UNITED STATES 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, 1997. Commission File Number 0-10658 BWC FINANCIAL CORP. (Exact name of registrant as specified in its charter) CALIFORNIA 94-262100 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1400 Civic Drive, Walnut Creek, California _ 94596 __ (Address of principal executive offices) (510) 932-5353 (Registrant's telephone number: (including area code) 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, 1997, there were 1,004,343 shares of common stock, no par value outstanding. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE Item 1 Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6-7 Item 2 Management's Discussion and Analysis of Results of Operations 8-11 	 Interest Rate Sensitivity Table 12 PART II - OTHER INFORMATION Item 1 Legal Proceedings 13 Item 2 Changes in Securities 13 Item 3 Defaults Upon Senior Securities 13 Item 4 Submission of Matters to a Vote of Security Holders 13 Item 5 Other Materially Important Events 13 Item 6 Exhibits and Reports on Form 8-K 13 Signatures 14 BWC FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS September 30, December 31, ASSETS 1997 1996 (Unaudited) Cash and Due From Banks $18,446,000 $15,383,000 Federal Funds Sold 4,000,000 -- Other Short Term Investments 136,000 26,000 Total Cash and Cash Equivalents 22,582,000 15,409,000 Investment Securities: Available for Sale 34,110,000 10,399,000 Held to Maturity (approximate market value of $7,367,000 in 1997 and $8,765,000 in 1996) 7,310,000 8,726,000 Loans, Net of Allowance for Credit Losses of $2,592,000 in 1997 and $1,893,000 in 1996. 149,614,000 138,878,000 Bank Premises and Equipment, Net 1,410,000 1,522,000 Interest Receivable and Other Assets 3,208,000 2,439,000 $218,234,000 $177,373,000 Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $52,019,000 $41,766,000 Interest-bearing: Money Market Accounts 41,755,000 29,561,000 Savings and NOW Accounts 27,424,000 25,189,000 Time Deposits: Under $100,000 40,489,000 34,167,000 $100,000 or more 35,698,000 25,208,000 Total Interest-bearing 145,366,000 114,125,000 Total Deposits 197,385,000 155,891,000 Federal Funds Purchased -- 3,600,000 Interest Payable and Other Liabilities 2,298,000 1,472,000 Total Liabilities 199,683,000 160,963,000 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 - 1,121,280 shares in 1997 and 1,016,598 in 1996. 14,685,000 12,172,000 Retained Earnings 3,772,000 4,231,000 Capital adjustment on available-for-sale securities 94,000 7,000 Total Shareholders' Equity 18,551,000 16,410,000 Total Liabilities and Shareholders' Equity $218,234,000 $177,373,000 <FN> The accompanying notes are an integral part of these consolidated statements. </FN> BWC FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) (Unaudited) (Unaudited) INTEREST INCOME Loans, Including Fees $4,196,000 $2,960,000 $11,702,000 $8,262,000 Investment Securities: Taxable 449,000 243,000 853,000 802,000 Non-taxable 95,000 122,000 301,000 384,000 Federal Funds Sold 114,000 13,000 302,000 83,000 Other Short Term Investments 15,000 0 39,000 7,000 Total Interest Income 4,869,000 3,338,000 13,197,000 9,538,000 INTEREST EXPENSE Deposits 1,591,000 881,000 4,170,000 2,631,000 Federal Funds Purchased -- 7,000 3,000 16,000 Total Interest Expense 1,591,000 888,000 4,173,000 2,647,000 NET INTEREST INCOME 3,278,000 2,450,000 9,024,000 6,891,000 PROVISION FOR CREDIT LOSSES 300,000 200,000 825,000 500,000 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 2,978,000 2,250,000 8,199,000 6,391,000 NONINTEREST INCOME Service Charges on Deposit Accounts 191,000 162,000 565,000 472,000 Other 210,000 168,000 621,000 532,000 Total Noninterest Income 401,000 330,000 1,186,000 1,004,000 NONINTEREST EXPENSE Salaries and Related Benefits 1,201,000 962,000 3,480,000 2,770,000 Occupancy 205,000 197,000 603,000 572,000 Furniture and Equipment 142,000 119,000 398,000 397,000 Other 558,000 562,000 1,696,000 1,570,000 Total Noninterest Expense 2,106,000 1,840,000 6,177,000 5,309,000 INCOME BEFORE INCOME TAXES 1,273,000 740,000 3,208,000 2,086,000 Provision for Income Taxes 464,000 260,000 1,140,000 658,000 NET INCOME $809,000 $480,000 $2,068,000 $1,428,000 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $0.63 $0.38 $1.61 $1.14 Average common and common equivalent shares 1,287,997 1,268,849 1,283,567 1,247,455 <FN> The accompanying notes are an intergral part of these consolidated statements. </FN> BWC FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 1996 (Unaudited) (Unaudited) OPERATING ACTIVITIES: Net Income $2,068,000 $1,428,000 Adjustments to reconcile net income to net cash provided(used): Amortization of loan fees (966,000) 640,000 Provision for possible credit losses 825,000 500,000 Depreciation and amortization 292,000 244,000 Gain on sale of securities available for sale 3,000 21,000 Increase in accrued interest receivable and other assets (769,000) (111,000) Increase in accrued interest payable and other liabilities 826,000 319,000 Net Cash Provided(Used) by Operating Activities 2,279,000 3,041,000 INVESTING ACTIVITIES: Proceeds from maturities of investment securities 4,775,000 1,930,000 Proceeds from the sales of investment securities -- 16,417,000 Purchase of investment securities (26,987,000) (5,216,000) Loans originated, net of collections (10,594,000) (18,271,000) Purchase of bank premises and equipment (180,000) (315,000) Net Cash Used by Investing Activities (32,986,000) (5,455,000) FINANCING ACTIVITIES: Net increase(decrease) in deposits 41,494,000 (810,000) Decrease in Fed Funds Purchases (3,600,000) -- Proceeds from issuance of common stock 29,000 -- Cash paid for the repurchase of common stock (37,000) (463,000) Cash paid in lieu of fractional shares (5,000) (5,000) Net Cash Provided(Used) by Financing Activities 37,881,000 (1,278,000) CASH AND CASH EQUIVALENTS: Increase(decrease)in cash and cash equivalents 7,174,000 (3,692,000) Cash and cash equivalents at beginning of year 15,409,000 12,617,000 Cash and Cash Equivalents at period end $22,583,000 $8,925,000 ADDITIONAL CASH FLOW INFORMATION: Interest Paid $3,423,000 $2,568,000 Income Taxes Paid $1,435,000 $412,000 <FN> The accompanying notes are an integral part of these consolidated statements. </FN> 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, 1997 and the results of operations for the nine months ended September 30, 1997 and 1996 and cash flows for the nine months ended September 30, 1997 and 1996. 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 1996 Annual Report to Shareholders, which is incorporated by reference in the Company's 1996 annual report on Form 10-K. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the operating results for the full year. Net income per common and common equivalent share is computed using the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of stock options and stock dividends. 2.	INVESTMENT SECURITIES AND OTHER SHORT TERM INVESTMENTS The amortized cost and approximate market value of investment securities at September 30, 1997 are as follows: Gross Amortized Unrealized Market Cost Gain(Loss) Value Held-to-maturity Obligations of State and Political Subdivisions $ 7,310,000 $ 57,000 $ 7,367,000 Available-for-sale Taxable Obligations of State & Political Subdivisions $ 5,425,000 $ 15,000 $ 5,440,000 Available-for-sale U.S. Treasury Securities $11,064,000 $ 64,000 $11,128,000 Available-for-sale U.S. Government Agencies $17,479,000 $ 63,000 $17,542,000 For the nine months ended September 30, 1997, the Bank did not sell any investment securities. <PAGE The following table shows the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 1997. Held-to-Maturity Available-for-Sale Amortized Market Amortized Market Cost Value Cost Value Within one year $ 1,203,000 $1,207,000 $ 9,324,000 $ 9,338,000 After one but within five years $ 6,107,000 $6,160,000 $20,318,000 $20,430,000 Over five years $ -- $ -- $ 4,326,000 $ 4,342,000 3.	ALLOWANCE FOR CREDIT LOSSES For the Nine months Ended September 30, 1997 1996 Allowance for credit losses at beginning of period $1,893,000 $1,529,000 Chargeoffs (179,000) (45,000) Recoveries 53,000 28,000 Net chargeoffs (126,000) (17,000) Provisions 825,000 500,000 Allowance for credit losses at end of period $2,592,000 $2,012,000 	 Ratio of allowance for credit losses to loans 1.70% 1.67% MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Net Income Net income for the first nine months in 1997 of $2,068,000 was $640,000 greater than the first nine months in 1996. This represented a return on average assets during this period of 1.42%, and a return on average equity of 15.87%. The return on average assets during the first nine months of 1996 was 1.28%, and the return on average equity was 12.49%. Net income for the three months ending September 30, 1997, of $809,000, was $329,000 over the comparable period in 1996. The return on average assets during the third quarter was 1.53%, and the return on average equity was 17.88%. The return on average assets during the third quarter of 1996 was 1.28%, and the return on average equity was 12.30%. Earning assets averaged $180,670,000 during the nine months ended September 30, 1997, as compared to $136,836,000 for the comparable period in 1996. Earning assets averaged $197,564,000 during the third quarter of 1997 as compared to $140,193,000 during the third quarter of 1996. Earnings per average common and common equivalent shares, adjusted for the 10% stock dividend declared March 31, 1997 (this includes any dilutive effect of unexercised options outstanding), was $1.61 for the first nine months of 1997 as compared to $1.14 for the first nine months of 1996. For the third quarter of 1997, earnings per average common and common equivalent shares was $0.63 as compared to $0.38 for the third quarter of 1996. 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 1997 was $9,024,000, or $2,133,000 greater than the comparable period in 1996. This increase was primarily the result of an increase in the volume of loans outstanding during the 1997 period as compared to 1996. Of this increase 96% was the result of increased volume and only 4% to an increase in the net interest rate spread. Net interest income during the three months ended September 30, 1997 was $3,278,000, or $828,000 greater than the comparable period in 1996. As with the nine months result, the change is related to volume increases rather than net interest margin changes. Of the increase, 95% was related to volume and 5% to rates. <PAGE 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, 1997, was 1.70% as compared to 1.67% for the period ending September 30, 1996. This reflects a conservative attitude on the part of management and is considered adequate to provide for potential future losses. The Corporation had net loan losses of $126,000 during the first nine months of 1997, as compared to a net loss of $17,000 during the comparable period in 1996. The following table provides information on past due and nonaccrual loans: For the Nine months Ended September 30, 1997 1996 Loans Past Due 90 Days or More $ 0 $ 1,000 Nonaccrual Loans 296,000 89,000 Total $ 296,000 $ 90,000 As of September 30, 1997 and 1996, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 1997 remains uncollected. Interest foregone on nonaccrual loans was approximately $30,000 and $19,000 as of September 30, 1997 and 1996 respectively. Noninterest Income Noninterest income during the first nine months of 1997 of $1,186,000 was $182,000 greater than earned during the comparable period of 1996. This was reflected in increases in most areas of noninterest income and fees, and is commensurate with the Corporation's growth. During the third quarter of 1997, noninterest income of $401,000 was $71,000 greater than earned during the comparable quarter of 1996. The same reasons applicable for the first nine months apply to the third quarter results. Noninterest Expense Total noninterest expenses of $6,177,000 during the first nine months of 1997 are $868,000 over the comparable period in 1996. The major categories of this are detailed below. Salaries and related benefits are $710,000 greater during the first nine months of 1997 as compared to 1996. This increase is related to award bonuses paid to staff and officers, plus staffing increases and general merit increases related to the Corporation's growth and expanding operations. Staff FTE (full time equivalency) averaged 80.5 during the first nine months of 1997 as compared to 69.8 for the comparable 1996 period. Occupancy expense increased $31,000 during the respective periods due to the Corporation's new Fremont office, plus rental adjustments and operating expense increases on other office facilities. Total furniture and equipment expense were essentially the same between the respective periods. Other expense increased $126,000 between the respective periods and is related to general increases in growth and activity. During the third quarter of 1997, the Corporation had a total of $2,106,000 in noninterest expense which was $266,000 over the comparable quarter of 1996. This increase was primarily attributed to increases in salary and related benefits expenses for the same reasons as given above regarding the increase in the nine month operating results. Other Real Estate Owned As of September 30, 1997, 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 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 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 1997 and 1996. At year-end 1990, 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 September 30, 1997, December 31, 1996, and September 30, 1996. Risk-based capital ratios: Capital Ratios Minimum September 30, December 31, September 30, regulatory 1997 1996 1996 requirements Tier 1 capital 10.51% 10.42% 12.08% 4.00% Total capital 11.76% 11.67% 13.34% 8.00% Leverage ratio 8.28% 9.35% 9.95% 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 29% of total assets at September 30, 1997, and 19% at September 30, 1996. 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 $13,000,000. General Total assets of the Corporation at September 30, 1997 of $218,234,000 have increased $67,161,000, or 44% as compared to September 30, 1996. Total loans of $152,206,000 have increased $32,009,000, or 27%, and total deposits of $197,385,000 have increased $63,594,000 or 48%. The Corporation's loan to deposit ratio as of September 30, 1997 and 1996 was 77% and 89% respectively. INTEREST RATE SENSITIVITY (in thousands except share and per share data) <FN> 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, 1997. 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. </FN> Interest Rate Sensitivity 3 3-6 12 1-5 Over 5 Repricing within: months months months years years Totals September 30, 1997 ASSETS: Federal funds sold $4,000 $0 $0 $0 $0 $4,000 Investment securities $2,302 $1,008 $3,209 $27,571 $7,466 $41,556 Construction & real estate loans $56,592 $9,887 $4,841 $242 $658 $72,220 Commercial loans $44,087 $2,999 $1,423 $726 $36 $49,271 Consumer loans $25,955 $452 $850 $3,416 $42 $30,715 Real estate mortgages Interest-bearing assets $132,936 $14,346 $10,323 $31,955 $8,202 $197,762 Savings and Now accounts $27,424 $0 $0 $0 $0 $27,424 Money market accounts $41,755 $0 $0 $0 $0 $41,755 Time deposits <$100,000 $20,008 $7,246 $11,573 $1,662 $0 $40,489 Time deposits >$100,000 $21,697 $9,801 $3,293 $907 $0 $35,698 Interest-bearing liabilities $110,884 $17,047 $14,866 $2,569 $0 $145,366 Rate sensitive gap $22,052 ($2,701) ($4,543) $29,386 $8,202 $52,396 Cumulative rate sensitive gap $22,052 $19,351 $14,808 $44,194 $52,396 $104,792 Cumulative position to average earning assets 11.15% 9.78% 7.49% 22.35% 26.49% PART II - OTHER INFORMATION 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 	None Item 6 - Exhibits and Reports on Form 8-K 	None 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 27, 1997					James L. Ryan ___________________________ _________________________________ Date James L. Ryan Chairman and Chief Executive Officer October 27, 1997					Leland E. Wines ______________________ ________________________________ Date Leland E. Wines CFO and Corp. Secretary