QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 _____
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 September 30, 2003, there were 3,553,950 shares of common stock, no par value outstanding.
| Item 1 | Legal Proceedings | 22 |
| Item 2 | Changes in Securities and Use of Proceeds | 22 |
| Item 3 | Defaults Upon Senior Securities | 22 |
| Item 4 | Submission of Matters to a Vote of | |
| Security Holders | 22 | |
| Item 5 | Other Information | 22 |
| Item 6 | Exhibits and Reports on Form 8-K | 22 |
| Signatures | 23 | |
| Exhibit 31.1 | 24 | |
| Exhibit 31.2 | 25 | |
| Exhibit 32.1 | 26 | |
| Exhibit 32.2 | 26 |
In thousands September 30, December 31,
Assets 2003 2002
-----------------------------
(Unaudited)
Cash and Due From Banks $ 18,294 $ 20,993
Federal Funds Sold 26,101 2,000
Other Short-term Investments 66 36
-----------------------------
Total Cash and Cash Equivalents 44,461 23,029
Investment Securities:
Available-for-Sale 55,286 60,290
Held-to-Maturity (approximate fair value of
$16,027 in 2003 and $11,270 in 2002) 15,718 10,815
Loans, Net of Allowance for Credit Losses of $6,164
in 2003 and $5,977 in 2002 330,931 303,583
BWC Mortgage Services Loans-Held-for-Sale 5,737 --
Bank Premises and Equipment, Net 3,399 3,161
Interest Receivable and Other Assets 8,377 8,588
-----------------------------
Total Assets $ 463,909 $ 409,466
=============================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 114,579 $ 99,175
-----------------------------
Interest-bearing:
Money Market Accounts 169,042 141,553
Savings and NOW Accounts 52,455 50,066
Time Deposits:
Under $100,000 24,308 26,087
$100,000 or more 22,304 24,072
-----------------------------
Total Interest-bearing 268,109 241,778
Total Deposits 382,688 340,953
Federal Home Loan Bank Borrowings 28,132 23,622
BWC Mortgage Services Borrowings 5,715 --
Interest Payable and Other Liabilities 3,354 2,892
-----------------------------
Total Liabilities 419,889 367,467
-----------------------------
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 -
3,553,950 shares in 2003 and 3,619,510 in 2002 31,386 32,575
Retained Earnings 11,972 8,570
Accumulated other comprehensive income 662 854
-----------------------------
Total Shareholders' Equity 44,020 41,999
-----------------------------
Total Liabilities and Shareholders' Equity $ 463,909 $ 409,466
=============================
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,
---------------------------------------------------------------
2003 2002 2003 2002
Interest Income (Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------------------------------------------------
Loans, including Fees $ 6,365 $ 5,173 $ 17,597 $ 16,089
Investment Securities:
Taxable 512 897 1,626 2,485
Non-taxable 118 115 332 339
Federal Funds Sold 36 64 99 204
Other Short-term Investments -- - 1 3
---------------------------------------------------------------
Total Interest Income 7,031 6,249 19,655 19,120
Interest Expense
Deposits 648 1,014 2,057 3,241
Federal Funds Purchased - - 1 -
FHLB Borrowings 337 228 925 651
BWC MTG Banking 227 - 298 -
---------------------------------------------------------------
----------------
Total Interest Expense 1,212 1,242 3,281 3,892
Net Interest Income 5,819 5,007 16,374 15,228
Provision for Credit Losses 450 300 1,050 900
---------------------------------------------------------------
Net Interest Income After Provision For Credit Losses 5,369 4,707 15,324 14,328
Noninterest Income
BWC Mortgage Services - Commissions 2,857 2,065 8,287 5,161
BWC Mortgage Services - Fees & Other 1,836 360 3,453 887
Service Charges on Deposit Accounts 248 240 777 673
Other 381 316 1,223 1,015
Gain/(loss) on Security Transactions - (37) (12) (24)
---------------------------------------------------------------
Total Noninterest Income 5,322 2,944 13,728 7,712
Noninterest Expense
Salaries and Related Benefits 2,887 2,300 8,430 6,916
BWC Mortgage Services - Commissions 2,748 1,424 6,887 3,586
BWC Mortgage Services - Fees & Other 532 188 1,300 440
Occupancy 504 417 1,482 1,234
Furniture and Equipment 184 188 550 572
Other 1,087 1,147 3,511 3,554
---------------------------------------------------------------
Total Noninterest Expense 7,942 5,664 22,160 16,302
---------------------------------------------------------------
BWC Mortgage Services - Minority Interest 481 274 1,060 635
Income Before Income Taxes 2,268 1,713 5,832 5,103
Provision for Income Taxes 850 609 2,216 1,857
---------------------------------------------------------------
Net Income $ 1,418 $ 1,104 $ 3,616 $ 3,246
===============================================================
Basic Earnings Per Share $ 0.40 $ 0.32 $ 1.01 $ 0.95
Diluted Earnings Per Share $ 0.40 $ 0.31 $ 1.01 $ 0.90
===============================================================
Weighted Average Basic Shares 3,552,432 3,480,458 3,573,012 3,421,717
Weighted Average Diluted Share Equivalents Related to Options 16,421 118,229 14,809 192,708
Weighted Average Diluted Shares 3,568,853 3,598,687 3,587,821 3,614,424
===============================================================
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 -- -- -- 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 September 30, 2003 -- -- 3,616 -- 3,616 3,616
Other Comprehensive Income, net of tax -- -- -- (192) (192) (192)
---------------
Comprehensive Income -- -- -- -- -- $ 3,424
Cash dividends paid -- -- (214) -- (214)
Stock options exercised 6,140 90 -- -- 90
Tax benefit from the exercise of stock options -- 13 -- -- 13
Repurchase and retirement of shares by the
Corporation (71,700) (1,292) -- -- (1,292)
----------------------------------------------------------------------
Balance, September 30, 2003 (Unaudited) 3,553,950 $ 31,386 $ 11,972 $ 662 $ 44,020
======================================================================
The accompanying notes are an integral part of these consolidated statements.
For the Nine Months
In thousands Ended September 30,
---------------------------------------
2003 2002
---------------------------------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net Income $3,616 $3,246
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (2,068) (1,451)
Provision for credit losses 1,050 900
Depreciation and amortization 411 458
Loss on sale of securities available-for-sale 12 24
Tax benefit from the exercise of stock options -- 414
Decrease/(increase) in accrued interest receivable
and other assets 211 (618)
Increase/(decrease) in accrued interest payable
and other liabilities 462 (767)
---------------------------------------
Net Cash Provided by Operating Activities 3,694 2,206
---------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 23,942 21,760
Proceeds from the sales of available-for-sale investment securities 488 13,101
Purchase of investment securities (24,430) (47,518)
Decrease/(increase) in loans originated, net of collections (26,330) 1,035
Increase in BWC Mtg. Loans Held-for-Sale (5,737) --
Purchase of bank premises and equipment (649) (181)
---------------------------------------
Net Cash Used by Investing Activities (32,716) (11,803)
---------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 41,735 5,926
Increase in Fed Funds Purchased and other borrowings 4,510 7,597
Increase in BWC Mortgage Services borrowings 5,715 --
Proceeds from issuance of common stock -- 370
Cash paid for the repurchase of common stock (1,292) (1,853)
Cash dividends paid (214) --
Cash paid in lieu of fractional shares -- (6)
---------------------------------------
Net Cash Provided by Financing Activities 50,454 12,034
---------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 21,432 2,437
Cash and cash equivalents at beginning of year 23,029 21,049
---------------------------------------
Cash and Cash Equivalents at period end $44,461 $23,486
=======================================
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $3,421 $4,548
=======================================
Income Taxes Paid $1,706 $2,055
=======================================
The accompanying notes are an integral part of these consolidated 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, 2003 and the results of operations for the three months and nine months ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 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 nine months ended September 30, 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 July 15, 2002.
The amortized cost and approximate market value of investment
securities at September 30, 2003 are as follows:
In thousands
Gross
Amortized Unrealized Market
Cost Gain Value
--------------------------------------------------------------
Held-to-maturity
Obligations of State and
Political Subdivisions $15,718 $ 309 $16,027
Available-for-sale
U.S. Treasury Securities 275 4 279
U.S. Government Agencies 21,897 271 22,168
Taxable Obligations of
State & Political Subdivisions 15,110 309 15,419
Corporate Securities 16,941 479 17,420
- --------------------------------------------------------------------------------------------------------------------
Total Available-for-sale $54,223 $ 1,063 $55,286
The following table shows the amortized cost and estimated market value
of investment securities by contractual maturity at September 30, 2003.
In thousands
Held-to-Maturity Available-for-Sale
-----------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------------------
Within one year $ 3,093 $3,147 $25,254 $ 25,529
After one, but within
five, years 12,477 12,732 28,969 29,757
Over five years 148 148 - -
- ----------------------------------------------------------------------------------------------------------------
Total $15,718 $ 16,027 $54,223 $ 55,286
In thousands
For the Nine Months Ended
September 30,
2003 2002
-----------------------------------------
Total loans outstanding at end of
period, before deducting allowance
for credit losses $337,095 $ 281,489
-----------------------------------------
Allowance for credit losses at
beginning of period 5,977 5,403
Charge-offs (1,101) (493)
Recoveries 238 100
-----------------------------------------
Net (charge-offs)/recoveries (863) (393)
Provisions 1,050 900
Allowance for credit losses at
end of period $ 6,164 $ 5,910
=========================================
Ratio of allowance for credit
losses to loans 1.83% 2.10%
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, 2003 and 2002 are as follows:
In thousands
2003 2002
================================================================================================
Unrealized gain(loss) arising
during the period, net of tax $ (199) $ 975
- ------------------------------------------------------------------------------------------------
Reclassification adjustment for net
realized gains(losses) on securities
available-for-sale included in net
income during the year, net of tax (7) 40
- ------------------------------------------------------------------------------------------------
Net unrealized gain(loss) included
in other comprehensive income $ (192) $ 935
================================================================================================
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 September 30, 2003 and 2002 concerning the Corporation’s reportable segments is shown in the following table.
For the Nine Months Ended 09/30/2003 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 19,180 $ 480 $ (5) $ 19,655 Commissions Received - 8,287 - 8,287 Total Interest Expense 2,987 299 (5) 3,281 Salaries & Benefits 7,098 1,332 - 8,430 Commissions Paid - 6,887 - 6,887 Segment Profit before Tax 4,900 2,118 (1,186) 5,832 Total Assets $ 456,874 $ 8,099 $ (1,064) $ 463,909 - ----------------------------------------------------------------------------------------------------------------------------- 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 Three Months Ended 09/30/2003 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 6,664 $ 369 $ (2) $ 7,031 Commissions Received - 2,857 - 2,857 Total Interest Expense 986 227 (1) 1,212 Salaries & Benefits 2,392 495 - 2,887 Commissions Paid - 2,748 - 2,748 Segment Profit before Tax 1,791 960 (483) 2,268 Total Assets $ 456,874 $ 8,099 $ (1,064) $ 463,909 - ----------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended 09/30/2002 Community Mortgage In thousands Banking Services Adjustments Total - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 6,250 $ - $ (1) $ 6,249 Commissions Received - 2,065 - 2,065 Total Interest Expense 1,243 - (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 - -----------------------------------------------------------------------------------------------------------------------------
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.
For the Nine Months Ended
September 30,
Net Income: 2003 2002
------------------ -----------------
As reported $ 3,616,000 $ 3,246,000
Compensation expense 120,615 132,910
------------------ -----------------
Pro forma $ 3,495,385 $ 3,113,090
Basic Earnings per share:
As reported $ 1.01 $ 0.95
Pro forma $ 0.98 $ 0.91
Diluted Earnings per share:
As reported $ 1.01 $ 0.90
Pro forma $ 0.97 $ 0.86
Weighted Average Basic Shares 3,573,012 3,421,717
Weighted Average Diluted Shares 3,587,821 3,614,424
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.
Prime rate averaged 4.17% for the first nine months of 2003, compared to 4.75% for the comparable period of 2002, a decrease of .58% 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 reduced economic activity will have an adverse effect on Corporate performance.
Total assets of the Corporation at September 30, 2003 of $463,909,000 have increased $53,680,000 or 13% as compared to September 30, 2002. Total loans of $337,095,000 have increased $55,606,000 or 20%, and total deposits plus FHLB long-term borrowings of $410,820,000 have increased $43,874,000 or 12%. Since year-end 2002 the Corporation’s assets have increased 13%, loans increased 9%, and deposits plus FHLB long-term borrowings increased 13%.
The Corporation’s loans-to-deposits plus FHLB borrowings ratio as of September 30, 2003 was 82%, as compared to 77% in 2002.
The Corporation’s subsidiary, BWC Mortgage Services, has established lines-of-credit with third party providers for the purpose of funding sold loans to reduce the time it takes to close mortgages for borrowers. The loans-held-for-sale are generally on the books for less than a month and carry virtually no credit risk to the Corporation. For this reason these loans are reported as a separate line item below the loans and reserves of the Corporation and are not included in the calculation of the ratio of allowance for credit losses to loans. Interest income and fees associated with these loans are included in the “Loans, including Fees” section of the Corporation’s income statement.
Net income for the first nine months in 2003 of $3,616,000 was $370,000 more than the first nine months in 2002. This represented a return on average assets during this period of 1.11% and a return on average equity of 11.29%. The return on average assets during the first nine months of 2002 was 1.07%, and the return on average equity was 11.09%.
Net income for the three months ending September 30, 2003 of $1,418,000 was $314,000 more than the comparable period in 2002. The return on average assets during the third quarter of 2003 was 1.22%, and the return on average equity was 13.07%. The return on average assets during the third quarter of 2002 was 1.07%, and the return on average equity was 11.02%.
Earning assets averaged $414,303,000 during the nine months ended September 30, 2003, as compared to $378,018,000 for the comparable period in 2002. Earning assets averaged $443,186,000 during the third quarter of 2003 as compared to $386,954,000 during the third quarter of 2002.
Diluted earnings per average common share were $1.01 for the first nine months of 2003 as compared to $0.90 for the first nine months of 2002. For the third quarter of 2003, diluted earnings per average common share were $0.40 as compared to $0.31 for the third quarter of 2002.
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 2003 was $16,374,000 or $1,146,000 more than the comparable period in 2002. This was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $9,347,000 more than during the first nine months of 2002. The average prime lending rate averaged 4.17% during the first nine months of 2003 as compared to an average of 4.75% for the first nine months of 2002.
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 5.39% during the first nine months of 2003 as compared to 5.44% in 2002. The decrease in net interest margin is estimated to have resulted in a decrease in interest income of $827,000 during the first nine months of 2003 as compared to the same period in 2002. 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 $1,973,000 resulting in a net increase in interest income of $1,146,000.
During the third quarter of 2003 the Corporation’s net interest margin averaged 5.34%, an improvement over the third quarter of 2002, of 5.22%. As a result of both the improved margin and increased volume, the Corporation’s net interest margin increased $812,000 as compared to the prior year period.
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, SFAS 114 and staff accounting bulletin 102. 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, 2003 was 1.83%, as compared to 2.10% for the period ending September 30, 2002. The Corporation’s ratios for both periods is considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for loan losses. As of September 30, 2003 it had $5,267,000 in allocated allowance and $897,000 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 $863,000 during the first nine months of 2003 as compared to net losses of $393,000 during the comparable period in 2002.
The following table provides information on past-due and nonaccrual loans:
September 30,
2003 2002
-------- -------
Loans Past-due 90 Days or More $ 49,000 $ 4,000
Nonaccrual Loans 665,000 1,119,000
------- ---------
Total $ 714,000 $1,123,000
========= =========
As of September 30, 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 $150,000 and $428,000, as of September 30, 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, 2001 and 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 latter 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 during the first nine months of 2003 was $6,016,000 greater than during the comparable period of 2002, primarily related to the activities of the Corporation’s mortgage subsidiary which accounted for $5,692,000 of this increase. The increase in their income is in part a reflection of the low interest rates during the current year and the corresponding strong market in mortgages and refinancing, as well as to the service level and reputation of BWC Mortgage Services.
The other categories of noninterest income increased from the prior year, reflecting the Corporation’s growth.
There were losses on securities available-for-sale of $12,000 during the first nine months of 2003 as compared to losses of $24,000 during the comparable 2002 period.
Third quarter results reflect the same circumstances as discussed above, with noninterest income of $2,378,000 greater than during the comparable period of 2002. Of this, $2,268,000 came from BWC Mortgage Services.
Noninterest expense during the first nine months of 2003 was $5,858,000 greater than during the comparable period in 2002, primarily related to the growth and increased activity of the Corporation’s mortgage subsidiary which accounted for $4,549,000.
Salaries and related benefits were $1,514,000 greater during the first nine months of 2003 as compared to 2002. Of this increase, BWC Mortgage Services accounted for $768,000. This is again related to the significant growth and increase in activity in this market segment. The Bank’s staff averaged 125 full-time equivalent (FTE) persons during the first nine months of 2003 as compared to 118 during 2002 and is reflective of the Bank’s growth and increase in business development efforts.
Occupancy expense increased $248,000 over the comparable period in 2002. Of this increase, BWC Mortgage Services accounted for $72,000 and the Bank for $176,000. 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, remodeling improvements as well as general operating and CPI-based increases, account for the increase in this expense category over the prior year.
Total furniture and equipment expenses decreased a modest $22,000 as compared to the 2002 period, related primarily to a reduction in maintenance and repair expenses between the respective periods.
Other expenses reflect a decrease of $43,000 between the respective periods, however, the 2002 expense includes a check fraud loss of approximately $200,000. During 2003 the Corporation experienced increased legal fees of approximately $130,000 over the prior year, related primarily to defending the Corporation’s interest in bankruptcy cases. The balance of the increases was related to the Corporation’s growth and expanded activities.
During the third quarter of 2003 the Corporation’s noninterest expense increased $2,278,000 over the comparable quarter of 2002, of which BWC Mortgage Services accounted for $1,798,000. The balance of $480,000 is related to the same reasons that were applicable for the nine months results.
As of September 30, 2003 the Corporation had no Other Real Estate Owned assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
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 2003 and 2002. 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, 2003, December 31, 2002, and September 30, 2002.
Risk-based capital ratios: Capital Ratios
Minimum
September 30, December 31, September 30, Regulatory
2003 2002 2002 Requirements
---- ---- ---- ------------
Tier 1 capital 11.02% 11.45% 11.52% 4.00%
Total capital 12.27% 12.70% 12.78% 8.00%
Leverage ratio 9.34% 10.04% 9.65% 4.00%
The Company’s total shareholders’ equity increased to $44.02 million at September 30, 2003 from $42 million at December 31, 2002. The increase was the result of net income earned during the nine months ended September 30, 2003. At September 30, 2003, shareholders’ equity was 9.49 percent of total assets, compared to 10.26 percent at December 31, 2002.
The market value of available-for-sale securities was greater than book value at both September 30, 2003 and December 31, 2002, primarily as a result of low market interest rates, which resulted in unrealized gains in the investment portfolio. In the event market interest rates increase, the market value of the Company’s investment portfolio may decrease. Because changes in the market value of available-for-sale securities are a component of other comprehensive income within stockholders’ equity, a decrease in market value of securities would negatively impact stockholders’ equity. The Company performs a quarterly simulation analysis of changes in the market value of the investment portfolio given a 200-basis-point change in interest rates. The latest analysis indicated a decrease in market value of approximately $1.5 million net of federal income tax. This decrease, however, would be more than offset through the increased earnings of the Corporation which, according the this test, result in a net increase in equity of $0.7 million and the Company would continue to be well in excess on capital adequacy requirements in the event the Company would be required to liquidate these securities for unforeseen liquidity needs.
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 Management Committee and Board of Directors.
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 nine months of 2003 and 2002.
Cash, investment securities, and other temporary investments represent 25% of total assets at September 30, 2003 and 30% of total assets at September 30, 2002.
Cash flows from operations contribute significantly to liquidity as well as proceeds from maturities of securities and increasing customer deposits. As indicated on the Company’s Consolidated Statement of Cash Flows, net cash from operating activities for the nine months ended September 30, 2003 contributed $3,694,000 to liquidity compared to $2,206,000 for the nine months ended September 30, 2002. The majority of the Company’s funding comes from customer deposits within its operating region. Customer deposits provided $41,735,000 for the nine months ended September 30, 2003 compared to $5,926,000 for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, non-interest demand deposits and Money Market savings accounts provided the majority of the deposit growth. Borrowing activities also provide a source of funding and, in the period ending September 30, 2003, borrowed funds contributed $33,847,000 as compared to $20,551,000 for the period ending September 30, 2002. Other important sources of liquidity are investments in federal funds, other short-term investments and the Company’s securities portfolio. The Company maintains a ladder of securities that provides prepayments and payments at maturity and a portfolio of available-for-sale securities that could be converted to cash quickly. Proceeds from maturity and sale of securities provided $23,942,000 for the nine months ended September 30, 2003 compared to $21,760,000 for the nine months ended September 30, 2002.
The Corporation’s management has an effective asset and liability management program, and carefully monitors its liquidity on a continuing basis. The Corporation has available from correspondent banks, Federal Fund lines of credit totaling $15,000,000. In addition, the Corporation has approximately $6,000,000 secured borrowing capacity with the Federal Home Loan Bank and a $1,000,000 secured borrowing line with the Federal Reserve Bank. The Corporation also has a source of liquidity in its ability to sell SBA and Commercial Real Estate loans to other investors.
At the 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 nine months of 2003 there was $90,000 raised from the exercise of stock options. During the first nine months of 2002 the exercise of stock options generated cash to the Corporation of $370,000. 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 nine months 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 nine months of 2003, and 2002 of $3,744,000, and $3,377,000 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.
Quantitative and Qualitative Disclosures about Market Risk
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, 2003 was consistent with the interest-rate exposure presented in the Corporation’s 2002 annual report and was within the Corporation’s risk policy range.
Repricing within: 3 3-6 12 1-5 Over 5
In thousands Months Months Months Years Years Totals
- --------------------------------------------------------------------------------------------------------------------
Assets:
Federal Funds Sold & Short-term
Investments $ 26,167 $ - $ - $ - $ - $ 26,167
Investment securities 8,311 4,568 15,743 42,234 148 71,004
Construction & Real Estate Loans 139,980 6,960 1,154 9,380 19,938 177,412
Commercial Loans 91,718 1,700 3,088 2,425 197 99,128
Consumer Loans 45,955 18 43 46 - 46,062
Leases 1,831 1,785 3,209 7,668 - 14,493
BWC Mortgage Loans Held-for-Sale 5,737 - - - - 5,737
------------------------------------------------------------------------------
Interest-bearing assets $ 319,699 $ 15,031 $ 23,237 $ 61,753 $ 20,283 $ 440,003
------------------------------------------------------------------------------
Liabilities:
Money market accounts 84,521 84,521 - - - 169,042
Time deposits <$100,000 7,642 5,923 8,460 2,283 - 24,308
Time deposits >$100,000 9,421 5,330 5,966 1,587 - 22,304
Federal Home Loan Bank Borrowings $ 184 $ 186 $ 378 $ 9,064 $ 18,320 $ 28,132
BWC Mortgage Services Borrowings 5,715 - - - - 5,715
Federal Funds Purchased - - - - - -
------------------------------------------------------------------------------
Interest-bearing liabilities $ 107,483 $ 95,960 $ 14,804 $ 12,934 $ 18,320 $ 249,501
------------------------------------------------------------------------------
Rate-sensitive gap $ 212,216 $ (80,929) $ 8,433 $ 48,819 $ 1,963 $ 190,502
Cumulative rate-sensitive gap $ 212,216 $ 131,287 $ 139,720 $ 188,539 $ 190,502
=================================================================
Cumulative rate-sensitive ratio 2.97 1.65 1.64 1.82 1.76
(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, 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
None
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
A $0.06 per share cash dividend was declared by the Board of Directors to Share Holders of Record as of September 10, 2003.
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 | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Exeutive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (b) | Reports on Form 8-K | |
| The registrant furnished a report on form 8-K dated October 28, 2003 which contains a press release announcing financial results for the quarter and year-to-date ended September 30, 2003. |
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)
November 10, 2003 James L. Ryan
___________________________ _________________________________
Date James L. Ryan
Chairman and Chief Executive Officer
November 10, 2003 Leland E. Wines
______________________ ________________________________
Date Leland E. Wines
EVP/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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. | |
Date: November 10, 2003
James L. Ryan
Chairman and CEO
Exhibit 31.1
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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. | |
Date: November 10, 2003
Leland E. Wines
EVP/CFO and Corp. Secretary
Exhibit 31.2
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 September 30, 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: November 10, 2003
JAMES L. RYAN
Chairman and 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 September 30, 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: November 10, 2003
LELAND E. WINES
EVP/CFO and Corp. Secretary