SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2000. Commission File Number 0-10658 BWC FINANCIAL CORP.
Incorporated pursuant to the Laws of California Internal Revenue Service - Employer Identification No. 94-262100 1400 Civic Drive, Walnut Creek, California 94596
(925) 932-5353 N/A
(Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No _____ APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1924 subsequent to the distribution of securities under a plan confirmed by court. Yes _____ No _____APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock as the latest practicable date. As of September 30, 2000, there were 2,858,841 shares of common stock, no par value outstanding. |
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
Assets 2000 1999
---------------------------------------
(Unaudited)
Cash and Due From Banks $ 17,557,000 $ 12,593,000
Federal Funds Sold 7,644,000 --
Other Short-term Investments 53,000 25,000
---------------------------------------
Total Cash and Cash Equivalents 25,254,000 12,618,000
Investment Securities:
Available for Sale 51,759,000 53,717,000
Held-to-Maturity (approximate fair value of
$9,943,000 in 2000 and $11,595,000 in 1999) 10,017,000 11,739,000
Loans, Net of Allowance for Credit Losses of $5,139,000
in 2000 and $4,466,000 in 1999 237,095,000 209,493,000
Real Estate Loans held-for-sale 14,000 480,000
Bank Premises and Equipment, Net 2,972,000 2,965,000
Interest Receivable and Other Assets 6,949,000 5,719,000
---------------------------------------
Total Assets $ 334,060,000 $ 296,731,000
=======================================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 82,969,000 $ 76,958,000
---------------------------------------
Interest-bearing:
Money Market Accounts 112,440,000 93,439,000
Savings and NOW Accounts 37,329,000 38,059,000
Time Deposits:
Under $100,000 32,624,000 29,354,000
$100,000 or more 32,832,000 20,859,000
---------------------------------------
Total Interest-bearing 215,225,000 181,711,000
Total Deposits 298,194,000 258,669,000
Federal Funds Purchased -- 5,350,000
BWC Mortgage Services Line-of-Credit 12,000 473,000
BWC Mortgage Services Other Borrowed Funds 52,000 77,000
Interest Payable and Other Liabilities 3,084,000 2,733,000
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Total Liabilities 301,342,000 267,302,000
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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 -
2,858,841 shares in 2000 and 2,612,786 in 1999 23,771,000 20,154,000
Retained Earnings 9,252,000 9,802,000
Capital adjustment on available-for-sale securities (305,000) (527,000)
---------------------------------------
Total Shareholders' Equity 32,718,000 29,429,000
---------------------------------------
Total Liabilities and Shareholders' Equity $ 334,060,000 $ 296,731,000
=======================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------------------------------------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------------------------------------------------------
Interest Income
Loans, Including Fees $7,298,000 $5,159,000 $20,244,000 $15,048,000
Investment Securities:
Taxable 808,000 764,000 2,394,000 2,049,000
Non-taxable 117,000 136,000 368,000 423,000
Federal Funds Sold 145,000 178,000 328,000 354,000
Other Short Term Investments 5,000 57,000 30,000 145,000
-------------------------------------------------------------------
Total Interest Income 8,373,000 6,294,000 23,364,000 18,019,000
Interest Expense
Deposits 2,394,000 1,667,000 6,448,000 4,811,000
Federal Funds Purchased -- -- 22,000 5,000
Other Borrowed Funds 3,000 13,000 44,000 43,000
-------------------------------------------------------------------
Total Interest Expense 2,397,000 1,680,000 6,514,000 4,859,000
Net Interest Income 5,976,000 4,614,000 16,850,000 13,160,000
Provision For Credit Losses 300,000 150,000 775,000 450,000
-------------------------------------------------------------------
Net Interest Income After Provision
For Credit Losses 5,676,000 4,464,000 16,075,000 12,710,000
Noninterest Income
BWC Mortgage Services - Commissions 877,000 606,000 2,136,000 2,477,000
BWC Mortgage Services - Fees & Other 139,000 206,000 444,000 692,000
Service Charges on Deposit Accounts 204,000 216,000 599,000 604,000
Other 223,000 311,000 749,000 874,000
Gains on Security Transactions 9,000 -- 9,000 30,000
-------------------------------------------------------------------
Total Noninterest Income 1,452,000 1,339,000 3,937,000 4,677,000
Noninterest Expense
Salaries and Related Benefits 2,177,000 1,902,000 6,243,000 5,493,000
BWC Mortgage Services - Commissions 572,000 440,000 1,429,000 1,708,000
BWC Mortgage Services - Fees & Other 149,000 129,000 458,000 384,000
Occupancy 286,000 233,000 798,000 678,000
Furniture and Equipment 180,000 157,000 518,000 424,000
Other 1,006,000 888,000 2,921,000 2,530,000
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Total Noninterest Expense 4,370,000 3,749,000 12,367,000 11,217,000
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BWC Mortgage Services - Minority Interest 93,000 57,000 187,000 317,000
Income Before Income Taxes 2,665,000 1,997,000 7,458,000 5,853,000
Provision For Income Taxes 1,004,000 779,000 2,745,000 2,273,000
-------------------------------------------------------------------
Net Income $1,661,000 $ 1,218,000 $4,713,000 $ 3,580,000
===================================================================
Basic Earnings Per Share $0.58 $0.43 $1.63 $1.27
Diluted Earnings Per Share $0.52 $0.37 $1.46 $1.09
===================================================================
Average Basic Shares 2,864,764 2,852,200 2,888,424 2,824,345
Average Diluted Share Equivalents
Related to Options 330,810 439,982 329,581 451,684
Average Diluted Shares 3,195,574 3,292,182 3,218,005 3,276,029
===================================================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
---------------------------------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net Income $4,713,000 $3,580,000
Adjustments to reconcile Net Income to
net cash provided(used):
Amortization of loan fees (1,483,000) (1,341,000)
Provision for credit losses 775,000 450,000
Depreciation and amortization 393,000 312,000
Gain on sale of securities available for sale (9,000) (30,000)
Tax benefit from the exercise of stock options 350,000 --
Increase in accrued interest receivable
and other assets (1,230,000) (725,000)
Increase/(decrease) in accrued interest payable
and other liabilities 351,000 (100,000)
---------------------------------------
Net Cash Provided by Operating Activities 3,860,000 2,146,000
---------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 5,638,000 6,087,000
Proceeds from the sales of available-for-sale investment securities 2,309,000 11,956,000
Purchase of investment securities (4,036,000) (28,256,000)
Loans originated, net of collections (26,428,000) 115,000
Purchase of bank premises and equipment (399,000) (1,677,000)
---------------------------------------
Net Cash Used by Investing Activities (22,916,000) (11,775,000)
---------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 39,525,000 18,659,000
Increase/(decrease) in Fed Funds Purchased (5,350,000) 849,000
Proceeds from issuance of common stock 755,000 591,000
Cash paid for the repurchase of common stock (2,748,000) --
Decrease in BWC Mortgage Services borrowings (487,000) --
Cash paid in lieu of fractional shares (3,000) --
---------------------------------------
Net Cash Provided by Financing Activities 31,692,000 20,099,000
---------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 12,636,000 10,470,000
Cash and cash equivalents at beginning of year 12,618,000 16,680,000
---------------------------------------
Cash and cash equivalents at period end $25,254,000 $27,150,000
=======================================
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $6,232,000 $3,162,000
=======================================
Income Taxes Paid $1,885,000 $2,258,000
=======================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the periods ending December 31, 1999, and September 30, 2000
Number Common Retained
of Shares Stock Earnings
------------------------------------------
Balance, January 1, 1999 ..................... 2,511,151 $ 19,002,000 $ 5,006,000
Net Income as of December 31, 1999 ........... -- -- 4,796,000
Other Comprehensive Loss, net of tax
benefit of $323,000 ...................... -- -- --
Comprehensive Income ......................... -- -- --
Common stock issued and sold to the
Defined Contribution Plan ................ 22,186 466,000 --
Stock options exercised ...................... 79,449 261,000 --
Tax benefit from the exercise of stock options -- 425,000 --
------------------------------------------
Balance, December 31, 1999 ................... 2,612,786 20,154,000 9,802,000
Net Income as of September 30, 2000 .......... -- -- 4,713,000
Other Comprehensive Income, net of tax
benefit of $136,000 ..................... -- -- --
Comprehensive Income ......................... -- -- --
Stock options exercised ...................... 103,173 434,000 --
Repurchase and retirement of shares by the
Corporation ............................... (132,496) (2,748,000) --
Common Stock Issued and sold to the
Defined Contribution Plan ............... 15,640 321,000 --
10% stock dividend including payment of
fractional shares ....................... 259,738 5,260,000 (5,263,000)
Tax benefit from the exercise of stock options -- 350,000 --
-------------------------------------------
Balance, September 30, 2000 .................. 2,858,841 $ 23,771,000 $ 9,252,000
===========================================
Accumulated
other
Comprehensive Comprehensive
Income Total Income
---------------------------------------------
Balance, January 1, 1999 ..................... $ 335,000 $ 24,343,000
Net Income as of December 31, 1999 ........... -- 4,796,000 $ 4,796,000
Other Comprehensive Loss, net of tax
benefit of $323,000 ...................... (862,000) (862,000) (862,000)
-----------
Comprehensive Income ......................... -- -- 3,934,000
Common stock issued and sold to the
Defined Contribution Plan ................ -- 466,000
Stock options exercised ...................... -- 261,000
Tax benefit from the exercise of stock options -- 425,000
---------------------------------------------
Balance, December 31, 1999 ................... (527,000) 29,429,000
Net Income as of September 30, 2000 .......... -- 4,713,000 4,713,000
Other Comprehensive Income, net of tax
benefit of $136,000 ..................... 222,000 222,000 222,000
-----------
Comprehensive Income ......................... -- -- $ 4,935,000
Stock options exercised ...................... -- 434,000
Repurchase and retirement of shares by the
Corporation ............................... (2,748,000) --
Common Stock Issued and sold to the
Defined Contribution Plan ............... -- 321,000
10% stock dividend including payment of
fractional shares ....................... (3,000) --
Tax benefit from the exercise of stock options -- 350,000
---------------------------------------------
Balance, September 30, 2000 .................. $ (305,000) $ 32,718,000
=============================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2000 and the results of operations for the three months and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999.
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 1999 Annual Report to Shareholders, which is incorporated by reference in the Company’s 1999 annual report on Form 10-K. The results of operations for the three months and nine months ended September 30, 2000 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, stock dividends and the stock splits.
2. INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
The amortized cost and approximate market value of investment securities at September 30, 2000 are as follows:
Gross
Amortized Unrealized Market
Cost Gain/(Loss) Value
-------------------------------------------
Held-to-maturity
Obligations of State and
Political Subdivisions ...... $10,017,000 $ (74,000) $ 9,943,000
Available-for-sale
Taxable Obligations of
State & Political
Subdivisions .............. $12,581,000 $ (43,000) $12,538,000
U.S. Treasury Securities ......... 5,020,000 (27,000) 4,993,000
U.S. Government Agencies ......... 27,449,000 (208,000) 27,241,000
Preferred Stock .................. 1,649,000 (117,000) 1,532,000
Corporate Securities ............. 5,553,000 (98,000) 5,455,000
- --------------------------------------------------------------------------------
Total Available-for-sale ......... $52,252,000 $ (493,000) $51,759,000
The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2000.
Held-to-Maturity Available-for-Sale
------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------------------------------------
Within one year ........ $ 1,451,000 $ 1,890,000 $15,772,000 $15,724,000
After one but within
five years .......... 7,047,000 6,552,000 33,569,000 33,142,000
Over five years ........ 1,519,000 1,501,000 2,911,000 2,893,000
- --------------------------------------------------------------------------------
Total .................. $10,017,000 $ 9,943,000 $52,252,000 $51,759,000
3. ALLOWANCE FOR CREDIT LOSSES
For the Nine Months Ended
September 30,
2000 1999
--------------------------------
Allowance for credit losses at
beginning of period ................. $ 4,466,000 $ 3,919,000
Charge-offs ............................ (178,000) (43,000)
Recoveries ............................. 76,000 90,000
--------------------------------
Net (charge-offs)/recoveries ........... (102,000) 47,000
Provisions ............................. 775,000 450,000
Allowance for credit losses at
end of period ....................... $ 5,139,000 $ 4,416,000
================================
Ratio of allowance for credit
losses to loans ..................... 2.12% 2.36%
4. COMPREHENSIVE INCOME
For the Bank, comprehensive income includes net income reported on the statement of income and changes in the fair value of its available-for-sale investments reported as a component of shareholders’ equity.
The components of other comprehensive income for the nine months ended September 30, 2000 and 1999 are as follows:
2000 1999
================================================================================
Unrealized gain(loss) arising
during the period, net of tax ................. $ 228,000 $(889,000)
--------- ---------
Reclassification adjustment for net
realized gains on securities
available-for-sale included in net
income during the year, net of tax ............ 6,000 19,000
--------- ---------
Net unrealized gain(loss) included
in other comprehensive income ................. $ 222,000 $(908,000)
========= =========
5. FASB 131 DISCLOSURE
The Corporation is principally engaged in community banking activities through its seven 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. As permitted under the Statement, the separate banking offices have been aggregated into a single reportable segment, Community Banking.
The Corporation’s community banking segment provides loans, leases, SBA loan products, asset-based lending services 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 ending September 30, 2000, and 1999 concerning the Corporation’s reportable segments is shown in the following table.
For the Nine Months Community Mortgage
Ended 09/30/2000 Banking Services Adjustments Total
- --------------------------------------------------------------------------------------
Total Interest Income ... $ 23,359,000 $ 15,000 $ (10,000) $ 23,364,000
Commissions Received .... -- 2,136,000 -- 2,136,000
Total Interest Expense .. 6,501,000 23,000 (10,000) 6,514,000
Salaries & Benefits . 5,933,000 310,000 -- 6,243,000
Commissions Paid ........ -- 1,429,000 -- 1,429,000
Segment Profit before Tax 7,351,000 374,000 (267,000) 7,458,000
Total Assets ............ $333,858,000 $ 355,000 $ (153,000) $334,060,000
- --------------------------------------------------------------------------------------
For the Nine Months Community Mortgage
Ended 09/30/1999 Banking Services Adjustments Total
- --------------------------------------------------------------------------------------
Total Interest Income ... $ 17,979,000 $ 40,000 $ -- $ 18,019,000
Commissions Received .... -- 2,477,000 -- 2,477,000
Total Interest Expense .. 4,816,000 43,000 -- 4,859,000
Salaries & Benefits . 5,053,000 440,000 -- 5,493,000
Commissions Paid ........ -- 1,708,000 -- 1,708,000
Segment Profit before Tax 5,562,000 633,000 (342,000) 5,853,000
Total Assets ............ $287,033,000 $ 1,323,000 $ (441,000) $287,915,000
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For the Three Months Community Mortgage
Ended 09/30/2000 Banking Services Adjustments Total
- --------------------------------------------------------------------------------------
Total Interest Income ... $ 8,372,000 $ 4,000 $ (3,000) $ 8,373,000
Commissions Received .... -- 877,000 -- 877,000
Total Interest Expense .. 2,395,000 5,000 (3,000) 2,397,000
Salaries & Benefits . 2,069,000 108,000 -- 2,177,000
Commissions Paid ........ -- 572,000 -- 572,000
Segment Profit before Tax 2,604,000 185,000 (124,000) 2,665,000
Total Assets ............ $333,858,000 $ 355,000 $ (153,000) $334,060,000
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For the Three Months Community Mortgage
Ended 09/30/1999 Banking Services Adjustments Total
- --------------------------------------------------------------------------------------
Total Interest Income ... $ 6,279,000 $ 15,000 $ -- $ 6,294,000
Commissions Received .... -- 606,000 -- 606,000
Total Interest Expense .. 1,667,000 13,000 -- 1,680,000
Salaries & Benefits . 1,775,000 127,000 -- 1,902,000
Commissions Paid ........ -- 440,000 -- 440,000
Segment Profit before Tax 1,940,000 118,000 (61,000) 1,997,000
Total Assets ............ $287,033,000 $ 1,323,000 $ (441,000) $287,915,000
- --------------------------------------------------------------------------------------
6. SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities (as amended by SFAS 137 and SFAS 138). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter.
The implementation of this statement is not expected to have a material impact on the Corporation’s financial position or results of operations.
General
Total assets of the Corporation at September 30, 2000 of $334,060,000 have increased $46,145,000 or 16% as compared to September 30, 1999. Total loans of $242,234,000 have increased $54,840,000 or 29%, and total deposits of $298,194,000 have increased $41,394,000 or 16%. Since year-end 1999 the Corporation’s assets have increased 13%, loans increased 13% and deposits increased 15%.
The Corporation’s loan-to-deposit ratio as of September 30, 2000 was 81%, as compared to 73% in 1999.
Net Income
Net income for the first nine months in 2000 of $4,713,000 was $1,133,000 greater than the first nine months in 1999. This represented a return on average assets during this period of 1.97% and a return on average equity of 20.39%. The return on average assets during the first nine months of 1999 was 1.73%, and the return on average equity was 18.25%.
Net income for the three months ending September 30, 2000 of $1,661,000 was $443,000 over the comparable period in 1999. The return on average assets during the third quarter was 2.01%, and the return on average equity was 20.81%. The return on average assets during the third quarter of 1999 was 1.69%, and the return on average equity was 17.87%.
Earning assets averaged $298,273,000 during the nine months ended September 30, 2000, as compared to $260,476,000 for the comparable period in 1999. Earning assets averaged $308,815,000 during the third quarter of 2000 as compared to $271,613,000 during the third quarter of 1999.
Diluted earnings per average common share were $1.46 for the first nine months of 2000 as compared to $1.09 for the first nine months of 1999. For the third quarter of 2000, diluted earnings per average common share were $0.52 as compared to $0.37 for the third quarter of 1999.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans and deposits and interest rate fluctuations caused by economic conditions affect net interest income.
Net interest income during the first nine months of 2000 was $16,850,000 or $3,690,000 greater than the comparable period in 1999. Higher interest rates accounted for $1,070,000 or 29% of the total increase in net interest income between the respective periods. The majority, or 71% of the increase ($2,620,000) was due to increases in the volume of loans outstanding during the 2000 period, as compared to 1999. The Corporation’s net interest spread averaged 7.62% during the first nine months of 2000, as compared to 6.86% for the comparable period in 1999.
During the third quarter of 2000, the net interest spread averaged 7.77%, as compared to 6.85% during 1999. During the third quarter 29% or $395,000 was also related to the higher interest rates during the third quarter of 2000. The balance of 71% or $967,000 of the increase was related to volume growth.
Due to the fact that the Corporation has more rate-sensitive assets than liabilities, the increases in interest rates have a positive effect on the Corporation’s net interest margin. Conversely, reductions in interest rates have a negative effect. The rate increases were brought about by the Federal Reserve in an effort to slow the national economy and prevent escalating inflation.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated and is in accordance with SFAS 114. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate, the performance of borrowers, and other conditions to determine the adequacy of the allowance.
The ratio of the allowance for credit losses to total loans as of September 30, 2000 was 2.12%, as compared to 2.36% for the period ending September 30, 1999. Industry standards for this ratio are generally averaging between 1.25% to 1.75%. 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 loan losses. As of September 30, 2000 it had $3,358,000 in allocated reserves and $1,781,000 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 new credit products that have been introduced. In the past few years, the Bank has opened an Asset-based Lending Department, a Leasing Department and a Small Business Administration lending program. The Bank also has a high concentration of credit in Construction Real Estate lending. The uncertainties associated with the new products, coupled with the Bank’s traditionally strong construction concentration, fully support a strong reserve position.
The Corporation had net charge-offs of $102,000 during the first nine months of 2000 as compared to net recoveries of $47,000 during the comparable period in 1999.
The following table provides information on past-due and nonaccrual loans:
For the Nine months Ended
September 30,
2000 1999
-------- --------
Loans Past-due 90 Days or More ............... $ 12,000 $ 6,000
Nonaccrual Loans ............................. 206,000 422,000
Total ........................................ $218,000 $428,000
As of September 30, 2000 and 1999, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2000 remains uncollected. Interest foregone on nonaccrual loans was approximately $13,000 and $26,000, as of September 30, 2000 and 1999 respectively.
Noninterest Income
Noninterest income during the first nine months of 2000 was $740,000 less than during the comparable period of 1999. The decrease in 2000 was primarily related to decreased activity in the Corporation’s mortgage brokerage subsidiary, BWC Mortgage Services, which had total fee and commission income of $2,580,000 during the first nine months of 2000, which was $589,000 less than that earned during the comparable period in 1999. The decrease in income is a reflection of the increase in interest rates during the current year and the corresponding slow-down in mortgage financing activity.
There was a decrease in “Other” noninterest income between the respective periods of $125,000. This was related to reduced gains on SBA loan sales which were $29,000 during the first nine months of 2000 as compared to $120,000 during the comparable period in 1999. The decrease is not related to reduced SBA activity, but rather to a decision by management to retain the guaranteed portion in the Corporation’s own loan portfolio, rather than sell it in the market. At this time, management believes that there is a greater benefit to be gained from retaining the interest income on these loans than from premiums on their sale.
There was $9,000 in gains on securities available-for-sale, as compared to a $30,000 gain during the first nine months of 1999.
During the third quarter of 2000 noninterest income from BWC Mortgage Services was $1,016,000, which represents an increase of $204,000 from the comparable quarter of 1999. Adjustments in brokerage activity and other actions on the part of BWC Mortgage Services management has resulted in increased income, diring this period, in spite of the higher interest rate environment faced during the current year.
Noninterest Expense
Noninterest expense during the first nine months of 2000 was $1,150,000 greater than during the comparable period in 1999.
BWC Mortgage Services reflected a decrease in noninterest expense of $645,000 during the respective periods, which is related to the slow-down in mortgage origination activity due to higher interest rates.
Salaries and related benefits were $1,190,000 greater during the first nine months of 2000 as compared to 1999. This increase is related to the growth of operations, preparations for a new office in San Jose, general merit increases and performance bonuses. Staff averaged 113.5 full-time equivalent (FTE) persons during the first nine months of 2000 as compared to 100.0 FTE in 1999.
Occupancy expense increased $120,000 over the comparable period in 1999 in part due to the Bank’s new Livermore office, which was opened in November 1999, and the new office being prepared for opening later this year in San Jose, as well as to CPI and operating increases.
Total furniture and equipment expenses increased $94,000 as compared to the 1999 period, which is related primarily to the installation of new computer equipment in the Corporation’s data processing department plus the relocation and expansion of other departments.
Other expenses reflect an increase of $391,000 between the respective periods and is related to the Corporation’s growth and expanded activities.
During the third quarter of 2000 the Corporation’s noninterest expense increased $621,000 over the comparable quarter of 1999. BWC Mortgage Services reflected an increase in noninterest expense of $26,000 during the comparable periods, whereas other Corporation noninterest expenses reflected an increase of $595,000. The same reasons that were applicable for the first nine months apply to the third quarter results.
Other Real Estate Owned
As of September 30, 2000 the Corporation had no Other Real Estate Owned assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
Capital Adequacy
The Federal Deposit Insurance Corporation (FDIC) has established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital includes the eligible allowance for credit losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 8% at September 30, for both 2000 and 1999. 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, 2000, December 31, 1999, and September 30, 1999.
Risk-based capital ratios: Capital Ratios
Minimum
September 30, December 31, September 30, Regulatory
2000 1999 1999 Requirements
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Tier 1 capital 10.81% 12.21% 12.49% 4.00%
Total capital 12.06% 13.58% 13.74% 8.00%
Leverage ratio 9.98% 10.66% 9.76% 3.00%
On July 25, 2000 the Board of Directors declared a 10% stock dividend to shareholders of record as of August 1, 2000.
Liquidity
Liquidity is a key aspect in the overall fiscal health of a financial corporation. The primary source of liquidity for BWC Financial Corp. is its marketable securities and Federal Funds Sold. Cash, investment securities and other temporary investments represented 26% of total assets at September 30, 2000 and 33% at September 30, 1999. 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.
Interest-Rate Risk Management
Movement in interest rates can create fluctuations in the Corporation’s income and economic value due to an imbalance in the re-pricing or maturity of assets or liabilities. The components of interest-rate risk which are actively measured and managed include: re-pricing risk and the risk of non-parallel shifts in the yield curve. Interest-rate risk exposure is actively managed with the goal of minimizing the impact of interest-rate volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to re-pricing or maturity characteristics. Therefore, the Corporation uses a variety of measurement tools to monitor and control the overall interest-rate risk exposure of the on-balance - -sheet positions. For each measurement tool, the level of interest-rate risk created by the assets and liabilities is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Corporation’s interest-rate risk as of September 30, 2000 was consistent with the interest-rate exposure presented in the Corporation’s 1999 annual report and was within the Corporation’s risk policy range.
(in thousands except share and per share data)
Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest rate sensitivity position of the Corporation as of September 30, 2000. 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.
3 3-6 12 1-5 Over 5
Repricing within: months months months years years Totals
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Assets:
Federal Funds Sold & Short Term Inv $ 7,697 $ -- $ -- $ -- $ -- $ 7,697
Investment securities .............. 4,929 3,961 8,285 40,189 4,412 61,776
Construction & Real Estate Loans ... 94,978 7,722 2,617 934 -- 106,251
Commercial Loans ................... 57,739 13,542 10,484 3,047 -- 84,812
Consumer Loans ..................... 38,106 170 335 1,006 -- 39,617
Leases ............................. 1,979 1,482 2,766 5,327 -- 11,554
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Interest-bearing assets ............ $205,428 $ 26,877 $ 24,487 $ 50,503 $ 4,412 $311,707
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Liabilities:
Money market accounts .............. 84,384 28,128 -- -- -- 112,512
Time deposits <$100,000 ............ 10,538 10,634 8,825 2,585 -- 32,624
Time deposits >$100,000 ............ 12,898 11,830 3,971 4,133 -- 32,832
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Interest-bearing liabilities ....... $107,820 $ 50,592 $ 12,796 $ 6,718 $ -- $177,968
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Rate-sensitive gap ................. $ 97,608 $(23,715) $ 11,691 $ 43,785 $ 4,412 $133,739
Cumulative rate-sensitive gap ...... $ 97,608 $ 73,893 $ 85,584 $129,369 $133,781
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Cumulative rate-sensitive ratio .... 1.91 1.47 1.50 1.73 1.75
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
| On July 25, 2000 a 10% stock dividend was granted to shareholders of record August 1, 2000. |
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Materially Important Events
| On August 2, 2000 an S-8 Registration Statement was filed relating to the "BWC 2000 Stock Option Plan" which was approved by shareholders during the 2000 shareholders meeting. |
Item 6 - Exhibits and Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BWC FINANCIAL CORP.
(Registrant)
October 31, 2000 James L. Ryan
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Date James L. Ryan
Chairman and Chief Executive Officer
October 31, 2000 Leland E. Wines
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Date Leland E. Wines
CFO and Corp. Secretary
