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, 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 September 30, 1999, there
were 2,594,537 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
Consolidated Statements of Changes in
Shareholders' Equity 6
Notes to Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis
of Results of Operations 12-19
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
September December 31,
ASSETS 1999 1998
(Unaudited)
Cash and Due From Banks $11,196,000 $14,345,000
Federal Funds Sold 14,355,000 2,300,000
Other Short Term Investments 1,599,000 35,000
Total Cash and Cash Equivalents 27,150,000 16,680,000
Investment Securities:
Available for Sale 57,171,000 45,655,000
Held to Maturity (approximate market value
of $11,703,000 in 1999 and $13,797,000 in 1998) 11,756,000 13,592,000
Loans, Net of Allowance for Credit Losses of $4,416,000
in 1999 and $3,919,000 in 1998. 182,977,000 183,058,000
Real Estate Loans Held for Sale 857,000 --
Bank Premises and Equipment, Net 2,668,000 1,303,000
Interest Receivable and Other Assets 5,336,000 4,611,000
$287,915,000 $264,899,000
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $76,471,000 $69,783,000
Interest-bearing:
Money Market Accounts 96,740,000 64,687,000
Savings and NOW Accounts 34,418,000 37,139,000
Time Deposits:
Under $100,000 30,872,000 34,293,000
$100,000 or more 18,298,000 32,238,000
Total Interest-bearing 180,328,000 168,357,000
Total Deposits 256,799,000 238,140,000
BWC Mort.Serv. Line-of-Credit 849,000 --
Interest Payable and Other Liabilities 2,316,000 2,416,000
Total Liabilities 259,964,000 240,556,000
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 -
2,594,537 shares in 1999 and 2,511,151 in 1998. 19,593,000 19,002,000
Retained Earnings 8,586,000 5,006,000
Capital adjustment on available-for-sale securities (228,000) 335,000
Total Shareholders' Equity 27,951,000 24,343,000
Total Liabilities and Shareholders' Equity $287,915,000 $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 For the Nine Months
Ended September Ended September 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INTEREST INCOME
Loans, Including Fees $5,159,000 $4,592,000 $15,048,000 $13,411,000
Investment Securities:
Taxable 764,000 771,000 2,049,000 1,860,000
Non-taxable 136,000 140,000 423,000 353,000
Federal Funds Sold 178,000 168,000 354,000 383,000
Other Short Term Investments 57,000 114,000 145,000 183,000
Total Interest Income 6,294,000 5,785,000 18,019,000 16,190,000
INTEREST EXPENSE
Deposits 1,667,000 1,847,000 4,811,000 5,107,000
Federal Funds Purchased -- -- 5,000 --
Other Borrowed Funds 13,000 -- 43,000 --
Total Interest Expense 1,680,000 1,847,000 4,859,000 5,107,000
NET INTEREST INCOME 4,614,000 3,938,000 13,160,000 11,083,000
PROVISION FOR CREDIT LOSSES 150,000 225,000 450,000 600,000
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 4,464,000 3,713,000 12,710,000 10,483,000
NONINTEREST INCOME
BWC Mortgage Services - Commissions 606,000 1,030,000 2,477,000 2,605,000
BWC Mortgage Services - Fees & Other 206,000 96,000 692,000 266,000
Service Charges on Deposit Accounts 216,000 219,000 604,000 615,000
Fees 184,000 148,000 560,000 443,000
Other Income 127,000 51,000 314,000 126,000
Investment Securities Gains (losses), Net -- 3,000 30,000 35,000
Total Noninterest Income 1,339,000 1,547,000 4,677,000 4,090,000
NONINTEREST EXPENSE
Salaries and Related Benefits 1,776,000 1,339,000 5,053,000 3,918,000
BWC Mortgage Services - Commissions 440,000 606,000 1,708,000 1,489,000
BWC Mortgage Services - Fees & Other 255,000 220,000 824,000 551,000
Occupancy 233,000 209,000 678,000 622,000
Furniture and Equipment 157,000 141,000 424,000 426,000
Other 888,000 744,000 2,530,000 2,138,000
Total Noninterest Expense 3,749,000 3,259,000 11,217,000 9,144,000
BWC Mortgage Services - Minority Interest 57,000 150,000 317,000 416,000
INCOME BEFORE INCOME TAXES 1,997,000 1,851,000 5,853,000 5,013,000
Provision for Income Taxes 779,000 737,000 2,273,000 1,959,000
NET INCOME $1,218,000 $1,114,000 $3,580,000 $3,054,000
Basic Earnings Per Share $0.47 $0.45 $1.40 $1.23
Diluted Earnings Per Share $0.41 $0.38 $1.20 $1.05
Average Basic Shares 2,592,331 2,489,612 2,564,476 2,482,405
Average Diluted Share Equivalents Related to Options 399,983 446,532 410,622 437,926
Average Diluted Shares 2,992,314 2,936,144 2,975,098 2,920,331
<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,
1999 1998
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net Income $3,580,000 $3,054,000
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (1,341,000) (1,163,000)
Provision for credit losses 450,000 600,000
Depreciation and amortization 312,000 305,000
Gain on sale of securities available for sale (30,000) (35,000)
Increase in accrued interest receivable
and other assets (725,000) (1,798,000)
Increase in accrued interest payable
and other liabilities (100,000) 1,008,000
Net Cash Provided(Used) by Operating Activities 2,146,000 1,971,000
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 6,087,000 3,058,000
Proceeds from the sales of available-for-sale investment securities 11,956,000 9,160,000
Purchase of investment securities (28,256,000) (44,940,000)
Loans originated, net of collections (972,000) 3,227,000
Real estate loans held for sale, net change (857,000) --
Purchase of bank premises and equipment (1,677,000) (197,000)
Net Cash Used by Investing Activities (11,775,000) (29,692,000)
FINANCING ACTIVITIES:
Net increase in deposits 18,659,000 29,182,000
Net increase in borrowings to support real estate loans held for sale 849,000 --
Proceeds from issuance of common stock 591,000 415,000
Cash paid in lieu of fractional shares -- (7,000)
Net Cash Provided(Used) by Financing Activities 20,099,000 29,590,000
CASH AND CASH EQUIVALENTS:
Increase(decrease)in cash and cash equivalents 10,470,000 1,869,000
Cash and cash equivalents at beginning of year 16,680,000 22,143,000
Cash and Cash Equivalents at period end $27,150,000 $24,012,000
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $3,162,000 $4,895,000
Income Taxes Paid $2,258,000 $2,228,000
<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 September 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 September 30, 1999 -- -- 3,580,000 -- 3,580,000 3,580,000
Other Comprehensive Income(Loss), net of tax
benefit of $140,000 -- -- -- (563,000) (563,000) (563,000)
Comprehensive Income -- -- -- -- -- $3,017,000
Common Stock Issued and sold to the
Defined Contribution Plan 18,966 391,000 -- -- 391,000
Stock Options Exercised at $3.10 per share 64,420 200,000 -- -- 200,000
Balance, September 30, 1999 2,594,537 $19,593,000 $8,586,000 ($228,000) $27,951,000
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 September 30, 1999 and the results of operations for the nine months
ended September 30, 1999 and 1998 and cash flows for the nine months ended
September 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 nine months ended September 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 September 30, 1999 are as follows:
Gross
Amortized Unrealized Market
Cost Gain/(Loss) Value
Held-to-maturity
Obligations of State and
Political Subdivisions $11,756,000 $ (53,000) $11,703,000
Available-for-sale
Taxable Obligations of
State & Political
Subdivisions $11,378,000 $(31,000) $11,347,000
U.S. Treasury Securities 12,065,000 (9,000) 12,056,000
U.S. Government Agencies 26,863,000 (200,000) 26,663,000
U.S. Government Agencies
Preferred Stock 1,652,000 (19,000) 1,633,000
Corporate Securities 5,581,000 (109,000) 5,472,000
Total Available-for-sale $57,539,000 $(368,000) $57,171,000
The following table shows the amortized cost and estimated market
value of investment securities by contractual maturity at September 30,
1999.
Held-to-Maturity Available-for-Sale
Amortized Market Amortized
Market
Cost Value Cost
Value
Within one year $ 1,672,000 $1,686,000 $10,353,000 $10,355,000
After one but within
five years $ 5,704,000 $5,692,000 $40,424,000 $40,136,000
Over five years $ 4,380,000 $4,325,000 $ 6,762,000 $ 6,680,000
Total $11,756,000 $11,703,000 $57,539,000 $57,171,000
3. ALLOWANCE FOR CREDIT LOSSES
For the Nine months Ended
September 30,
1999 1998
Allowance for credit losses at
beginning of period $3,919,000 $2,936,000
Chargeoffs (43,000) (81,000)
Recoveries 90,000 258,000
Net (recoveries)/chargeoffs (47,000) (177,000)
Provisions 450,000 600,000
Allowance for credit losses at
end of period $4,416,000 $3,713,000
Ratio of allowance for credit
losses to loans 2.36 2.29%
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 Nine months For the Three months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Net Income $3,580,000 $3,054,000 $1,218,000 $1,114,000
Other Comprehensive
Income, net of tax:
Adjustment for available-
for-sale securities (563,000) 536,000 (16,000) 463,000
Total Comprehensive
Income $3,017,000 $3,590,000 $1,202,000 $1,577,000
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 September 30, 1999,
and 1998 concerning the Corporation's reportable segments is shown in the
following table.
For the Nine months, Community Mortgage
Ended 09/30/1999 Banking Services Adjustments Total
Total Interest Income $ 17,979,000 $40,000 $ 18,019,000
Commissions Received $2,477,000 2,477,000
Total Interest Expense 4,816,000 43,000 4,859,000
Salaries & Benefits 5,053,000 5,053,000
Commissions Paid 1,708,000 1,708,000
Segment Profit before Tax 5,562,000 633,000 ($342,000) 5,853,000
Total Assets $287,033,000 $1,323,000 ($441,000) $287,915,000
For the Nine months, Community Mortgage
Ended 09/30/1998 Banking Services Adjustments Total
Total Interest Income $ 16,190,000 $ 16,190,000
Commissions Received $2,605,000 2,605,000
Total Interest Expense 5,107,000 5,107,000
Salaries & Benefits 3,918,000 3,918,000
Commissions Paid 1,489,000 1,489,000
Segment Profit before Tax 4,670,000 832,000 ($489,000) 5,013,000
Total Assets $263,070,000 $280,000 ($166,000) $263,184,000
For the Three Months, Community Mortgage
Ended 09/30/1999 Banking Services Adjustments Total
Total Interest Income $ 6,279,000 $ 15,000 $ 6,294,000
Commissions Received $606,000 606,000
Total Interest Expense 1,667,000 13,000 1,680,000
Salaries & Benefits 1,776,000 1,776,000
Commissions Paid 440,000 440,000
Segment Profit before Tax 1,940,000 118,000 ($ 61,000) 1,997,000
Total Assets $287,033,000 $1,323,000 ($441,000) $287,915,000
For the Three Months, Community Mortgage
Ended 09/30/1998 Banking Services Adjustments Total
Total Interest Income $ 5,785,000 $5,785,000
Commissions Received $1,030,000 1,030,000
Total Interest Expense 1,847,000 1,847,000
Salaries & Benefits 1,339,000 1,339,000
Commissions Paid 606,000 606,000
Segment Profit before Tax 1,758,000 300,000 ($207,000) 1,851,000
Total Assets $263,070,000 $280,000 ($166,000) $263,184,000
6. SFAS No. 133
In September 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 September 15,
2000. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning September
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 September 30, 1999 of $287,915,000 have
increased $24,731,000 or 9% as compared to September 30, 1998. Total loans
of $187,393,000 have increased $25,343,000 or 16%, and total deposits of
$256,799,000 have increased $20,145,000 or 8%. Since year-end 1998 the
Corporation's assets have increased 9%, loans have remained relatively
constant and deposits increased 8%.
The Corporation's loan-to-deposit ratio as of September 30, 1999 was 73%
and was 68% as of September 30, 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) was
a positive contributor to the income growth of the Corporation, both this
year and last year.
Net Income
Net income for the first nine months in 1999 of $3,580,000 was $526,000
greater than the first nine months in 1998. This represented a return on
average assets during this period of 1.73% and a return on average equity
of 18.25%. The return on average assets during the first nine months of
1998 was 1.68%, and the return on average equity was 19.21%.
Net income for the three months ending September 30, 1999, of $1,218,000
was $104,000 over the comparable period in 1998. The return on average
assets during the third quarter was 1.69%, and the return on average equity
was 17.87%. The return on average assets during the third quarter of 1998
was 1.70%, and the return on average equity was 18.69%.
Earning assets averaged $260,476,000 during the nine months ended September
30, 1999, as compared to $228,337,000 for the comparable period in 1998.
Earning assets averaged $271,613,000 during the third quarter of 1999 as
compared to $248,762,000 during the third quarter of 1998.
Diluted earnings per average common share were $1.20 for the first nine
months of 1999 as compared to $1.05 for the first nine months of 1998. For
the third quarter of 1999, diluted earnings per average common share were
$0.41 as compared to $0.38 for the third 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 nine months of 1999 was $13,160,000 or
$2,077,000 greater than the comparable period in 1998. Of this increase,
108% was due to increases in the volume of loans outstanding during the
1999 period as compared to the 1998 period offset by an 8% reduction, which
was related to rate changes. Net interest income during the third quarter
of 1999 was $676,000 greater than the comparable quarter in 1998. Similar
volume and rate conditions existed for the third quarter of 1999 as for the
nine months results.
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, 1999 was 2.36% as compared to 2.29% for the period ending September 30,
1998. Industry standards for this ratio are generally averaging between
1.5% to 2.0%. The Corporation's ratios for both periods are 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 September 30, 1999 it had $2,786,000 in
allocated reserves and $1,630,000 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 support a strong
reserve position.
The Corporation had net recoveries of $47,000 during the first nine months
of 1999 as compared to net recoveries of $177,000 during the comparable
period in 1998.
The following table provides information on past-due and nonaccrual loans:
For the Nine Months Ended
September 30,
1999 1998
Loans Past Due 90 Days or More $ 6,000 $ 2,000
Nonaccrual Loans 422,000 31,000
Total $ 428,000 $ 33,000
As of September 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 $26,000 and $1,000 as of September 30, 1999 and
1998, respectively.
Noninterest Income
Noninterest income during the first nine months of 1999 was $587,000
greater than during the comparable period of 1998. The increase in 1999
was reflected in most categories including the Corporation's brokerage
subsidiary, BWC Mortgage Services, which reflected an increase of $298,000
over the comparable period in 1998.
Service charge income reflected a modest decrease of $11,000 from the
comparable period in 1998, whereas fees reflected an increase of $117,000
and other income increased $188,000.
The gains on securities available-for-sale, which were called or sold,
were $5,000 less than during the comparable period in 1998.
During the third quarter of 1999 noninterest income was $208,000 less than
during the comparable quarter of 1998. The cause of the decrease is
attributed to a decrease of $314,000 in other income generated from the
Corporation's brokerage subsidiary, BWC Mortgage Services. Economic
conditions during the third quarter of 1998 were ideal for mortgage
activity. Increasing interest rates and a reduction in mortgage activity
are the primary cause of the reduction in these fees.
Fees from service charges on deposit accounts were down a modest $3,000,
and income from fees and other income reflect an increase of $112,000 from
the comparable quarter of 1998. There were no security gains or losses in
the third quarter of 1999. There was a $3,000 gain in the third quarter of
1998.
Noninterest Expense
Noninterest expense during the first nine months of 1999 was $2,073,000
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
$492,000 over the comparable period in 1998. The increase in BWC Mortgage
Services noninterest expense is related to the growth of this subsidiary
and the start-up expenses of a mortgage banking operation, which deals in
pre-sold mortgages.
Salaries and related benefits were $1,135,000 greater during the first nine
months of 1999 as compared to 1998. This increase is related to general
merit increases, performance bonuses and growth of operations. Staff
averaged 100.0 full-time equivalent (FTE) persons during the first nine
months of 1999 as compared to 86.5 FTE in 1998. Occupancy expense
increased $56,000 over the comparable period in 1998 due to the opening of
the Bank's new Livermore office in November 1998 and the purchase of new
facilities for this office in September 1999, as well as increases in other
leaseholds which are due to CPI and operating increases. Total furniture
and equipment expense decreased a modest $2,000 as compared to the 1998
period. Other expense reflects an increase of $392,000 between the
respective periods and is related to the Corporation's growth and expanded
activities.
During the third quarter of 1999 the Corporation's noninterest expense
increased $490,000 over the comparable quarter of 1998. The same reasons
that were applicable for the first nine months apply to the third quarter
results.
Other Real Estate Owned
As of September 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 September 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 September 30, 1999, December 31, 1998, and September
30, 1998.
Risk-based capital ratios: Capital Ratios
Minimum
September 30 December 31 September 30 Regulatory
1999 1998 1998 Requirements
Tier 1 capital 12.49% 11.75% 12.06% 4.00%
Total capital 13.74% 13.01% 13.32% 8.00%
Leverage ratio 9.76% 8.72% 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 33% of total assets
at September 30, 1999 and 37% at September 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 September 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. During the third quarter of
1999 a new teller system and telephone banking system have been installed
in the Bank and, in the Corporation's mortgage brokerage subsidiary,
corrections have been made to a documentation software system. These
efforts completed the Corporation's projects for replacing all non-
compliant systems 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
Installation of a gas powered generator $55,000
Voice response system $40,000
Preparation of Y2K Business Resumption Contingency Plans $10,000
Re-write of BWC Mortgage Services software $6,700
Personnel expenses have not been 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 did incur some additional costs to comply with
requirements of its regulatory agencies related to year 2000 issues. These
costs have not exceeded $20,000 at this time, and have 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 has installed 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, and telephone failure. Management believes it has taken all
reasonable steps and preparations.
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, 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. $15,954 $ -- $ -- $ -- $ -- $15,954
Investment securities 5,008 4,527 2,492 45,840 11,060 68,927
Construction & real estate loans 76,078 7,494 2,660 0 0 86,232
Commercial loans 49,153 4,582 7,575 1,566 -- 62,876
Consumer Loans 30,243 317 504 1,139 0 32,203
Leases 676 675 1,200 3,531 -- 6,082
Interest-bearing assets 177,112 17,595 14,431 52,076 11,060 272,274
Savings and Now accounts $34,418 $ -- $ -- $ -- $ -- $34,418
Money market accounts 96,740 -- -- -- -- 96,740
Time deposits <$100,000 12,544 7,117 9,970 1,241 -- 30,872
Time deposits >$100,000 9,846 4,117 3,891 444 -- 18,298
Interest-bearing liabilities 153,548 11,234 13,861 1,685 -- 180,328
Rate sensitive gap $23,564 $6,361 $570 $50,391 $11,060 $91,946
Cumulative rate sensitive gap $23,564 $29,925 $30,495 $80,886 $91,946
Cumulative rate sensitive ratio 1.15 1.18 1.17 1.45 1.51
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, 1999 James L. Ryan
___________________________ _________________________________
Date James L. Ryan
Chairman and Chief Executive Officer
October 27, 1999 Leland E. Wines
______________________ ________________________________
Date Leland E. Wines
CFO and Corp. Secretary