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, 1998.
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, 1998,
there were 2,505,124 shares of common stock, no par value outstanding.
<PAGE>
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 6-8
Item 2 Management's Discussion and Analysis
of Results of Operations 9-16
Interest Rate Sensitivity Table 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of
Security Holders 18
Item 5 Other Materially Important Events 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
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BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
Cash and Due From Banks $14,486,000 $17,745,000
Federal Funds Sold 5,050,000 4,350,000
Other Short Term Investments 4,476,000 48,000
Total Cash and Cash Equivalents 24,012,000 22,143,000
Investment Securities:
Available for Sale 60,314,000 33,062,000
Held to Maturity (approximate market value
of $14,239,000 in 1998 and $7,950,000 in 1997) 14,007,000 7,894,000
Loans, Net of Allowance for Credit Losses of $3,713,000
in 1998 and $2,936,000 in 1997. 158,337,000 161,002,000
Bank Premises and Equipment, Net 1,348,000 1,455,000
Interest Receivable and Other Assets 5,166,000 3,367,000
$263,184,000 $228,923,000
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $61,613,000 $59,847,000
Interest-bearing:
Money Market Accounts 72,154,000 44,406,000
Savings and NOW Accounts 32,768,000 29,755,000
Time Deposits:
Under $100,000 36,142,000 36,829,000
$100,000 or more 33,977,000 36,635,000
Total Interest-bearing 175,041,000 147,625,000
Total Deposits 236,654,000 207,472,000
Federal Funds Purchased -- --
Interest Payable and Other Liabilities 3,005,000 2,003,000
Total Liabilities 239,659,000 209,475,000
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 -
2,505,124 shares in 1998 and 1,121,280 in 1997. 19,018,000 18,603,000
Retained Earnings 3,832,000 706,000
Capital adjustment on available-for-sale securities 675,000 139,000
Total Shareholders' Equity 23,525,000 19,448,000
Total Liabilities and Shareholders' Equity $263,184,000 $228,923,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
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<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME For the Nine Months
Ended September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $4,592,000 $4,196,000 $13,411,000 $11,702,000
Investment Securities:
Taxable 771,000 449,000 1,860,000 853,000
Non-taxable 140,000 95,000 353,000 301,000
Federal Funds Sold 168,000 114,000 383,000 302,000
Other Short Term Investments 114,000 15,000 183,000 39,000
Total Interest Income 5,785,000 4,869,000 16,190,000 13,197,000
INTEREST EXPENSE
Deposits 1,847,000 1,591,000 5,107,000 4,170,000
Federal Funds Purchased -- -- -- 3,000
Total Interest Expense 1,847,000 1,591,000 5,107,000 4,173,000
NET INTEREST INCOME 3,938,000 3,278,000 11,083,000 9,024,000
PROVISION FOR CREDIT LOSSES 225,000 300,000 600,000 825,000
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 3,713,000 2,978,000 10,483,000 8,199,000
NONINTEREST INCOME
Service Charges on Deposit Accounts 219,000 191,000 615,000 565,000
Fees 148,000 135,000 443,000 381,000
Other Income 201,000 72,000 542,000 237,000
Investment Securities Gains (losses), Net 3,000 3,000 34,000 3,000
Total Noninterest Income 571,000 401,000 1,634,000 1,186,000
NONINTEREST EXPENSE
Salaries and Related Benefits 1,339,000 1,201,000 3,918,000 3,480,000
Occupancy 209,000 205,000 622,000 603,000
Furniture and Equipment 141,000 142,000 426,000 398,000
Other 744,000 558,000 2,138,000 1,696,000
Total Noninterest Expense 2,433,000 2,106,000 7,104,000 6,177,000
INCOME BEFORE INCOME TAXES 1,851,000 1,273,000 5,013,000 3,208,000
Provision for Income Taxes 737,000 464,000 1,959,000 1,140,000
NET INCOME $1,114,000 $809,000 $3,054,000 $2,068,000
Earnings per share based on Net Income figures:
Basic Earnings Per Share $0.45 $0.33 $1.23 $0.84
Diluted Earnings Per Share $0.38 $0.28 $1.05 $0.73
Average Basic Shares 2,489,612 2,474,702 2,482,405 2,475,199
Average Diluted Share Equivalents Related to Options 446,532 367,177 437,926 356,711
Average Diluted Shares 2,936,144 2,841,879 2,920,331 2,831,910
<FN>
The accompanying notes are an intergral part of these consolidated statements.
</FN>
</TABLE>
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<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
1998 1997
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
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Net Income $3,054,000 $2,068,000
Adjustments to reconcile net income to
net cash provided(used):
Amortization of loan fees (1,163,000) (966,000)
Provision for credit losses 600,000 825,000
Depreciation and amortization 305,000 292,000
Gain on sale of securities available for sale (34,000) 3,000
Increase in accrued interest receivable
and other assets (1,798,000) (769,000)
Increase in accrued interest payable
and other liabilities 1,008,000 826,000
Net Cash Provided(Used) by Operating Activities 1,972,000 2,279,000
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 3,057,000 4,775,000
Proceeds from the sales of available-for-sale investment securities 9,160,000 --
Purchase of investment securities (44,940,000) (26,987,000)
Loans originated, net of collections 3,227,000 (10,594,000)
Purchase of bank premises and equipment (197,000) (180,000)
Net Cash Used by Investing Activities (29,693,000) (32,986,000)
FINANCING ACTIVITIES:
Net increase in deposits 29,182,000 41,494,000
Decrease in Fed Funds Purchases -- (3,600,000)
Proceeds from issuance of common stock 415,000 29,000
Cash paid for the repurchase of common stock -- (37,000)
Cash paid in lieu of fractional shares (7,000) (5,000)
Net Cash Provided(Used) by Financing Activities 29,590,000 37,881,000
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 1,869,000 7,174,000
Cash and cash equivalents at beginning of year 22,143,000 15,409,000
Cash and Cash Equivalents at period end $24,012,000 $22,583,000
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $4,895,000 $3,423,000
Income Taxes Paid $2,228,000 $1,435,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
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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, 1998 and the results of operations for the nine months ended
September 30, 1998 and 1997 and cash flows for the nine months ended September
30, 1998 and 1997.
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 1997 Annual Report to Shareholders, which is incorporated by
reference in the Company's 1997 annual report on Form 10-K. The results of
operations for the nine months ended September 30, 1998 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, 1998 are as follows:
Gross
Amortized Unrealized Market
Cost Gain Value
Held-to-maturity
Obligations of State and
Political Subdivisions $14,007,000 $ 232,000 $14,239,000
Available-for-sale
Taxable Obligations of
State & Political
Subdivisions $12,800,000 $413,000 $13,213,000
U.S. Treasury Securities 12,128,000 194,000 12,322,000
U.S. Government Agencies 30,384,000 383,000 30,767,000
Preferred Stock
U.S. Government Agencies 1,654,000 84,000 1,738,000
Corporate Securities 2,259,000 15,000 2,274,000
Total Available-for-sale $59,225,000 $1,089,000 $60,314,000
For the nine months ended September 30, 1998, the Bank did not sell any
investment securities, however, a number of securities were called.
The following table shows the amortized cost and estimated market value
of investment securities by contractual maturity at September 30, 1998.
Held-to-Maturity Available-for-Sale
Amortized Market Amortized Market
Cost Value Cost Value
Within one year $ 3,482,000 $3,522,000 $17,021,000 $17,110,000
After one but within
five years $ 4,413,000 $4,476,000 $37,716,000 $38,581,000
Over five years $ 6,112,000 $6,241,000 $ 4,488,000 $ 4,623,000
Total $14,007,000 $14,239,000 $59,225,000 $60,314,000
3. ALLOWANCE FOR CREDIT LOSSES
For the Nine months Ended
September 30,
1998 1997
Allowance for credit losses at
beginning of period $2,936,000 $1,893,000
Chargeoffs (81,000) (179,000)
Recoveries 258,000 53,000
Net (recoveries)/chargeoffs (177,000) 126,000
Provisions 600,000 825,000
Allowance for credit losses at
end of period $3,713,000 $2,592,000
Ratio of allowance for credit
losses to loans 2.29% 1.60%
4. SFAS No. 130
On January 1, 1998 the Corporation adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For
the Corporation, comprehensive income includes net income reported on the
income statement and changes in the fair value of its available for sale
securities reported as a component of shareholder's equity.
The Corporation's comprehensive income for the period is reflected in the
following table:
For the Three Months
Ended September 30,
1998 1997
NET INCOME $1,114,000 $809,000
Other Comprehensive Income, net of
tax:
Adjustment for available-for-
sale securities $463,000 $99,000
TOTAL COMPREHENSIVE INCOME $1,577,000 $908,000
For the Nine Months
Ended September 30,
1998 1997
NET INCOME $3,054,000 $2,068,000
Other Comprehensive Income, net of
tax:
Adjustment for available-for-
sale securities $536,000 $87,000
TOTAL COMPREHENSIVE INCOME $3,590,000 $2,155,000
5. 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, 1999. 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 company'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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net Income
Net income for the first nine months in 1998 of $3,054,000 was $986,000
greater than the first nine months in 1997. This represented a return on
average assets during this period of 1.68% and a return on average equity
of 19.21%. The return on average assets during the first nine months of
1997 was 1.42% and the return on average equity was 15.87%.
Net income for the three months ending September 30, 1998, of $1,114,000
was $305,000 over the comparable period in 1997. The return on average
assets during the third quarter was 1.70% and the return on average equity
was 18.69%. The return on average assets during the third quarter of 1997
was 1.53% and the return on average equity was 17.88%.
Earning assets averaged $228,337,000 during the nine months ended September
30, 1998, as compared to $180,670,000 for the comparable period in 1997.
Earning assets averaged $248,762,000 during the third quarter of 1998 as
compared to $197,564,000 during the third quarter of 1997.
Diluted earnings per average common share, adjusted for the 10% stock
dividend to shareholders of record February 2, 1998 and March 31, 1997 and
the 2 for 1 stock split to shareholders of record July 10, 1998, was $1.05
for the first nine months of 1998 as compared to $0.73 for the first nine
months of 1997. For the third quarter of 1998, diluted earnings per average
common share was $0.38 as compared to $0.28 for the third quarter of 1997.
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 1998 was $11,083,000 or
$2,059,000 greater than the comparable period in 1997. Of this increase,
93% was due to increases in the volume of loans and investments outstanding
during the 1998 period compared to 1997 and the balance related to rate
changes. Similar results existed for the third quarter of 1998 with 95% of
the increase of $660,000 related to volume increases and the balance
related to rate changes.
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, 1998 was 2.29% as compared to 1.70% for the period ending September 30,
1997. 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 recoveries of $177,000 during the first nine
months of 1998 as compared to net loan losses of $126,000 during the
comparable period in 1997.
The following table provides information on past due and nonaccrual loans:
For the Nine months Ended
September 30,
1998 1997
Loans Past Due 90 Days or More $ 2,000 $ 0
Nonaccrual Loans 31,000 296,000
Total $ 33,000 $ 296,000
As of September 30, 1998 and 1997, no loans were outstanding that had been
restructured. No interest earned on nonaccrual loans that was recorded in
income during 1998 remains uncollected. Interest foregone on nonaccrual
loans was approximately $1,000 and $30,000 as of September 30, 1998 and
1997 respectively.
Noninterest Income
Noninterest income during the first nine months of 1998 of $1,634,000 was
$448,000 greater than earned during the comparable period of 1997. This
was reflected in increases in all categories of noninterest income and fees
and includes income from the Corporation's mortgage brokerage subsidiary.
During the third quarter of 1998 noninterest income of $571,000 was
$170,000 greater than earned during the comparable quarter of 1997. The
same reasons applicable for the first nine months apply to the third
quarter results.
Noninterest Expense
Total noninterest expenses of $7,104,000 during the first nine months of
1998 were $927,000 over the comparable period in 1997. The major
categories of this are detailed below.
Salaries and related benefits were $438,000 greater during the first nine
months of 1998 as compared to 1997. 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. The Corporation also added a leasing division and increased
staffing in preparation for opening of an office in Livermore, CA. Staff
FTE (full time equivalency) averaged 86.5 during the first nine months of
1998 as compared to 80.5 for the comparable 1997 period.
Occupancy expense increased $19,000 during the respective periods due to
rental adjustments and operating expense increases on office facilities.
Total furniture and equipment expense increased $28,000 between the
respective periods reflecting the growth and added technology in the
Corporation's operations.
Other expense increased $442,000 between the respective periods and is
related to the Corporation's growth and expanded activities, especially in
Construction Real Estate. This category also includes expenses related to
the Corporation getting its stock listed on NASDAQ.
During the third quarter of 1998 the Corporation had a total of $2,433,000
in noninterest expense which was $327,000 over the comparable quarter of
1997. The same reasons applicable for the first nine months apply to the
third quarter results.
Other Real Estate Owned
As of September 30, 1998 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 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 1998 and 1997. 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, 1998, December 31, 1997, and September
30,
1997.
Risk-based capital ratios: Capital Ratios
Minimum
September 30, December 31, September 30, Regulatory
1998 1997 1997 Requirements
Tier 1 capital 11.75% 10.90% 10.51% 4.00%
Total capital 13.01% 12.15% 11.76% 8.00%
Leverage ratio 8.72% 9.64% 8.28% 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 37% of total assets
at September 30, 1998 and 29% at September 30, 1997. 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 $11,000,000.
General
Total assets of the Corporation at September 30, 1998 of $263,184,000
increased $44,950,000 or 20.6% as compared to September 30, 1997. Total
loans of $162,050,000 increased $9,844,000 or 6.5% and total deposits of
$236,654,000 increased $39,269,000 or 19.9%. Since year end 1997 the
Corporation's assets have increased 15%, whereas loans had a modest
decrease of 1.15% and deposits increased 14%. The increase in deposit
growth over loan growth was placed in investments which increased 81% from
last year end.
The Corporation's loan to deposit ratio as of September 30, 1998 was 68%
and was 77% in 1997.
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 and Business Financing Division are all
positive contributors to the income growth of the Corporation this year.
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, are 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, 1998 was well
within the Corporation's risk policy range and less than the interest rate
exposure presented in the Corporation's 1997 annual report, which was also
within the Corporation's risk policy range.
Year 2000 Issues
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 1900s 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 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 has completed an assessment of its automated systems and has
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 four,
although appropriate follow-up activities are continuing to occur, and the
Corporation is proceeding with additional testing and implementation phases
of the Y2K Plan.
1. Project Management: The Corporation has assigned primary
responsibility for year 2000 project management to its Chief Financial
Officer. The Corporation also formed a year 2000 compliance committee,
consisting of appropriate representatives from its critical operational and
data processing areas, to assist the Chief Financial Officer in
implementing the Y2K Plan. 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.
2. Awareness: The Corporation has 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).
3. 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
substantially 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 materially 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.
4. Testing: Updating and testing of the Corporation's mission-critical
automated systems is substantially complete, although additional testing of
future dates in year 2000 is continuing. Testing of changed or new systems
will continue throughout 1998 and 1999.
5. 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. This phase also involves upgrading and
replacing automated systems where appropriate and will continue throughout
1998 and should be substantially complete by the end of the first quarter
of 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 (2) $54,000
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 $38,000
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 complying 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.
6. 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
borrowers loan application. A list of all borrowers whose loans or lines
of credit are considered significant, were mailed a questionnaire, with
response required, and are in process of being Y2K risk rated by the
Corporation. 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 1998 and 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.
Other 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:
1. Commercial banks may experience a contraction in their deposit base if
a significant amount of deposited funds are withdrawn by customers
prior to the year 2000, and interest rates may increase in the latter
part of 1999. This potential deposit contraction could make it
necessary for the banks to change their sources of funding and could
materially impact future earnings. The Corporation has incorporated a
contingency plan for addressing this situation, should it occur.
2. 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 is in the process of assessing their Y2K
readiness and risk to the Corporation.
3. 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.
4. 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.
5. 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 substantially developed a contingency plan related to
year 2000 issues, however, this is a plan that is still in development.
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. As such the Contingency Plan deals primarily
with issues outside of Management's control or ability to test, such as
power, water, telephone failure.
<PAGE>
<TABLE>
<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 September 30, 1998. 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>
<CAPTION>
3 3-6 12 1-5 Over 5
Repricing within: months months months years years Totals
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold & Short Term Inv. $9,526 $0 $0 $0 $0 $9,526
Investment securities $3,303 $3,615 $9,755 $31,301 $26,347 $74,321
Construction & real estate loans $67,015 $9,307 $2,790 $476 $544 $80,132
Commercial loans $44,871 $4,273 $586 $1,175 $38 $50,943
Consumer loans $27,076 $415 $771 $1,999 $10 $30,271
Leases $66 $66 $126 $446 $0 $704
Interest-bearing assets $151,857 $17,676 $14,028 $35,397 $26,939 $245,897
Savings and Now accounts $32,768 $0 $0 $0 $0 $32,768
Money market accounts $72,154 $0 $0 $0 $0 $72,154
Time deposits <$100,000 $15,836 $7,706 $9,968 $2,632 $0 $36,142
Time deposits >$100,000 $22,531 $4,759 $6,155 $532 $0 $33,977
Interest-bearing liabilities $143,289 $12,465 $16,123 $3,164 $0 $175,041
Rate sensitive gap $8,568 $5,211 ($2,095) $32,233 $26,939 $70,856
Cumulative rate sensitive gap $8,568 $13,779 $11,684 $43,917 $70,856
Cumulative position to average
earning assets 3.48% 5.60% 4.75% 17.86% 28.82%
</TABLE>
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
On July 21, 1998 the Corporation's stock began trading on the NASDAQ
stock exchange.
Item 6 - Exhibits and Reports on Form 8-K
None
<PAGE>
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 29, 1998 James L. Ryan
___________________________ _________________________________
Date James L. Ryan
Chairman and Chief Executive
Officer
October 29, 1998 Leland E. Wines
______________________ ________________________________
Date Leland E. Wines
CFO and Corp. Secretary
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000353650
<NAME> BWC FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 14486000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9526000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60314000
<INVESTMENTS-CARRYING> 14007000
<INVESTMENTS-MARKET> 14239000
<LOANS> 162050000
<ALLOWANCE> 3713000
<TOTAL-ASSETS> 263184000
<DEPOSITS> 236654000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3005000
<LONG-TERM> 0
0
0
<COMMON> 19018000
<OTHER-SE> 4507000
<TOTAL-LIABILITIES-AND-EQUITY> 263184000
<INTEREST-LOAN> 13411000
<INTEREST-INVEST> 2213000
<INTEREST-OTHER> 566000
<INTEREST-TOTAL> 16190000
<INTEREST-DEPOSIT> 5107000
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 11083000
<LOAN-LOSSES> 600000
<SECURITIES-GAINS> 34000
<EXPENSE-OTHER> 7104000
<INCOME-PRETAX> 5013000
<INCOME-PRE-EXTRAORDINARY> 5013000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3054000
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 6.59
<LOANS-NON> 31000
<LOANS-PAST> 2000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 490000
<ALLOWANCE-OPEN> 2936000
<CHARGE-OFFS> 81000
<RECOVERIES> 258000
<ALLOWANCE-CLOSE> 3713000
<ALLOWANCE-DOMESTIC> 1816000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1897000
</TABLE>
