QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002.
Commission File Number 0-10658
BWC FINANCIAL CORP.
Incorporated pursuant to the Laws of California
Internal Revenue Service - Employer Identification No. 94-2621001
1400 Civic Drive, Walnut Creek, California 94596
(925) 932-5353
N/A
(Former name, former address, and former fiscal year, if changed
since last report.)
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 _____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1924 subsequent to the distribution of securities under a plan confirmed by court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as the latest practicable date. As of June 30, 2002, there were 3,092,997 shares of common stock, no par value outstanding.
| Item 1 | Legal Proceedings | 17 |
| Item 2 | Changes in Securities | 17 |
| Item 3 | Defaults Upon Senior Securities | 17 |
| Item 4 | Submission of Matters to a Vote of | |
| Security Holders | 17 | |
| Item 5 | Other Materially Important Events | 17 |
| Item 6 | Exhibits and Reports on Form 8-K | 17 |
| Signatures | 18 |
In thousands June 30, December 31,
Assets 2002 2001
-----------------------------
(Unaudited)
Cash and Due From Banks $ 21,754 $ 15,016
Federal Funds Sold 20,556 6,000
Other Short-term Investments 35 33
-----------------------------
Total Cash and Cash Equivalents 42,345 21,049
Investment Securities:
Available-for-Sale 75,466 76,684
Held-to-Maturity (approximate fair value of
$10,340 in 2002 and $10,338 in 2001) 9,882 10,025
Loans, Net of Allowance for Credit Losses of $5,724
in 2002 and $5,403 in 2001 269,569 276,064
Bank Premises and Equipment, Net 3,339 3,558
Interest Receivable and Other Assets 8,431 7,677
-----------------------------
Total Assets $ 409,032 $ 395,057
=============================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 94,271 $ 87,172
-----------------------------
Interest-bearing:
Money Market Accounts 155,781 143,317
Savings and NOW Accounts 46,198 44,543
Time Deposits:
Under $100 27,729 30,416
$100 or more 27,762 35,021
-----------------------------
Total Interest-bearing 257,470 253,297
Total Deposits 351,741 340,469
Federal Home Loan Bank Borrowings 15,298 12,955
Interest Payable and Other Liabilities 2,678 3,381
-----------------------------
Total Liabilities 369,717 356,805
-----------------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred Stock, no par value:
5,000,000 shares authorized, none outstanding -- --
Common Stock, no par value:
25,000,000 shares authorized; issued and outstanding -
3,092,997 shares in 2002 and 3,092,474 in 2001 26,091 27,160
Retained Earnings 12,533 10,391
Accumulated other comprehensive income 691 701
-----------------------------
Total Shareholders' Equity 39,315 38,252
-----------------------------
Total Liabilities and Shareholders' Equity $ 409,032 $ 395,057
=============================
The accompanying notes are an integral part of these consolidated statements.
For the Three Months For the Six Months
In thousands except per-share amounts Ended June 30, Ended June 30,
----------------------------------------------------
2002 2001 2002 2001
Interest Income (Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------
Loans, including Fees $ 5,309 $ 6,802 $ 10,916 $ 13,916
Investment Securities:
Taxable 736 819 1,588 1,601
Non-taxable 112 114 224 224
Federal Funds Sold 87 73 140 276
Other Short-term Investments -- 2 3 19
----------------------------------------------------
Total Interest Income 6,244 7,810 12,871 16,036
Interest Expense
Deposits 1,050 2,199 2,227 4,720
Federal Funds Purchased -- 16 -- 16
FHLB Borrowings 219 91 423 146
Other Borrowed Funds -- 1 -- 1
----------------------------------------------------
Total Interest Expense 1,269 2,307 2,650 4,883
Net Interest Income 4,975 5,503 10,221 11,153
Provision for Credit Losses 300 375 600 750
----------------------------------------------------
Net Interest Income After Provision For Credit Losses 4,675 5,128 9,621 10,403
Noninterest Income
BWC Mortgage Services - Commissions 1,605 1,428 3,096 2,628
BWC Mortgage Services - Fees & Other 241 212 527 395
Service Charges on Deposit Accounts 222 193 433 396
Other 305 322 699 654
Gains on Security Transactions -- 11 13 65
----------------------------------------------------
Total Noninterest Income 2,373 2,166 4,768 4,138
Noninterest Expense
Salaries and Related Benefits 2,298 2,405 4,616 4,730
BWC Mortgage Services - Commissions 1,132 979 2,162 1,791
BWC Mortgage Services - Fees & Other 133 117 252 232
Occupancy 408 362 817 699
Furniture and Equipment 189 207 384 396
Other 1,050 1,290 2,407 2,238
----------------------------------------------------
Total Noninterest Expense 5,210 5,360 10,638 10,086
----------------------------------------------------
BWC Mortgage Services - Minority Interest 171 166 361 302
Income Before Income Taxes 1,667 1,768 3,390 4,153
Provision for Income Taxes 606 654 1,248 1,556
----------------------------------------------------
Net Income $ 1,061 $ 1,114 $ 2,142 $ 2,597
====================================================
Basic Earnings Per Share $ 0.31 $ 0.33 $ 0.63 $ 0.75
Diluted Earnings Per Share $ 0.29 $ 0.29 $ 0.59 $ 0.68
====================================================
Weighted Average Basic Shares 3,402,260 3,420,465 3,392,608 3,443,550
Weighted Average Diluted Share Equivalents Related to Options 210,536 359,841 229,947 363,987
Weighted Average Diluted Shares 3,612,796 3,780,306 3,622,555 3,807,537
====================================================
The accompanying notes are an integral part of these consolidated statements.
In thousands For the Six Months Ended June 30,
--------------------------------------
2002 2001
--------------------------------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net Income $2,142 $2,597
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (966) (938)
Provision for credit losses 600 750
Depreciation and amortization 302 284
Gain on sale of securities available for sale (13) (65)
Tax benefit from the exercise of stock options 414 299
Increase in accrued interest receivable
and other assets (754) (456)
Decrease in accrued interest payable
and other liabilities (703) (1,193)
--------------------------------------
Net Cash Provided by Operating Activities 1,022 1,278
--------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 13,697 7,726
Proceeds from the sales of available-for-sale investment securities 6,064 23,881
Purchase of investment securities (17,949) (30,426)
Increase(decrease) in loans originated, net of collections 6,851 (17,587)
Purchase of bank premises and equipment (521) (580)
--------------------------------------
Net Cash Used by Investing Activities 8,142 (16,986)
--------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 11,272 15,241
Increase in Fed Funds Purchased and other borrowings 2,343 4,154
Proceeds from issuance of common stock 370 227
Cash paid for the repurchase of common stock (1,853) (1,525)
Cash paid in lieu of fractional shares -- (5)
Decrease in BWC Mortgage Services borrowings -- --
--------------------------------------
Net Cash Provided by Financing Activities 12,132 18,092
--------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 21,296 2,384
Cash and cash equivalents at beginning of year 21,049 24,472
--------------------------------------
Cash and Cash Equivalents at period end $42,345 $26,856
======================================
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $3,187 $4,777
======================================
Income Taxes Paid $1,373 $2,285
======================================
The accompanying notes are an integral part of these consolidated statements.
For the periods ending December 31, 2001, and June 30, 2002
In thousands except share amounts Accumulated
Other
Number Common Retained Comprehensive Comprehensive
of Shares Stock Earnings Income/(Loss) Total Income
--------------------------------------------------------------------------------------
Balance, January 1, 2001 2,850,850 $ 23,193 $ 10,975 $ 43 $ 34,211
Net Income as of December 31, 2001 -- -- 5,464 -- 5,464 $ 5,464
Other Comprehensive Income, net of tax
liability of $429 -- -- -- 658 658 658
----------------
Comprehensive Income -- -- -- -- --
6,122
Stock options exercised 91,918 329 -- -- 329
Repurchase and retirement of shares by the
Corporation (132,002) (2,704) -- -- (2,704)
10% stock dividend including payment of
fractional shares 281,708 6,043 (6,048) -- (5)
Tax benefit from the exercise of stock -- 299 -- -- 299
options
----------------------------------------------------------------------
Balance, December 31, 2001 3,092,474 27,160 10,391 701 38,252
Net Income as of June 30, 2002 -- -- 2,142 -- 2,142 2,142
Other Comprehensive Income, net of tax
liability of $419 -- -- -- (10) (10) (10)
----------------
Comprehensive Income -- -- -- -- -- $ 2,132
Stock options exercised 88,096 370 -- -- 370
Repurchase and retirement of shares by the
Corporation (87,573) (1,853) -- -- (1,853)
Tax benefit from the exercise of stock -- 414 -- -- 414
options
----------------------------------------------------------------------
Balance June 30, 2002 3,092,997 $ 26,091 $ 12,533 $ 691 $ 39,315
The accompanying notes are an integral part of these consolidated statements.
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2002 and the results of operations for the six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001. Certain information and footnote disclosures presented in the Corporation’s annual consolidated financial statements are not included in these interim financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s 2001 Annual Report to Shareholders, which is incorporated by reference in the Company’s 2001 annual report on Form 10-K. The results of operations for the six months ended June 30, 2002, and the results of interm periods presented, are not necessarily indicative of the operating results for the full year. Diluted earnings per share is computed using the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of stock options. All per share amounts have been restated to reflect the 10% stock dividend given July 15, 2002 and June 15, 2001.
2. INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
The amortized cost and approximate market value of investment securities at June 30, 2002 are as follows:
In thousands
Gross
Amortized Unrealized Market
Cost Gain Value
-----------------------------------
Held-to-maturity
Obligations of State and
Political Subdivisions ................ $ 9,882 $ 458 $10,340
Available-for-sale
U.S. Treasury Securities ................ 4,065 28 4,093
U.S. Government Agencies ................ 36,074 411 36,485
Taxable Obligations of
State & Political Subdivisions ........ 28,797 594 29,391
Corporate Securities .................... 5,420 77 5,497
- --------------------------------------------------------------------------------
Total Available-for-sale ................ $74,356 $ 1,110 $75,466
The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at June 30, 2002.
In thousands
Held-to-Maturity Available-for-Sale
---------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------------
Within one year ................ $ 933 $ 983 $33,070 $33,413
After one, but within
five, years ................. 8,949 9,357 32,436 33,199
Over five years ................ -- -- 8,850 8,854
- --------------------------------------------------------------------------------
Total .......................... $ 9,882 $10,340 $74,356 $75,466
3. ALLOWANCE FOR CREDIT LOSSES
In Thousands
For the Six Months Ended
June 30,
2002 2001
-----------------------------
Total loans outstanding at end of
period, before deducting allowance
for credit losses .......................... $ 275,293 $ 270,153
----------------------------
Allowance for credit losses at
beginning of period ....................... 5,403 5,042
Charge-offs .................................. (357) (825)
Recoveries ................................... 78 130
----------------------------
Net (charge-offs)/recoveries ................. (279) (695)
Provisions ................................... 600 750
Allowance for credit losses at
end of period ............................. $ 5,724 $ 5,097
============================
Ratio of allowance for credit
losses to loans 2.08% 1.89%
For the Bank, comprehensive income includes net income reported on the statement of income and changes in the fair value of its available- for-sale investments reported as a component of shareholders’ equity.
The components of other comprehensive income for the six months ended June 30, 2002 and 2001 are as follows:
In thousands
2002 2001
================================================================================
Unrealized gain(loss) arising
during the period, net of tax ....................... $ (2) $398
- --------------------------------------------------------------------------------
Reclassification adjustment for net
realized gains on securities
available-for-sale included in net
income during the year, net of tax .................. 8 40
- --------------------------------------------------------------------------------
Net unrealized gain(loss) included
in other comprehensive income ....................... $(10) $358
================================================================================
Note: Net unrealized gain(loss) comes from "Comp.Inc." as "Net (after tax) change in AFS securities. Reclassification adjustment is the gain of securities sold (Income Statement) less tax (.38). Unrealized gain(loss) is the sum of the above two amounts.
5. BUSINESS SEGMENTS
The Corporation is principally engaged in community banking activities through its eight Bank branches. In addition to its community banking activities, the Corporation provides mortgage brokerage services through its joint venture, BWC Mortgage Services. These activities are monitored and reported by Corporation management as a separate operating segment. The separate banking offices have been aggregated into a single reportable segment, Community Banking.
The Corporation’s community banking segment provides loans, leases and lines of credit to local businesses and individuals. This segment also derives revenue by investing funds that are not loaned to others in the form of loans, leases or lines of credit, into investment securities. The business purpose of BWC Mortgage Services is the origination and placement of long-term financing for real estate mortgages.
Summarized financial information for the periods ended June 30, 2002 and 2001 concerning the Corporation’s reportable segments is shown in the following table.
For the Six Months Ended 06/30/2002 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 12,873 $ 2 $ (4) 12,871 Commissions Received - 3,096 - 3,096 Total Interest Expense 2,652 2 (4) 2,650 Salaries & Benefits 4,255 361 - 4,616 Commissions Paid - 2,162 - 2,162 Segment Profit before Tax 3,142 722 (474) 3,390 Total Assets $ 408,914 $ 356 $ (238) $ 409,032 - ----------------------------------------------------------------------------------------------------------------------------- For the Six Months Ended 06/30/2001 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 16,039 $ 3 $ (6) 16,036 Commissions Received - 2,628 - 2,628 Total Interest Expense 4,886 3 (6) 4,883 Salaries & Benefits 4,421 309 - 4,730 Commissions Paid - 1,791 - 1,791 Segment Profit before Tax 3,922 604 (373) 4,153 Total Assets $ 370,563 $ 374 $ (271) $ 370,666 - ----------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended 06/30/2002 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 6,246 $ 1 $ (4) $ 6,243 Commissions Received - 1,605 - 1,605 Total Interest Expense 1,271 1 (4) 1,268 Salaries & Benefits 2,121 177 - 2,298 Commissions Paid - 1,131 - 1,131 Segment Profit before Tax 1,532 342 (207) 1,667 Total Assets $ 408,914 $ 356 $ (238) 409,032 - ----------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended 06/30/2001 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 7,811 $ 2 $ (3) 7,810 Commissions Received - 1,428 - 1,428 Total Interest Expense 2,309 1 (3) 2,307 Salaries & Benefits 2,234 171 - 2,405 Commissions Paid - 979 - 979 Segment Profit before Tax 1,643 332 (207) 1,768 Total Assets $ 370,563 $ 374 $ (271) 370,666 - -----------------------------------------------------------------------------------------------------------------------------
Forward-Looking Statements
Except for historical financial information contained herein, certain matters discussed in the Annual Report of BWC Financial Corp. constitute “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to BWC Financial Corp., Bank of Walnut Creek and BWC Real Estate, include, but are not limited to, those related to the economic environment, particularly in the areas in which the Company and the Bank operate, competitive products and pricing, loan delinquency rates, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
General
Prime rate averaged 4.75% during the first half of 2002, compared to 7.98% for the first half of 2001, a decrease of 3.23% between the comparable periods. Due to the Corporation’s asset-sensitive position, low interest rates result in a narrowing of the Corporation’s net interest margin. Continued low interest rates and slow economic activity most probably will have an adverse effect on performance throughout 2002.
Total assets of the Corporation at June 30, 2002 of $409,032,000 have increased $38,366,000 or 10% as compared to June 30, 2001. Total loans of $275,293,000 have increased $5,139,000 or 2%, and total deposits of $351,741,000 have increased $26,865,000 or 8%. Since year-end 2001 the Corporation’s assets have increased 4%, loans decreased 2%, and deposits increased 3%.
The Corporation’s loan-to-deposit ratio as of June 30, 2002 was 78%, as compared to 83% in 2001.
Net Income
Net income for the first six months in 2002 of $2,142,000 was $455,000 less than the first six months in 2001. This represented a return on average assets during this period of 1.07% and a return on average equity of 11.14%. The return on average assets during the first six months of 2001 was 1.45%, and the return on average equity was 14.67%.
Net income for the three months ending June 30, 2002 of $1,061,000 was $53,000 less than the comparable period in 2001. The return on average assets during the second quarter was 1.06%, and the return on average equity was 10.97%. The return on average assets during the second quarter of 2001 was 1.23%, and the return on average equity was 12.48%.
Earning assets averaged $373,550,000 during the six months ended June 30, 2002, as compared to $337,682,000 for the comparable period in 2001. Earning assets averaged $374,510,000 during the second quarter of 2002 as compared to $341,441,000 during the second quarter of 2001.
Diluted earnings per average common share were $.59 for the first six months of 2002 as compared to $0.68 for the first six months of 2001. For the second quarter of 2002, diluted earnings per average common share were $0.29 as compared to $0.29 for the second quarter of 2001.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans and deposits and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first six months of 2002 was $10,221,000 or $932,000 less than the comparable period in 2001. This was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $35,868,000 more than during the first six months of 2001. The prime lending rate has held at 4.75% during the first six months of 2002 as compared to an average of 7.98% for the first six months of 2001.
Due to the Corporation’s asset-sensitive position, decreasing interest rates result in a decrease in the Corporation’s net interest margin. The Corporation’s net interest margin averaged 5.56% during the first six months of 2002 as compared to 6.71% in 2001. The decrease in net interest margin is estimated to have resulted in a decrease in interest income of $1,157,000 during the first six months of 2002 as compared to the same period in 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $225,000.
During the second quarter 2002 the Corporation’s net interest margin averaged 5.38% as compared to 6.53% in 2001. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $536,000 during the second quarter of 2002 as compared to the same period in 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $8,000. The result was a net decrease in interest income of $528,000 during the second quarter of 2002 as compared to 2001.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated and is in accordance with SFAS 114. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate, the performance of borrowers, and other conditions to determine the adequacy of the allowance.
The ratio of the allowance for credit losses to total loans as of June 30, 2002 was 2.08%, as compared to 1.89% for the period ending June 30, 2001. The Corporation’s ratios for both periods is considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for loan losses. As of June 30, 2002 it had $3,499,000 in allocated allowance and $2,225,000 in unallocated allowance. The Corporation’s management believes that the amount of unallocated allowance is reasonable due to the growth of the Bank’s loan portfolio and the type of credit products that comprise the portfolio.
The Corporation had net losses of $279,000 during the first six months of 2002 as compared to net losses of $694,000 during the comparable period in 2001.
The following table provides information on past-due and nonaccrual loans:
June 30,
2002 2001
---------- ----------
Loans Past-due 90 Days or More $ 10,000 $ 30,000
Nonaccrual Loans 1,113,000 1,311,000
---------- ----------
Total $1,123,000 $1,341,000
As of June 30, 2002 and 2001, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2002 remains uncollected. Interest foregone on nonaccrual loans was approximately $428,000 and $252,000, as of June 30, 2002 and 2001 respectively.
Noninterest Income
Noninterest income during the first six months of 2002 was $630,000 greater than during the comparable period of 2001, primarily related to the activities of the Corporation’s mortgage subsidiary. The increase in their income is in part a reflection of the low interest rates during the current year and the corresponding strong market in mortgages and refinancing.
The other categories of noninterest income are comparable to the prior year and the Corporation’s growth.
There were gains on securities available-for-sale of $13,000 during the first six months of 2002 as compared to $65,000 during the comparable 2001 period. The greater gains in 2001 were the result of a large number of agency securities which were called by the issuing agencies due to the decline in rates and the ability of these agencies to reissue debt at lower rates.
During the second quarter of 2002 noninterest income was $207,000 greater than in the comparable prior year period. Almost all this increase is related to the activities of the Corporation’s mortgage subsidiary.
Noninterest Expense
Noninterest expense during the first six months of 2002 was $552,000 greater than during the comparable period in 2001.
BWC Mortgage Services reflected an increase in noninterest expense of $305,000 during the respective periods, which is a reflection of the strength of the mortgage market and their increased activity in this market.
Salaries and related benefits were $114,000 less during the first six months of 2002 as compared to 2001. This decrease is related primarily to a reduction in general merit increases and provision for performance bonuses. The Bank’s staff averaged 119 full-time equivalent (FTE) persons during the first six months of 2002 and 2001.
Occupancy expense increased $118,000 over the comparable period in 2001 primarily related to the new 15 year master lease (February 2001), on our headquarters office in Walnut Creek, remodeling expenses to that office, a new lease on our Pleasanton office (July 2001) at current market rates (this had been under a sub-lease at below market rates), and due to CPI and operating increases.
Total furniture and equipment expenses decreased a modest $12,000 as compared to the 2001 period, related primarily to a reduction in maintenance and repair expenses between the respective periods.
Other expenses reflect an increase of $169,000 between the respective periods, which includes a check fraud loss taken in the first quarter of 2002 of approximately $200,000. During the second quarter of 2001, the Bank experienced a check fraud loss of approximately $100,000.
During the second quarter of 2002 the Corporation’s noninterest expense decreased $150,000 over the comparable quarter of 2001. Of this decrease, $100,000 is related to the check fraud loss mentioned above. The balance is related to the same reasons that were applicable for the six months results.
Other Real Estate Owned
As of June 30, 2002 the Corporation had no Other Real Estate Owned assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
Capital Adequacy
The Federal Deposit Insurance Corporation (FDIC) has established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital includes the eligible allowance for credit losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 8% at June 30, for both 2002 and 2001. The FDIC has also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by the quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3% for the highest-rated banks.
The following table shows the Corporation’s risk-based capital ratios and leverage ratio as of June 30, 2002, December 31, 2001, and June 30, 2001.
Risk-based capital ratios: Capital Ratios
Minimum
June 30, December 31, June 30, Regulatory
2002 2001 2001 Requirements
Tier 1 capital 11.68% 11.65% 11.48% 4.00%
Total capital 12.93% 12.90% 12.73% 8.00%
Leverage ratio 9.66% 9.22% 9.86% 3.00%
Liquidity
Liquidity is a key aspect in the overall fiscal health of a financial corporation. The primary source of liquidity for BWC Financial Corp. is its marketable securities and Federal Funds Sold. Cash, investment securities and other temporary investments represented 31% of total assets at June 30, 2002 and 25% at June 30, 2001. The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. Additionally, the Corporation has available from correspondent banks Federal Fund lines of credit totaling $15,000,000 and the ability to borrow, on a collateralized basis, from the Federal Home Loan Bank.
Movement in interest rates can create fluctuations in the Corporation’s income and economic value due to an imbalance in the re-pricing or maturity of assets or liabilities. The components of interest-rate risk which are actively measured and managed include: re-pricing risk and the risk of non-parallel shifts in the yield curve. Interest-rate risk exposure is actively managed with the goal of minimizing the impact of interest-rate volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to re-pricing or maturity characteristics. Therefore, the Corporation uses a variety of measurement tools to monitor and control the overall interest-rate risk exposure of the on-balance-sheet positions. For each measurement tool, the level of interest-rate risk created by the assets and liabilities is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Corporation’s interest-rate risk as of June 30, 2002 was consistent with the interest-rate exposure presented in the Corporation’s 2001 annual report and was within the Corporation’s risk policy range.
Repricing within: 3 3-6 12 1-5 Over 5
In thousands Months Months Months Years Years Totals
- --------------------------------------------------------------------------------------------------------------------
Assets:
Federal Funds Sold & Short-term
Investments $ 20,556 $ - $ - $ - $ - $ 20,556
Investment securities
9,804 10,990 13,552 42,148 8,854 85,348
Construction & Real Estate Loans
101,866 16,475 2,402 1,839 13,259 135,841
Commercial Loans
71,741 1,929 2,320 2,255 106 78,351
Consumer Loans
48,387 63 129 202 - 48,781
Leases
1,683 1,716 3,050 5,871 - 12,320
------------------------------------------------------------------------------
Interest-bearing assets $ 254,037 $ 31,173 $ 21,453 $ 52,315 $ 22,219 $ 381,197
------------------------------------------------------------------------------
Liabilities:
Money market accounts $ 77,891 $ 77,890 $ - $ - $ - $ 155,781
Time deposits <$100,000
10,447 6,275 8,197 2,810 - 27,729
Time deposits >$100,000
13,156 5,462 5,863 3,281 - 27,762
------------------------------------------------------------------------------
Interest-bearing liabilities $ 101,494 $ 89,627 $ 14,060 $ 6,091 $ - $ 211,272
------------------------------------------------------------------------------
Rate-sensitive gap $ 152,543 $ (58,454) $ 7,393 $ 46,224 $ 22,219 $ 169,925
Cumulative rate-sensitive gap $ 152,543 $ 94,089 $ 101,482 $ 147,706 $ 169,925
=================================================================
Cumulative rate-sensitive ratio 2.50 1.49 1.49 1.70 1.80
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Materially Important Events
A 10% stock dividend was declared by the Corporation’s Board of Directors to shareholders of record July 15, 2002.
Item 6 - Exhibits and Reports on Form 8-K
None
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.
BWC FINANCIAL CORP.
(Registrant)
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Date James L. Ryan
Chairman and Chief Executive Officer
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Date Leland E. Wines
CFO and Corp. Secretary