-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qyj9iolLuvlO+yynolqZJD27a000zX32CpIynFZTaawYebbRboxCY5vqFkMoeylC mqNFk9fLmecD0iscpqNrBw== 0000353650-98-000013.txt : 19980803 0000353650-98-000013.hdr.sgml : 19980803 ACCESSION NUMBER: 0000353650-98-000013 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980731 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BWC FINANCIAL CORP CENTRAL INDEX KEY: 0000353650 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942621001 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-14119 FILM NUMBER: 98674646 BUSINESS ADDRESS: STREET 1: 1400 CIVIC DR CITY: WALNUT CREEK STATE: CA ZIP: 94596 BUSINESS PHONE: 5109325353 MAIL ADDRESS: STREET 1: P O BOX 8080 STREET 2: 1400 CIVIC DRIVE CITY: WALNUT CREEK STATE: CA ZIP: 94596-8080 10-Q/A 1 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, 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) (510) 932-5353 (Registrant's telephone number: (including area code) N/A (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1924 subsequent to the distribution of securities under a plan confirmed by court. Yes No _____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as the latest practicable date. As of June 30, 1998, there were 1,234,162 shares of common stock, no par value outstanding. 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, 1998 and the results of operations for the six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 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 six months ended June 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 June 30, 1998 are as follows: Gross Amortized Unrealized Market Cost Gain Value Held-to-maturity Obligations of State and Political Subdivisions $10,417,000 $ 57,000 $10,474,000 Available-for-sale Taxable Obligations of State & Political Subdivisions $12,303,000 $ 90,000 $12,393,000 U.S. Treasury Securities 9,573,000 60,000 9,633,000 U.S. Government Agencies 19,353,000 171,000 19,524,000 Total Available-for-sale $41,229,000 $321,000 $41,550,000 For the six months ended June 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 June 30, 1998. Held-to-Maturity Available-for-Sale Amortized Market Amortized Market Cost Value Cost Value Within one year $ 2,299,000 $2,314,000 $ 5,503,000 $4,515,000 After one but within five years $ 4,775,000 $4,805,000 $21,066,000 $22,218,000 Over five years $ 3,343,000 $3,355,000 $14,660,000 $14,817,000 Total $10,417,000 $10,474,000 $41,229,000 $41,550,000 3. ALLOWANCE FOR CREDIT LOSSES For the Six months Ended June 30, 1998 1997_ Allowance for credit losses at beginning of period $2,936,000 $1,893,000 Chargeoffs (53,000) (63,000) Recoveries 201,000 25,000 Net (recoveries)/chargeoffs (148,000) 38,000 Provisions 375,000 525,000 Allowance for credit losses at end of period $3,460,000 $2,380,000 Ratio of allowance for credit losses to loans 2.07% 1.60% 4. SUBSEQUENT EVENTS: During the regular board meeting held June 30, 1998, the Board of Directors declared a two (2) for one (1) stock split to shareholders of record as of July 10, 1998. All share and per share data in this 10Q report, as appropriate, reflect this split. The Board of Directors instructed management to proceed with the steps necessary to list the Corporation's stock on NASDAQ, and the Corporation's stock was listed as of July 21, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Net Income Net income for the first six months in 1998 of $1,940,000 was $682,000 greater than the first six months in 1997. This represented a return on average assets during this period of 1.67% and a return on average equity of 18.88%. The return on average assets during the first six months of 1997 was 1.36% and the return on average equity was 14.82%. Net income for the three months ending June 30, 1998, of $974,000 was $307,000 over the comparable period in 1997. The return on average assets during the second quarter was 1.62% and the return on average equity was 18.45%. The return on average assets during the second quarter of 1997 was 1.37% and the return on average equity was 15.44%. Earning assets averaged $218,124,000 during the six months ended June 30, 1998, as compared to $172,222,000 for the comparable period in 1997. Earning assets averaged $226,316,000 during the second quarter of 1998 as compared to $181,129,000 during the second 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 $0.67 for the first six months of 1998 as compared to $0.45 for the first six months of 1997. For the second quarter of 1998, diluted earnings per average common share was $0.33 as compared to $0.24 for the second 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 six months of 1998 was $7,145,000 or $1,400,000 greater than the comparable period in 1997. Of this increase, 83% was due to increases in the volume of loans outstanding during the 1998 period as compared to 1997 and the balance as related to rate changes. Similar results existed for the second quarter of 1998. 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, 1998 was 2.07% as compared to 1.60% for the period ending June 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 $148,000 during the first six months of 1998 as compared to net loan losses of $38,000 during the comparable period in 1997. The following table provides information on past due and nonaccrual loans: For the Six months Ended June 30, 1998 1997 Loans Past Due 90 Days or More $ 1,000 $ 479,000 Nonaccrual Loans 477,000 428,000 Total $ 478,000 $ 907,000 As of June 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 $21,000 and $24,000 as of June 30, 1998 and 1997 respectively. Noninterest Income Noninterest income during the first six months of 1998 of $1,064,000 was $249,000 greater than earned during the comparable period of 1997. This was reflected in increases in all categories of noninterest income and fees and was commensurate with the Corporation's growth during these comparable periods. During the second quarter of 1998 noninterest income of $544,000 was $148,000 greater than earned during the comparable quarter of 1997. The same reasons applicable for the first six months apply to the second quarter results. Noninterest Expense Total noninterest expenses of $4,672,000 during the first six months of 1998 are $601,000 over the comparable period in 1997. The major categories of this are detailed below. Salaries and related benefits are $300,000 greater during the first six 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. Staff FTE (full time equivalency) averaged 83.5 during the first six months of 1998 as compared to 78.8 for the comparable 1997 period. Occupancy expense increased $15,000 during the respective periods due to rental adjustments and operating expense increases on office facilities. Total furniture and equipment expense increased $29,000 between the respective periods reflecting the growth and added technology in the Corporation's operations. Other expense increased $257,000 between the respective periods and is related to general increases in growth and activity. During the second quarter of 1998 the Corporation had a total of $2,400,000 in noninterest expense which was $346,000 over the comparable quarter of 1997. The same reasons applicable for the first six months apply to the second quarter results. Other Real Estate Owned As of June 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 June 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 June 30, 1998, December 31, 1997, and June 30, 1997. Risk-based capital ratios: Capital Ratios Minimum June 30, December 31, June 30, regulatory 1997 1997 1997 requirements Tier 1 capital 11.35% 10.90% 10.43% 4.00% Total capital 12.60% 12.15% 11.68% 8.00% Leverage ratio 9.05% 9.64% 8.64% 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 June 30, 1998 and 27% at June 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. 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 nonowner 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 Corporation's consolidated statements of income. 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. General Total assets of the Corporation at June 30, 1998 of $252,542,000 have increased $48,982,000 or 24% as compared to June 30, 1997. Total loans of $167,333,000 have increased $18,776,000 or 13% and total deposits of $228,741,000 have increased $44,720,000 or 24%. Since year end 1997 the Corporation's assets have increased 10%, loans increased 2% and deposits increased 10%. The increase in deposit growth over loan growth was placed in investments which increased 27% from last year end. The Corporation's loan to deposit ratio as of June 30, 1998 was 73% and was 81% 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 June 30, 1998 was consistent with the interest rate exposure presented in the Corporation's 1997 annual report and was within the Corporation's risk policy range. 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, 1998 and the results of operations for the six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 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 six months ended June 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 June 30, 1998 are as follows: Gross Amortized Unrealized Market Cost Gain Value Held-to-maturity Obligations of State and Political Subdivisions $10,417,000 $ 57,000 $10,474,000 Available-for-sale Taxable Obligations of State & Political Subdivisions $12,303,000 $ 90,000 $12,393,000 U.S. Treasury Securities 9,573,000 60,000 9,633,000 U.S. Government Agencies 19,353,000 171,000 19,524,000 Total Available-for-sale $41,229,000 $321,000 $41,550,000 For the six months ended June 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 June 30, 1998. Held-to-Maturity Available-for-Sale Amortized Market Amortized Market Cost Value Cost Value Within one year $ 2,299,000 $2,314,000 $ 5,503,000 $4,515,000 After one but within five years $ 4,775,000 $4,805,000 $21,066,000 $22,218,000 Over five years $ 3,343,000 $3,355,000 $14,660,000 $14,817,000 Total $10,417,000 $10,474,000 $41,229,000 $41,550,000 3. ALLOWANCE FOR CREDIT LOSSES For the Six months Ended June 30, 1998 1997_ Allowance for credit losses at beginning of period $2,936,000 $1,893,000 Chargeoffs (53,000) (63,000) Recoveries 201,000 25,000 Net (recoveries)/chargeoffs (148,000) 38,000 Provisions 375,000 525,000 Allowance for credit losses at end of period $3,460,000 $2,380,000 Ratio of allowance for credit losses to loans 2.07% 1.60% 4. SUBSEQUENT EVENTS: During the regular board meeting held June 30, 1998, the Board of Directors declared a two (2) for one (1) stock split to shareholders of record as of July 10, 1998. All share and per share data in this 10Q report, as appropriate, reflect this split. The Board of Directors instructed management to proceed with the steps necessary to list the Corporation's stock on NASDAQ, and the Corporation's stock was listed as of July 21, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Net Income Net income for the first six months in 1998 of $1,940,000 was $682,000 greater than the first six months in 1997. This represented a return on average assets during this period of 1.67% and a return on average equity of 18.88%. The return on average assets during the first six months of 1997 was 1.36% and the return on average equity was 14.82%. Net income for the three months ending June 30, 1998, of $974,000 was $307,000 over the comparable period in 1997. The return on average assets during the second quarter was 1.62% and the return on average equity was 18.45%. The return on average assets during the second quarter of 1997 was 1.37% and the return on average equity was 15.44%. Earning assets averaged $218,124,000 during the six months ended June 30, 1998, as compared to $172,222,000 for the comparable period in 1997. Earning assets averaged $226,316,000 during the second quarter of 1998 as compared to $181,129,000 during the second 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 $0.67 for the first six months of 1998 as compared to $0.45 for the first six months of 1997. For the second quarter of 1998, diluted earnings per average common share was $0.33 as compared to $0.24 for the second 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 six months of 1998 was $7,145,000 or $1,400,000 greater than the comparable period in 1997. Of this increase, 83% was due to increases in the volume of loans outstanding during the 1998 period as compared to 1997 and the balance as related to rate changes. Similar results existed for the second quarter of 1998. 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, 1998 was 2.07% as compared to 1.60% for the period ending June 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 $148,000 during the first six months of 1998 as compared to net loan losses of $38,000 during the comparable period in 1997. The following table provides information on past due and nonaccrual loans: For the Six months Ended June 30, 1998 1997 Loans Past Due 90 Days or More $ 1,000 $ 479,000 Nonaccrual Loans 477,000 428,000 Total $ 478,000 $ 907,000 As of June 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 $21,000 and $24,000 as of June 30, 1998 and 1997 respectively. Noninterest Income Noninterest income during the first six months of 1998 of $1,064,000 was $249,000 greater than earned during the comparable period of 1997. This was reflected in increases in all categories of noninterest income and fees and was commensurate with the Corporation's growth during these comparable periods. During the second quarter of 1998 noninterest income of $544,000 was $148,000 greater than earned during the comparable quarter of 1997. The same reasons applicable for the first six months apply to the second quarter results. Noninterest Expense Total noninterest expenses of $4,672,000 during the first six months of 1998 are $601,000 over the comparable period in 1997. The major categories of this are detailed below. Salaries and related benefits are $300,000 greater during the first six 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. Staff FTE (full time equivalency) averaged 83.5 during the first six months of 1998 as compared to 78.8 for the comparable 1997 period. Occupancy expense increased $15,000 during the respective periods due to rental adjustments and operating expense increases on office facilities. Total furniture and equipment expense increased $29,000 between the respective periods reflecting the growth and added technology in the Corporation's operations. Other expense increased $257,000 between the respective periods and is related to general increases in growth and activity. During the second quarter of 1998 the Corporation had a total of $2,400,000 in noninterest expense which was $346,000 over the comparable quarter of 1997. The same reasons applicable for the first six months apply to the second quarter results. Other Real Estate Owned As of June 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 June 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 June 30, 1998, December 31, 1997, and June 30, 1997. Risk-based capital ratios: Capital Ratios Minimum June 30, December 31, June 30, regulatory 1997 1997 1997 requirements Tier 1 capital 11.35% 10.90% 10.43% 4.00% Total capital 12.60% 12.15% 11.68% 8.00% Leverage ratio 9.05% 9.64% 8.64% 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 June 30, 1998 and 27% at June 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. 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 nonowner 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 Corporation's consolidated statements of income. 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. General Total assets of the Corporation at June 30, 1998 of $252,542,000 have increased $48,982,000 or 24% as compared to June 30, 1997. Total loans of $167,333,000 have increased $18,776,000 or 13% and total deposits of $228,741,000 have increased $44,720,000 or 24%. Since year end 1997 the Corporation's assets have increased 10%, loans increased 2% and deposits increased 10%. The increase in deposit growth over loan growth was placed in investments which increased 27% from last year end. The Corporation's loan to deposit ratio as of June 30, 1998 was 73% and was 81% 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 June 30, 1998 was consistent with the interest rate exposure presented in the Corporation's 1997 annual report and was within the Corporation's risk policy range. 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 -----END PRIVACY-ENHANCED MESSAGE-----