Summarized financial information for the periods ended March 31, 2002 and 2001 concerning the Corporation's reportable segments is shown in the following table.
Forward-Looking Statements
Except for historical financial information contained herein, certain matters discussed in the Annual Report of BWC Financial Corp. constitute “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to BWC Financial Corp., Bank of Walnut Creek and BWC Real Estate, include, but are not limited to, those related to the economic environment, particularly in the areas in which the Company and the Banks operate, competitive products and pricing, loan delinquency rates, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
General
Prime rate averaged 8.62% during the first quarter of 2001, compared to 4.75% for the first quarter of 2002, a decrease of 3.87% between the comparable quarters. Due to the Corporation’s asset-sensitive position, low interest rates result in a narrowing of the Corporation’s net interest margin. Continued low interest rates and slower economic activity most probably will have an adverse affect on performance in 2002.
Total assets of the Corporation at March 31, 2002 of $397,994,000 increased $30,600,000, or 8%, as compared to March 31, 2001. Total loans of $278,763,000 at March 31, 2002 increased $18,296,000, or 7%, during the same period. Total deposits of $342,730,000 increased $20,091,000, or 6%, during the same period.
The Corporation’s loan-to-deposit ratio as of March 31, 2002 and 2001 was 81%.
Other short-term investments are investments in a mutual fund operated by Federated Funds Investments and are comprised of short-term US Treasury Securities. Investments are done on a daily basis and are similar in liquidity to Fed Funds Investments.
Net Income
Net income for the first three months in 2002 of $1,081,000 was down $402,000 from the first three months in 2001. This represented a return on average assets during the quarter of 1.09% as compared to 1.67% in 2001, and a return on average equity of 11.34% as compared to 16.87% in 2001. The reduction in rates of return is the result of the decreases in the prime rate that have been brought about by actions of the Federal Reserve. Since most of the Bank’s loans are indexed to the prime rate, decreases in this index will reduce the return on these assets to a greater extent than can be offset by reductions to interest-bearing deposits.
Earning assets averaged $372,590,000 during the first quarter of 2002, an increase of $38,666,000 from the comparable quarter of 2001. During this same period loans averaged $278,234,000, an increase of $21,433,000 over 2001, and deposits averaged $344,383,000, an increase of $31,076,000 over 2001.
Diluted earnings per average common share and common equivalent shares for the first three months of 2002 were $0.33, as compared to $0.43 for the first three months of 2001.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans, deposits, and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first three months of 2002 was $5,246,000, or $404,000 less than the comparable period in 2001. This decrease is the result of decreases in interest rates. If there had been no change in the volume of loans and deposits, net interest income would have decreased by $624,000. Because of the increase in volume of loans and deposits, this amount was reduced by $220,000.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated and is in accordance with SFAS 5. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate, the performance of borrowers, and other conditions to determine the adequacy of the allowance.
The ratio of the allowance for credit losses to total loans as of March 31, 2002, was 2.01% as compared to 2.09% for the period ending March 31, 2001. The Corporation’s ratios for both periods are considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. As of March 31, 2001 the Corporation had $4,555,000 in allocated reserves and $1,058,000 in unallocated reserves. The Corporation’s management believes that the amount of unallocated reserves is reasonable, due to the growth of the Bank’s loan portfolio and the type of credit products that comprise the portfolio.
The Corporation had net losses of $90,000 during the first quarter of 2002 as compared to net recoveries of $33,000 during the comparable period in 2001.
The following table provides information on past-due and nonaccrual loans:
For the Three Months Ended
March 31,
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2002 2001
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Loans Past Due 90 Days or More $ 37,000 $ 3,000
Nonaccrual Loans 1,365,000 2,050,000
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Total $1,402,000 $2,053,000
As of March 31, 2002 and 2001, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2002 remains uncollected. Interest foregone on nonaccrual loans was approximately $389,000 and $183,000 as of March 31, 2002 and 2001, respectively.
Noninterest Income
Noninterest income during the first quarter of 2002 was $423,000 more than during the comparable quarter of 2001. The increase is attributed to increases in almost all areas of noninterest income as compared to 2001. Gains on securities sold was the only category lower this year than last. Due to the sharply declining rates in 2001, many securities were being called for redemption, with resulting gains to the holders.
Noninterest Expense
Noninterest expense during the first quarter of 2002 was $702,000 greater than during the comparable quarter of 2001. The increase in 2002 was reflected in increases in BWC Mortgage Service commissions of $218,000. Other expenses of BWC Mortgage Services were $41,000 less than the prior year. Salaries, bonuses and benefits were down $7,000 from the prior year, due to reduced bonus provisions during the current period.
Occupancy expense was $117,000 greater during the first quarter of the current year as compared to the prior year. The Corporation opened a new banking office in San Jose in March last year, renegotiated a long-term contract on its headquarters office in Walnut Creek in February, and renewed the lease on its Pleasanton facility in July, which had been at favorable subsidized rates. The new higher rates on these facilities, as well as general operating and CPI-based increases, account for the increase in this expense category over the prior year.
Furniture and equipment expense was up only $6,000 from the prior year.
Other expenses of $1,357,000 was up $409,000 from the prior year. The largest increase in this category was in operational losses, which increased $270,000 over this period last year. The Corporation had one operational loss of over $200,000 taken in March of 2002. The first quarter increase in operating losses may not be reflective of the full year’s results. The balance of the increase in other operating expenses, as compared to last year, is related to the Corporation’s growth and the timing and extent of its various activities.
Other Real Estate Owned
As of March 31, 2002, the Corporation had no "other real-estate-owned" assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
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 March 31, 2002 was within the Corporation’s risk policy range and comparable to the interest rate exposure presented in the Corporation’s 2001 annual report, which was also within the Corporation’s risk policy range.
Capital Adequacy
In 1989, the Federal Deposit Insurance Corporation (FDIC) established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital also includes the eligible allowance for loan losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 4% and 8% at March 31 for both 2002 and 2001. The FDIC also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by the quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3% for the highest-rated banks.
The following table shows the Corporation’s risk-based capital ratios and leverage ratio as of March 31, 2002, December 31, 2001, and March 31, 2001.
Risk-based capital ratios: Capital Ratios
Minimum
Current guidelines March 31, December 31, March 31, regulatory
2002 2001 2001 requirements
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Tier 1 capital 11.54% 11.65% 11.47% 4.00%
Total capital 12.79% 12.90% 12.73% 8.00%
Leverage ratio 9.44% 9.22% 9.90% 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 investment securities and Federal Funds Sold. Cash, investment securities, and other temporary investments represented 29% of total assets at March 31, 2002 and 28% at March 31, 2001. The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. Additionally, the Corporation has available from correspondent banks Federal Fund lines of credit totaling $15,000,000 plus secured borrowing lines available at the Federal Home Loan Bank and at the Federal Reserve Bank.
Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest rate sensitivity position of the Corporation as of March 31, 2002. In a rising interest rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. Management believes that the sensitivity ratios reflected in these schedules fall within acceptable ranges, and represent no undue interest rate risk to the future earnings prospects of the Corporation.
Repricing within: 3 3-6 12 1-5 Over 5
In thousands Months Months Months Years Years Totals
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Assets:
Federal Funds Sold & Short-term
Investments ................. $ 13,081 $ -- $ -- $ -- $ -- $ 13,081
Investment securities .......... 9,198 8,530 18,729 40,497 3,006 79,960
Construction & Real Estate Loans 107,353 12,917 2,315 1,647 12,294 136,526
Commercial Loans ............... 75,652 2,257 2,772 2,200 93 82,974
Consumer Loans ................. 46,674 69 127 268 -- 47,138
Leases ......................... 1,876 1,773 3,033 5,443 -- 12,125
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Interest-bearing assets ........ $253,834 $ 25,546 $ 26,976 $ 50,055 $ 15,393 $371,804
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Liabilities:
Money market accounts .......... $ 76,075 $ 76,074 $ -- $ -- $ -- $152,149
Time deposits <$100,000 ........ 12,245 8,308 5,988 1,565 85 28,191
Time deposits >$100,000 ........ 13,046 10,273 4,413 2,129 $ -- 29,861
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Interest-bearing liabilities ... $101,366 $ 94,655 $ 10,401 $ 3,694 $ 85 $210,201
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Rate-sensitive gap ............. $152,468 $(69,109) $ 16,575 $ 46,361 $ 15,308 $161,603
Cumulative rate-sensitive gap .. $152,468 $ 83,359 $ 99,934 $146,295 $161,603
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Cumulative rate-sensitive ratio 2.50 1.43 1.48 1.70 1.77
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
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)
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Date James L. Ryan
Chairman and Chief Executive Officer
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Date Leland E. Wines
CFO and Corp. Secretary
