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 June 30, 1999.
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)
(925) 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 June 30, 1999, there
were 2,587,299 shares of common stock, no par value outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Changes in
Shareholders' Equity 6
Notes to Consolidated Financial Statements 7-10
Item 2 Management's Discussion and Analysis
of Results of Operations 11-19
Interest Rate Sensitivity 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of
Security Holders 21
Item 5 Other Materially Important Events 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
(Unaudited)
Cash and Due From Banks $14,714,000 $14,345,000
Federal Funds Sold 7,154,000 2,300,000
Other Short Term Investments 4,221,000 35,000
Total Cash and Cash Equivalents 26,089,000 16,680,000
Investment Securities:
Available for Sale 46,505,000 45,655,000
Held to Maturity (approximate market value
of $12,573,000 in 1999 and $13,797,000 in 1998) 12,629,000 13,592,000
Loans, Net of Allowance for Credit Losses of $4,256,000
in 1999 and $3,919,000 in 1998. 185,514,000 183,058,000
Real Estate Loans Held for Sale 376,000 --
Bank Premises and Equipment, Net 1,429,000 1,303,000
Interest Receivable and Other Assets 5,039,000 4,611,000
$277,581,000 $264,899,000
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $75,013,000 $69,783,000
Interest-bearing:
Money Market Accounts 82,700,000 64,687,000
Savings and NOW Accounts 35,488,000 37,139,000
Time Deposits:
Under $100,000 31,972,000 34,293,000
$100,000 or more 23,099,000 32,238,000
Total Interest-bearing 173,259,000 168,357,000
Total Deposits 248,272,000 238,140,000
BWC Mort.Serv. Line-of-Credit 376,000 --
Interest Payable and Other Liabilities 2,335,000 2,416,000
Total Liabilities 250,983,000 240,556,000
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 -
2,587,299 shares in 1999 and 2,511,151 in 1998. 19,442,000 19,002,000
Retained Earnings 7,367,000 5,006,000
Capital adjustment on available-for-sale securities (211,000) 335,000
Total Shareholders' Equity 26,598,000 24,343,000
Total Liabilities and Shareholders' Equity $277,581,000 $264,899,000
<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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Loans, Including Fees $5,012,000 $4,452,000 $9,864,000 $8,820,000
Investment Securities:
Taxable 633,000 603,000 1,284,000 1,089,000
Non-taxable 140,000 111,000 288,000 213,000
Federal Funds Sold 100,000 117,000 175,000 214,000
Other Short Term Investments 81,000 53,000 89,000 69,000
Total Interest Income 5,966,000 5,336,000 11,700,000 10,405,000
INTEREST EXPENSE
Deposits 1,602,000 1,680,000 3,144,000 3,260,000
Federal Funds Purchased -- -- 5,000 --
Total Interest Expense 1,602,000 1,680,000 3,149,000 3,260,000
NET INTEREST INCOME 4,364,000 3,656,000 8,552,000 7,145,000
PROVISION FOR CREDIT LOSSES 150,000 225,000 300,000 375,000
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 4,214,000 3,431,000 8,252,000 6,770,000
NONINTEREST INCOME
BWC Mortgage Services - Commissions 969,000 853,000 1,872,000 1,575,000
BWC Mortgage Services - Fees & Other 277,000 87,000 510,000 170,000
Service Charges on Deposit Accounts 182,000 206,000 388,000 396,000
Fees 188,000 169,000 376,000 296,000
Other Income 155,000 23,000 187,000 75,000
Investment Securities Gains (losses), Net -- 4,000 30,000 31,000
Total Noninterest Income 1,771,000 1,342,000 3,363,000 2,543,000
NONINTEREST EXPENSE
Salaries and Related Benefits 1,623,000 1,309,000 3,278,000 2,579,000
BWC Mortgage Services - Commissions 743,000 466,000 1,268,000 882,000
BWC Mortgage Services - Fees & Other 246,000 170,000 599,000 331,000
Occupancy 230,000 205,000 444,000 413,000
Furniture and Equipment 147,000 141,000 267,000 285,000
Other 834,000 745,000 1,643,000 1,395,000
Total Noninterest Expense 3,823,000 3,036,000 7,499,000 5,885,000
BWC Mortgage Services - Minority Interest 130,000 152,000 260,000 266,000
INCOME BEFORE INCOME TAXES 2,032,000 1,585,000 3,856,000 3,162,000
Provision for Income Taxes 790,000 611,000 1,494,000 1,222,000
NET INCOME $1,242,000 $974,000 $2,362,000 $1,940,000
Basic Earnings Per Share $0.48 $0.39 $0.93 $0.78
Diluted Earnings Per Share $0.42 $0.33 $0.80 $0.66
Average Basic Shares 2,587,299 2,482,315 2,550,549 2,485,983
Average Diluted Share Equivalents Related to Options 390,409 450,462 415,941 433,623
Average Diluted Shares 2,977,708 2,932,777 2,966,490 2,919,606
<FN>
The accompanying notes are an intergral part of these consolidated statements.
</FN>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
1999 1998
OPERATING ACTIVITIES:
Net Income $2,362,000 $1,940,000
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (940,000) (722,000)
Provision for credit losses 300,000 375,000
Depreciation and amortization 189,000 198,000
Gain on sale of securities available for sale (30,000) (31,000)
Increase in accrued interest receivable
and other assets (428,000) (1,015,000)
Increase/(decrease) in accrued interest payable
and other liabilities (80,000) 83,000
Net Cash Provided(Used) by Operating Activities 1,373,000 828,000
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 2,979,000 1,100,000
Proceeds from the sales of available-for-sale investment securities 10,556,000 8,780,000
Purchase of investment securities (13,940,000) (20,716,000)
Loans originated, net of collections (1,816,000) (2,524,000)
Purchase of bank premises and equipment (314,000) (126,000)
Net Cash Used by Investing Activities (2,535,000) (13,486,000)
FINANCING ACTIVITIES:
Net increase in deposits 10,131,000 21,269,000
Proceeds from issuance of common stock 440,000 189,000
Cash paid in lieu of fractional shares -- (7,000)
Net Cash Provided(Used) by Financing Activities 10,571,000 21,451,000
CASH AND CASH EQUIVALENTS:
Increase(decrease)in cash and cash equivalents 9,409,000 8,793,000
Cash and cash equivalents at beginning of year 16,680,000 22,143,000
Cash and Cash Equivalents at period end $26,089,000 $30,936,000
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $3,205,000 $3,225,000
Income Taxes Paid $1,078,000 $700,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the periods ending December 31, 1998, and June 30, 1999 Accumulated
other
Number Common Retained Comprehensive Comprehensive
of Shares Stock Earnings Income Total Income
Balance, January 1, 1998 1,233,051 $18,603,000 $706,000 $139,000 $19,448,000
Net Income for 1998 -- -- 4,228,000 -- 4,228,000 4,228,000
Other Comprehensive Income, net of tax
liability of $134,000 -- -- -- 196,000 196,000 196,000
Comprehensive Income -- -- -- -- -- $4,424,000
Two for one Stock Split 1,248,832 -- -- --
Stock Options Exercised at $3.50 to $5.59 per share 15,741 57,000 -- -- 57,000
Common Stock Issued and sold to the
Defined Contribution Plan at $24.06 per share 16,527 398,000 -- -- 398,000
Repurchase and retirement of shares by the
Corporation at $18.25 to $19.00 per share (3,000) (56,000) -- -- (56,000)
Adjustment for tax benefit resulting from the exercises
of incentive stock options. -- -- 72,000 -- 72,000
Balance, December 31, 1998 2,511,151 19,002,000 5,006,000 335,000 24,343,000
Net Income as of June 30, 1999 -- -- 2,362,000 -- 2,362,000 2,362,000
Other Comprehensive Income(Loss), net of tax
benefit of $335,000 -- -- -- (546,000) (546,000) (546,000)
Comprehensive Income -- -- -- -- -- $1,816,000
Common Stock Issued and sold to the
Defined Contribution Plan at $20.44 per share 11,728 240,000 -- -- 239,000
Stock Options Exercised at $3.10 per share 64,420 200,000 -- -- 200,000
Balance, June 30, 1999 2,587,299 $19,442,000 $7,368,000 ($211,000) $26,598,000
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
June 30, 1999 and the results of operations for the six months ended June 30,
1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998.
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 1998 Annual Report to Shareholders, which is incorporated by
reference in the Company's 1998 annual report on Form 10-K. The results of
operations for the six months ended June 30, 1999 are not necessarily
indicative of the operating results for the full year.
Diluted earnings per share is computed using the weighted average number
of shares outstanding during the period, adjusted for the dilutive effect of
stock options, stock dividends and the stock splits.
2. INVESTMENT SECURITIES AND OTHER SHORT TERM INVESTMENTS
The amortized cost and approximate market value of investment securities
at June 30, 1999 are as follows:
Gross
Amortized Unrealized Market
Cost Gain/(Loss) Value
Held-to-maturity
Obligations of State and
Political Subdivisions $12,629,000 $ (56,000) $12,573,000
Available-for-sale
Taxable Obligations of
State & Political
Subdivisions $10,146,000 $(40,000) $10,106,000
U.S. Treasury Securities 12,596,000 (7,000) 12,589,000
U.S. Government Agencies 17,832,000 (213,000) 17,619,000
U.S. Government Agencies
Preferred Stock 1,652,000 45,000 1,697,000
Corporate Securities 4,620,000 (126,000) 4,494,000
Total Available-for-sale $46,846,000 $(341,000) $46,505,000
The following table shows the amortized cost and estimated market value
of investment securities by contractual maturity at June 30, 1999.
Held-to-Maturity Available-for-Sale
Amortized Market Amortized Market
Cost Value Cost Value
Within one year $ 1,448,000 $1,451,000 $ 9,774,000 $ 9,770,000
After one but within
five years $ 5,169,000 $5,188,000 $26,038,000 $25,814,000
Over five years $ 6,012,000 $5,934,000 $11,034,000 $10,921,000
Total $12,629,000 $12,573,000 $46,846,000 $46,505,000
3. ALLOWANCE FOR CREDIT LOSSES
For the Six months Ended
June 30,
1999 1998
Allowance for credit losses at
beginning of period $3,919,000 $2,936,000
Chargeoffs 39,000 53,000
Recoveries (76,000) (201,000)
Net (recoveries)/chargeoffs (37,000) (148,000)
Provisions 300,000 375,000
Allowance for credit losses at
end of period $4,256,000 $3,460,000
Ratio of allowance for credit
losses to loans 2.24% 2.07%
4. COMPREHENSIVE INCOME
The Bank has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), as of January 1, 1998. This
statement established standards for the reporting and display of comprehensive
income and its components in the financial statements. For the Bank,
comprehensive income includes net income reported on the statements of income
and changes in the fair value of its available-for-sale investments reported
as a component of shareholders' equity.
The Corporation's comprehensive income for the period is reflected in the
following table:
For the Six months For the Three months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Net Income $2,362,000 $1,940,000 $1,242,000 $ 974,000
Other Comprehensive Income,
net of tax:
Adjustment for available-
for-sale securities (547,000) 73,000 (402,000) 48,000
Total Comprehensive Income $1,815,000 $2,013,000 $ 840,000 $1,022,000
5. FASB 131 DISCLOSURE
The Corporation adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131) as of January 1, 1998. This statement establishes standards for the
reporting and display of information about operating segments in financial
statements and related disclosures.
The Corporation is principally engaged in community banking activities through
its seven Bank branches. In addition to its community banking activities, the
Corporation provides mortgage brokerage services through its joint venture,
BWC Mortgage Services. These activities are monitored and reported by
Corporation management as a separate operating segment. As permitted under
the Statement, the separate banking offices have been aggregated into a single
reportable segment, Community Banking.
The Corporation's community banking segment provides loans, leases, SBA loan
products, asset based lending services and lines of credit to local businesses
and individuals. This segment also derives revenue by investing funds, that
are not loaned to others in the form of loans, leases or lines of credits,
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 period ending June 30, 1999, and 1998
concerning the Corporation's reportable segments is shown in the following
table.
For the Six Months, Community Mortgage
Ended 06/30/1999 Banking Services Adjustments Total
Total Interest Income $11,700,000 $11,700,000
Commissions Received $1,872,000 1,872,000
Total Interest Expense 3,149,000 3,149,000
Salaries & Benefits 3,278,000 3,278,000
Commissions Paid 1,268,000 1,268,000
Segment Profit before Tax 3,622,000 515,000 ($281,000) 3,856,000
Total Assets $277,266,000 $833,000 ($518,000) $277,581,000
For the Six Months, Community Mortgage
Ended 06/30/1998 Banking Services Adjustments Total
Total Interest Income $10,405,000 $10,405,000
Commissions Received $1,575,000 1,575,000
Total Interest Expense 3,260,000 3,260,000
Salaries & Benefits 2,579,000 2,579,000
Commissions Paid 882,000 882,000
Segment Profit before Tax 2,912,000 532,000 ($282,000) 3,162,000
Total Assets $262,443,000 $209,000 ($10,125,000) $252,527,000
For the Three Months, Community Mortgage
Ended 06/30/1999 Banking Services Adjustments Total
Total Interest Income $5,966,000 $5,966,000
Commissions Received $968,000 968,000
Total Interest Expense 1,602,000 1,602,000
Salaries & Benefits 3,278,000 3,278,000
Commissions Paid 743,000 743,000
Segment Profit before Tax 1,911,000 257,000 1,688,000 3,856,000
Total Assets $277,266,000 $833,000 ($518,000) $277,581,000
For the Three Months, Community Mortgage
Ended 06/30/1998 Banking Services Adjustments Total
Total Interest Income $5,336,000 $5,336,000
Commissions Received $853,000 853,000
Total Interest Expense 1,680,000 1,680,000
Salaries & Benefits 1,309,000 1,309,000
Commissions Paid 467,000 467,000
Segment Profit before Tax 2,912,000 303,000 ($53,000) 3,162,000
Total Assets $252,443,000 $209,000 ($125,000) $252,527,000
6. SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the Corporation's
election, before January 1, 1998).
The Corporation has no derivative or hedged instruments and therefore the
implementation of this statement is not expected to have a material impact on
the Corporation's financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
General
Total assets of the Corporation at June 30, 1999 of $277,581,000 have
increased $25,054,000 or 10% as compared to June 30, 1998. Total loans of
$189,770,000 have increased $22,438,000 or 13% and total deposits of
$248,272,000 have increased $19,655,000 or 9%. Since year end 1998 the
Corporation's assets have increased 5%, loans increased 1.5% and deposits
increased 4%.
The Corporation's loan-to-deposit ratio as of June 30, 1999 was 76% and was
73% in 1998.
Other Short-Term Investments are investments in a mutual fund operated by
Federated Funds Investments and comprised of short-term US Treasury
Securities. Investments are done on a daily basis and are similar in
liquidity to Fed Funds Investments, but carry a slightly higher yield.
The Corporation's mortgage brokerage subsidiary (BWC Mortgage Services),
and the Bank's SBA Division, Business Financing (asset based lending)
Division, and Leasing Division are all positive contributors to the income
growth of the Corporation this year.
Net Income
Net income for the first six months in 1999 of $2,362,000 was $422,000
greater than the first six months in 1998. This represented a return on
average assets during this period of 1.74% and a return on average equity
of 18.46%. The return on average assets during the first six months of
1998 was 1.67%, and the return on average equity was 18.88%.
Net income for the three months ending June 30, 1999, of $1,242,000 was
$268,000 over the comparable period in 1998. The return on average assets
during the second quarter was 1.80% and the return on average equity was
18.93%. The return on average assets during the second quarter of 1998 was
1.62%, and the return on average equity was 18.45%.
Earning assets averaged $254,908,000 during the six months ended June 30,
1999, as compared to $218,124,000 for the comparable period in 1998.
Earning assets averaged $259,881,000 during the second quarter of 1999 as
compared to $226,316,000 during the second quarter of 1998.
Diluted earnings per average common share, adjusted for the 2-for-1 stock
split to shareholders of record July 10, 1998, were $0.80 for the first six
months of 1999 as compared to $0.66 for the first six months of 1998. For
the second quarter of 1999, diluted earnings per average common share was
$0.42 as compared to $0.33 for the second quarter of 1998.
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 1999 was $8,552,000 or
$1,407,000 greater than the comparable period in 1998. Of this increase,
105% was due to increases in the volume of loans outstanding during the
1999 period as compared to 1998, offset by a 5% reduction which was related
to rate changes. Similar results existed for the second quarter of 1999.
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,
1999 was 2.24% as compared to 2.07% for the period ending June 30, 1998.
Industry standards for this ratio are generally averaging between 1.5% to
2.0%. The Corporation's ratios for both periods is considered adequate to
provide for potential future losses.
The Corporation performs a quarterly analysis of the adequacy of its
reserve for loan losses. As of June 30, 1999 it had $2,997,000 in
allocated reserves and $1,259,000 in unallocated reserves. The
Corporation's management believes that the amount of unallocated reserves
is reasonable due to the growth of the Bank's loan portfolio and the new
credit products that have been introduced. In the past few years, the Bank
has opened an Asset Based Lending Department, a Leasing Department and a
Small Business Association lending program. The Bank also has a high
concentration of credit in Construction Real Estate lending. The
uncertainties associated with the new products, coupled with the Bank's
traditionally strong construction concentration, fully supports a strong
reserve position.
The Corporation had net recoveries of $36,000 during the first six months
of 1999 as compared to net recoveries of $148,000 during the comparable
period in 1998.
The following table provides information on past-due and nonaccrual loans:
For the Six Months Ended
June 30,
1999 1998
Loans Past Due 90 Days or More $ 0 $ 1,000
Nonaccrual Loans 326,000 477,000
Total $ 326,000 $ 478,000
As of June 30, 1999 and 1998, no loans were outstanding that had been
restructured. No interest earned on nonaccrual loans that was recorded in
income during 1999 remains uncollected. Interest foregone on nonaccrual
loans was approximately $15,000, and $21,000 as of June 30, 1999 and 1998
respectively.
Noninterest Income
Noninterest income during the first six months of 1999 was $820,000 greater
than during the comparable period of 1998. The increase in 1999 was
reflected in increases in most categories including the Corporation's
brokerage subsidiary, BWC Mortgage Services, which reflected an increase of
$637,000 over the comparable period in 1998.
Service charge income reflected a modest decrease of $8,000 from the
comparable period in 1998, whereas fees reflected an increase of $80,000
and other income increased $112,000.
There were gains on securities available-for-sale which were called or
sold, of $30,000 during the first six months of 1999, as compared to gains
of $31,000 on called or sold securities available-for-sale during the
comparable period in 1998.
During the second quarter of 1999 noninterest income was $429,000 greater
than during the comparable quarter of 1998. Of this increase, $306,000 was
generated from the Corporation's brokerage subsidiary, BWC Mortgage
Services. The balance of the increase of $123,000 came from increases in
fees and other income. There were no gains on securities sold or called
during the second quarter of 1999 as compared to a $4,000 gain during the
second quarter of 1998.
Noninterest Expense
Noninterest expense during the first six months of 1999 was $1,614,000
greater than during the comparable period in 1998. The increase in 1999
was reflected in increases in most categories, including the Corporation's
brokerage subsidiary, BWC Mortgage Services, which reflected an increase of
$654,000, over the comparable period in 1998. The increase in BWC Mortgage
Services noninterest expense is related to the growth of this subsidiary
and expansion of its mortgage services.
Salaries and related benefits were $699,000 greater during the first six
months of 1999 as compared to 1998. This increase is related to general
merit increases, performance bonuses and growth of operations. Staff
averaged 98.2 full-time equivalent (FTE) persons during the first six
months of 1999 as compared to 83.5 FTE in 1998. Occupancy expense
increased $31,000 over the comparable period in 1998 due to the opening of
the Bank's new Livermore Office in November 1998, and due to CPI and
operating increases. Total Furniture and Equipment expense decreased
$18,000 as compared to the 1998 period. Other Expense reflects an increase
of $248,000 between the respective periods and is related to the
Corporation's growth and expanded activities.
During the second quarter of 1999 the Corporation's noninterest expense
increased $787,000 over the comparable quarter of 1998. The same reasons
that were applicable for the first six months apply to the second quarter
results.
Other Real Estate Owned
As of June 30, 1999 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
1999 and 1998. 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, 1999, December 31, 1998, and June 30, 1998.
Risk-based capital ratios: Capital Ratios
Minimum
June 30, December 31, June 30, regulatory
requirements
1998 1998 1998
Tier 1 capital 11.23% 10.90% 12.06% 4.00%
Total capital 12.49% 12.17% 13.32% 8.00%
Leverage ratio 8.88% 9.40% 9.75% 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, 1999 and 33% at June 30, 1998. The Corporation's management
has an effective asset and liability management program and carefully
monitors its liquidity on a continuing basis. Additionally, the
Corporation has available from correspondent banks Federal Fund lines of
credit totaling $15,000,000.
Interest-Rate Risk Management
Movement in interest rates can create fluctuations in the Corporation's
income and economic value due to an imbalance in the re-pricing or maturity
of assets or liabilities. The components of interest rate risk which are
actively measured and managed include: re-pricing risk and the risk of
non-parallel shifts in the yield curve. Interest-rate risk exposure is
actively managed with the goal of minimizing the impact of interest-rate
volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business
activities do not naturally create offsetting positions with respect to re-
pricing or maturity characteristics. Therefore, the Corporation uses a
variety of measurement tools to monitor and control the overall interest-
rate risk exposure of the on-balance-sheet positions. For each measurement
tool, the level of interest-rate risk created by the assets and liabilities
is a function primarily of their contractual interest-rate re-pricing dates
and contractual maturity (including principal amortization) dates.
The Corporation's interest-rate risk as of June 30, 1999 was consistent
with the interest-rate exposure presented in the Corporation's 1998 annual
report and was within the Corporation's risk policy range.
Year 2000 Issues & Status Report
Introduction:
The year 2000 creates challenges with respect to the automated systems used
by financial institutions and other companies. Many software programs are
not able to recognize the year 2000, since many programs and systems were
designed to store calendar years in the 1900's by assuming the "19" and
storing only the last two digits of the year. For example, these automated
systems would recognize a year stored as "00" as the year 1900, rather than
as the year 2000. If these automated systems are not appropriately re-
coded, updated, or replaced before the year 2000, they will likely confuse
data, crash, or fail in some other manner. In addition, many software
programs and automated systems will fail to recognize the year 2000 as a
leap year. The problem is not limited to computer systems. Year 2000
issues will potentially affect every system that has an embedded microchip
containing this flaw, such as automated teller machines, elevators, and
vaults.
The year 2000 challenge is especially problematic for financial
institutions, since many transactions, such as interest accruals and
payments, are date sensitive. It also may affect the operations of third
parties with whom BWC Financial Corp. and its subsidiaries (collectively,
the "Corporation") do business, including the Corporation's vendors,
suppliers, utility companies, and customers.
The Corporation is committed to addressing these year 2000 challenges in a
prompt and responsible manner and has dedicated resources to do so.
Management completed an assessment of its automated systems in 1997 and
implemented a plan to resolve these issues, including purchasing
appropriate computer technology. The Corporation's year 2000 compliance
plan ("Y2K Plan") has six phases. These phases are (1) project management,
(2) awareness, (3) assessment, (4) testing, (5) renovation and
implementation, and (6) client awareness, verification and risk assessment.
The Corporation has substantially completed phases one through five, and is
continuing with its client awareness and education phase.
Project Management: The Corporation assigned primary responsibility for
year 2000 project management to its Chief Financial Officer. The
Corporation also formed a year 2000 Compliance Committee in July, 1997,
consisting of appropriate representatives from its critical operational and
data processing areas, to assist the Chief Financial Officer in
implementing the Y2K Plan. The committee and other personnel within the
Corporation have been actively addressing Y2K issues and concerns since the
committee's formation. In addition, the Corporation provides monthly
reports to its Board of Directors in order to assist them in overseeing the
Corporation's year 2000 readiness.
Awareness: The Corporation completed several projects designed to promote
awareness of year 2000 issues throughout our organization and our customer
base. These projects include mailing information brochures to deposit and
loan customers; providing training for lending officers and other staff;
responding to customer, vendor, and shareholder inquiries; and providing
year 2000 information and progress updates on the Corporation's Web site
(bowc.com). Efforts in this phase will continue up to the century date
change.
Assessment: Assessment is the process of identifying all mission-critical
applications that could potentially be negatively affected by dates in the
year 2000 and beyond. The Corporation's assessment phase is complete.
Systems examined during this phase included telecommunications systems,
account-processing applications, and other software and hardware used in
connection with customer accounts. The Corporation's operations, like
those of many other companies, are intertwined with the operations of
certain of its business partners. Accordingly, the Corporation's
operations could be materially affected, if the operations of those
companies who provide the Corporation with mission critical applications,
systems, and services are affected. For example, the Corporation depends
upon vendors who provide equipment, technology, and software to it in
connection with its business operations. Failure of these software vendors
to achieve year 2000 readiness could substantially affect the operations of
the Corporation. In response to this concern, the Corporation has
identified and contacted those vendors who provide our mission-critical
applications. The Corporation has received year 2000 compliance assurance
from its primary mission-critical vendors, and is continuing to assess the
efforts of other vendors for year 2000 compliance.
Testing: Updating and testing of the Corporation's mission-critical
automated systems has been completed as well as testing of most non-
critical systems. Additional testing of changed or new systems will
continue as needed.
Renovation and Implementation: This phase involves obtaining and
implementing renovated software applications provided by our vendors. As
these applications are received and implemented, the Corporation will test
them for year 2000 compliance. At this time there are no mission-critical
systems that remain unimplemented or untested. In the Bank, a new teller
system and telephone banking system are in process of installation and, in
the Corporation's mortgage brokerage subsidiary, corrections are being made
to a documentation software system. Completion of these non-critical
projects will be prior to September 30, 1999.
Estimated Costs to Address the Corporation's Year 2000 Issues: The total
financial effect of these year 2000 challenges on the Corporation cannot be
predicted with certainty at this time. In fact, in spite of all efforts
being made to rectify these problems, the success of these efforts cannot
be guaranteed until the year 2000 actually arrives. The Corporation has or
will upgrade or replace certain automated systems before the year 2000,
without regard to the year 2000 compliance issues, due to technology
updates and Corporation expansion. The Corporation's estimated budget
under its Y2K Plan includes not only Y2K-specific upgrades, but also
upgrades that included Y2K corrections that would have taken place without
regard to Y2K issues.
Item 1997 1998 1999
ATM Machines $54,000 $6,000
Expanded disk space on
mainframe for Y2K testing $3,000
Documentation tracking software $8,000
Customer profitability software $18,000
Teller-line system (hardware & software) $125,000
Voice response system $40,000
Preparation of Y2K Business Resumption Contingency Plans $10,000
Re-write of BWC Mortgage Services software $5,000
Personnel expenses are not expected to be impacted as a result of Y2K
activities. Priorities have been adjusted to provide the time necessary
for existing personnel to deal with the year 2000 challenges.
Note: The Corporation may incur additional costs to comply with
requirements of its regulatory agencies related to year 2000 issues.
Management cannot predict these costs at this time, so they have not been
included in the table above.
Based on the estimates set forth above and the information the Corporation
has received to date from its critical system providers and vendors,
Management does not believe that expenses related to meeting the
Corporation's year 2000 challenges will have a material effect on the
operations or financial performance of the Corporation. However, factors
beyond the control of management, such as the effects on vendors of our
mission-critical software and systems, the effects of year 2000 issues on
the economy, and the development of the risks identified below under "The
Risks of the Corporation's Year 2000 Issues," among other things, could
have a material effect on the operations or financial performance of the
Corporation.
Client Awareness, Verification and Risk Assessment: Multiple statement
inserts describing and raising year 2000 awareness have been included in
bank statement mailings. Lending officers have been trained in Y2K issues
and have been documenting Y2K readiness of borrowers since early 1998.
Since mid-1998 documentation of Y2K preparedness has been included in the
borrower's loan application. A list of all borrowers whose loans or lines
of credit are considered significant have been contacted, and only minimal
risks were identified. Appropriate responses to current and future credit
requests will take their Y2K status into consideration. Continuation of
these and additional activities are planned for the balance of 1999.
The Risks of the Corporation's Year 2000 Issues:
The year 2000 presents certain risks to the Company and its operations.
Some of these risks are present because the Corporation purchases
technology applications from other parties who face year 2000 challenges.
Others of these risks are inherent in the business of banking or are risks
faced by many companies with stock traded on a national stock exchange.
Although it is impossible to identify every possible risk that the
Corporation may face moving into the millennium, Management has to date
identified the following potential risks:
Commercial banks may experience a contraction in their deposit base and
significant cash demands, if a significant amount of deposited funds are
withdrawn by customers prior to the year 2000. This potential deposit
contraction could make it necessary for the banks to change their sources
of funding and could materially impact short-term future earnings. The
Corporation has incorporated a contingency plan for addressing this
situation, should it occur.
The Bank lends significant amounts to businesses and contractors in our
market area. If these businesses are adversely affected by year 2000
issues, their ability to repay loans could be impaired. This increased
credit risk could affect the Corporation's financial performance. As part
of the Corporation's Y2K Plan, the Corporation has identified its primary
borrowers, and continues to assess their Y2K readiness and risk to the
Corporation.
The Corporation's operations, like those of many other companies, can be
affected by the year-2000-triggered failures of other companies upon whom
the Corporation depends for the functioning of its automated systems.
Accordingly, the Corporation's operations could be materially affected, if
the operations of those companies (power companies, telephone companies,
etc.) who provide the Corporation with mission-critical systems and
services are materially affected. As described above, the Corporation has
identified its mission-critical vendors and is monitoring their year 2000
compliance progress.
All companies with stock traded on a national stock exchange, including BWC
Financial Corp, could experience a drop in stock price as investors change
their investment portfolios or sell stock prior to the millennium. At this
time, it is impossible to predict whether or not this will, in fact, be the
case with respect to the stock of BWC Financial Corp. or any other company.
The Corporation's ability to operate effectively in the year 2000 could be
affected by communications abilities and access to utilities, such as
electricity, water, telephone, and others. To the extent access is
interrupted due to the effects of year 2000 issues, operations capabilities
of the Corporation will be disrupted. The Corporation has incorporated a
contingency plan for addressing this situation, to the extent possible,
should it occur; however, normal operations could be seriously affected.
The Corporation's Contingency Plans:
The Corporation has completed the development of a contingency plan related
to year 2000 issues, including cash reserves, liquidity, and operational
issues. Additions to the plan may be made as events unfold in 1999.
Management believes that all of the Corporation's systems and hardware will
be year 2000 ready. The Corporation also has contracts with two "back-up"
sites for disaster recovery, and is in the process of installing its own
generator to support its data center operations in event of a power
failure. As such, the Contingency Plan deals primarily with operational
issues for events generally outside of Management's control or ability to
test, such as power, water, telephone failure.
<FN>
INTEREST RATE SENSITIVITY
(in thousands except share and per share data)
Proper management of the rate sensitivity and maturities of assets and liabilities is required
to provide an optimum and stable net interest margin. Interest rate sensitivity spread management
is an important tool for achieving this objective and for developing strategies and means to
improve profitability. The schedules shown below reflect the interest rate sensitivity position
of the Corporation as of June 30, 1999. 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>
3 3-6 12 1-5 Over 5
Repricing within: months months months years years Totals
ASSETS:
Federal funds sold & Short Term Inv. $11,375 $ -- $ -- $ -- $ -- $11,375
Investment securities 1,555 5,018 4,645 30,983 16,933 59,134
Construction & real estate loans 82,261 5,889 3,773 40 0 91,963
Commercial loans 47,069 8,485 3,697 1,697 -- 60,948
Consumer Loans 30,123 340 647 1,210 0 32,320
Leases 737 555 1,006 2,241 -- 4,539
Interest-bearing assets 173,120 20,287 13,768 36,171 16,933 260,279
Savings and Now accounts $35,488 $ -- $ -- $ -- $ -- $35,488
Money market accounts 82,700 -- -- -- -- 82,700
Time deposits <$100,000 10,121 10,037 10,780 1,034 -- 31,972
Time deposits >$100,000 9,980 7,096 5,271 752 -- 23,099
Interest-bearing liabilities 138,289 17,133 16,051 1,786 -- 173,259
Rate sensitive gap $34,831 $3,154 -$2,283 $34,385 $16,933 $87,020
Cumulative rate sensitive gap $34,831 $37,985 $35,702 $70,087 $87,020
Cumulative rate sensitive ratio 1.25 1.24 1.21 1.40 1.50
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
Election of directors and appointment of accountants.
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)
___________________________ _________________________________
Date James L. Ryan
Chairman and Chief Executive
Officer
______________________ ________________________________
Date Leland E. Wines
CFO and Corp. Secretary