QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 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 September 30, 2002, there were 3,521,603 shares of common stock, no par value outstanding.
| Item 1 | Legal Proceedings | 19 |
| Item 2 | Changes in Securities and Use of Proceeds | 19 |
| Item 3 | Defaults Upon Senior Securities | 19 |
| Item 4 | Submission of Matters to a Vote of | |
| Security Holders | 19 | |
| Item 5 | Other Information | 19 |
| Item 6 | Exhibits and Reports on Form 8-K | 19 |
| Signatures | 20 | |
| Certification by CFO | 21 | |
| Certification by CEO | 22 |
In thousands September 30, December 31,
Assets 2002 2001
---------------- ----------------
(Unaudited)
Cash and Due From Banks $ 15,152 $ 15,016
Federal Funds Sold 8,299 6,000
Other Short-term Investments 35 33
---------------- ----------------
Total Cash and Cash Equivalents 23,486 21,049
Investment Securities:
Available-for-Sale 88,628 76,684
Held-to-Maturity (approximate fair value of
$11,529 in 2002 and $10,338 in 2001) 10,959 10,025
Loans, Net of Allowance for Credit Losses of $5,910
in 2002 and $5,403 in 2001 275,579 276,064
Bank Premises and Equipment, Net 3,281 3,558
Interest Receivable and Other Assets 8,295 7,677
---------------- ----------------
Total Assets $ 410,228 $ 395,057
================ ================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 97,734 $ 87,172
---------------- ----------------
Interest-bearing:
Money Market Accounts 149,146 143,317
Savings and NOW Accounts 46,518 44,543
Time Deposits:
Under $100 27,062 30,416
$100 or more 25,935 35,021
---------------- ----------------
Total Interest-bearing 248,661 253,297
Total Deposits 346,395 340,469
Federal Home Loan Bank Borrowings 20,551 12,955
Interest Payable and Other Liabilities 2,614 3,381
---------------- ----------------
Total Liabilities 369,560 356,805
---------------- ----------------
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 -
3,521,603 shares in 2002 and 3,092,474 in 2001 32,496 27,160
Retained Earnings 7,226 10,391
Accumulated other comprehensive income 946 701
---------------- ----------------
Total Shareholders' Equity 40,668 38,252
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 410,228 $ 395,057
================ ================
The accompanying notes are an integral part of these consolidated statements.
For the Three Months For the Nine Months
In thousands except per-share amounts Ended September 30, Ended September 30,
---------------------------- -------------------------
2002 2001 2002 2001
Interest Income (Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- -------------- ------------- -------------
Loans, including Fees $5,173 $6,575 $16,089 $20,491
Investment Securities:
Taxable 897 772 2,485 2,373
Non-taxable 115 111 339 335
Federal Funds Sold 64 155 204 431
Other Short-term Investments -- 39 3 58
------------- -------------- ------------- -------------
Total Interest Income 6,249 7,652 19,120 23,688
Interest Expense
Deposits 1,014 1,998 3,241 6,718
Federal Funds Purchased -- -- -- 16
FHLB Borrowings 228 100 651 246
Other Borrowed Funds -- -- -- 1
------------- -------------- ------------- -------------
Total Interest Expense 1,242 2,098 3,892 6,981
Net Interest Income 5,007 5,554 15,228 16,707
Provision for Credit Losses 300 400 900 1,150
------------- -------------- ------------- -------------
Net Interest Income After Provision For Credit Losses 4,707 5,154 14,328 15,557
Noninterest Income
BWC Mortgage Services - Commissions 2,065 1,369 5,161 3,997
BWC Mortgage Services - Fees & Other 360 254 887 649
Service Charges on Deposit Accounts 240 180 673 576
Other 316 325 1,015 979
Gain(Loss) on Security Transactions (37) -- (24) 65
------------- -------------- ------------- -------------
Total Noninterest Income 2,944 2,128 7,712 6,266
Noninterest Expense
Salaries and Related Benefits 2,300 2,039 6,916 6,769
BWC Mortgage Services - Commissions 1,424 968 3,586 2,759
BWC Mortgage Services - Fees & Other 188 127 440 445
Occupancy 417 370 1,234 983
Furniture and Equipment 188 254 572 650
Other 1,147 1,061 3,554 3,299
------------- -------------- ------------- -------------
Total Noninterest Expense 5,664 4,819 16,302 14,905
------------- -------------- ------------- -------------
BWC Mortgage Services - Minority Interest 274 153 635 455
Income Before Income Taxes 1,713 2,310 5,103 6,463
Provision for Income Taxes 609 837 1,857 2,393
------------- -------------- ------------- -------------
Net Income $ 1,104 $ 1,473 $3,246 $4,070
============= ============== ============= =============
Basic Earnings Per Share $0.32 $0.43 $0.95 $1.18
Diluted Earnings Per Share $0.31 $0.39 $0.90 $1.07
============= ============== ============= =============
Weighted Average Basic Shares 3,489,625 3,434,877 3,424,772 3,440,658
Weighted Average Diluted Share Equivalents
Related to Options 118,229 320,142 192,708 349,372
Weighted Average Diluted Shares 3,607,854 3,755,018 3,617,480 3,790,030
============= ============== ============= =============
The accompanying notes are an integral part of these consolidated statements.
For the Nine Months
In thousands Ended September 30,
-------------------------------------
2002 2001
------------------- ------------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net Income $3,246 $4,070
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (1,451) (1,473)
Provision for credit losses 900 1,150
Depreciation and amortization 458 443
Loss(Gain) on sale of securities available for sale 24 (65)
Tax benefit from the exercise of stock options 414 299
Increase in accrued interest receivable
and other assets (618) (16)
Decrease in accrued interest payable
and other liabilities (767) (275)
------------------- ------------------
Net Cash Provided by Operating Activities 2,206 4,133
------------------- ------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 21,760 12,261
Proceeds from the sales of available-for-sale investment securities 13,101 25,881
Purchase of investment securities (47,518) (37,581)
Decrease(increase) in loans originated, net of collections 1,035 (21,295)
Purchase of bank premises and equipment (181) (1,144)
------------------- ------------------
Net Cash Used by Investing Activities (11,803) (21,878)
------------------- ------------------
FINANCING ACTIVITIES:
Net increase in deposits 5,926 48,295
Increase in Fed Funds Purchased and other borrowings 7,597 4,124
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 (6) (5)
------------------- ------------------
Net Cash Provided by Financing Activities 12,034 51,116
------------------- ------------------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 2,437 33,371
Cash and cash equivalents at beginning of year 21,049 24,472
------------------- ------------------
Cash and Cash Equivalents at period end $23,486 $57,843
=================== ==================
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $4,548 $6,888
=================== ==================
Income Taxes Paid $2,055 $2,285
=================== ==================
The accompanying notes are an integral part of these consolidated statements.
For the periods ending December 31, 2001, and September 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 options -- 299 -- -- 299
-------------- ------------- ------------- ----------------- --------------
Balance, December 31, 2001 3,092,474
27,160 10,391 701 38,252
Net Income as of September 30, 2002 -- -- 3,246 -- 3,246 3,246
Other Comprehensive Income, net of tax
liability of $419 -- -- -- 245 245 245
----------------
Comprehensive Income -- -- -- -- -- $ 3,491
Stock options exercised 224,508 370 -- -- 370
Repurchase and retirement of shares by the
Corporation (104,417) (1,853) -- -- (1,853)
10% stock dividend including payment of
fractional shares 309,038 6,405 (6,411) -- (6)
Tax benefit from the exercise of stock options -- 414 -- -- 414
-------------- ------------- ------------- ----------------- --------------
Balance, September 30, 2002 3,521,603 $ 32,496 $ 7,226 $ 946 $ 40,668
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 September 30, 2002 and the results of operations for the nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2002 are as follows:
In thousands
Gross
Amortized Unrealized Market
Cost Gain Value
------------------ ------------------------ -----------------
Held-to-maturity
Obligations of State and
Political Subdivisions $10,959 $ 570 $11,529
Available-for-sale
U.S. Treasury Securities 4,050 47 4,097
U.S. Government Agencies 35,493 514 36,007
Taxable Obligations of
State & Political Subdivisions 28,280 655 28,935
Corporate Securities 19,284 305 19,589
- ------------------------------------------------------ ------------------ ------------------------ -----------------
Total Available-for-sale $87,107 $ 1,521 $88,628
In thousands
Held-to-Maturity Available-for-Sale
---------------------------------- -----------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ---------------- ------------------ ----------------
Within one year $ 2,068 $2,145 $39,282 $ 39,675
After one, but within
five, years 8,891 9,384 38,975 40,095
Over five years -- -- 8,850 8,858
- ----------------------------------------- ----------------- ---------------- ------------------ ----------------
Total $10,959 $ 11,529 $87,107 $ 88,628
3. ALLOWANCE FOR CREDIT LOSSES
In thousands
For the Nine Months Ended
September 30,
2002 2001
------------------- ------------------
Total loans outstanding at end of
period, before deducting allowance
for credit losses $281,489 $ 273,835
------------------- ------------------
Allowance for credit losses at
beginning of period 5,403 5,042
Charge-offs (493) (1,421)
Recoveries 100 165
------------------- ------------------
Net (charge-offs)/recoveries (393) (1,256)
Provisions 900 1,150
Allowance for credit losses at
end of period $ 5,910 $ 4,936
=================== ==================
Ratio of allowance for credit
losses to loans 2.10% 1.80%
4. COMPREHENSIVE INCOME
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 nine months ended September 30, 2002 and 2001 are as follows:
In thousands
2002 2001
====================================== ==================== ====================
Unrealized gain(loss) arising
during the period, net of tax $ 221 $ 975
- -------------------------------------- -------------------- --------------------
Reclassification adjustment for net
realized gain(loss) on securities
available-for-sale included in net
income during the year, net of tax (24) 40
- -------------------------------------- -------------------- --------------------
Net unrealized gain(loss) included
in other comprehensive income $ 245 $ 935
====================================== ==================== ====================
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 placing funds that are not loaned to others, 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 September 30, 2002 and 2001 concerning the Corporation’s reportable segments is shown in the following table.
For the Nine Months Ended 09/30/2002 Community Mortgage In thousands Banking Services Adjustments Total - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- Total Interest Income $ 19,123 $ 2 $ (5) $ 19,120 Commissions Received - 5,161 - 5,161 Total Interest Expense 3,895 2 (5) 3,892 Salaries & Benefits 6,352 564 - 6,916 Commissions Paid - 3,586 - 3,586 Segment Profit before Tax 4,600 1,270 (767) 5,103 Total Assets $ 410,114 $ 497 $ (383) $ 410,228 - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- For the Nine Months Ended 09/30/2001 Community Mortgage In thousands Banking Services Adjustments Total - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- Total Interest Income $ 23,693 $ 4 $ (9) $ 23,688 Commissions Received - 3,997 - 3,997 Total Interest Expense 6,986 4 (9) 6,981 Salaries & Benefits 6,299 470 - 6,769 Commissions Paid - 2,759 - 2,759 Segment Profit before Tax 6,086 910 (533) 6,463 Total Assets $ 406,558 $ 326 $ (226) $ 406,658 - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- For the Three Months Ended 09/30/2002 Community Mortgage In thousands Banking Services Adjustments Total - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- Total Interest Income $ 6,250 $ 1 $ (1) $ 6,249 Commissions Received - 2,065 - 2,065 Total Interest Expense 1,243 0 (1) 1,242 Salaries & Benefits 2,097 203 - 2,300 Commissions Paid - 1,424 - 1,424 Segment Profit before Tax 1,458 548 (293) 1,713 Total Assets $ 410,114 $ 497 $ (383) $ 410,228 - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- For the Three Months Ended 09/30/2001 Community Mortgage In thousands Banking Services Adjustments Total - ---------------------------------------- -------------------- -------------------- --------------------- -------------------- Total Interest Income $ 7,654 $ 1 $ (3) $ 7,652 Commissions Received - 1,369 - 1,369 Total Interest Expense 2,100 1 (3) 2,098 Salaries & Benefits 1,878 161 - 2,039 Commissions Paid - 968 - 968 Segment Profit before Tax 2,164 306 (160) 2,310 Total Assets $ 406,558 $ 326 $ (226) $ 406,658 - ---------------------------------------- -------------------- -------------------- --------------------- --------------------
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 has remained at 4.75% throughout the first nine months of 2002, compared to an average of 7.51% during the same period in 2001, a decrease of 2.76% 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 the remainder of 2002.
Total assets of the Corporation at September 30, 2002 of $410,228,000 have increased $3,570,000 as compared to September 30, 2001. Total loans of $281,489,000 have increased $7,654,000. Total deposits of $346,395,000 have decreased $11,536,000, offset by Federal Home Loan Borrowings, to support our fixed rate commercial real estate lending, which increased by $14,003,000. Since year-end 2001 the Corporation’s assets have increased 4%, loans have remained at approximately the same level, deposits increased 2% and FHLB borrowings have increased 59%. The FHLB borrowings are based on the same terms with a positive spread to the Corporation.
The Corporation's loan-to-deposit ratio as of September 30, 2002 was 81%, as compared to 77% in 2001.
Net Income
Net income for the first nine months in 2002 of $3,246,000 was $824,000 less than the first nine months in 2001. This represented a return on average assets during this period of 1.07% and a return on average equity of 11.09%. The return on average assets during the first nine months of 2001 was 1.48%, and the return on average equity was 15.06%.
Net income for the three months ending September 30, 2002 of $1,104,000 was $369,000 less than the comparable period in 2001. The return on average assets during the third quarter was 1.07%, and the return on average equity was 11.02%. The return on average assets during the third quarter of 2001 was 1.55%, and the return on average equity was 18.32%.
Earning assets averaged $378,018,000 during the nine months ended September 30, 2002, as compared to $344,948,000 for the comparable period in 2001. Earning assets averaged $386,954,000 during the third quarter of 2002 as compared to $359,479,000 during the third quarter of 2001.
Diluted earnings per average common share were $.90 for the first nine months of 2002 as compared to $1.07 for the first nine months of 2001. For the third quarter of 2002, diluted earnings per average common share were $0.31 as compared to $0.39 for the third 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 nine months of 2002 was $15,228,000 or $1,479,000 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 $4,838,000 more than during the first nine 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 5.44% during the first nine months of 2002 as compared to 6.54% in 2001. The decrease in net interest margin is estimated to have resulted in a decrease in interest income of $1,727,000 during the first nine 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 $248,000.
Net interest income during the third quarter of 2002 was $5,007,000 or $547,000 less than the comparable period in 2001. This was on a net earning-asset base that averaged $6,281,000 more than during the third quarter of 2001.
The Corporation’s net interest margin averaged 5.21% as compared to 6.21% in 2001. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $575,000 during the third 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 $28,000.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for probable losses that can be reasonably anticipated. 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 September 30, 2002 was 2.10%, as compared to 1.80% for the period ending September 30, 2001. The Corporation’s ratios for both periods are considered adequate to provide for probable losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for loan losses. As of September 30, 2002 it had $4,213,000 in allocated allowance and $1,697,000 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 $393,000 during the first nine months of 2002 as compared to net losses of $1,256,000 during the comparable period in 2001.
The following table provides information on past-due and nonaccrual loans:
September 30,
2002 2001
--------------------------
Loans Past-due 90 Days or More $ 4,000 $ 31,000
Nonaccrual Loans 1,119,000 1,117,000
------------------------------
Total $1,123,000 $1,148,000
As of September 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 $471,000 and $318,000, as of September 30, 2002 and 2001 respectively.
Noninterest Income
Noninterest income during the first nine months of 2002 was $1,446,000 greater than during the comparable period of 2001, primarily related to the activities of the Corporation’s mortgage subsidiary. Their income increased significantly in 2002, reflecting 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 net losses on securities available-for-sale of $24,000 during the first nine months of 2002 as compared to net gains of $65,000 during the comparable 2001 period. The losses are due to calls on investment securities purchased at premiums which were not fully amortized by the call date.
During the third quarter of 2002 noninterest income was $816,000 greater than in the comparable prior year period. Almost all of this increase is related to the activities of the Corporation’s mortgage subsidiary.
Noninterest Expense
Noninterest expense during the first nine months of 2002 was $1,397,000 greater than during the comparable period in 2001. The largest component of the increase was BWC Mortgage Services, which reflected an increase in noninterest expense of $822,000 during the respective periods. As with their effect on noninterest income, this increase is a reflection of the strength of the mortgage market during 2002, and their increased activity in this market.
Salaries and related benefits were $147,000 more during the first nine months of 2002 as compared to 2001. This increase is related primarily to general merit increases and provision for performance bonuses. The Bank’s staff averaged 118 full-time equivalent (FTE) persons during the first nine months of 2002 and 120 FTE in 2001.
Occupancy expense increased $251,000 over the comparable period in 2001 primarily related to the 15-year master lease (February 2001), on our headquarters office in Walnut Creek, remodeling expenses to that office, a lease on our Pleasanton office (July 2001) at current market rates (this had been under a sub-lease at below market rates), and to CPI and operating increases.
Total furniture and equipment expenses decreased $78,000 as compared to the 2001 period, related primarily to a reduction in maintenance and repair expenses between the respective periods. Some of this reduction is related to the replacement of older equipment, which had greater maintenance and repair costs, than the new equipment.
Other expenses reflect an increase of $255,000 between the respective periods, which includes a check fraud loss taken in the first quarter of 2002 of approximately $200,000. During the third quarter of 2001, the Bank experienced a check fraud loss of approximately $100,000.
During the third quarter of 2002 the Corporation’s noninterest expense increased $845,000 over the comparable quarter of 2001. BWC Mortgage Service activity accounted for $517,000 of this increase. Of the remainder, salary and benefit expense accounted for $261,000.
Other-Real-Estate-Owned
As of September 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 September 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 September 30, 2002, December 31, 2001, and September 30, 2001.
- ----------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios: Capital Ratios
- ----------------------------------------------------------------------------------------------------------------------
Minimum
September 30, December 31, September 30, Regulatory
2002 2001 2001 Requirements
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Tier 1 capital 11.52% 11.65% 11.54% 4.00%
Total capital 12.78% 12.90% 12.79% 8.00%
Leverage ratio 9.65% 9.22% 9.79% 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 30% of total assets at September 30, 2002 and 31% at September 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 and the Federal Reserve Bank.
Interest-Rate Risk Management
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 September 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.
Interest Rate Sensitivity
Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest-rate-sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest-rate-sensitivity position of the Corporation as of September 30, 2002. In a rising interest rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. Management believes that the sensitivity ratios reflected in these schedules fall within acceptable ranges, and represent no undue interest rate risk to the future earnings prospects of the Corporation.
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 $ 8,334 $ - $ - $ - $ - $ 8,334
Investment securities 14,337 9,627 17,779 48,986 8,858 99,587
Construction & Real Estate Loans 103,799 9,342 1,072 7,148 13,036 134,397
Commercial Loans 78,124 2,920 1,463 1,163 51 83,721
Consumer Loans 49,632 59 108 146 - 49,945
Leases 1,870 1,804 3,138 6,614 - 13,426
---------------- ---------------- ---------------- --------------- ---------------- ----------------
Interest-bearing assets $256,096 $ 23,752 $ 23,560 $ 64,057 $ 21,945 $389,410
---------------- ---------------- ---------------- --------------- ---------------- ----------------
Liabilities:
Money market accounts $ 74,573 $ 74,573 $ - $ - $ - $149,146
Time deposits <$100,000 8,491 7,305 8,134 3,130 2 27,062
Time deposits >$100,000 8,685 7,618 5,952 3,680 - 25,935
---------------- ---------------- ---------------- --------------- ---------------- ----------------
Interest-bearing liabilities $ 91,749 $ 89,496 $ 14,086 $ 6,810 $ 2 $202,143
---------------- ---------------- ---------------- --------------- ---------------- ----------------
Rate-sensitive gap $164,347 $(65,744) $ 9,474 $ 57,247 $ 21,943 $187,267
Cumulative rate-sensitive gap $164,347 $ 98,603 $108,077 $165,324 $187,267
================ ================ ================ =============== ================
Cumulative rate-sensitive ratio 2.79 1.54 1.55 1.82 1.93
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Registrant's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Registrant's Chief Executive Officer, Chief Financial Officer and several other members of the Registrant's senior management within the 90-day period preceding the filing date of this quarterly report. The Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Registrant in the reports it files or submits under the Act is (i) accumulated and communicated to the Registrant's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30, 2002, the Registrant did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
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)
10/30/2002 James L. Ryan
- --------------------------- ---------------------------------
Date James L. Ryan
Chairman and Chief Executive Officer
10/30/02 Leland E. Wines
- ---------------------- --------------------------------
Date Leland E. Wines
CFO and Corp. Secretary
I, Leland E. Wines, EVP/CFO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BWC Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (10/28/02); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; | |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and | |
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: 10/30/2002
Leland E. Wines
EVP/CFO
I, James L. Ryan, Chairman and CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BWC Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (10/28/02); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; | |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and | |
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: 10/30/2002
James L. Ryan
Chairman and CEO