QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003.
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 _____
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ____ NO _X__
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 March 31, 2003, there were 3,549,510 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 CEO | 21 | |
| Certification by CFO | 22 | |
| Exhibit 99.1 | 23 | |
| Exhibit 99.2 | 23 |
In thousands March 31, December 31,
Assets 2003 2002
-----------------------------
(Unaudited)
Cash and Due From Banks $ 11,549 $ 20,993
Federal Funds Sold 12,151 2,000
Other Short-term Investments 68 36
-----------------------------
Total Cash and Cash Equivalents 23,768 23,029
Investment Securities:
Available-for-Sale 53,941 60,290
Held-to-Maturity (approximate fair value of
$10,322 in 2003 and $11,270 in 2002) 10,803 10,815
Loans, Net of Allowance for Credit Losses of $6,032
in 2003 and $5,977 in 2002 315,134 303,583
Bank Premises and Equipment, Net 3,153 3,161
Interest Receivable and Other Assets 8,210 8,588
-----------------------------
Total Assets $ 415,009 $ 409,466
=============================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 99,563 $ 99,175
-----------------------------
Interest-bearing:
Money Market Accounts 146,483 141,553
Savings and NOW Accounts 52,669 50,066
Time Deposits:
Under $100,000 26,010 26,087
$100,000 or more 22,638 24,072
-----------------------------
Total Interest-bearing 247,800 241,778
Total Deposits 347,363 340,953
Federal Home Loan Bank Borrowings 22,819 23,622
Interest Payable and Other Liabilities 3,038 2,892
-----------------------------
Total Liabilities 373,220 367,467
-----------------------------
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 -
3,549,510 shares in 2003 and 3,619,510 in 2002 31,315 32,575
Retained Earnings 9,649 8,570
Accumulated other comprehensive income 825 854
-----------------------------
Total Shareholders' Equity 41,789 41,999
-----------------------------
Total Liabilities and Shareholders' Equity $ 415,009 $ 409,466
=============================
The accompanying notes are an integral part of these consolidated statements.
In thousands except per-share amounts For the Three Months Ended March 31,
2003 2002
--------------------------------
Interest Income (Unaudited) (Unaudited)
Loans, Including Fees $ 5,440 $ 5,607
Investment Securities:
Taxable 581 852
Non-taxable 107 112
Federal Funds Sold 30 53
Other Short-term Investments -- 4
--------------------------------
Total Interest Income 6,158 6,628
Interest Expense
Deposits 713 1,177
Federal Funds Purchased -- --
FHLB Borrowings 302 204
Other Borrowed Funds -- 1
--------------------------------
Total Interest Expense 1,015 1,382
Net Interest Income 5,143 5,246
Provision For Credit Losses 300 300
--------------------------------
Net Interest Income After Provision For Credit Losses 4,843 4,946
Noninterest Income
BWC Mortgage Services - Commissions 2,855 1,491
BWC Mortgage Services - Fees & Other 535 286
Service Charges on Deposit Accounts 265 211
Other 441 394
Gains on Security Transactions -- 13
--------------------------------
Total Noninterest Income 4,096 2,395
Noninterest Expense
Salaries and Related Benefits 2,771 2,318
BWC Mortgage Services - Commissions 2,010 1,030
BWC Mortgage Services - Fees & Other 318 119
Occupancy 489 409
Furniture and Equipment 173 195
Other 1,120 1,357
--------------------------------
Total Noninterest Expense 6,881 5,428
--------------------------------
BWC Mortgage Services - Minority Interest 291 190
Income Before Income Taxes 1,767 1,723
Provision For Income Taxes 688 642
--------------------------------
Net Income $ 1,079 $ 1,081
================================
Basic Earnings Per Share $0.30 $0.32
Diluted Earnings Per Share $0.30 $0.30
================================
Weighted Average Basic Shares 3,618,757 3,382,694
Weighted Average Diluted Share Equivalents Related to Options 10,868 249,358
--------------------------------
Weighted Average Diluted Shares 3,629,625 3,632,052
================================
The accompanying notes are an integral part of these consolidated statements.
In thousands except share amounts Accumulated
Other
Number Common Retained Comprehensive Comprehensive
of Shares Stock Earnings Income/(Loss) Total Income
----------------------------------------------------------------------------------------
Balance, January 1, 2002 3,092,474 $ 27,160 $ 10,391 $ 701 $ 38,252
Net Income as of December 31, 2002 -- -- 4,588 -- 4,588 4,588
Other Comprehensive Income, net of tax
liability of $519 -- -- -- 153 153 153
----------------
Comprehensive Income -- -- -- -- -- $ 4,741
Stock options exercised 335,721 928 -- -- 928
Repurchase and retirement of shares by the
Corporation (117,723) (2,396) -- -- (2,396)
10% stock dividend including payment of
fractional shares 309,038 6,404 (6,409) -- (5)
Tax benefit from the exercise of stock options -- 479 -- -- 479
------------------------------------------------------------------------
Balance, December 31, 2002 3,619,510 $ 32,575 $ 8,570 $ 854 $ 41,999
------------------------------------------------------------------------
Net Income as of March 31, 2003 -- -- 1,079 -- 1,079 1,079
Other Comprehensive Income, net of tax
liability of $295 -- -- -- (29) (29) (29)
----------------
Comprehensive Income -- -- -- -- -- $ 1,050
Repurchase and retirement of shares by the
Corporation (70,000) (1,260) -- -- (1,260)
------------------------------------------------------------------------
Balance, March 31, 2003 (Unaudited) 3,549,510 $ 31,315 $ 9,649 $ 825 $ 41,789
========================================================================
The accompanying notes are an integral part of these consolidated statements.
In thousands For the Three Months
Ended March 31,
----------------------------------
OPERATING ACTIVITIES: 2003 2002
----------------------------------
(Unaudited) (Unaudited)
Net Income $ 1,079 $ 1,081
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (592) (479)
Provision for credit losses 300 300
Depreciation and amortization 124 133
Gain of sale of securities available-for-sale - 13
Tax benefit from the exercise of stock options - 414
(Decrease)/increase in accrued interest receivable
and other assets (378) 382
Increase/(decrease) in accrued interest payable
and other liabilities 146 (329)
----------------------------------
Net Cash Provided by Operating Activities 679 1,515
----------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 10,522 5,266
Proceeds from the sales of available-for-sale
investment securities - 6,077
Purchase of investment securities (3,433) (4,815)
Loans originated, net of collections (11,259) 3,093
Purchase of bank premises and equipment (117) (34)
----------------------------------
Net Cash Provided(Used) by Investing Activities (4,287) 9,587
----------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 6,410 2,261
Increase(decrease) in Fed Funds Purchased and other borrowings (803) 1,222
Proceeds from issuance of common stock - 366
Cash paid for the repurchase of common stock (1,260) (1,853)
----------------------------------
Net Cash Provided(Used) by Financing Activities 4,347 1,996
----------------------------------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 739 13,098
Cash and cash equivalents at beginning of year 23,029 21,049
----------------------------------
Cash and Cash Equivalents at period end $ 23,768 $ 34,147
==================================
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $ 1,032 $ 1,671
==================================
Income Taxes Paid $ - $ 296
==================================
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 March 31, 2003 and the results of operations for the three months ended March 31, 2003 and 2002 and cash flows for the three months ended March 31, 2003 and 2002.
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 2002 Annual Report to Shareholders, which is incorporated by reference in the Company's 2002 annual report on Form 10-K. The results of operations for the three months ended March 31, 2003, 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 in July 2002.
2. INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
The amortized cost and approximate market value of investment securities at March 31, 2003 are as follows:
In thousands
Gross
Amortized Unrealized Market
Cost Gain Value
----------------------------------
Held-to-maturity
Obligations of State and
Political Subdivisions ................ $10,803 $ 394 $11,197
Available-for-sale
U.S. Treasury Securities ................ 278 2 280
U.S. Government Agencies ................ 21,670 338 22,008
Taxable Obligations of
State & Political Subdivisions ........ 14,170 477 14,647
Corporate Securities .................... 16,497 509 17,006
-------- ------- -------
Total Available-for-sale ................ $52,615 $ 1,326 $53,941
The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at March 31, 2003.
In thousands
Held-to-Maturity Available-for-Sale
---------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------------
Within one year ................ $ 2,450 $ 2,475 $23,989 $24,278
After one, but within
five, years ................. 8,353 8,722 28,391 29,422
Over five years ................ -- -- 235 241
------- ------- ------- -------
Total .......................... $10,803 $11,197 $52,615 $53,941
3. ALLOWANCE FOR CREDIT LOSSES
In thousands
For the Three Months Ended
March 31,
2003 2002
------------------------------------
Total loans outstanding at end of
period, before deducting allowance
for credit losses $321,166 $ 278,763
-----------------------------------
Allowance for credit losses at
beginning of period 5,977 5,403
Charge-offs (292) (126)
Recoveries 47 36
----------------------------------
Net (charge-offs)/recoveries (245) (90)
Provisions 300 300
Allowance for credit losses at
end of period $ 6,032 $ 5,613
=====================================
Ratio of allowance for credit
losses to loans 1.88% 2.01%
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 three months ended March 31, 2003 and 2002 are as follows:
In thousands
2003 2002
================================================================================
Unrealized gain(loss) arising
during the period, net of tax $ (29) $ (217)
- --------------------------------------------------------------------------------
Reclassification adjustment for net
realized gains(losses) on securities
available-for-sale included in net
income during the year, net of tax - 8
- --------------------------------------------------------------------------------
Net unrealized gain(loss) included
in other comprehensive income $ (29) $ (225)
================================================================================
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 March 31, 2003 and 2002 concerning the Corporation’s reportable segments is shown in the following table.
For the Three Months Ended 03/31/2003 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 6,159 $ 1 $ (2) $ 6,158 Commissions Received - 2,855 - 2,855 Total Interest Expense 1,017 - $ (2) 1,015 Salaries & Benefits 2,379 392 - 2,771 Commissions Paid - 2,010 - 2,010 Segment Profit before Tax 1,561 582 (376) 1,767 Total Assets $ 414,682 $ 890 $ (563) $ 415,009 - ----------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended 03/31/2002 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 6,627 $ 1 $ - $ 6,628 Commissions Received - 1,491 - 1,491 Total Interest Expense 1,381 1 - 1,382 Salaries & Benefits 2,134 184 - 2,318 Commissions Paid - 1,031 - 1,031 Segment Profit before Tax 1,610 380 (267) 1,723 Total Assets $ 397,869 $ 549 $ (424) $ 397,994 - -----------------------------------------------------------------------------------------------------------------------------
The Corporation uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair-value-based method to account for stock option plans. The fair-value-based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Corporation has elected to continue to use the intrinsic value method. The pro forma disclosures illustrating the impact on net income of applying the fair-value method are reflected in the following table.
Net Income: 2003 2002
------------------ -----------------
As reported $ 1,079,000 $ 1,081,000
Compensation expense 39,000 44,000
------------------ -----------------
Pro forma $ 1,040,000 $ 1,037,000
Basic Earnings per share:
As reported $ 0.30 $ 0.32
Pro forma $ 0.29 $ 0.31
Diluted Earnings per share:
As reported $ 0.30 $ 0.30
Pro forma $ 0.29 $ 0.29
Weighted Average Basic Shares 3,618,757 3,382,694
Weighted Average Diluted Shares 3,629,625 3,632,052
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 Banks 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 4.25% during the first quarter of 2003, compared to 4.75% for the first quarter of 2002, a decrease of .50% between the comparable quarters. Due to the Corporation’s asset-sensitive position, low interest rates result in a narrowing of the Corporation’s net interest margin which averaged 5.40% for the first quarter of 2003, as compared to 5.75% in 2002. Continued low interest rates and slower economic activity will have an adverse effect on performance in 2003.
Total assets of the Corporation at March 31, 2003 of $415,009,000 increased $17,015,000, or 4%, as compared to March 31, 2002. Total loans of $321,166,000 at March 31, 2003 increased $42,403,000, or 15%, during the same period. Total deposits of $347,363,000 increased $4,633,000, or 1%, during the same period.
The Corporation's loan-to-deposit ratio as of March 31, 2003 and 2002 was 92% and 81% respectively. A significant and growing segment of the Corporation’s loan portfolio is commercial real-estate lending, of which approximately one-third is fixed-rate and funded, not by deposits, but by fixed-rate borrowings from the FHLB. Management believes that a more meaningful ratio therefore, is loans to deposits plus FHLB (Federal Home Loan Bank) borrowings. This ratio as of March 31, 2003 and 2002 was 86.8% and 78.1%, respectively.
Other short-term investments are investments in a mutual fund operated by Federated Funds Investments and are comprised of short-term US Treasury Securities. Investments are done on a daily basis and are similar in liquidity to Fed Funds Investments.
Net Income
Net income for the first three months in 2003 of $1,079,000 was down $2,000 from the first three months in 2002. This represented a return on average assets during the quarter of 1.05% as compared to 1.09% in 2002, and a return on average equity of 10.23% as compared to 11.34% in 2002. The reduction in rates of return is the result of the decreases in the prime and market rates that have been brought about by actions of the Federal Reserve. Since most of the Bank’s loans are indexed to the prime rate, decreases in this index will reduce the return on these assets to a greater extent than can be offset by reductions to interest-bearing deposits.
Earning assets averaged $388,771,000 during the first quarter of 2003, an increase of $16,181,000 from the comparable quarter of 2002. During this same period loans averaged $312,906,000, an increase of $34,672,000 over 2002, and deposits averaged $343,248,000, a decrease of $1,135,000 from 2002. FHLB fixed rate borrowings averaged 23,501,000 during the first quarter of 2003, an increase of 9,666,000 over 2002.
Diluted earnings per average common share and common equivalent shares for the first three months of 2003 and 2002 were $0.30.
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, deposits, and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first three months of 2003 was $5,143,000, or $103,000 less than the comparable period in 2002. This decrease is the result of decreases in interest rates. If there had been no change in the volume of loans and deposits, net interest income would have decreased by $450,000, but due to the increase in volume of loans and deposits, this amount was reduced to this lower amount.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated and is in accordance with SFAS 5. 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 March 31, 2003, was 1.88% as compared to 2.01% for the period ending March 31, 2002. The Corporation’s ratios for both periods are considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. As of March 31, 2003 the Corporation had $4,460,000 in allocated reserves and $1,572,000 in unallocated reserves. The Corporation’s management believes that the amount of unallocated reserves 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 credit losses of $245,000 during the first quarter of 2003 as compared to net credit losses of $90,000 during the comparable period in 2002.
The following table provides information on past-due and nonaccrual loans:
For the Three Months Ended March 31,
2003 2002
---------- ----------
Loans Past Due 90 Days or More $ 35,000 $ 37,000
Nonaccrual Loans 1,070,000 1,365,000
---------- ----------
Total $1,105,000 $1,402,000
As of March 31, 2003 and 2002, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2003 remains uncollected. Interest foregone on nonaccrual loans was approximately $136,000 and $389,000 as of March 31, 2003 and 2002, respectively.
The Allowance for Loan and Lease Loss Reserve Methodology requires that certain loans be reviewed under the directives of the Federal Financial Institutions Examination Council’s (FFIEC) policy statement dated July 6, 2001and FASB 114, to determine whether or not the loan is impaired and necessitates a Specific Reserve. By Bank policy all loans and leases that are classified Substandard (Risk Rating 6) or Doubtful (Risk Rating 7) are reviewed to determine if they are impaired. An impaired loan defined by FASB 114, is one which ”based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement”. All amounts due according to the contractual terms means ”that both the contractual interest payments and contractual principal payments will be collected as scheduled in the loan agreement”.
When a loan is determined to be impaired, the extent of impairment is based on the expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, FASB 114 permits a creditor to measure impairment based on the fair value of the collateral. It is this later form of measurement that the Bank has elected to use, as personal or real property assets collateralize a large percentage of the Bank’s loans.
In selecting this approach to determining the necessity of Specific Reserves, the Bank documents:
| * | How the fair value of the collateral was determined, e.g. current appraisal (real property, equipment or inventory), method for valuation of collectable accounts or notes receivable, method for valuation of other assets. |
|
| * | Supporting rationale for adjustments to appraisals or loan-to-value discount applied to determine the collateral value. |
|
| * | The determination of the cost to sell or liquidate the collateral. |
|
| * | The qualifications, expertise and independence of the appraiser. |
For purposes of the Bank’s Credit Policy regarding this section of the ALLL methodology the following practices and definitions apply.
| * | An appraisal will be considered ”current” for the initial assessment of a loan under FASB 114, if it is less than six months old. In subsequent annual assessments the appraisal may not be older than twelve months. Where we are assessing accounts or notes receivable we should order a receivables audit to assist in the initial assessment and refresh it every six months. | |
| * | In developing the rationale to support appraisal adjustments or the loan-to-value discount on personal property, external comps and collateral audits should be used as much as possible. | |
| * | All costs to sell or liquidate the collateral, except legal expenses, are to be included. An estimate may be used where definitive amounts are not available. |
The calculation of the Specific Reserve follows:
Gross Collateral Value | |
Less: Cost to Sell | |
Less: Loan-To-Value Discount (1) | |
Equals: Net Collateral Value | |
Less: Current Principal Outstanding |
If the calculation produces a collateral excess, it is not appropriate to assign a Specific Reserve. If the calculation results in a collateral shortfall, the Specific Reserve should equal the amount of the shortfall.
(1) The loan-to-value discount does not have to follow the Bank standard if the rationale for an adjustment warrants a greater or lesser amount.
Noninterest Income
Noninterest income during the first quarter of 2003 was $1,701,000 more than during the comparable quarter of 2002. The increase is attributed to increases in almost all areas of noninterest income as compared to 2002, but primarily in BWC Mortgage Services income which increased $1,613,000 between the respective periods.
Noninterest Expense
Noninterest expense during the first quarter of 2003 was $1,453,000 greater than during the comparable quarter of 2002. The increase in 2003 was primarily related to increases in BWC Mortgage Services commissions and other expenses of $1,179,000.
Salaries, bonuses and benefits expense increased $453,000 from the prior year. Of this, BWC Mortgage Services increased average FTE (full-time-equivalency) from 9 during the first quarter of 2002, to 19 for the comparable quarter in 2003. Staff expense for BWC Mortgage services increased from $184,000 in the first quarter of 2002, to $392,000 in 2003. This increase of $208,000 in staff salaries is related the the significant growth and increased activity in the mortgage market and BWC Mortgage Services in particular. During this same period the Bank increased average FTE by 6 persons, to 124 FTE and total salary, including benefits and merit increases, by $245,000.
Occupancy expense was $80,000 greater during the first quarter of the current year as compared to the prior year. Of this, BWC Mortgage Services accounted for $19,000, with the balance of the increase coming from the Bank. The Bank acquired full occupancy of its headquarters building in Walnut Creek, January 1, 2003, prior to which approximately 3,212 square feet had been sub-leased to Fidelity Investments. The Bank also acquired additional space for support operations at 1700 Broadway. Increased space, as well as general operating and CPI-based increases, account for the increase in this expense category over the prior year.
Furniture and equipment expense decreased $22,000 from the prior year.
Other expenses of $1,120,000 decreased $237,000 from the prior year. The prior year included an operational loss of over $200,000.
Other Real Estate Owned
As of March 31, 2003, 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
In 1989, the Federal Deposit Insurance Corporation (FDIC) 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 also includes the eligible allowance for loan 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 4% and 8% at March 31 for both 2003 and 2002. The FDIC 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 March 31, 2003, December 31, 2002, and March 31, 2002.
Risk-based capital ratios: Capital Ratios
Minimum
Current guidelines March 31, December 31, March 31, regulatory
2003 2002 2002 requirements
------ ------ ------ ------
Tier 1 capital 11.21% 11.45% 11.54% 4.00%
Total capital 12.47% 12.70% 12.79% 8.00%
Leverage ratio 10.03% 10.04% 9.44% 3.00%
Liquidity
The objective of liquidity management is to ensure the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met, taking into account all on- and off-balance sheet funding demands. Liquidity management also includes ensuring cash flow needs are met at a reasonable cost. Liquidity risk arises from the possibility the Corporation may not be able to satisfy current or future financial commitments, or the Corporation may become unduly reliant on alternative funding sources. The Corporation maintains a liquidity risk management policy to address and manage this risk. The policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements which comply with regulatory guidance. The policy also includes a contingency funding plan to address liquidity needs in the event of an institution-specific or a systemic financial market crisis. The liquidity position is continually monitored and reported on monthly to the Asset/Liability Management Committee.
Funds are available from a number of sources, including the securities portfolio, the core deposit base, the capital markets, the Federal Home Loan Bank, the Federal Reserve Bank, and through the sale and securitization of various types of assets. Funding sources did not change significantly during 2003. Core deposits, the most significant source of funding, comprised approximately 78% of funding during the first quarter of 2003 and 77% in the comparable quarter of 2002.
Cash, investment securities, and other temporary investments represent 21% of total assets at March 31, 2003 and 23% of total assets at March 31, 2002.
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. In addition, the Corporation has approximately $12,000,000 secured borrowing capacity with the Federal Home Loan Bank and a $1,000,000 secured borrowing line with the Federal Reserve Bank.
At the financial holding company level, the Corporation uses cash to repurchase common stock and pay for professional services and miscellaneous expenses. The main sources of funding for the holding company include dividends and returns of investment from its subsidiaries.
During the past two years, the primary source of funding for the holding company has been receipts from dividends, stock options exercised, and returns of investment from its subsidiaries. During the first quarter of 2003 and 2002, stock options exercised generated cash to the Corporation of $0, and $366,000, respectively. Based on the current level of options outstanding, future cash-flows from this source are expected to diminish. The subsidiaries of the Corporation declared dividends to the holding company in the first quarter of 2003, and 2002 of $2,260,000, and $500,000 respectively. The subsidiaries also provided liquidity to the Corporation in the form of returns of capital during the first quarter of 2003, and 2002 of $1,165,000, and $1,158,000 respectively. As of January 1, 2003, the amount of dividends the bank subsidiary can pay to the parent company without prior regulatory approval was $15,447,000, versus $15,967,000 at January 1, 2002. The subsidiary bank is subject to regulation and, among other things, may be limited in their ability to pay dividends or transfer funds to the holding company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows, may not represent cash immediately available to the holding company.
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 employs a variety of modeling tools to monitor interest-rate risks. One of the earlier and more basic models is GAP reporting. The net difference between the amount of assets and liabilities within a cumulative calendar period is typically referred to as the ”rate sensitivity position.”
As part of the GAP analysis to help manage interest-rate risk, the Corporation also performs an earnings simulation analysis to identify the interest-rate risk exposures resulting from the Corporation’s asset and liability positions, such as its loans, investment securities and customer deposits. The Corporation’s policy is to maintain a risk of a 2% rate shock to net interest income at risk to a level of not more than 15%. The earnings simulation analysis as of March 31, 2003 estimated that a 2% interest-rate shock (decrease) could lower pretax earnings by $2,910,000, which was 14.1% of 2003 net annualized interest income.
This earnings simulation does not account for the potential impact of loan prepayments, deposit drifts, or other balance sheet movements in response to modeled changes in interest rates, and the resulting effect, if any, on the Corporation’s simulated earnings analysis.
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 March 31, 2003. 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 $ 12,152 $ - $ - $ - $ - $ 12,152
Investment securities 6,347 6,728 13,653 37,775 241 64,744
Construction & Real Estate Loans 133,029 10,737 832 7,285 16,018 167,901
Commercial Loans 85,287 1,864 639 1,610 247 89,647
Consumer Loans 50,072 41 52 92 -- 50,257
Leases 1,900 1,718 9,743 0 -- 13,361
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Interest-bearing assets $ 288,787 $ 21,088 $ 24,919 $ 46,762 $ 16,506 $ 398,062
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Liabilities:
Money market accounts $ 73,242 $ 73,241 $ - $ - $ - $ 146,483
Time deposits <$100,000 9,916 7,539 4,735 3,820 0 26,010
Time deposits >$100,000 8,884 6,939 3,419 3,396 $ - 22,638
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Interest-bearing liabilities $ 92,042 $ 87,719 $ 8,154 $ 7,215 $ - $ 195,130
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Rate-sensitive gap $ 196,745 $ (66,631) $ 16,765 $ 39,547 $ 16,506 $ 202,932
Cumulative rate-sensitive gap $ 196,745 $ 130,114 $ 146,879 $ 186,426 $ 202,932
=================================================================
Cumulative rate-sensitive ratio 3.14 1.72 1.78 1.96 2.04
(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 March 31, 2003, 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
The Corporation is a defendant in legal actions arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Corporation’s financial position.
Item 2 - Changes in Securities and Use of Proceeds
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
(a) Index to Exhibits
The following exhibits are attached hereto and filed herewith:
| Exhibit | ||
| Number | Description of Exhibit | |
| 99.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 | |
| 99.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 | |
| (b) | 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)
May 13, 2003 James L. Ryan
___________________________ _________________________________
Date James L. Ryan
Chairman and Chief Executive Officer
May 13, 2003 Leland E. Wines
______________________ ________________________________
Date Leland E. Wines
CFO and Corp. Secretary
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 (4/25/03); 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: May 13, 2003
James L. Ryan
Chairman and CEO
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 (4/25/03); 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: May 13, 2003
Leland E. Wines
EVP/CFO
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BWC Financial Corp. (the ”Corporation”) on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the ”Report”), I, James L. Ryan, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1) | The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation. |
DATE: May 13, 2003
JAMES L. RYAN
CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of BWC Financial Corp. (the ”Corporation”) on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the ”Report”), I, Leland E. Wines, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1) | The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation. |
DATE: May 13, 2003
LELAND E. WINES
CHIEF FINANCIAL OFFICER