---------- ------------ Total noninterest income $1,411 $1,325 $86 6 =========== ========== ============ Noninterest income from continuing operations increased $86,000 or 6% to $1,411,000 for the first quarter of 2000 when compared to $1,325,000 for the same period in 1999. Such increase is primarily due to an increase in merchant card net revenue of $118,000, an increase in loan servicing income of $24,000 and an increase of $22,000 in service charges on deposit accounts. These increases were partially offset by a decline of $63,000 in other income. Noninterest Expense Noninterest expense from continuing operations increased by $53,000 or 1% to $3,858,000 during the first quarter of 2000 compared to $3,805,000 for the first quarter of 1999. The following table sets forth the components of the Company's noninterest expense during the three months ended March 31, 2000, as compared to the same period in 1999. Three Months Ended March 31, $ % --------------------------- 2000 1999 Change Change ------------- ------------ --------------------- (dollars in thousands) Salaries and employee benefits $2,150 $2,158 ($8) (0) Occupancy and equipment expense 501 532 (31) (6) Other 1,207 1,115 92 8 ------------- ------------ ---------- Total noninterest expense $3,858 $3,805 $53 1 ============= ============ ========== 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 40.6% for the three months ended March 31, 2000, compared to 38.5% for the same period in 1999. Business Segments Through September 10, 1999, the Company operated in four principal product and service lines: core community banking, merchant card services, sub prime lending, and residential mortgage banking and brokerage. The Company's core community banking segment includes commercial, commercial real estate, construction, and permanent residential lending along with all depository activities. The Company's merchant card services industry group provides credit card settlement services for 93,000 merchants throughout the United States. The Company's sub prime lending unit, known as Allied Diversified Credit and the Company's residential mortgage banking and brokerage arm, known as Valley Financial were divested on September 10, 1999. The divestiture took the form of an asset sale and employee transfer. The Company has disclosed the operations of these units as discontinued operations. Accordingly, historical financial information regarding segments has been restated to reflect only those segments associated with continuing operations. Summary financial data by industry segment as follows: For the quarter ended March 31, 2000 --------------------------------------- Community Total Banking Bankcard Company --------------------------------------- (in thousands) Total Interest Income $8,159 $ --- $8,159 Total Interest Expense 3,220 --- 3,220 Interest income/(expense) allocation (295) 295 --- --------------------------------------- Net Interest Income 4,644 295 4,939 Provision for Loan Losses 100 --- 100 Total other Operating Income 514 897 1,411 Total other Operating Expense 3,409 449 3,858 --------------------------------------- Income from continuing operations before income taxes and extraordinary item 1,649 743 2,392 Provision for income taxes 670 302 972 --------------------------------------- Income from continuing operations before $979 $441 $1,420 extraordinary item ======================================= Total Average Assets $405,445 $23,939 $429,384 ======================================= For the quarter ended March 31, 1999 --------------------------------------- Community Total Banking Bankcard Company --------------------------------------- (in thousands) Total Interest Income $7,228 $ --- $7,228 Total Interest Expense 2,466 3 2,469 Interest income/(expense) allocation (137) 137 --- --------------------------------------- Net Interest Income 4,625 134 4,759 Provision for Loan Losses 300 --- 300 Total other Operating Income 546 779 1,325 Total other Operating Expense 3,482 323 3,805 --------------------------------------- Income from continuing operations before income taxes and extraordinary item 1,389 590 1,979 Provision for income taxes 542 226 768 --------------------------------------- Income from continuing operations before $847 $364 $1,211 extraordinary item ======================================= Total Average Assets $339,825 $10,147 $349,972 ======================================= Community Banking The Community Banking segment's income from continuing operations before income tax and extraordinary item increased for the quarter ended March 31, 2000 when compared to the same period in the prior year. The increase is due to reduced operating expenses, a lower provision for loan losses and growth in earning assets. In the first quarter of 2000, segment expenses declined primarily due to reduced overhead and administrative expenses. Additionally, the Company increased its permanent loan portfolio through renewed marketing efforts. Total average portfolio loans amounted to $313,405,000 in the first quarter of 2000 and $272,276,000 in the first quarter of 1999, which reflects a 15% increase. Bankcard The Merchant Card segment provides Visa and Mastercard credit card processing and settlement services for roughly 93,000 merchants located throughout the United States. Yearly processing volume is in excess of $1.6 billion. The Company's merchant card services customer base is made up of merchants located in its primary market area and merchants who have been acquired by the Company through the use of independent sales organizations, or ISO's. The Merchant Card processing segment has experienced three successive years of revenue and earnings growth due to an increase in the number of merchants it services and an increase of independent sales organizations (ISO's) to market its services. In December 1998 the Company renegotiated the terms of a processing contract with an ISO who represented $1,736,000 or 66% of the Company's 1998 merchant draft net processing revenue and $1,412,000 or 45% of such revenue in 1999. As a result of the renegotiation the ISO bought down its processing rate in consideration for a payment of $2,600,000 to the Company. The term of the renegotiated contract is for two years and requires the Company to continue to process merchant card transaction volume from this ISO's customers. The Company has amortized such payment over the life of the renegotiated contract into income. During the first quarter of 2000 and 1999, $480,000 and $410,000 of this payment was recognized as revenue. The amount of unearned processing revenue was $960,000 as of March 31, 2000. The balance of this account will be amortized into income in 2000. The Company expects to build its overall merchant card processing business through direct marketing efforts and new ISO's in an effort to offset any potential decline in future revenues that may result in periods following the term of the buydown. The Company bears certain risks associated with its merchant credit card processing business. Due to a contractual obligation between NBR and Visa and MasterCard, NBR stands in the place of the merchant in the event that a merchant is unable to pay charge-backs from cardholders. As a result of this obligation, NBR may incur losses associated with its merchant credit card processing business. Accordingly, NBR has established a reserve to provide for losses associated with charge-back losses. Such reserve, which totaled $1,044,000 and $606,000 as of March 31, 2000 and 1999, was estimated based upon industry loss data as a percentage of transaction volume throughout each year, historical losses incurred by the Company, and management's assumptions regarding merchant and ISO risk. The provision for charge-back losses, which is included in the financial statements as a reduction in merchant draft processing income, was $136,000 and $147,000 for the quarters ended March 31, 2000 and 1999, respectively. While charge offs were minimal, the increase in the reserve reflects the growth in transaction volume, increased exposures to internet merchants, and a new ISO relationship in which the Company assumes fraud risk directly rather than looking first to the ISO. For further discussion see "Certain Important Considerations for Investors". Investment Securities Total investment securities increased $3,124,000 or 4% to $79,829,000 as of March 31, 2000 when compared to $76,705,000 as of December 31, 1999. Such increase is due to an effort to increase the overall yield in earning assets of the Company by decreasing its overnight federal fund investment position and redirect such amounts into the higher yielding investment portfolio. The Company's average federal fund position was $10,014,000 for the first three months of 2000 as compared to $14,588,000 in 1999. Loans Total loans increased $7,146,000 or 2% to $321,591,000 at March 31, 2000 compared to $314,445,000 at December 31, 1998. The increase in portfolio loans is primarily attributable to the Company's marketing efforts and a general expansion of businesses within the Company's market area. Real estate construction loans have increased $2,376,000 to $42,435,000 at March 31, 2000 as compared to $40,059,000 at December 31, 1999. In addition, the Company has emphasized the funding of permanent residential real estate loans and commercial real estate loans in the first three months of 2000. Residential real estate loans increased $1,543,000 to $132,047,000 at March 31, 2000, as compared to $130,504,000 at December 31, 1999, and commercial real estate has grown $5,667,000 to $85,143,000 compared to $79,476,000. The following table summarizes the composition of the loan portfolio at March 31, 2000 and December 31, 1999. March 31, 2000 December 31, 1999 ------------------------------------ ------------------------------------ Amount % Amount % ------------------------------------ ------------------------------------ (dollars in thousands) (dollars in thousands) Residential real estate mortgage $132,047 42 $130,504 42 Commercial real estate mortgage 85,143 26 79,476 25 Commercial 58,908 18 61,165 19 Real estate construction 42,435 13 40,059 13 Installment and other 4,416 1 4,624 1 Less deferred loan fees (1,358) 0 (1,383) 0 ------------------------------------ ------------------------------------ Total portfolio loans 321,591 100 314,445 100 ================== ================== Less allowance for loan losses (7,980) (7,931) ------------------ ------------------ Net loans $313,611 $306,514 ================== ================== 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 adequacy of 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 or potential problem loans. The specific allocations are increased or decreased through management's reevaluation 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 and general economic conditions and other qualitative factors. The following table summarizes the Company's allowance for loan losses: Three months ended March 31, ---------------------------- 2000 1999 ------------ ------------- (dollars in thousands) Beginning allowance for loan losses $7,931 $8,041 Provision for loan losses 100 300 Charge-offs (67) (257) Recoveries 16 158 ------------ ------------- Ending allowance for loan losses $7,980 $8,242 ============ ============= Net charge-offs to average loans (annualized) .07% .15% The allowance for loan losses as a percentage of portfolio loans decreased from 2.62% at December 31, 1999 to 2.48% at March 31, 2000. This decrease is due to several factors which include an improvement in the overall credit quality of the Company's loan portfolio, as evidence by the reduction of nonperforming loans presented below, growth in the Company's loan portfolio and a reduction in loan charge-offs. The growth in the Company's loan portfolio is primarily comprised of commercial and residential real estate loans that generally bear a lower credit risk than construction or commercial loans. Accordingly, under the Company's loan loss reserve methodology, such loans generally receive a lower loan loss reserve allocation as compared to commercial or construction loans. Nonperforming Assets The following table summarizes the Company's nonperforming assets. March 31, December 31, 2000 1999 -------------- -------------- (dollars in thousands) Nonaccrual loans $2,534 $3,063 Restructured loans 307 1,018 -------------- -------------- Total nonperforming loans 2,841 4,081 Other real estate owned 2,041 2,363 -------------- -------------- Total nonperforming assets $4,882 $6,444 ============== ============== Nonperforming assets to total assets 1.12% 1.52% Nonperforming assets have decreased from $6,444,000 as of December 31, 1999 to $4,882,000 as of March 31, 2000. The decrease is attributable to a decrease in restructured loans of $711,000, nonaccrual loans of $529,000 and a decline in other real estate owned of $322,000. Nonperforming loans consist of loans to 32 borrowers, 11 of which have balances in excess of $100,000. The two largest have recorded balances of $472,000 and $313,000. Both properties are secured by real estate. Based on information currently available, management believes that adequate reserves are included in the allowance for loan losses to cover any loss exposure that may result from these loans. Other real estate owned consists of 7 properties. Four properties are residential, two are commercial buildings and the remaining is a motel. Based on information currently available, management believes that reserves are not required to cover any loss exposure that may result from these loans. Although the volume of nonperforming assets will depend in part on the future economic environment, there is one additional loan relationship which totals approximately $1,044,000 about which management has serious doubts as to the ability of the borrower to comply with the present repayment terms. This loan may become a nonperforming asset based on the information presently known about possible credit problems of the borrower. At March 31, 2000, the Company's total recorded investment in impaired loans (as defined by SFAS 114 and 118) was $3,189,000 of which $2,878,000 relates to the recorded investment for which there is a related allowance for loan losses of $548,000 determined in accordance with these statements and $311,000 relates to the amount of that recorded investment for which there is no related allowance for loan losses determined in accordance with these standards. The average recorded investment in the impaired loans during the three months ended March 31, 2000 and 1999 was $3,356,000 and $10,029,000. The decline in the average recorded investment of impaired loans of $6,673,000 at March 31, 2000 compared to March 31, 1999 is a direct result of the Company's decline in nonperforming loans of $5,186,000. The related amount of interest income recognized during the periods that such loans were impaired was $39,000 and $123,000 for the three month periods ended March 31, 2000 and 1999. From time to time the Company may be required to repurchase mortgage loans from mortgage loan investors depending upon representations and warranties of the purchase agreement between the investor and the Company. Such representations and warranties include valid appraisal, status of borrower or fraud. In the first three months of 2000 the Company was not required to repurchase any such loans. The Company expects that it may be required to repurchase loans in the future. The Company maintains a reserve for its estimate of potential losses associated with the repurchase of previously sold mortgage loans. Such reserve amounts to $42,000 as of March 31, 2000 and $142,000 as of December 31, 1999. The decrease in the reserve of $100,000 relates to a charge-off taken on one loan in the first quarter of 2000. Liquidity Redwood's primary source of liquidity is dividends from its financial institution subsidiary. Redwood's primary uses of liquidity has historically been associated with cash payments made to the subordinated debt holders, dividend payments made to the preferred stock holders, and operating expenses of the parent. It is Redwood's general policy to retain liquidity at Redwood at a level which management believes to be consistent with the safety and soundness of the Company as a whole. As of March 31, 2000, Redwood held $721,000 in deposits at NBR. In 1998, Redwood reinstated a cash dividend to its common stock holders at a quarterly rate of $.04 per share. In 1999 Redwood increased this dividend 50% to $.06 per share. In the fourth quarter of 1999, the dividend increased again to $.10 per share. Prior to March 1999 Redwood was required to make monthly payments of interest at 8.5% on $12,000,000 of subordinated debentures issued in 1993. The subordinated debentures were early redeemed in the first quarter of 1999. 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 became undercapitalized. If NBR is restricted from paying dividends, Redwood could be unable to pay dividends to its common shareholders. No assurance can be given as to the ability of NBR to pay dividends to Redwood. During the first three months of 2000, NBR declared a dividend of $1,500,000. Management believes that as of March 31, 2000, the Company's liquidity position was adequate for the operations of Redwood and its subsidiary for the foreseeable future. Although each entity within the consolidated Company manages its own liquidity, the Company's consolidated cash flow can be divided into three distinct areas: operating, investing and financing. For the three months ended March 31, 2000 the Company received cash of $175,000 from operating activities and $10,397,000 in financing activities while using $10,222,000 in investing activities. Capital Resources A strong capital base is essential to the Company's continued ability to service the needs of its customers. Capital protects depositors and the 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 FRB and the OCC have each established capital guidelines, which include minimum capital requirements. The regulations impose three sets of standards: a "risk-based", "leverage" and "tangible" capital standard. Under the risk-based capital standard, assets reported on an institution's balance sheet and certain off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight. This standard characterizes an institution's capital as being "Tier 1" capital (defined as principally comprising shareholders' equity and noncumulative preferred stock) and "Tier 2" capital (defined as principally comprising the allowance for loan losses and subordinated debt). Under the leverage capital standard, an institution must maintain a specified minimum ratio of Tier 1 capital to total assets, with the minimum ratio ranging from 4% to 6%. The leverage ratio for the Company and NBR is based on average assets for the quarter. The following table summarizes the consolidated capital ratios and the capital ratios of the principal subsidiaries at March 31, 2000 and December 31, 1999. Company NBR -------------- ------------- March 31, 2000 Total capital to risk based assets 13.44% 13.08% Tier 1 capital to risk based assets 12.17 11.82 Leverage ratio 9.04 8.76 December 31, 1999 Total capital to risk based assets 13.01 13.20 Tier 1 capital to risk based assets 11.74 11.94 Leverage ratio 8.66 8.86 NBR's capital ratios declined in the first quarter of 1999 due to an $8.0 million dividend to Redwood and the early payoff of a $3.0 million note due Redwood. Such payments were necessary to provide funding of Redwood's early redemption of its $12.0 million subordinated debt. In the fourth quarter of 1999, the Company announced the completion of its initial stock repurchase program authorized on October 27, 1998. Total shares repurchased under this authorization were 171,000 at an average price of $20.97 per share. In a separate action the Board of Directors authorized the repurchase of an additional 150,000 outstanding shares. This stock repurchase program was completed the first week of May 2000, at an average price of $18.38. Under the repurchase program, the Company purchases shares from time to time on the open market or through privately negotiated transactions. Year 2000 The Company's mission critical systems successfully responded to the century date change. Accordingly, the Company's core banking systems, including the applications software for its deposit, loan and merchant card processing computer systems, as well as the electronic funds transfers system with the Federal Reserve, are fully operational and accurately processing customer information and transactions. The Company will continue to monitor its systems and those of its vendors and suppliers over the coming months. 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 a contractual obligation between the Company and Visa and Mastercard, NBR stands in the place of the merchant in the event that a merchant is unable to pay on charge-backs from cardholders. Management has taken certain actions to decrease the risk of merchant bankruptcy with its merchant bankcard business. These steps include the discontinuance of high-risk accounts. The Company utilizes ISO's to acquire merchant credit card customers. The Company's ability to maintain and grow net revenue from its merchant credit card processing operation is dependent upon maintaining and adding to these ISO relationships. Merchant bankcard 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. During November 1999, VISA adopted several rule changes to reduce risks in high-risk merchant bankcard programs and these rule changes affect the Company's Merchant Bankcard business. The rule changes go into effect on March 31, 2001. These changes include a requirement that a processor's reported fraud ratios be no greater than three times the national average. At December 31, 1999 (the most recent period available from VISA) the Company's overall fraud ratio was below the VISA requirement. Other VISA changes include the requirement that total processing volume in certain high-risk categories (as defined by VISA) be less than 20% of total processing volume. At December 31, 1999 (the most recent information available from VISA) the Company's total VISA transactions within these certain high-risk categories were 10.4% of VISA total processing volume. Other changes VISA announced include a requirement that weekly VISA volumes be less than 20% of an institutions tangible equity capital, and a requirement that aggregate charge-backs for the previous six months be less than 5% of the institution's tangible equity capital. At December 31, 1999, (the most recent information available from VISA) the Company's weekly VISA volume was 54.4% of tangible equity capital, and aggregate charge-backs for the previous six months were 11.1% of tangible equity capital. Merchant Bankcard participants, such as the Company, must comply with these new VISA rules by filing a compliance plan with VISA. Such plan has been filed by the Company and accepted by VISA. At this time the Company believes that it will be in compliance with all rule changes when they go into effect on March 31, 2001. Should the Company be unable to comply with these rule changes, the Company would seek a waiver from VISA. However, should VISA not grant the Company a waiver, the Company would need to restructure the merchant bankcard unit, which could adversely affect merchant bankcard revenue. Concentration of Lending Activities. Concentration of the Company's lending activities in the real estate sector, including construction loans, could have the effect of intensifying the impact on the Company of adverse changes in the real estate market in the Company's lending areas. At March 31, 2000, approximately 81% of the Company's loans were secured by real estate, of which 33% 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 within Northern and Central California. The ability of the Company to continue to originate mortgage or construction loans may be impaired by adverse changes in local or regional economic conditions, adverse changes in the real estate market, increasing interest rates, or acts of nature (including earthquakes, which may cause uninsured damage and other loss of value to real estate that secures the Company's loans). Due to the concentration of the Company's real estate collateral, such events could have a significant adverse impact on the value of such collateral or the Company's earnings. 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. Competition from Other Financial Institutions. The Company competes for deposits and loans principally with major commercial banks, other independent banks, savings and loan associations, savings banks, thrift and loan associations, credit unions, mortgage companies, insurance companies and other lending institutions. With respect to deposits, additional significant competition arises from corporate and governmental debt securities, as well as money market mutual funds. The Company also depends for its origination of mortgage loans on independent mortgage brokers who are not contractually obligated to do business with the Company and are regularly solicited by the Company's competitors. Aggressive policies of such competitors have in the past resulted, and may in the future result, in a decrease in the Company's volume of mortgage loan originations and/or a decrease in the profitability of such originations, especially during periods of declining mortgage loan origination volumes. Several of the nation's largest savings and loan associations and commercial banks have a significant number of branch offices in the areas in which the Company conducts operations. Among the advantages possessed by the larger of these institutions are their ability to make larger loans, finance extensive advertising campaigns, access international money markets and generally allocate their investment assets to regions of highest yield and demand. Item 3. Quantitative and Qualitative Disclosure about Market Risk There were no significant changes to the Company's market risk from December 31, 1999 to March 31, 2000. PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 1. Exhibits. The following documents are included or incorporated by reference in Form 10-Q. Exhibit Number Description -------------- ----------- 3. Amended and restated By-Laws of the Registrant, filed as Exhibit 3 to the Registrant's 1994 Annual Report on Form 10-K and by this reference incorporated herein. 3.1 Articles of Incorporation of the Registrant. 10. Executive Salary Continuation Agreement between Patrick W. Kilkenny and Redwood Empire Bancorp. 10.1 Executive Severance Agreement between Patrick W. Kilkenny and Redwood Empire Bancorp. 10.2 Executive Salary Continuation Agreement between James E. Beckwith and Redwood Empire Bancorp. 10.3 Executive Severance Agreement between James E. Beckwith and Redwood Empire Bancorp. 10.4 The Registrant's 401 (k) Profit Sharing Plan, filed as Exhibit 28.1 to the Registrant's Registration Statement on Form S-8 dated June 12, 1990 (Registration No. 33-35377), and by this reference incorporated herein. 10.5 The Registrant's Amended and Restated 1991 Stock Option Plan, filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 filed on July 8, 1992 (Registration No. 33-49372), and by this reference incorporated herein. 10.6 The Registrant's Executive Salary Continuation Plan, filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-2 dated December 13, 1993 (Registration No. 33-71324), and by this reference incorporated herein. 10.7 Dividend Reinvestment and Stock Purchase Plan on Form S-3 dated April 28, 1993 (Registration No. 3361750), and by this reference incorporated herein. 10.8 Lease, Dated June 1, 1999, between National Bank of the Redwoods and Advanced Development & Investments. 10.9 Asset Sale Agreement dated September 10, 1999 between National Bank of the Redwoods and Valley Financial Acquisition, Inc. 2. Reports on Form 8-K There were no events requiring a Form 8-K filing during the first quarter ended March 31, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacity indicated. REDWOOD EMPIRE BANCORP (Registrant) DATE: 5/12/00 BY: /s/ James E. Beckwith James E. Beckwith Executive Vice President, Chief Operating Officer, Principal Financial Officer, and Principal Accounting Officer