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 Bank operate, competitive products and pricing, loan delinquency rates, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
General
Prime rate averaged 4.75% during the first half of 2002, compared to 7.98% for the first half of 2001, a decrease of 3.23% between the comparable periods. Due to the Corporation’s asset-sensitive position, low interest rates result in a narrowing of the Corporation’s net interest margin. Continued low interest rates and slow economic activity most probably will have an adverse effect on performance throughout 2002.
Total assets of the Corporation at June 30, 2002 of $409,032,000 have increased $38,366,000 or 10% as compared to June 30, 2001. Total loans of $275,293,000 have increased $5,139,000 or 2%, and total deposits of $351,741,000 have increased $26,865,000 or 8%. Since year-end 2001 the Corporation’s assets have increased 4%, loans decreased 2%, and deposits increased 3%.
The Corporation’s loan-to-deposit ratio as of June 30, 2002 was 78%, as compared to 83% in 2001.
Net Income
Net income for the first six months in 2002 of $2,142,000 was $455,000 less than the first six months in 2001. This represented a return on average assets during this period of 1.07% and a return on average equity of 11.14%. The return on average assets during the first six months of 2001 was 1.45%, and the return on average equity was 14.67%.
Net income for the three months ending June 30, 2002 of $1,061,000 was $53,000 less than the comparable period in 2001. The return on average assets during the second quarter was 1.06%, and the return on average equity was 10.97%. The return on average assets during the second quarter of 2001 was 1.23%, and the return on average equity was 12.48%.
Earning assets averaged $373,550,000 during the six months ended June 30, 2002, as compared to $337,682,000 for the comparable period in 2001. Earning assets averaged $374,510,000 during the second quarter of 2002 as compared to $341,441,000 during the second quarter of 2001.
Diluted earnings per average common share were $.59 for the first six months of 2002 as compared to $0.68 for the first six months of 2001. For the second quarter of 2002, diluted earnings per average common share were $0.29 as compared to $0.29 for the second quarter 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 and deposits and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first six months of 2002 was $10,221,000 or $932,000 less than the comparable period in 2001. This was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $35,868,000 more than during the first six months of 2001. The prime lending rate has held at 4.75% during the first six months of 2002 as compared to an average of 7.98% for the first six months of 2001.
Due to the Corporation’s asset-sensitive position, decreasing interest rates result in a decrease in the Corporation’s net interest margin. The Corporation’s net interest margin averaged 5.56% during the first six months of 2002 as compared to 6.71% in 2001. The decrease in net interest margin is estimated to have resulted in a decrease in interest income of $1,157,000 during the first six months of 2002 as compared to the same period in 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 $225,000.
During the second quarter 2002 the Corporation’s net interest margin averaged 5.38% as compared to 6.53% in 2001. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $536,000 during the second quarter of 2002 as compared to the same period in 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 $8,000. The result was a net decrease in interest income of $528,000 during the second quarter of 2002 as compared to 2001.
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 June 30, 2002 was 2.08%, as compared to 1.89% for the period ending June 30, 2001. 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 June 30, 2002 it had $3,499,000 in allocated allowance and $2,225,000 in unallocated allowance. The Corporation’s management believes that the amount of unallocated allowance is reasonable due to the growth of the Bank’s loan portfolio and the type of credit products that comprise the portfolio.
The Corporation had net losses of $279,000 during the first six months of 2002 as compared to net losses of $694,000 during the comparable period in 2001.
The following table provides information on past-due and nonaccrual loans:
June 30,
2002 2001
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Loans Past-due 90 Days or More $ 10,000 $ 30,000
Nonaccrual Loans 1,113,000 1,311,000
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Total $1,123,000 $1,341,000
As of June 30, 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 $428,000 and $252,000, as of June 30, 2002 and 2001 respectively.
Noninterest Income
Noninterest income during the first six months of 2002 was $630,000 greater than during the comparable period of 2001, primarily related to the activities of the Corporation’s mortgage subsidiary. The increase in their income is in part a reflection of the low interest rates during the current year and the corresponding strong market in mortgages and refinancing.
The other categories of noninterest income are comparable to the prior year and the Corporation’s growth.
There were gains on securities available-for-sale of $13,000 during the first six months of 2002 as compared to $65,000 during the comparable 2001 period. The greater 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 second quarter of 2002 noninterest income was $207,000 greater than in the comparable prior year period. Almost all this increase is related to the activities of the Corporation’s mortgage subsidiary.
Noninterest Expense
Noninterest expense during the first six months of 2002 was $552,000 greater than during the comparable period in 2001.
BWC Mortgage Services reflected an increase in noninterest expense of $305,000 during the respective periods, which is a reflection of the strength of the mortgage market and their increased activity in this market.
Salaries and related benefits were $114,000 less during the first six months of 2002 as compared to 2001. This decrease is related primarily to a reduction in general merit increases and provision for performance bonuses. The Bank’s staff averaged 119 full-time equivalent (FTE) persons during the first six months of 2002 and 2001.
Occupancy expense increased $118,000 over the comparable period in 2001 primarily related to the new 15 year master lease (February 2001), on our headquarters office in Walnut Creek, remodeling expenses to that office, a new lease on our Pleasanton office (July 2001) at current market rates (this had been under a sub-lease at below market rates), and due to CPI and operating increases.
Total furniture and equipment expenses decreased a modest $12,000 as compared to the 2001 period, related primarily to a reduction in maintenance and repair expenses between the respective periods.
Other expenses reflect an increase of $169,000 between the respective periods, which includes a check fraud loss taken in the first quarter of 2002 of approximately $200,000. During the second quarter of 2001, the Bank experienced a check fraud loss of approximately $100,000.
During the second quarter of 2002 the Corporation’s noninterest expense decreased $150,000 over the comparable quarter of 2001. Of this decrease, $100,000 is related to the check fraud loss mentioned above. The balance is related to the same reasons that were applicable for the six months results.
Other Real Estate Owned
As of June 30, 2002 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 June 30, for both 2002 and 2001. 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 June 30, 2002, December 31, 2001, and June 30, 2001.
Risk-based capital ratios: Capital Ratios
Minimum
June 30, December 31, June 30, Regulatory
2002 2001 2001 Requirements
Tier 1 capital 11.68% 11.65% 11.48% 4.00%
Total capital 12.93% 12.90% 12.73% 8.00%
Leverage ratio 9.66% 9.22% 9.86% 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 June 30, 2002 and 25% at June 30, 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 and the ability to borrow, on a collateralized basis, from the Federal Home Loan Bank.
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 June 30, 2002 was consistent with the interest-rate exposure presented in the Corporation’s 2001 annual report and was within the Corporation’s risk policy range.
Repricing within: 3 3-6 12 1-5 Over 5
In thousands Months Months Months Years Years Totals
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Assets:
Federal Funds Sold & Short-term
Investments $ 20,556 $ - $ - $ - $ - $ 20,556
Investment securities
9,804 10,990 13,552 42,148 8,854 85,348
Construction & Real Estate Loans
101,866 16,475 2,402 1,839 13,259 135,841
Commercial Loans
71,741 1,929 2,320 2,255 106 78,351
Consumer Loans
48,387 63 129 202 - 48,781
Leases
1,683 1,716 3,050 5,871 - 12,320
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Interest-bearing assets $ 254,037 $ 31,173 $ 21,453 $ 52,315 $ 22,219 $ 381,197
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Liabilities:
Money market accounts $ 77,891 $ 77,890 $ - $ - $ - $ 155,781
Time deposits <$100,000
10,447 6,275 8,197 2,810 - 27,729
Time deposits >$100,000
13,156 5,462 5,863 3,281 - 27,762
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Interest-bearing liabilities $ 101,494 $ 89,627 $ 14,060 $ 6,091 $ - $ 211,272
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Rate-sensitive gap $ 152,543 $ (58,454) $ 7,393 $ 46,224 $ 22,219 $ 169,925
Cumulative rate-sensitive gap $ 152,543 $ 94,089 $ 101,482 $ 147,706 $ 169,925
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Cumulative rate-sensitive ratio 2.50 1.49 1.49 1.70 1.80
Item 1 - Legal Proceedings
None
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
A 10% stock dividend was declared by the Corporation’s Board of Directors to shareholders of record July 15, 2002.
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
