SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001.
Commission File Number 0-10658
BWC FINANCIAL CORP.
Incorporated pursuant to the Laws of California
Internal Revenue Service - Employer Identification No. 94-2621001
1400 Civic Drive, Walnut Creek, California 94596
(925) 932-5353
N/A
(Former name, former address, and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No _____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1924 subsequent to the distribution of securities under a plan confirmed by court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as the latest practicable date. As of September 30, 2001, there were 3,133,365 shares of common stock, no par value outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION
Item 1 | Legal Proceedings | 18 |
Item 2 | Changes in Securities | 18 |
Item 3 | Defaults Upon Senior Securities | 18 |
Item 4 | Submission of Matters to a Vote of | |
Security Holders | 18 | |
Item 5 | Other Materially Important Events | 18 |
Item 6 | Exhibits and Reports on Form 8-K | 18 |
Signatures | 19 |
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
In thousands September 30, December 31, Assets 2001 2000 ----------------------------- (Unaudited) Cash and Due From Banks $ 19,044 $ 20,684 Federal Funds Sold 33,207 3,268 Other Short-term Investments 5,592 520 ----------------------------- Total Cash and Cash Equivalents 57,843 24,472 Investment Securities: Available-for-Sale 58,844 58,025 Held-to-Maturity (approximate fair value of $9,936 in 2001 and $9,975 in 2000) 9,540 9,920 Loans, Net of Allowance for Credit Losses of $4,936 in 2001 and $5,042 in 2000 268,899 247,281 Bank Premises and Equipment, Net 3,593 2,892 Interest Receivable and Other Assets 7,939 7,923 ----------------------------- Total Assets $ 406,658 $ 350,513 ============================= Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing $ 95,366 $ 88,143 ----------------------------- Interest-bearing: Money Market Accounts 153,279 114,718 Savings and NOW Accounts 42,748 38,892 Time Deposits: Under $100 31,087 31,554 $100 or more 35,451 36,329 ----------------------------- Total Interest-bearing 262,565 221,493 Total Deposits 357,931 309,636 Federal Funds Purchased -- -- Federal Home Loan Bank Borrowings 6,548 2,424 Interest Payable and Other Liabilities 3,967 4,242 ----------------------------- Total Liabilities 368,446 316,302 ----------------------------- Commitments and Contingent Liabilities Shareholders' Equity Preferred Stock, no par value: 5,000,000 shares authorized, none outstanding -- -- Common Stock, no par value: 25,000,000 shares authorized; issued and outstanding - 3,133,365 shares in 2001 and 2,850,850 in 2000 28,237 23,193 Retained Earnings 8,998 10,975 Accumulated other comprehensive income 977 43 ----------------------------- Total Shareholders' Equity 38,212 34,211 ----------------------------- Total Liabilities and Shareholders' Equity $ 406,658 $ 350,513 ============================= 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 In thousands except per-share amounts Ended September 30, Ended September 30, ------------------ ----------------- Interest Income 2001 2000 2001 2000 (Unaudited) (Unaudited) -------------------------------------- Loans, including Fees .......................... $ 6,575 $ 7,298 $20,491 $20,244 Investment Securities: Taxable ................................... 772 808 2,373 2,394 Non-taxable ............................... 111 117 335 368 Federal Funds Sold ............................. 155 145 431 328 Other Short-term Investments ................... 39 5 58 30 -------------------------------------- Total Interest Income ............... 7,652 8,373 23,688 23,364 Interest Expense Deposits ..................................... 1,998 2,394 6,718 6,448 Federal Funds Purchased ...................... -- -- 16 22 FHLB Borrowings .............................. 100 -- 246 -- Other Borrowed Funds ......................... -- 3 1 44 -------------------------------------- Total Interest Expense ............. 2,098 2,397 6,981 6,514 Net Interest Income ................................. 5,554 5,976 16,707 16,850 Provision for Credit Losses ......................... 400 300 1,150 775 -------------------------------------- Net Interest Income After Provision For Credit Losses 5,154 5,676 15,557 16,075 Noninterest Income BWC Mortgage Services - Commissions .......... 1,369 877 3,997 2,136 BWC Mortgage Services - Fees & Other ..... 254 139 649 444 Service Charges on Deposit Accounts .......... 180 204 576 599 Other ........................................ 325 223 979 749 Gains on Security Transactions ............... -- 9 65 9 -------------------------------------- Total Noninterest Income ............ 2,128 1,452 6,266 3,937 Noninterest Expense Salaries and Related Benefits ................ 2,039 2,177 6,769 6,243 BWC Mortgage Services - Commissions .......... 968 572 2,759 1,429 BWC Mortgage Services - Fees & Other ..... (2) 149 316 458 Occupancy .................................... 499 286 1,112 798 Furniture and Equipment ...................... 254 180 650 518 Other ........................................ 1,061 1,006 3,299 2,921 -------------------------------------- Total Noninterest Expense ........... 4,819 4,370 14,905 12,367 -------------------------------------- BWC Mortgage Services - Minority Interest ........... 153 93 455 187 Income Before Income Taxes .......................... 2,310 2,665 6,463 7,458 Provision for Income Taxes .......................... 837 1,004 2,393 2,745 -------------------------------------- Net Income .......................................... $ 1,473 $ 1,661 $ 4,070 $ 4,713 ====================================== Basic Earnings Per Share $0.47 $0.53 $1.30 $1.48 Diluted Earnings Per Share $0.43 $0.47 $1.18 $1.33 ======================================== Weighted Average Basic Shares 3,122,615 3,151,240 3,127,871 3,177,266 Weighted Average Diluted Share Equivalents Related to Options 291,038 363,388 317,611 363,431 Weighted Average Diluted Shares 3,413,653 3,514,629 3,445,482 3,540,698 ======================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months In thousands Ended September 30, --------------------- 2001 2000 --------------------- OPERATING ACTIVITIES: (Unaudited) (Unaudited) Net Income ......................................................... $ 4,070 $ 4,713 Adjustments to reconcile net income to net cash provided(used): Amortization of loan fees ..................................... (1,473) (1,483) Provision for credit losses ................................... 1,150 775 Depreciation and amortization ................................. 443 393 Gain on sale of securities available for sale ................. (65) (9) Tax benefit from the exercise of stock options ................ 299 350 Increase in accrued interest receivable and other assets ........................................... (16) (1,230) Increase/(decrease) in accrued interest payable and other liabilities ...................................... (275) 351 -------------------- Net Cash Provided by Operating Activities ........... 4,133 3,860 -------------------- INVESTING ACTIVITIES: Proceeds from maturities of investment securities .................. 12,261 5,638 Proceeds from the sales of available-for-sale investment securities 25,881 2,309 Purchase of investment securities .................................. (37,581) (4,036) Loans originated, net of collections ............................... (21,295) (26,428) Purchase of bank premises and equipment ............................ (1,144) (399) -------------------- Net Cash Used by Investing Activities ............... (21,879) (22,916) -------------------- FINANCING ACTIVITIES: Net increase in deposits ........................................... 48,295 39,525 Increase(decrease) in Fed Funds Purchased and other borrowings ..... 4,124 (5,350) Proceeds from issuance of common stock ............................. 227 755 Cash paid for the repurchase of common stock ....................... (1,525) (2,748) Cash paid in lieu of fractional shares ............................. (5) (487) Decrease in BWC Mortgage Services borrowings ....................... -- (3) -------------------- Net Cash Provided by Financing Activities ........... 51,117 31,692 -------------------- CASH AND CASH EQUIVALENTS: Increase in cash and cash equivalents .............................. 33,371 12,636 Cash and cash equivalents at beginning of year ..................... 24,472 12,618 -------------------- Cash and Cash Equivalents at period end ....................... $ 57,843 $ 25,254 ==================== ADDITIONAL CASH FLOW INFORMATION: Interest Paid ...................................................... $ 6,888 $ 6,232 ==================== Income Taxes Paid .................................................. $ 2,285 $ 1,885 ==================== 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, 2000, and September 30, 2001 Accumulated In thousands except share amounts Other Number Common Retained Comprehensive Comprehensive of Shares Stock Earnings Income/(Loss) Total Income --------------------------------------------------------------------------------- Balance, January 1, 2000 ..................... 2,612,786 $ 20,154 $ 9,802 $ (527) $ 29,429 Net Income as of December 31, 2000 ........... -- -- 6,435 -- 6,435 $ 6,435 Other Comprehensive Income, net of tax liability of $350,000 ........................ -- -- -- 570 570 570 ---------- Comprehensive Income ......................... -- -- -- -- -- $ 7,005 Stock options exercised ...................... 122,460 495 -- -- 495 Repurchase and retirement of shares by the Corporation .................................. (159,774) (3,387) -- -- (3,387) Common Stock Issued and sold to the Defined Contribution Plan .................... 15,640 321 -- -- 321 10% stock dividend including payment of fractional shares ............................ 259,738 5,260 (5,262) -- (2) Tax benefit from the exercise of stock options -- 350 -- -- 350 -------------------------------------------------------------------------------- Balance, December 31, 2000 ................... 2,850,850 $ 23,193 $ 10,975 $ 43 $ 34,211 (Unaudited) Net Income as of September 30, 2001 .......... -- -- 4,070 -- 4,070 $ 4,070 Other Comprehensive Income, net of tax liability of $599,000 ........................ -- -- -- 934 934 934 ---------- Comprehensive Income ......................... -- -- -- -- -- $ 5,004 Stock options exercised ...................... 67,531 227 -- -- 227 Repurchase and retirement of shares by the Corporation .................................. (66,724) (1,525) -- -- (1,525) 10% stock dividend including payment of fractional shares ............................ 281,708 6,043 (6,047) -- (5) Tax benefit from the exercise of stock options -- 299 -- -- 299 ------------------------------------------------------------------------------- Balance, September 30, 2001 .................. 3,133,365 $ 28,237 $ 8,998 $ 977 $ 38,212 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, 2001 and the results of operations for the nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000.
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 2000 Annual Report to Shareholders, which is incorporated by reference in the Company’s 2000 annual report on Form 10-K. The results of operations for the nine months ended September 30, 2001, and the results of interm periods persented 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 May, 2001.
2. INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
The amortized cost and approximate market value of investment securities at September 30, 2001 are as follows:
In thousands Gross Amortized Unrealized Market Cost Gain Value --------------------------- Held-to-maturity Obligations of State and Political Subdivisions .................... $ 9,540 $ 396 $ 9,936 Available-for-sale U.S. Treasury Securities .................... 1,004 9 1,013 U.S. Government Agencies ..................... 28,435 693 29,128 Taxable Obligations of State & Political Subdivisions ............. 21,414 768 22,182 Corporate Securities ........................ 6,415 106 6,521 ----------------------------- Total Available-for-sale .................... $57,268 $ 1,576 $58,844
The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2001.
In thousands Held-to-Maturity Available-for-Sale ------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ------------------------------------------- Within one year ................ $ 428 $ 437 $11,330 $11,471 After one, but within five, years ................. 8,948 9,328 41,340 42,690 Over five years ................ 164 171 4,598 4,683 ------------------------------------------- Total .......................... $ 9,540 $ 9,936 $57,268 $58,844
3. ALLOWANCE FOR CREDIT LOSSES
In Thousands For the Nine Months Ended September 30, 2001 2000 ----------------------------- Total loans outstanding at end of period, before deducting allowance for credit losses ........................ $ 273,835 $ 242,234 ---------------------------- Allowance for credit losses at beginning of period ..................... 5,042 4,466 Charge-offs ................................ (1,421) (178) Recoveries ................................. 165 76 ---------------------------- Net (charge-offs)/recoveries ............... (1,256) (102) Provisions ................................. 1,150 775 Allowance for credit losses at end of period ........................... $ 4,936 $ 5,139 ============================ Ratio of allowance for credit losses to loans 1.80% 2.12%
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, 2001 and 2000 are as follows:
2001 2000 ================================================================================ Unrealized gain(loss) arising during the period, net of tax ........................ $975 $228 -------------------------------------------------------------------------------- Reclassification adjustment for net realized gains on securities available-for-sale included in net income during the year, net of tax ................... 40 6 -------------------------------------------------------------------------------- Net unrealized gain(loss) included in other comprehensive income ........................ $935 $222 ================================================================================
5. BUSINESS SEGMENTS
The Corporation is principally engaged in community banking activities through its eight Bank branches. In addition to its community banking activities, the Corporation provides mortgage brokerage services through its joint venture, BWC Mortgage Services. These activities are monitored and reported by Corporation management as a separate operating segment. The separate banking offices have been aggregated into a single reportable segment, Community Banking.
The Corporation's community banking segment provides loans, leases and lines of credit to local businesses and individuals. This segment also derives revenue by investing funds that are not loaned to others in the form of loans, leases or lines of credit, into investment securities. The business purpose of BWC Mortgage Services is the origination and placement of long-term financing for real estate mortgages.
Summarized financial information for the years ended September 30, 2001 and 2000 concerning the Corporation's reportable segments is shown in the following table.
For the Nine Months Community Mortgage Ended 09/30/2001 Banking Services Adjustments Total -------------------------------------------------------------------------------- Total Interest Income ......... $ 23,693 $ 4 $ (9) $ 23,688 Commissions Received .......... -- 3,998 -- 3,997 Total Interest Expense ........ 6,986 4 (9) 6,981 Salaries & Benefits ........... 6,299 470 -- 6,769 Commissions Paid .............. -- 2,759 -- 2,759 Segment Profit before Tax ..... 6,086 910 (533) 6,463 Total Assets .................. $406,558 $ 326 $ (226) 406,658 -------------------------------------------------------------------------------- For the Nine Months Community Mortgage Ended 09/30/2000 Banking Services Adjustments Total -------------------------------------------------------------------------------- Total Interest Income ......... $ 23,359 $ 15 $ (10) $ 23,364 Commissions Received .......... -- 2,136 -- 2,136 Total Interest Expense ........ 6,501 23 (10) 6,514 Salaries & Benefits ........... 5,933 310 -- 6,243 Commissions Paid .............. -- 1,429 -- 1,429 Segment Profit before Tax ..... 7,351 374 (267) 7,458 Total Assets .................. $333,858 $ 355 $ (153) $334,060 -------------------------------------------------------------------------------- For the Three Months Community Mortgage Ended 09/30/2001 Banking Services Adjustments Total -------------------------------------------------------------------------------- Total Interest Income ......... $ 7,654 $ 1 $ (3) $ 7,652 Commissions Received .......... -- 1,370 -- 1,369 Total Interest Expense ........ 2,100 1 (3) 2,098 Salaries & Benefits ........... 1,878 161 -- 2,039 Commissions Paid .............. -- 968 -- 968 Segment Profit before Tax ..... 2,164 306 (160) 2,310 Total Assets .................. $406,558 $ 326 $ (226) $406,658 -------------------------------------------------------------------------------- For the Three Months Community Mortgage Ended 09/30/2000 Banking Services Adjustments Total -------------------------------------------------------------------------------- Total Interest Income ......... $ 8,372 $ 4 $ (3) $ 8,373 Commissions Received .......... -- 877 -- 877 Total Interest Expense ........ 2,395 5 (3) 2,397 Salaries & Benefits ........... 2,069 108 -- 2,177 Commissions Paid .............. -- 572 -- 572 Segment Profit before Tax ..... 2,604 185 (124) 2,665 Total Assets .................. $333,858 $ 355 $ (153) $334,060 --------------------------------------------------------------------------------
6. DERIVATIVES AND HEDGING ACTIVITIES
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. The Statement, as amended, 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 Corporation does not own any freestanding or imbedded derivatives.
The Corporation adopted SFAS 133 effective January 1, 2001. The implementation of this statement did not have a material impact on the Corporation’s financial position or results of operations.
7. SUBSEQUENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Standards Accounting Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combinations and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". SFAS No. 141 is effective for transactions initiated after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Corporation does not expect the adoption of this statement to have a material effect on its consolidated results of operations or financial position.
In June 2001, the Financial Standards Accounting Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations”. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Corporation is required to adopt the provisions of Statement No. 143 no later than the beginning of fiscal year 2003, with early adoption permitted. The Corporation does not expect the adoption of this statement to have a material effect on its consolidated results of operations or financial position.
In October 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 becomes effective for fiscal years beginning after December 15, 2001, with early applications encouraged. The Corporation does not expect the adoption of this statement to have a material effect on its consolidated results of operations or financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OF RESULTS OF OPERATIONS
General
Total assets of the Corporation at September 30, 2001 of $406,658,000 have increased $72,598,000 or 22% as compared to September 30, 2000. Total loans of $273,835,000 have increased $31,601,000 or 13%, and total deposits of $357,931,000 have increased $59,737,000 or 20%. Since year-end 2000 the Corporation’s assets have increased 16%, loans increased 9%, and deposits increased 16%.
The Corporation’s loan-to-deposit ratio as of September 30, 2001 was 77%, as compared to 81% in 2000.
Net Income
Net income for the first nine months in 2001 of $4,070,000 was $643,000 less than the first nine months in 2000. This represented a return on average assets during this period of 1.48% and a return on average equity of 15.06%. The return on average assets during the first nine months of 2000 was 1.97%, and the return on average equity was 20.39%.
Net income for the three months ending September 30, 2001 of $1,473,000 was $188,000 less than the comparable period in 2000. The return on average assets during the third quarter was 1.55%, and the return on average equity was 18.32%. The return on average assets during the third quarter of 2000 was 2.01%, and the return on average equity was 20.81%.
Earning assets averaged $344,948,000 during the nine months ended September 30, 2001, as compared to $298,273,000 for the comparable period in 2000. Earning assets averaged $359,479,000 during the third quarter of 2001 as compared to $308,815,000 during the third quarter of 2000.
Diluted earnings per average common share were $1.18 for the first nine months of 2001 as compared to $1.33 for the first nine months of 2000. For the third quarter of 2001, diluted earnings per average common share were $0.43 as compared to $0.47 for the third quarter of 2000.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans and deposits and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first nine months of 2001 was $16,707,000 or $143,000 less than the comparable period in 2000. This was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $46,678,000 more than during the first nine months of 2000. The prime lending rate decreased from 9.50% at the beginning of 2001 to 6.00% as of September 30, 2001, or a drop of 3.50%. The average prime rate for the first nine months of 2001 was 7.51% as compared to an average of 9.15% in 2000.
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 6.54% during the first nine months of 2001 as compared to 7.62% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $2,298,000 during the first nine months of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $2,155,000. The result was a net decrease in interest income of $143,000 during the first nine months of 2001 as compared to 2000.
During the third quarter 2001 the Corporation’s net interest margin averaged 6.21% as compared to 7.77% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $1,013,000 during the third quarter of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $591,000. The result was a net decrease in interest income of $422,000 during the third quarter of 2001 as compared to 2000.
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, 2001 was 1.80%, as compared to 2.12% for the period ending September 30, 2000. 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, 2001 the Corporation had fully allocated its reserves of $4,936,000. The Bank operates 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 products, coupled with the Bank’s traditionally strong construction concentration, support a strong allowance position.
The Corporation had net charge-offs of $1,256,000 during the first nine months of 2001 as compared to net charge-offs of $102,000 during the comparable period in 2000. During the second quarter of 2001 a charge was taken against the allowance of approximately $600,000 and in the third quarter a charge was taken in the amount of $325,000 related to two borrowers in the Corporation’s Asset-based Lending Department. A thorough review of all credits in this department has been completed, utilizing both internal and external credit analysts, and management believes all identified probable credit losses have been provided for.
The following table provides information on past-due and nonaccrual loans:
September 30, ----------------------------- 2001 2000 ----------------------------- Loans Past-due 90 Days or More $ 31,000 $ 12,000 Nonaccrual Loans 1,117,000 206,000 ----------------------------- Total $1,148,000 $ 218,000 =============================
As of September 30, 2001 and 2000, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2001 remains uncollected. Interest foregone on nonaccrual loans was approximately $318,000 and $13,000, as of September 30, 2001 and 2000 respectively.
Noninterest Income
Noninterest income during the first nine months of 2001 was $2,329,000 greater than during the comparable period of 2000. The increase in 2001 was primarily related to increased activity in the Corporation’s brokerage subsidiary, BWC Mortgage Services, which had total fee income of $4,646,000 during the first nine months of 2001 which was $2,066,000 greater than that earned during the comparable period in 2000. The increase in income is in large part a reflection of the decrease in interest rates during the current year and the corresponding increase in mortgages and refinancing activity.
There were gains on securities available-for-sale of $65,000 during the first nine months of 2001 whereas there was only $9,000 during the 2000 period. The gains in 2001 were the result of a large number of agency securities which were called by the issuing agencies due to the decline in rates and the ability of these agencies to reissue debt at lower rates.
During the third quarter of 2001 noninterest income from BWC Mortgage Services was $1,623,000 which was $607,000 greater than that earned during the comparable quarter of 2000. The same reasons given above for the nine-month results are applicable to the third quarter.
Noninterest Expense
Noninterest expense during the first nine months of 2001 was $2,538,000 greater than during the comparable period in 2000.
BWC Mortgage Services reflected an increase in noninterest expense of $1,188,000 during the respective periods, which is related to their increase in mortgage origination activity due in part to lower interest rates.
Salaries and related benefits were $526,000 greater during the first nine months of 2001, as compared to 2000. This increase is related to the growth of operations, general merit increases and provision for performance bonuses. As the year progresses, if performance goals are not met, bonus provisions may be reduced or reversed. The Bank’s staff averaged 120 full-time equivalent (FTE) persons during the first nine months of 2001 as compared to 114 FTE in 2000.
Occupancy expense increased $314,000 over the comparable period in 2000 in part due to the Bank’s new San Jose office, which was opened in March, 2001, and due to CPI and operating increases.
Total furniture and equipment expenses increased $132,000 as compared to the 2000 period, which is related in part to the addition of the San Jose office and additions and upgrades to the Bank’s information technology systems. The Bank has added a number of new systems this year which will improve both internal operations and customer service in the future. Included in these enhancements are the Bank’s internet banking and bill paying services, a new customer profitability analysis system, a new accounts platform automation system and a check imaging system. The Bank also plans to extend the check imaging service to its internet banking clients.
Other expenses reflect an increase of $378,000 between the respective periods. The Bank incurred an operating loss of approximately $100,000 during the second quarter of 2001 related to check fraud. The balance of the increase in other expenses is primarily related to the Corporation’s growth and expanded activities.
During the third quarter of 2001 the Corporation’s noninterest expense increased $449,000 over the comparable quarter of 2000. BWC Mortgage Services reflected an increase in noninterest expense of $245,000 during the comparable periods, and other Corporation noninterest expenses reflected an increase of $204,000. The reasons that were applicable for the first nine months apply to the third quarter results, particularly as related to the new San Jose office and the addition of technology systems.
Other Real Estate Owned
As of September 30, 2001 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 2001 and 2000. 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, 2001, December 31, 2000, and September 30, 2000.
Risk-based capital ratios: Capital Ratios Minimum September 30, December 31, September 30, Regulatory 2001 2000 2000 Requirements Tier 1 capital 11.54% 12.21% 10.81% 4.00% Total capital 12.79% 13.58% 12.06% 8.00% Leverage ratio 9.79% 10.66% 9.98% 3.00%
Liquidity
Liquidity is a key aspect in the overall fiscal health of a financial corporation. The primary source of liquidity for BWC Financial Corp. is its marketable securities and Federal Funds Sold. Cash, investment securities and other temporary investments represented 31% of total assets at September 30, 2001 and 26% at September 30, 2000. The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. Additionally, the Corporation has available from correspondent banks Federal Fund lines of credit totaling $15,000,000 and the ability to borrow, on a collateralized basis, from the Federal Home Loan Bank and the Federal Reserve Bank.
Interest-Rate Risk Management
Movement in interest rates can create fluctuations in the Corporation’s income and economic value due to an imbalance in the re-pricing or maturity of assets or liabilities. The components of interest-rate risk which are actively measured and managed include: re-pricing risk and the risk of non-parallel shifts in the yield curve. Interest-rate risk exposure is actively managed with the goal of minimizing the impact of interest-rate volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to re-pricing or maturity characteristics. Therefore, the Corporation uses a variety of measurement tools to monitor and control the overall interest-rate risk exposure of the on-balance-sheet positions. For each measurement tool, the level of interest-rate risk created by the assets and liabilities is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Corporation’s interest-rate risk as of September 30, 2001 was consistent with the interest-rate exposure presented in the Corporation’s 2000 annual report and was within the Corporation’s risk policy range.
Interest Rate Sensitivity
Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest rate sensitivity position of the Corporation as of September 30, 2001. In a rising interest rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. Management believes that the sensitivity ratios reflected in these schedules fall within acceptable ranges, and represent no undue interest rate risk to the future earnings prospects of the Corporation.
Repricing within: 3 3-6 12 1-5 Over 5 In thousands months months months years years Totals -------------------------------------------------------------------------------------------------------------------- Assets: Federal Funds Sold & Short-term Investments $ 38,799 $ - $ - $ - $ - $ 38,799 Investment securities 5,693 4,978 10,745 46,261 707 68,384 Construction & Real Estate Loans 115,146 13,892 1,404 1,506 5,800 137,748 Commercial Loans 72,034 2,362 2,390 1,544 134 78,464 Consumer Loans 43,915 126 181 421 -- 44,643 Leases 82 192 1,328 11,416 -- 13,018 ------------------------------------------------------------------------------ Interest-bearing assets $ 275,669 $ 21,550 $ 16,048 $ 61,148 $ 6,641 $ 381,056 ------------------------------------------------------------------------------ Liabilities: Money market accounts $ 114,919 $ 38,360 $ - $ - $ - $ 153,279 Time deposits <$100,000 9,213 9,394 10,682 1,797 1 31,087 Time deposits >$100,000 11,865 12,957 9,353 1,276 -- 35,451 ------------------------------------------------------------------------------ Interest-bearing liabilities $ 135,997 $ 60,711 $ 20,035 $ 3,073 $ 1 $ 219,817 ------------------------------------------------------------------------------ Rate-sensitive gap $ 139,672 $ (39,161) $ (3,987) $ 58,075 $ 6,640 $ 161,239 Cumulative rate-sensitive gap $ 139,672 $ 100,511 $ 96,524 $ 154,599 $ 161,239 ================================================================= Cumulative rate-sensitive ratio 2.03 1.51 1.45 1.70 1.73
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings The Corporation is a defendant in legal actions arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Corporation's financial position. Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Materially Important Events None Item 6 - Exhibits and Reports on Form 8-K On August 28, 2001 the Corporation terminated Arthur Andersen LLP as principal accountants and engaged Moss Adams LLP as principal accountants for fiscal year ending December 31, 2001. There were no disagreements with Arthur Andersen LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.
SIGNATURES
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 25, 2001 James L. Ryan --------------------------- --------------------------------- Date James L. Ryan Chairman and Chief Executive Officer October 25, 2001 Leland E. Wines ---------------------- -------------------------------- Date Leland E. Wines CFO and Corp. Secretary