2001 ANNUAL REPORT
BWC Financial Corp.
Table of Contents
To our Shareholders
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Management's Discussion and Analysis of Operations
To Our Shareholders, Clients and Friends
In a year marked by a slowing economy, a record number of decreases in the prime rate, and a country unified by the tragic and sobering events of September 11, BWC Financial Corp. stayed the course, continuing its history of profitability, managed growth and credit quality.
While facing a slower economy, the Corporation enjoyed a growth of 13%, or approximately $45 million, in total assets from the prior year. Total deposit growth was 10% and loan growth was 12%.
Net income in 2001 was $5,464,000, reflecting a return on average assets of 1.45% and a return on average equity of 14.97%. While the Corporation’s return on average assets was down in 2001 from the all-time high of 1.97% in 2000, we were above those of our peers.
An unprecedented eleven decreases in prime, bringing the rate to 4.75% at year end — a forty-year low, resulted in diminished margins, and subsequently, lower earnings for Bank of Walnut Creek. At the same time, BWC Mortgage Services capitalized on the lower interest rate environment, producing $500 million in new and refinanced mortgages, an increase of $200 million over the previous year’s loans.
BWC Mortgage Services is providing consumers with expert guidance through Internet technology, with the added convenience of local service. Their website,www.bwcmortgage.com, offers instant access to a world of knowledge and information, including: mortgage calculators, a look at current rates, powerful refinance strategies, free pre-qualification for loans, and an exclusive Mortgage Manager program.
During the First Quarter, Bank of Walnut Creek opened its South Bay location at 1625 The Alameda in San Jose. Regional Manager Steve Prouty, business bankers, and staff have been working to expand the Bank’s influence in that area, calling on local businesses and professionals and participating in local business activities.
This past year Ruth Batz joined the Bank as Vice President and Manager of the SBA Division, renewing a focus on relationship business banking with SBA clients. With plans to increase our asset-based lending portfolio, Howard Berkman joined the Bank as president of BWC Business Credit. This division, specializing in accounts receivable financing for emerging and growing companies, strengthened its staff in readiness for their increased volume.
The Business Banking Group continues its concentration on loans to small and mid-sized businesses and to the professional market place, growing its portfolio through individual calling efforts and referrals from satisfied clients. Branch offices are maintaining a sales and service focus as they work on increasing their client base and market penetration.
Throughout the Bank, there is constant vigilance with respect to credit risk management, with enhancements to that process supporting loan growth and credit quality.
Construction and home improvement loans remain constant, and that division continues to gain market share, while contributing significantly to the Bank’s income. The focus on commercial real estate that was initiated last year has paid off with a significant increase in that loan portfolio, including fixed and adjustable rate mortgages for a variety of projects.
On the technology side, the Bank has introduced a number of services to make banking even more convenient and effective.I-Banc, our Internet banking system, added an online bill payment feature, affording clients the opportunity to pay bills electronically.I-Bancis popular with clients for both personal and business banking. Business clients can choose special cash management features. I-Banc,Cash Manager for Business and Bill Pay can all be accessed directly through the Bank’s website, which also includes various loan applications that can be downloaded for customer convenience.
The recent implementation of an electronic Check Imaging system allows the Bank to provide clients with exact photographic images of their checks, streamlining record keeping and eliminating bulky statements. A monthly activity statement, along with check images reproduced several to a page, is printed on regular sized paper. The Check Imaging system takes a picture of the front and back of each check and converts this information into microscopic pieces of computer data. Additional features are being added to this system, including statements available on CD ROMs, and by FAX or e-mail. Currently, work is progressing on technology that will further enhance these services by enabling I-Banc users to view their check images online.
Our dedication to the communities we serve, both as a Corporation and as individuals, is rewarding and recognized. For the second consecutive year, Bank of Walnut Creek was named as one of San Ramon’sTop Ten Corporate Citizens, an award based on contributions to the welfare of the community. Since the Bank’s inception in 1980, our corporation and our individual employees have participated fully in the lives of the communities we serve, supporting civic, welfare, cultural, education and youth activities. Our employees, with the support of the Bank, serve on Chamber of Commerce boards and committees, and a variety of other nonprofit organizations. You will find our people working at most every community festival, participating in school activities, coaching youth sports, adopting families and collecting food and toys at the holidays.
The August 2001 edition ofU.S. Banker recognized BWC Financial Corp as a “truly successful company”. BWC was again awarded the Super Premier Performance designation by The Findley Reports on Financial Institutions, the Five Star rating from Bauer Reports, and the Blue Ribbon title from Veribanc, Inc.
A 10% stock dividend was distributed on June 15, 2001, to shareholders of record as of May 25. During the past year, the Corporation successfully met its goal of repurchasing 124,000 shares of stock, which were then retired. You are invited to visit our website atwww.bowc.comfor timely information on the Corporation, including the stock price.
As we reflect on the activities and results of 2001, we see a foundation for further growth-- an opportunity to build on the basics that have been established throughout our history. We look to 2002 with renewed dedication and with gratitude for our accomplishments.
Our priority is people.
God bless America!
James L. Ryan | Tom Mantor |
Chairman of the Board & | President & |
Chief Executive Officer | Chief Operating Officer |
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
In thousands December 31, Assets 2001 2000 ------------------------------------- Cash and Due From Banks $ 15,016 $ 20,684 Federal Funds Sold 6,000 3,268 Other Short-term Investments 33 520 ------------------------------------- Total Cash and Cash Equivalents 21,049 24,472 Investment Securities: Available-for-Sale 76,684 58,025 Held-to-Maturity (approximate fair value of $10,338 in 2001 and $9,975 in 2000) 10,025 9,920 Loans, Net of Allowance for Credit Losses of $5,403 in 2001 and $5,042 in 2000 276,064 247,281 Bank Premises and Equipment, Net 3,558 2,892 Interest Receivable and Other Assets 7,677 7,923 ------------------------------------- Total Assets $ 395,057 $ 350,513 ===================================== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing $ 87,172 $ 88,143 ------------------------------------- Interest-bearing: Money Market Accounts 143,317 114,718 Savings and NOW Accounts 44,543 38,892 Time Deposits: Under $100,000 30,416 31,554 $100,000 or more 35,021 36,329 ------------------------------------- Total Interest-bearing 253,297 221,493 Total Deposits 340,469 309,636 Federal Home Loan Bank Borrowings 12,955 2,424 Interest Payable and Other Liabilities 3,381 4,242 ------------------------------------- Total Liabilities 356,805 316,302 ------------------------------------- Commitments and Contingent Liabilities (Note 10) 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 - - 3,092,474 shares in 2001 and 2,850,850 in 2000 27,160 23,193 Retained Earnings 10,391 10,975 Accumulated other comprehensive income (loss) 701 43 ------------------------------------- Total Shareholders' Equity 38,252 34,211 ------------------------------------- Total Liabilities and Shareholders' Equity $ 395,057 $ 350,513 ===================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
In thousands except per share amounts For the Year Ended December 31, Interest Income 2001 2000 1999 ---------------------------------------------------- Loans, Including Fees $ 26,531 $ 27,787 $ 20,674 Investment Securities: Taxable 3,290 3,244 2,924 Non-taxable 441 480 555 Federal Funds Sold 527 570 483 Other Short-term Investments 90 57 148 ---------------------------------------------------- Total Interest Income 30,879 32,138 24,784 Interest Expense Deposits 8,202 9,066 6,548 Federal Funds Purchased 16 22 8 Other Borrowed Funds 373 51 69 ---------------------------------------------------- Total Interest Expense 8,591 9,139 6,625 Net Interest Income 22,288 22,999 18,159 Provision For Credit Losses 1,600 1,150 600 ---------------------------------------------------- Net Interest Income After Provision For Credit Losses 20,688 21,849 17,559 Noninterest Income BWC Mortgage Services - Commissions 5,909 3,315 3,108 BWC Mortgage Services - Fees & Other 970 609 897 Service Charges on Deposit Accounts 788 804 839 Other 1,332 1,147 1,228 Gains on Security Transactions 55 10 30 ---------------------------------------------------- Total Noninterest Income 9,054 5,885 6,102 Noninterest Expense Salaries and Related Benefits 8,948 8,612 7,618 BWC Mortgage Services - Commissions 4,084 2,226 2,176 BWC Mortgage Services - Fees & Other 639 613 552 Occupancy 1,344 1,069 947 Furniture and Equipment 877 718 600 Other 4,494 4,057 3,576 ---------------------------------------------------- Total Noninterest Expense 20,386 17,295 15,469 ---------------------------------------------------- BWC Mortgage Services - Minority Interest 695 327 350 Income Before Income Taxes 8,661 10,112 7,842 Provision For Income Taxes 3,197 3,677 3,046 ---------------------------------------------------- Net Income $ 5,464 $ 6,435 $ 4,796 ==================================================== Basic Earnings Per Share $1.75 $2.03 $1.54 Diluted Earnings Per Share $1.60 $1.83 $1.33 ==================================================== Weighted Average Basic Shares 3,121,006 3,164,163 3,112,873 Weighted Average Diluted Share Equivalents Related to Options 304,295 361,027 487,311 Weighted Average Diluted Shares 3,425,301 3,525,190 3,600,183 ==================================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the periods ending December 31, 1999, 2000, and 2001
In thousands except share amounts Accumulated Other Number Common Retained Comprehensive Comprehensive of Shares Stock Earnings Income/(Loss) Total Income ------------------------------------------------------------------------ Balance, January 1, 1999 2,511,151 $ 19,002 $ 5,006 $ 335 $ 24,343 Net Income as of December 31, 1999 -- -- 4,796 -- 4,796 $ 4,796 Other Comprehensive Income(Loss), net of tax benefit of $529 -- -- -- (862) (862) (862) -------------- Comprehensive Income -- -- -- -- -- 3,934 Common stock issued and sold to the Defined Contribution Plan 22,186 466 -- -- 466 Stock options exercised 79,449 261 -- -- 261 Tax benefit from the exercise of stock options -- 425 -- -- 425 ---------------------------------------------------------- Balance, December 31, 1999 2,612,786 20,154 9,802 (527) 29,429 Net Income as of December 31, 2000 -- -- 6,435 -- 6,435 6,435 Other Comprehensive Income, net of tax liability of $350 -- -- -- 570 570 570 -------------- Comprehensive Income -- -- -- -- -- 7,005 Stock options exercised 122,460 495 -- -- 495 Repurchase and retirement of shares by the Corporation (159,774) (3,387) -- -- (3,387) Common Stock issued and sold to the Defined Contribution Plan 15,640 321 -- -- 321 10% stock dividend including payment of fractional shares 259,738 5,260 (5,262) -- (2) Tax benefit from the exercise of stock options -- 350 -- -- 350 ---------------------------------------------------------- Balance, December 31, 2000 2,850,850 23,193 10,975 43 34,211 Net Income as of December 31, 2001 -- -- 5,464 -- 5,464 5,464 Other Comprehensive Income, net of tax liability of $402 -- -- -- 658 658 658 -------------- Comprehensive Income -- -- -- -- -- $ 6,122 Stock options exercised 91,918 329 -- -- 329 Repurchase and retirement of shares by the Corporation (132,002) (2,704) -- -- (2,704) 10% stock dividend including payment of fractional shares 281,708 6,043 (6,048) -- (5) Tax benefit from the exercise of stock options -- 299 -- -- 299 ---------------------------------------------------------- Balance, December 31, 2001 3,092,474 $ 27,160 $ 10,391 $ 701 $ 38,252 ========================================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands For the Year Ended December 31, Operating Activities: 2001 2000 1999 ----------------------------------------------- Net Income $ 5,464 $ 6,435 $ 4,796 Adjustments to reconcile net income to net cash provided: Amortization of loan fees (2,048) (2,013) (1,850) Provision for credit losses 1,600 1,150 600 Depreciation and amortization 665 577 488 Gain on sale of securities available-for-sale (55) (10) (30) Deferred income taxes 199 (569) (275) Real estate loans held for sale, net change -- 480 (480) Tax benefit from the exercise of stock options 299 350 425 Decrease/(increase) in interest receivable and other assets 246 (1,635) (1,108) Increase/(decrease) in interest payable and other liabilities (861) 1,509 317 ----------------------------------------------- Net Cash Provided by Operating Activities 5,509 6,274 2,883 ----------------------------------------------- Investing Activities: Proceeds from the maturities of investment securities 16,037 9,386 11,189 Proceeds from the sales of available-for-sale investment securities 29,819 3,200 12,776 Purchase of investment securities (64,148) (14,495) (30,731) Loans originated, net of collections (28,335) (36,925) (25,184) Purchase of bank premises and equipment (1,289) (504) (2,150) ----------------------------------------------- Net Cash Used by Investing Activities (47,916) (39,338) (34,100) ----------------------------------------------- Financing Activities: Net increase in deposits 30,833 50,967 20,528 Net increase(decrease) in borrowings to support real estate loans held for sale -- (473) 473 Increase (decrease) in Federal Funds Purchased and other borrowings 10,531 (3,003) 5,427 Proceeds from issuance of common stock 329 816 727 Cash paid for the repurchase of common stock (2,704) (3,387) -- Cash paid in lieu of fractional shares (5) (2) -- ----------------------------------------------- Net Cash Provided by Financing Activities 38,984 44,918 27,155 ----------------------------------------------- Cash and Cash Equivalents: Increase (decrease) in cash and cash equivalents (3,423) 11,854 (4,062) Cash and cash equivalents at beginning of year 24,472 12,618 16,680 ----------------------------------------------- Cash and Cash Equivalents at end of year $ 21,049 $ 24,472 $ 12,618 =============================================== Additional Cash Flow Information: Interest Paid $ 6,988 $ 8,685 $ 6,844 =============================================== Income Taxes Paid $ 2,285 $ 1,885 $ 3,202 =============================================== The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BWC Financial Corp. (the “Corporation”) and its subsidiaries, Bank of Walnut Creek (the “Bank”), and BWC Real Estate, conform with generally accepted accounting principles and general practice within the banking industry. The following is a summary of the more significant accounting policies.
Nature of Operations. The Corporation operates in Northern California with four branches in Contra Costa County, three in northern Alameda County and one in Santa Clara County, in the city of San Jose. The Corporation’s primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses, home construction lending, and home equity lines to individuals.
Basis of Presentation. The consolidated financial statements of the Corporation include the accounts of the Corporation, the Bank and BWC Real Estate. All significant inter-company balances and transactions have been eliminated in consolidation. BWC Real Estate, a wholly owned subsidiary of the Corporation, was formed in 1994 to enter into a joint venture arrangement with a real estate brokerage firm, creating a company called BWC Mortgage Services. As BWC Real Estate owns 51% of this joint venture, the Corporation has consolidated BWC Mortgage Services. The real estate brokerage firm’s interest in the joint venture is shown as minority interest in the consolidated financial statements.
Investment Securities. The Corporation classifies its investments in debt and equity securities as “held-to-maturity,” or “available-for-sale.” Investments classified as held-to-maturity are reported at amortized cost; investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related tax, if any, reported as a separate component of shareholders’ equity.
Amortization and accretion are included in interest income, while gains and losses on disposition are included in noninterest income and are determined using the specific identification method.
The Corporation’s policy of carrying investment securities as held-to-maturity is based upon its ability and management’s intent to hold such securities to maturity.
Loans are stated at the principal amount outstanding. Interest income is recognized using methods which approximate a level yield on principal amounts outstanding. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past-due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. When a loan is placed on non-accrual status, any accrued but uncollected interest is reversed from current income. Loan origination fees are deferred and amortized as yield adjustments over the contractual lives of the underlying loans.
Sales and Servicing of SBA Loans. The Corporation originates loans to customers under a Small Business Administration (“SBA”) program that generally provides for SBA guarantees of 70% to 90% of each loan. The Corporation generally sells the guaranteed portion of each loan to a third party and retains the unguaranteed portion in its own portfolio. The Corporation may be required to refund a portion of the sales premium received if the borrower defaults or the loan prepays within 90 days of the settlement date. As a result, the Corporation recognizes no gain or loss on these loan sales until the 90-day period elapses
To calculate the gain (loss) on sale, the Corporation’s investment in an SBA loan is allocated among the retained portion of the loan and the sold portion of the loan, based on the relative fair value of each portion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan.
Allowance for Credit Losses is maintained at a level considered adequate to provide for probable losses that can be reasonably estimated. 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 Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. The Corporation’s management believes that the amount of allowance is reasonable, due to the growth of the Bank’s loan portfolio, the new credit products that have been introduced and overall credit quality. In the past few years, the Bank has opened an Accounts Receivable Financing Division, a Leasing Division and a Small Business Administration 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 are considered in determining the allowance.
Premises and Equipment consists of leasehold improvements, furniture and equipment and are stated at cost, less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of furniture and equipment, primarily from five to fifteen years. Leasehold improvements are amortized over the terms of the leases or their estimated useful lives, whichever is shorter.
Federal Home Loan Bank Borrowings represent fixed rate loans issued to Bank of Walnut Creek secured by pledged real estate loans from the Bank. This borrowing is for the purpose of protecting an interest rate spread on offsetting fixed-rate commercial real estate loans granted by the Bank with similar amounts and terms. The loans are amortized over a ten-year period and carry interest rates ranging from 4.8% to 6.8%.
Income Taxes. The Corporation files consolidated income tax returns which include both the parent company and its subsidiaries. Deferred income taxes are recorded for all significant income and expense items recognized in different periods for financial reporting and income tax purposes.
Earnings Per Share (EPS). Basic EPS is calculated by dividing net income by the weighted average shares outstanding. No dilution for any potentially dilutive securities is included. Diluted EPS is calculated by dividing net income by the weighted average shares outstanding during the period including the dilutive effect of stock options. Weighted average shares and per-share amounts presented for all periods reflect the 10% stock dividend paid on June 15, 2001 and on August 1, 2000.
Letters of credit and commitments to extend credit are extended based upon evaluations of customer credit worthiness. The amount of collateral obtained is based upon these evaluations. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and commitments to extend credit generally have fixed expiration dates or other termination clauses. Because many of the standby letters of credit and commitments to extend credit are expected to expire without being drawn upon, total guarantee and commitment amounts do not necessarily represent future cash requirements.
Significant Group Concentrations of Credit Risk. The Bank accepts deposits and grants credit primarily within its local service area, the counties of Contra Costa, Alameda and Santa Clara, California. The Bank has a diversified loan portfolio and grants consumer, commercial and construction real estate loans, and is not dependent on any industry or group of customers. Although the Bank has a diversified loan portfolio, a substantial portion of its loans are real-estate related.
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, Fed Funds sold and other short-term investments.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting for Stock-based Compensation. The Corporation uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair-value-based method to account for stock option plans. The fair-value-based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Corporation has elected to continue to use the intrinsic value method. The pro forma disclosures illustrating the impact on net income of applying the fair-value method are included in Note 9.
Prior Year Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation.
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows: In thousands 2001 Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Loss Value ------------------------------------------------------------- U.S. Treasury Securities $ 9,160 $ - $ 1 $ 9,159 Securities of U.S. Government Agencies 40,102 522 - 40,624 Taxable Securities of State and Political Subdivisions 19,815 521 - 20,336 Corporate Debt Securities 6,477 88 - 6,565 ------------------------------------------------------------- Total 75,554 1,131 1 76,684 Held-to-maturity Obligations of State and Political Subdivisions 10,025 313 - 10,338 ------------------------------------------------------------- Total Investment Securities $ 85,579 $ 1,444 $ 1 $ 87,022 ============================================================= 2000 Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Loss Value ------------------------------------------------------------- U.S. Treasury Securities $ 3,015 $ - $ 6 $ 3,009 Securities of U.S. Government Agencies 34,341 - 29 34,312 Taxable Securities of State and Political Subdivisions 14,558 126 - 14,684 Corporate Debt Securities 6,041 - 21 6,020 ------------------------------------------------------------- Total 57,955 126 56 58,025 Held-to-maturity Obligations of State and Political Subdivisions 9,920 55 - 9,975 ------------------------------------------------------------- Total Investment Securities $ 67,875 $ 181 $ 56 $ 68,000 ============================================================= In 2001, 2000, and 1999, the Corporation received proceeds from sale of available-for-sale investment securities of $29,819,000, $3,200,000 and $12,776,000 respectively, and gains included in other noninterest income totaled $55,000, $10,000 and $30,000 respectively. The maturities of the investment security portfolio at December 31, 2001 follow: Held-to-maturity ------------------------------ Amortized Estimated Cost Fair Value ------------------------- Within one year $ 1,057 $ 1,078 After one through five years 8,804 9,092 Over five years 164 168 ------------------------- Total $ 10,025 $ 10,338 ========================= Available-for-sale ------------------------- Amortized Estimated Cost Fair Value ------------------------- Within one year $ 34,597 $ 34,907 After one through five years 40,440 41,240 Over five years 517 537 ------------------------- Total $ 75,554 $ 76,684 ========================= At December 31, 2001 and 2000, securities with a book value of $11,118,000 and $8,470,000 respectively, were pledged to secure public deposits. Market value of these same securities on those dates were $11,443,000 and $8,516,000 respectively.
NOTE 3: LOANS
The majority of the Bank's loans are to customers in Contra Costa, Alameda and Santa Clara Counties and surrounding areas. Depending upon the type of loan, the Bank generally obtains a secured interest in the general assets of the borrower and/or in any assets being financed. Outstanding loans by type were: December 31, In thousands 2001 2000 - -------------------------------------------------------------------------------- Real Estate Construction $ 91,673 $ 72,638 Real Estate Mortgages 47,028 29,436 Commercial 81,878 94,592 Installment 47,732 43,220 Leases 13,156 12,437 --------------------------- Total 281,467 252,323 Less: Allowance for Credit Losses (5,403) (5,042) --------------------------- Net Loans $ 276,064 $ 247,281 =========================== The following table provides further information on past-due and nonaccrual loans. December 31, 2001 2000 -------------------------- Loans past due 90 days or more, still accruing interest $ 257 $ 26 Nonaccrual Loans 846 2,041 -------------------------- Total $ 1,103 $ 2,067 ========================== As of December 31, 2001 and 2000, the Corporation's recorded investment in impaired loans was $1,103,000 and $2,067,000 respectively. As of December 31, 2001, and 2000, the Corporation had established a valuation allowance of $775,000 and $445,000 respectively, against impaired loans. The average recorded investment in impaired loans for 2001, and 2000 was $1,577,000, and $530,000 respectively. As of December 31, 2001 and 2000, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income remains uncollected. Interest foregone on nonaccrual loans was approximately $354,000 in 2001, $49,000 in 2000, and $8,000 in 1999.
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
In thousands For the Year Ended December 31, 2001 2000 1999 ------------------------------------------------------ Total loans outstanding at end of period, before deducting allowance for credit losses $ 281,467 $ 252,323 $ 213,959 ====================================================== Average total loans outstanding during period $ 267,177 $ 231,991 $ 190,755 ====================================================== Analysis of the allowance for credit losses: Beginning Balance $ 5,042 $ 4,466 $ 3,919 ------------------------------------------------------ Charge-offs: Commercial 1,009 502 126 Leases 382 125 -- Installment 75 34 27 ------------------------------------------------------ Total Charge-Offs 1,466 661 153 Recoveries: Commercial 138 72 96 Leases 79 8 -- Installment 10 7 4 ------------------------------------------------------ Total Recoveries 227 87 100 ------------------------------------------------------ Net Charge-Offs (Recoveries) 1,239 574 53 ------------------------------------------------------ Provisions charged to expense 1,600 1,150 600 ------------------------------------------------------ Ending Balance $ 5,403 $ 5,042 $ 4,466 ====================================================== Ratio of net charge-offs (recoveries) to average total loans 0.46% 0.25% 0.03% ====================================================== Ratio of allowance for credit losses to total loans at end of period 1.92% 2.00% 2.09% ======================================================
NOTE 5: Premises and Equipment
A summary of premises and equipment follows: In thousands December 31, 2001 2000 --------------------------- Leasehold Improvements $ 1,666 $ 1,206 Furniture and Equipment 4,589 3,824 Bank-owned Premises 1,321 1,321 --------------------------- 7,576 6,351 Accumulated Depreciation and Amortization (4,018) (3,459) --------------------------- Premises and Equipment, Net $ 3,558 $ 2,892 =========================== The amount of depreciation and amortization included in occupancy and furniture and equipment expense was $665,000 in 2001, $577,000 in 2000, and $488,000 in 1999.
NOTE 6: COMPREHENSIVE INCOME
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 components of other comprehensive income for the years ended December 31, 2001, 2000 and 1999 are as follows: 2001 2000 1999 - --------------------------------------------------- -------------------- --------------------- --------------------- Unrealized gain(loss) arising during the period, net of tax $ 692 $ 576 $ (843) - --------------------------------------------------- -------------------- --------------------- --------------------- Reclassification adjustment for net realized gains on securities available-for-sale included in net income during the year, net of tax 34 6 19 Net unrealized gain(loss) included in other comprehensive income $ 658 $ 570 $ (862) - --------------------------------------------------- -------------------- --------------------- ---------------------
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the Corporation’s financial instruments at December 31, 2001 and 2000. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than if a forced or liquidation sale.
In thousands 2001 Carrying Estimated Fair Amount Value --------------------------------------- Cash and cash equivalents $ 21,049 $ 21,049 Investment securities 86,709 87,022 Loans (net) 262,908 271,054 Deposit liabilities 340,469 343,762 Federal Home Loan Bank borrowings 12,955 13,625 In thousands 2000 Carrying Estimated Fair Amount Value --------------------------------------- Cash and cash equivalents $ 24,472 $ 24,472 Investment securities 67,945 68,000 Loans (net) 234,844 239,245 Deposit liabilities 309,636 309,924 Federal Home Loan Bank borrowings 2,424 2,090
The carrying amounts in the table are included in the consolidated balance sheets under the indicated captions.
The following notes summarize the major methods and assumptions used in estimating the fair values of financial instruments.
Short-term financial instruments are valued at their carrying amounts included in the consolidated balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies to cash and cash equivalents and other liabilities.
Loans, net of lease financing receivable, are valued on the basis of estimated future receipts of principal and interest, discounted at current rates. Loan prepayments are assumed to occur at the same rate as in previous periods when interest rates were at levels similar to current levels. Future cash flows for homogeneous categories of consumer loans are estimated on a portfolio basis and discounted at current rates offered for similar loan terms to new borrowers with similar credit profiles. The fair value of nonaccrual loans also is estimated on a present value basis, using higher discount rates appropriate to the higher risk involved. Fair value is also net of the allowance for credit losses which is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain loans in the portfolio.
Investment securities are valued at quoted market prices, if available. For securities not quoted, the reported fair value is estimated on the basis of financial and other information.
Fair value of demand deposits and deposits with no defined maturity is taken to be the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated using rates currently offered for deposits of similar remaining maturities. The intangible value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed.
The fair value of commitments to extend credit is estimated by using the fees currently charged to others to enter into similar agreements, taking into account the terms of the agreements, and the present creditworthiness of the counterparties. The fair value of commitments at December 31, 2001 was immaterial.
NOTE 8: INCOME TAXES
The provisions for income taxes in 2001, 2000, and 1999 consist of the following: Current 2001 2000 1999 ------------------- ------------------- ------------------- Federal $ 2,125 $ 3,172 $ 2,324 State 873 1,074 997 ------------------- ------------------- ------------------- Total Current 2,998 4,246 3,321 ------------------- ------------------- ------------------- Deferred Federal 134 (487) (239) State 65 (82) (36) ------------------- ------------------- ------------------- Total Deferred 199 (569) (275) ------------------- ------------------- ------------------- TOTAL $ 3,197 $ 3,677 $ 3,046 =================== =================== =================== The components of the net deferred tax assets of the Bank as of December 31, 2000 and 1999 were as follows: Deferred Tax Assets: 2001 2000 ------------------- ------------------- Allowance for credit losses $ 2,025 $ 2,079 Employee benefits and other 228 568 State taxes 297 163 ------------------- ------------------- Total deferred tax assets 2,550 2,810 Deferred Tax Liabilities: Available-for-sale securities (430) (27) Accretion and other -- (61) ------------------- ------------------- Total deferred tax liabilities (430) (88) ------------------- ------------------- Net Deferred Tax Assets $ 2,120 $ 2,722 =================== =================== The provisions for income taxes differ from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The reasons for these differences are as follows: 2000 2000 1999 ------------------- ------------------- ------------------- Provision based on the statutory Federal rate of 34% $ 2,945 $ 3,438 $ 2,666 Increases (reductions) in income taxes resulting from: State franchise taxes, net of Federal income tax benefit 626 723 561 Non-taxable interest income (449) (282) (293) Other 75 (202) 112 ------------------- ------------------- ------------------- TOTAL $ 3,197 $ 3,677 $ 3,046 =================== =================== =================== The 2001, 2000 and 1999 current tax provision does not reflect the deduction for tax purposes of non-qualified stock options exercised by directors. The benefit of the tax deduction is reflected as a direct increase to equity in the amount of $299,000, $350,000 and $425,000 respectively and a decrease of taxes payable of the same amounts.
NOTE 9: STOCK OPTIONS
In 2000, the Board of Directors of the Corporation adopted the 2000 Stock Option Plan, approved by shareholders in 2000, authorizing the issuance of up to 15% of the Corporation’s issued and outstanding shares. Under the 2000 Stock Option Plan, options to purchase shares of the Corporation’s common stock may be granted to certain key employees or directors. The options may be incentive stock options or nonqualified stock options. If incentive options are granted, the exercise price of the options will be the fair market value of the shares on the date the option is granted. The exercise price of nonqualified stock options to be granted can be below the fair market value of the shares at the grant date. To date, all options granted have been at the fair market value of the shares at the grant date and are nontransferable and are exercisable in installments.
As of December 31, 2001, 409,601 shares were available for future grant. The options are fully vested in either four or five years, depending on the terms granted, and expire after ten years.
A summary of the status of the Corporation's stock option plan at December 31, 2001, 2000, and 1999, which presents changes during the years then ended, is presented in the table below. Figures have been adjusted to reflect the 10% stock dividend given in June 2001 and in July 2000.
Weighted Weighted Weighted Average Average Average 2001 Exercise 2000 Exercise 1999 Exercise Shares Price Shares Price Shares Price ----------------------------------------------------------------------------- Outstanding at beginning of year 495,228 $ 5.45 618,420 $ 4.61 702,453 $ 4.11 Granted 30,950 20.49 23,595 18.49 12,100 19.32 Exercised 91,918 3.58 143,859 3.78 96,133 2.72 Forfeited 26,367 15.81 2,928 - - - Outstanding at end of year 407,893 $ 6.43 495,228 $ 5.45 618,420 $ 4.61 Exercisable at end of year 348,910 $ 4.33 431,471 $ 4.03 548,885 $ 3.53 Weighted average fair value of options granted during the year $ 9.72 $ 8.33 $ 10.25 Had the Corporation used the fair value method prescribed by SFAS 123 (See Note 1), the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Net Income: 2001 2000 1999 -------------- ------------ ------------- As reported $5,464,000 $6,435,000 $4,796,000 Pro forma $5,228,000 $6,330,000 $4,718,000 Basic Earnings per share: As reported $1.75 $2.03 $1.54 Pro forma $1.68 $2.00 $1.52 Diluted Earnings per share: As reported $1.60 $1.83 $1.33 Pro forma $1.53 $1.80 $1.31 The fair value of each option grant in 2001, 2000, and 1999, is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000, and 1999: risk-free rate of 5.21% for 2001, 5.17% for 2000 and 6.70% for 1999, no expected dividend yield, expected life of 8 years and expected volatility of 30.23% in 2001, 33.14% in 2000 and 32.61% in 1999.
The following table summarizes information about stock options outstanding at December 31, 2001. Options Outstanding: Options Weighted Weighted Exercisable: Weighted Range of Number Average Average Number Average Exercise Outstanding Contractual Life Exercise Exercisable Exercise Prices at 12/31/01 Remaining Years Price at 12/31/01 Price ---------------------- ---------------- -------------------- ------------- ----------------- --------------- $ 2.31 - $9.11 311,273 1.26 $ 2.88 311,273 $2.88 $15.81 - $21.82 96,620 7.62 $17.88 37,637 $16.33
NOTE 10: COMMITMENTS AND CONTINGENCIES
As of December 31, 2001 the approximate future minimum net rental payments under non-cancellable operating leases for premises were as follows: In thousands Year Amount - --------------- ------------------ 2002 $ 1,216 2003 1,233 2004 1,198 2005 1,037 2006 994 Thereafter 9,253 - --------------- ------------------ Total $ 14,931 =============== ==================
Rental expense for premises under operating leases included in occupancy expense was $911,000, $638,000, and $612,000, in 2001, 2000 and 1999 respectively. Minimum rentals may be adjusted for increases in the lessors' operating costs and/or increases in the Consumer Price Index.
At December 31, 2001, the Bank had outstanding approximately $149,359,000 in undisbursed loan commitments and $1,549,000 in standby letters of credit, which are not reflected in the accompanying consolidated balance sheets. Management does not anticipate any material losses to result from these transactions.
NOTE 11: DEFINED CONTRIBUTION PLAN
Substantially all eligible, salaried employees of the Corporation are covered by a defined contribution plan. Employees may, up to prescribed limits, contribute to the plan. Portions of such contributions are matched by the Corporation. The Corporation also may elect to make a discretionary contribution to the plan based on the Corporation’s earnings. The expense for this plan, for both matching and discretionary contributions, was $359,000, $374,000, and $303,000 in 2001, 2000, and 1999, respectively. Amounts vary from year to year based on such factors as employees entering and leaving the plan, profits earned by the Corporation, and variances of estimates from the final results.
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following: In thousands 2001 2000 1999 ------------------------------------------ Data Processing $ 596 $ 532 $ 394 Professional Fees 532 500 397 Business Development & Education 488 448 347 Telephone and Postage 397 356 345 Supplies 305 251 293 Marketing 388 298 316 Regulatory Fees 93 86 56 Other 1,695 1,586 1,427 ------------------------------------------ Total $ 4,494 $ 4,057 $ 3,575 ==========================================
NOTE 13: RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior approval from regulatory authorities. The limitations for a given year equal the lesser of the Bank’s net profits (as defined in the regulations) for the current year, combined with the retained net profits for the preceding two years or the Bank’s retained earnings. Under these restrictions, $15,967,000 of the Bank’s retained earnings were available for dividends at December 31, 2001.
The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Corporation is prohibited from borrowing from the Bank, unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Bank are limited to 10% of the Bank’s shareholders’ equity. Under these provisions, secured loans and advances to the Corporation were limited to $3,606,000 as of December 31, 2001. The Corporation has never received such extensions of credit by the Bank.
NOTE 14: PARENT-COMPANY-ONLY CONDENSED FINANCIAL INFORMATION
A summary of the financial statements of BWC Financial Corp.- parent-company-only follows: In thousands December 31, Summary Balance Sheets 2001 2000 --------------- ----------------- ---------------- Assets Cash on Deposit with the Bank $ 1,160 $ 590 Investment in the Bank 36,063 33,023 Investment in BWC Real Estate 1,029 598 --------------- ---------------- Total Assets $ 38,252 $ 34,211 =============== ================ Shareholders' Equity Common Stock $ 27,160 $ 23,193 Retained Earnings 11,092 11,018 --------------- ---------------- Total Shareholders' Equity $ 38,252 $ 34,211 =============== ================ Summary Statements of Income For the year ended December 31, 2001 2000 1999 --------------- ----------------- ---------------- Expenses - General and Administrative $ 83 $ 89 $ 24 --------------- ----------------- ---------------- Loss before income taxes and equity in net income of Subsidiaries (80) (89) (24) Income tax benefit 30 34 9 Equity in earnings of subsidiaries Distributed: Bank 3,000 1,000 - BWC Real Estate - 500 - Undistributed: Bank 2,083 5,287 4,596 BWC Real Estate 431 (297) 215 --------------- ----------------- ---------------- Net Income $ 5,464 $ 6,435 $ 4,796 =============== ================= ================ Summary Statements of Cash Flows For the year ended December 31, Operating activities: 2001 2000 1999 --------------- ----------------- ---------------- Net Income $ 5,464 $ 6,435 $ 4,796 Adjustments to reconcile net income to net cash used by operating activities: Equity in undistributed net income of Subsidiaries (2,514) (4,990) (4,811) Net Cash Provided(Used) by Operating Activities: 2,950 1,445 (15) --------------- ----------------- ---------------- Financing Activities: Proceeds from issuance of common stock 329 816 727 Cash paid in lieu of fractional shares (5) (3) - Shares repurchased by the Corporation (2,704) (3,387) - --------------- ----------------- ---------------- Net Cash Provided(Used) by Financing Activities (2,380) (2,574) 727 --------------- ----------------- ---------------- Increase(Decrease) in Cash 570 (1,129) 712 Cash on Deposit with the Bank: Beginning of year 590 1,719 1,007 --------------- ----------------- ---------------- End of year $ 1,160 $ 590 $ 1,719 =============== ================= ================
NOTE 15: REGULATORY MATTERS
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital to risk-weighted assets and of Tier I Capital to average assets (as defined). Management believes that the Corporation and the Bank, as of December 31, 2001 meet all capital adequacy requirements to which they are subject.
As of December 31, 2001 the most recent notification from FDIC categorized the Corporation and the Bank as “Well Capitalized” under the regulatory framework for prompt corrective action. To be categorized as “Well Capitalized” the Corporation and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Corporation’s or Bank’s category.
The Corporation’s and Bank’s actual capital amounts and ratios are presented in the following table:
Minimum Capital Minimum Actual Adequacy for Well Amount Ratio Requirements Capitalized --------------------------------------------------------------------------- As of December 31, 2001 Total Capital (to Risk Weighted Assets) Consolidated: $41,591 12.90% $25,792 > 8.0 $32,240 >10.0 Bank of Walnut Creek: $39,399 12.25% $25,734 > 8.0 $32,168 >10.0 Tier 1 Capital (to Risk Weighted Assets) Consolidated: $37,551 11.65% $12,896 > 4.0 $19,344 > 6.0 Bank of Walnut Creek: $35,361 10.99% $12,867 > 4.0 $19,301 > 6.0 Tier 1 Capital (to Average Assets) Consolidated: $37,551 9.22% $16,292 > 4.0 $20,365 > 5.0 Bank of Walnut Creek: $35,361 8.68% $16,292 > 4.0 $20,365 > 5.0 As of December 31, 2000 Total Capital (to Risk Weighted Assets) Consolidated: $38,348 11.88% $25,833 > 8.0 $32,292 >10.0 Bank of Walnut Creek: $36,611 12.32% $23,773 > 8.0 $29,717 >10.0 Tier 1 Capital (to Risk Weighted Assets) Consolidated: $34,299 10.62% $12,917 > 4.0 $19,375 > 6.0 Bank of Walnut Creek: $32,896 11.07% $11,887 > 4.0 $17,830 > 6.0 Tier 1 Capital (to Average Assets) Consolidated: $34,299 9.90% $13,860 > 4.0 $17,325 > 5.0 Bank of Walnut Creek: $32,896 9.49% $13,860 > 4.0 $17,325 > 5.0
NOTE 16: BUSINESS SEGMENTS
The Corporation is principally engaged in community banking activities through its eight 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. The separate banking offices have been aggregated into a single reportable segment, Community Banking. The other operating segments do not meet the prescribed aggregation or materiality criteria and therefore are reported as “All Other” in the following table.
The Corporation’s community banking segment provides loans, leases 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 credit, 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 years ended December 31, 2001, 2000, and 1999 concerning the Corporation's reportable segments is shown in the following table.
Community Mortgage 2001 Banking Services All Other Adjustments Total - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ---------------- Total Interest Income $ 30,886 $ 5 $ (11) $30,880 Commissions Received 5,909 5,909 Total Interest Expense 8,597 5 (11) 8,591 Salaries & Benefits 8,260 688 8,948 Commissions Paid 4,084 4,084 Segment Profit before Tax 8,016 1,390 (50) (695) 8,661 Total Assets (at December 31) $ 394,795 $ 740 $ 1,120 $ (1,598) $395,057 - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ---------------- Community Mortgage 2000 Banking Services All Other Adjustments Total - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ---------------- Total Interest Income $ 32,129 $ 21 $ (12) $32,138 Commissions Received 3,315 3,315 Total Interest Expense 9,126 25 (12) 9,139 Salaries & Benefits 8,187 425 8,612 Commissions Paid 2,226 2,226 Segment Profit before Tax 9,840 654 (55) (327) 10,112 Total Assets (at December 31) $ 350,299 $ 426 $ 652 $ (864) $350,513 - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ---------------- Community Mortgage 1999 Banking Services All Other Adjustments Total - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ---------------- Total Interest Income $ 24,730 $ 63 $ (9) $24,784 Commissions Received 3,108 3,108 Total Interest Expense 6,559 75 (9) 6,625 Salaries & Benefits 7,053 565 7,618 Commissions Paid 2,176 2,176 Segment Profit before Tax 7,509 698 (15) (350) 7,842 Total Assets (at December 31) $ 296,276 $ 974 $ 1,719 $ (2,238) $296,731 - ------------------------------------------ ---------------- ---------------- ---------------- ---------------- ----------------
NOTE 17: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In thousands except share and per share amounts 2001 March 31, June 30, September 30, December 31, ----------------- ------------------ ----------------- ------------------ Interest income $ 8,226 $ 7,810 $ 7,652 $ 7,191 Interest expense 2,576 2,307 2,098 1,610 ----------------- ------------------ ----------------- ------------------ Net interest income 5,650 5,503 5,554 5,581 Provision for credit losses 375 375 400 450 Noninterest income 1,972 2,166 2,128 2,788 Noninterest expense 4,726 5,360 4,819 5,481 BWC Mortgage Services - Minority Interest 136 166 153 240 ----------------- ------------------ ----------------- ------------------ Income before income taxes 2,385 1,768 2,310 2,198 Provision for income taxes 902 654 837 804 ----------------- ------------------ ----------------- ------------------ Net income $ 1,483 $ 1,114 $ 1,473 $ 1,394 ================= ================== ================= ================== Earnings per common share: Basic $ 0.47 $ 0.36 $ 0.47 $ 0.45 Diluted $ 0.43 $ 0.32 $ 0.43 $ 0.41 Weighted Average Basic Shares 3,151,485 3,109,514 3,122,615 3,100,411 Weighted Average Diluted Share Equivalents Related to Options 334,666 327,128 291,038 264,345 Weighted Average Diluted Shares 3,486,151 3,436,642 3,413,653 3,364,756 2000 March 31, June 30, September 30, December 31, ----------------- ------------------ ----------------- ------------------ Interest income $ 7,154 $ 7,836 $ 8,373 $ 8,775 Interest expense 2,003 2,113 2,397 2,626 ----------------- ------------------ ----------------- ------------------ Net interest income 5,151 5,723 5,976 6,149 Provision for credit losses 225 250 300 375 Noninterest income 1,112 1,372 1,452 1,949 Noninterest expense 3,969 4,028 4,370 4,928 BWC Mortgage Services - Minority Interest 10 84 93 140 ----------------- ------------------ ----------------- ------------------ Income before income taxes 2,059 2,733 2,665 2,655 Provision for income taxes 729 1,012 1,004 932 ----------------- ------------------ ----------------- ------------------ Net income $ 1,330 $ 1,721 $ 1,661 $ 1,723 ================= ================== ================= ================== Earnings per common share: Basic $ 0.41 $ 0.55 $ 0.53 $ 0.55 Diluted $ 0.37 $ 0.49 $ 0.47 $ 0.50 Weighted Average Basic Shares 3,223,623 3,156,936 3,151,240 3,124,856 Weighted Average Diluted Share Equivalents Related to Options 358,015 357,693 374,586 353,808 Weighted Average Diluted Shares 3,581,637 3,514,629 3,525,827 3,478,664
MOSS ADAMS LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of BWC Financial Corp.:
We have audited the accompanying consolidated balance sheets of BWC Financial Corp. (a California corporation) and Subsidiaries (the Corporation) as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BWC Financial Corp. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
MOSS ADAMS LLP
Stockton, California
February 28, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following is a summary of selected consolidated financial data for the five years ended December 31, 2001. The summary is followed by management's discussion and analysis of the significant changes in income and expense presented therein. This information should be read in conjunction with the consolidated financial statements and notes related thereto appearing elsewhere in this report.
In thousands except share and per share amounts Summary of Earnings 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------ Interest Income $ 30,879 $ 32,138 $ 24,784 $ 21,862 $ 18,316 Interest Expense 8,591 9,139 6,625 6,774 5,770 ------------------------------------------------------------------------------ Net Interest Income 22,288 22,999 18,159 15,088 12,546 Provision for Credit Losses 1,600 1,150 600 825 1,125 ------------------------------------------------------------------------------ Net Interest Income after Provision for Credit Losses 20,688 21,849 17,559 14,263 11,421 Noninterest Income 9,054 5,885 6,102 5,955 3,729 Noninterest Expense 20,386 17,295 15,469 12,762 10,244 Minority Interest 695 327 350 549 252 ------------------------------------------------------------------------------ Income before Income Taxes 8,661 10,112 7,842 6,907 4,654 Provision for Income Taxes 3,197 3,677 3,046 2,679 1,729 ------------------------------------------------------------------------------ Net Income $ 5,464 $ 6,435 $ 4,796 $ 4,228 $ 2,925 ============================================================================== Diluted Earnings Per Share (1) $1.60 $1.83 $1.33 $1.19 $0.85 Weighted Average Diluted Shares (1) 3,425,301 3,525,190 3,600,455 3,540,978 3,430,355 Book Value Per Diluted Share (1) $11.17 $9.70 $8.17 $6.87 $5.67 Summary Balance Sheets at December 31 Cash and Due from Banks $ 15,016 $ 20,684 $ 12,593 $ 14,345 $ 17,412 Federal Funds Sold 6,000 3,268 -- 2,300 4,350 Other Short-term Investments 33 520 25 35 48 Investment Securities 86,709 67,945 65,456 59,247 40,956 Loans, Net 276,064 247,281 209,493 183,058 161,002 Other Assets 11,235 10,815 9,164 5,914 4,854 ------------------------------------------------------------------------------ Total Assets $ 395,057 $ 350,513 $ 296,731 $ 264,899 $ 228,622 ============================================================================== Noninterest-bearing Deposits $ 87,172 $ 88,143 $ 76,958 $ 69,783 $ 59,354 Interest-bearing Deposits 253,297 221,493 181,711 168,357 147,625 Federal Funds Purchased -- -- 5,350 -- -- Other Borrowed Funds 12,955 2,424 550 -- -- Other Liabilities 3,381 4,242 2,733 2,416 2,195 Shareholders' Equity 38,252 34,211 29,429 24,343 19,448 ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 395,057 $ 350,513 $ 296,731 $ 264,899 $ 228,622 ============================================================================== (1) All share and per-share amounts give effect to the 10% stock dividend in June 2001, August 2000, the 2-for-1 stock split of July 1998 and the 10% stock dividends given in February 1998, and March 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Forward-Looking Statements
Except for historical financial information contained herein, certain matters discussed in the Annual Report of BWC Financial Corp. constitute ”forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to BWC Financial Corp., Bank of Walnut Creek and BWC Real Estate, include, but are not limited to, those related to the economic environment, particularly in the areas in which the Company and the Banks operate, competitive products and pricing, loan delinquency rates, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
General
2001
During this past year the Corporation has enjoyed strong earnings, resulting in a return on average assets of 1.45% and return on average equity of 14.97%. An economic recession began during the second quarter of the year and continued throughout the remainder of the year. While interest rates began the year with a 9.50% prime rate, after an unprecedented eleven cuts, we ended the year with a 4.75% prime rate, an over forty-year low. In spite of this, the Corporation’s return on average assets, though down from the all-time high in 2000 of 1.97%, were above those of our peers. Low interest rates and slower economic activity most probably will have an adverse affect on performance in 2002.
BWC Financial Corp. enjoyed a growth of 13%, or approximately $45 million, in total assets from the prior year. Total deposit growth was 10%, and loan growth was 12%. Net income was - -15%, or $971,000 less than 2000 as a result of the drop in interest rates. The Corporation’s mortgage brokerage joint venture, BWC Mortgage Services had a very successful year, in large part due to the lowering of interest rates, and continues to be a profitable addition to the Corporation.
Net Income
Net income in 2001 was $5,464,000, which reflects a return on average assets of 1.45% and a return on average equity of 14.97%. The Corporation’s average earning assets increased $49,159,000, or 16%, during 2001 as compared to 2000. During 2000, the Corporation’s net income was $6,435,000, which represented a return on average assets of 1.97% and a return on average equity of 20.45%. The Corporation’s average earning assets increased $39,887,000, or 15% during 2000 as compared to 1999. Net income in 1999 was $4,796,000, which represented a 1.70% return on average assets and a return on average equity of 17.93%.
Net Interest Income
Interest income represents interest earned by the Corporation on its portfolio of loans and investment securities. Interest expense represents interest paid to the Corporation’s depositors, borrowings from the Federal Home Loan Bank, as well as the temporary borrowing of Fed Funds on an occasional overnight 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 resulting from various economic conditions may significantly affect net interest income.
Total interest income in 2001 decreased $1,259,000 as compared to 2000. This was related in total to the drop in interest rates. Analysis of the influence rates had on interest income showed that interest income was over five million dollars less in 2001 than would have been earned using the rates in effect during 2000.
Total interest expense in 2001 decreased $548,000 from 2000. This was also related in total to the drop in interest rates. Analysis of the influence rates had on interest expense showed that interest expense was approximately two million dollars less in 2001 than would have been expensed using the rates in effect during 2000.
Based on the above factors affecting interest income and interest expense, net interest income decreased $711,000 during 2001 as compared to 2000. Had the same rates been in effect during 2001 as were experienced in 2000, the net interest income of the Corporation would have increased by over three million dollars.
Total interest income in 2000 increased $7,354,000 over 1999. Of this increase, 66% was related to the increase in the volume of average earning assets in 2000 as compared to 1999, and 34% was related to an increase in average interest rates. Total interest expense in 2000 increased $2,514,000 over 1999. Of this increase, 52% was related to the increase in the volume of interest-bearing deposits and borrowed funds in 2000 as compared to 1999, and 48% was related to an increase in the average interest-rates paid for these funds between the respective periods.
Based on the above factors affecting interest income and interest expense, net interest income increased $4,840,000 during 2000 as compared to 1999.
Net Interest Margin
Net interest margin is the ratio of net interest income divided by average earning assets. The Corporation’s net interest margin for 2001 averaged 6.36%, which represents a 1.25% decrease from the margin earned during 2000. During 2001 the prime rate averaged 6.92%, or 2.32% less than during 2000. The Corporation’s net interest margin for 2000 averaged 7.61%, which represents a 0.65% increase over the margin earned during 1999. During 2000 the prime rate averaged 9.24%, or 1.25% more than during 1999.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated and is in accordance with SFAS 5. 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 December 31, 2001 was 1.92%, as compared to 2.00% for the period ending December 31, 2000. The Corporation's ratios for both periods are considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. As of December 31, 2001 the Corporation had $5,216,000 in allocated reserves and $187,000 in unallocated reserves. As of December 31, 2000 the Corporation had $4,814,000 in allocated reserves and $228,000 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 Accounts Receivable Financing Division, a Leasing Division and a Small Business Administration 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 charge-offs of $1,239,000 during 2001 as compared to net charge-offs of $574,000 during the comparable period in 2000.
Noninterest Income
2001 vs. 2000
Total noninterest income in 2001 was $3,169,000 greater than earned in 2000. The noninterest income of the Corporation includes BWC Mortgage Services commissions and their other operating income. The noninterest income associated with BWC Mortgage Services accounted for $2,955,000 of the increase in noninterest income from 2000. With the low interest rates that prevailed in 2001, mortgage financing and refinancing activities were at an all-time high.
For Bank of Walnut Creek, income from service charges decreased $16,000 between the respective periods, due to a reduction in income from NSF charges assessed in 2001 as compared to 2000. Other noninterest income from various sources was up $185,000 from the prior year. Gains on security transactions of $55,000 in 2001 as compared to $10,000 the prior year were due primarily to gains on agency securities, which were called during 2001. Calls are made when the issuing agency can refinance the bonds at lower rates of interest.
2000 vs. 1999
Total noninterest income in 2000 was $217,000 less than earned in 1999. The noninterest income of the Corporation includes BWC Mortgage Services commissions and their other operating income. The noninterest income associated with BWC Mortgage Services accounted for a decrease in noninterest income of $81,000 in 2000 as compared to 1999, due primarily to termination of its mortgage funding activities.
For Bank of Walnut Creek, income from service charges decreased $35,000 between the respective periods. The primary reason was a reduction in non-sufficient fund or overdraft fees. The Corporation made a business decision to retain the guaranteed portion of SBA loans in the Bank’s loan portfolio; as a result, other noninterest income decreased $81,000. Gains on security transactions decreased $20,000 from the prior year. No securities were actually sold by the Corporation. The gains were the result of securities that were called by the issuing agency, resulting in a securities “gain-on-sale” to the Corporation.
Noninterest Expense
2001 vs. 2000
Total noninterest expense in 2001 increased $3,091,000 over that of 2000. The noninterest expense of the Corporation includes BWC Mortgage Services sales commissions and their other operating expenses. The growth and activities associated with BWC Mortgage Services accounted for an increase in noninterest expense of $1,884,000 in 2001 as compared to 2000. For Bank of Walnut Creek, officer and staff salaries reflect an increase of $336,000 over that of 2000. The increase between the two periods was related to salary and merit increases on existing staff and to staff number increases. Due to expansion of the Bank’s branch office network, and growth and expansion in departments, full time equivalents (FTE) in the Bank averaged 120 as compared to 114 during 2000.
Total occupancy expense increased $275,000 between the respective periods. This is partly related to the new office in San Jose, which opened in March 2001, renewal at market rates of our Pleasanton facilities which had been under a favorable sublease, and to the new master lease that was obtained on our headquarters building in Walnut Creek. It also reflects increases in operating leases and costs of other office space based on terms contained in lease contracts.
Furniture and equipment expense increased $159,000 from the previous year, related primarily to the opening of our San Jose office, remodeling and additions to our computer facilities, installation of new check and statement imaging equipment, and expanded operations.
Other operating expenses increased $437,000 over the comparable expenses in 2000. Most categories of operating expenses experienced increases, reflecting the growth and expansion of the Corporation and its activities, the introduction of our internet banking service in early 2001, and other information technology investments.
2000 vs. 1999
Total noninterest expense in 2000 increased $1,826,000 over that of 1999. The noninterest expense of the Corporation includes BWC Mortgage Services sales commissions and their other operating expenses. The growth and activities associated with BWC Mortgage Services accounted for an increase in noninterest expense of $111,000 in 2000 as compared to 1999. For Bank of Walnut Creek, officer and staff salaries reflect an increase of $994,000 over that of 1999. The increase between the two periods was related to salary and merit increases on existing staff, bonuses paid under incentive and performance plans, and to staff number increases. Due to expansion of the Bank’s branch office network, and growth and expansion in departments, full time equivalents (FTE) in the Bank averaged 114.0 as compared to 102.5 during 1999.
Total occupancy expense increased $122,000 between the respective periods. This is partly related to the new office in San Jose, which is to be opened in 2001, and to the renting of additional office space in Walnut Creek. It also reflects increases in operating leases and costs of other office space based on terms contained in lease contracts. Furniture and equipment expense increased $118,000 from the previous year, related primarily to additional computer and networking capabilities, expanded operations, additions, replacements, and service of equipment.
Other operating expenses increased $481,000 over the comparable expenses in 1999. Most categories of operating expenses experienced increases, reflecting the growth and expansion of the Corporation and its activities.
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 consists of 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 December 31, for both 2001 and 2000.
The FDIC also has 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 Bank's leverage ratio surpassed the regulatory minimum of 3% at December 31, for both 2001 and 2000. See Footnote 15 of the Consolidated Financial Statements.
Liquidity
Liquidity is a key aspect of the overall financial condition of a bank. The primary sources of liquidity for the Corporation are its marketable securities and Federal Funds sold. Marketable securities are investments of high grade, which may be sold with minimal risk of credit loss.
Cash, investment securities, and other temporary investments represent 27% of total assets at December 31, 2001 and 26% of total assets at December 31, 2000. The Corporation’s management has an effective asset and liability management program, and carefully monitors its liquidity on a continuing basis, including undisbursed loan commitments and future payments receivable. Additionally, the Corporation has available from correspondent banks, Federal Fund lines of credit totaling $15,000,000. In addition, the Corporation has a $2,000,000 secured borrowing line with the Federal Home Loan Bank and a $1,000,000 secured borrowing line with the Federal Reserve Bank.
Common Stock Prices
The common stock of BWC Financial Corp. is traded on the NASDAQ exchange. At December 31, 2001, BWC Financial Corp. had 353 shareholders of record plus approximately 465 street-named shareholders. At December 31, 2000, BWC Financial Corp. had 366 shareholders of record plus approximately 380 street-named shareholders.
The shareholders of BWC Financial Corp. will be entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available, subject to the dividend preference, if any, on preferred shares that may be outstanding and also subject to the restrictions of the California General Corporation Law. There are no preferred shares outstanding at this time. It is not anticipated that any cash dividends will be declared in the foreseeable future.
The low and high closing bid quotations for 2001 and 2000 were: 2001 2000 - ------------------------------- ---------------------------- -- ------------------------ --------------------------- 1st Quarter 2nd Quarter 1st Quarter 2nd Quarter $18.466 - $21.818 $19.146 - $23.636 $17.000 - $21.375 $17.250 - $22.250 - ------------------------------- ---------------------------- -- ------------------------ --------------------------- 3rd Quarter 4th Quarter 3rd Quarter 4th Quarter $18.5000 - $21.650 $17.000 - $20.900 $19.250 - $23.625 $20.000 - $23.500 - ------------------------------- ---------------------------- -- ------------------------ --------------------------- Stock prices have been adjusted for dividends and splits.
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 employs a variety of modeling tools to monitor interest-rate risks. One of the earlier and more basic models is GAP reporting. The net difference between the amount of assets and liabilities within a cumulative calendar period is typically referred to as the “rate sensitivity position.” As part of the GAP analysis to help manage interest-rate risk, the Corporation also performs an earnings simulation analysis to identify the interest-rate risk exposures resulting from the Corporation’s asset and liability positions, such as its loans, investment securities and customer deposits. The Corporation’s policy is to maintain a risk of a 2% rate shock to net interest income at risk to a level of not more than 15%. The earnings simulation analysis as of December 31, 2001 estimated that a 2% interest-rate shock (decrease) could lower pretax earnings by $1,853,000, which was 8.31% of 2001 net interest income. The Corporation policy is to also maintain a risk of a 2% rate shock to net pre-tax income of not greater than 30%. As of December 31, 2001 this risk level was estimated to be 21.39%.
This earnings simulation does not account for the potential impact of loan prepayments, deposit drifts, or other balance sheet movements in response to modeled changes in interest rates, and the resulting effect, if any, on the Corporation's simulated earnings analysis.
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 December 31, 2001. 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.
Repricing within: 3 3-6 12 1-5 Over 5 In thousands months months months years years Totals - ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Assets: Federal Funds Sold & Short-term Investments $ 6,033 $ - $ - $ - $ - $ 6,033 Investment securities 5,063 9,166 21,735 50,581 164 86,709 Construction & Real Estate Loans 109,298 13,041 1,622 3,084 11,656 138,701 Commercial Loans 74,046 2,887 2,939 1,892 114 81,878 Consumer Loans 47,105 96 157 374 -- 47,732 Leases 1,833 1,888 3,238 6,197 -- 13,156 ------------ ------------ ------------ ------------ ------------ ------------ Interest-bearing assets $ 243,378 $ 27,078 $ 29,691 $ 62,128 $ 11,934 $ 374,209 ------------ ------------ ------------ ------------ ------------ ------------ Liabilities: Money market accounts $ 107,740 $ 35,914 $ - $ - $ - $ 143,654 Time deposits <$100,000 11,265 10,110 7,167 1,788 86 30,416 Time deposits >$100,000 17,842 10,239 6,506 434 -- 35,021 ------------ ------------ ------------ ------------ ------------ ------------ Interest-bearing liabilities $ 136,847 $ 56,263 $ 13,673 $ 2,222 $ 86 $ 209,091 ------------ ------------ ------------ ------------ ------------ ------------ Rate-sensitive gap $ 106,531 $ (29,185) $ 16,018 $ 59,906 $ 11,848 $ 165,118 Cumulative rate-sensitive gap $ 106,531 $ 77,346 $ 93,364 $153,270 $165,118 ============ ============ ============ ============ ============ Cumulative rate-sensitive ratio 1.78 0.60 0.62 0.69 0.70