1999 ANNUAL REPORT
BWC Financial Corp.
Table of Contents
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
Interest Rate Sensitivity
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31.
1999 1998
Assets
Cash and Due From Banks 12,593,000 $ 14,345,000
Federal Funds Sold -- 2,300,000
Other Short Term Investments 25,000 35,000
Total Cash and Cash Equivalents 12,618,000 16,680,000
Investment Securities:
Available for Sale 53,717,000 45,655,000
Held to Maturity (approximate fair value of
$11,595,000 in 1999 and $13,797,000 in 1998) 11,739,000 13,592,000
Loans, Net of Allowance for Credit Losses of
$4,466,000 in 1999 and $3,919,000 in 1998 209,493,000 183,058,000
Real Estate Loans Held for Sale 480,000 --
Bank Premises and Equipment, Net 2,965,000 1,303,000
Interest Receivable and Other Assets 5,719,000 4,611,000
Total Assets $296,731,000 $264,899,000
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 76,958,000 $ 69,783,000
Interest-bearing:
Money Market Accounts 93,439,000 64,687,000
Savings and NOW Accounts 38,059,000 37,139,000
Time Deposits:
Under $100,000 29,354,000 34,293,000
$100,000 or more 20,859,000 32,238,000
Total Interest-bearing 181,711,000 168,357,000
Total Deposits 258,669,000 238,140,000
Federal Funds Purchased 5,350,000 --
BWC Mortgage Services Line-of-Credit 473,000 --
BWC Mortgage Services Other Borrowed Funds 77,000 --
Interest Payable and Other Liabilities 2,733,000 2,416,000
Total Liabilities 267,302,000 240,556,000
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
2,612,786 shares in 1999 and 2,511,151 in 1998 20,154,000 19,002,000
Retained Earnings 9,802,000 5,006,000
Capital adjustment on available for-sale-securities (527,000) 335,000
Total Shareholders' Equity 29,429,000 24,343,000
Total Liabilities and Shareholders'
Equity $296,731,000 $264,899,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
1999 1998 1997
Interest Income
Loans, Including Fees $20,674,000 $18,020,000 $16,107,000
Investment Securities:
Taxable 2,924,000 2,698,000 1,387,000
Non-taxable 555,000 504,000 391,000
Federal Funds Sold 483,000 421,000 383,000
Other Short Term Investments 148,000 219,000 48,000
Total Interest Income 24,784,000 21,862,000 18,316,000
Interest Expense
Deposits 6,548,000 6,770,000 5,767,000
Federal Funds Purchased 8,000 4,000 3,000
Other Borrowed Funds 69,000 -- --
Total Interest Expense 6,625,000 6,774,000 5,770,000
Net Interest Income 18,159,000 15,088,000 12,546,000
Provision For Credit Losses 600,000 825,000 1,125,000
Net Interest Income After
Provision For Credit Losses 17,559,000 14,263,000 11,421,000
Noninterest Income
BWC Mortgage Services
- Commissions 3,108,000 3,744,000 2,077,000
BWC Mortgage Services
- Fees & Other 897,000 376,000 175,000
Service Charges on
Deposit Accounts 839,000 832,000 761,000
Other 1,228,000 787,000 705,000
Gains on Security
Transactions 30,000 216,000 11,000
Total Noninterest Income 6,102,000 5,955,000 3,729,000
Noninterest Expense
Salaries and Related Benefits 7,137,000 5,344,000 4,737,000
BWC Mortgage Services
- Commissions 2,176,000 2,199,000 1,201,000
BWC Mortgage Services
- Fees & Other 1,034,000 825,000 537,000
Occupancy 947,000 855,000 812,000
Furniture and Equipment 600,000 578,000 556,000
Other 3,575,000 2,961,000 2,401,000
Total Noninterest Expense 15,469,000 12,762,000 10,244,000
BWC Mortgage Services -
Minority Interest 350,000 549,000 252,000
Income Before Income Taxes 7,842,000 6,907,000 4,654,000
Provision For Income Taxes 3,046,000 2,679,000 1,729,000
Net Income $ 4,796,000 $ 4,228,000 $ 2,925,000
Basic Earnings Per Share $1.86 $1.70 $1.18
Diluted Earnings Per Share $1.61 $1.44 $1.03
Average Basic Shares 2,572,622 2,487,730 2,475,075
Average Diluted Share
Equivalents Related to Options 402,736 438,698 367,697
Average Diluted Shares 2,975,358 2,926,428 2,842,772
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
For the periods ending December 31, 1997, 1998, and 1999
Accumulated
Other
Number Common Retained Comprehensive Comprehensive
of Shares Stock Earnings Income/(Loss) Total Income
Balance, January 1, 1997 1,016,598 $12,172,000 $4,231,000 $ 7,000 $16,410,000
Net Income for 1997 -- -- 2,925,000 -- 2,925,000 $ 2,925,000
Other Comprehensive Income, net of tax
liability of $68,000 -- -- -- 132,000 132,000 132,000
Comprehensive Income -- -- -- -- -- 3,057,000
10% stock dividend including
payment of fractional shares 101,882 2,521,000 (2,526,000) -- (5,000)
Stock options exercised at $6.76 per share 4,300 29,000 -- -- 29,000
Repurchase and retirement of shares by the
Corporation at $22.50 per share (1,650) (37,000) -- -- (37,000)
10% stock dividend including
payment of fractional shares 111,921 3,918,000 (3,924,000) -- (6,000)
Balance, December 31, 1997 1,233,051 18,603,000 706,000 139,000 19,448,000
Net Income for 1998 -- -- 4,228,000 -- 4,228,000 4,228,000
Other Comprehensive Income, net of tax
liability of $134,000 -- -- -- 196,000 196,000 196,000
Comprehensive Income -- -- -- -- -- 4,424,000
Two-for-one stock split 1,248,832 -- -- --
Stock options exercised at $3.50 to
$5.59 per share 15,741 57,000 -- -- 57,000
Common stock issued and sold to the
Defined Contribution Plan at
$24.06 per share 16,527 398,000 -- -- 398,000
Repurchase and retirement of shares by the
Corporation at $18.25 to
$19.00 per share (3,000) (56,000) -- -- (55,000)
Adjustment for tax benefit resulting from the
exercises of incentive stock options. -- -- 72,000 -- 71,000
Balance, December 31, 1998 2,511,151 19,002,000 5,006,000 335,000 24,343,000
Net Income as of December 31, 1999 -- -- 4,796,000 -- 4,796,000 4,796,000
Other Comprehensive Income(Loss), net of tax
benefit of $323,000 -- -- -- (862,000) (862,000) (862,000)
Comprehensive Income -- -- -- -- -- $3,934,000
Common stock issued and sold to the
Defined Contribution Plan 22,186 466,000 -- -- 466,000
Stock options exercised 79,449 261,000 -- -- 261,000
Tax benefit from the exercise of
non-qualified stock options -- 425,000 -- -- 425,000
Balance, December 31, 1999 2,612,786 $20,154,000 $9,802,000 $(527,000) $29,429,000
<FN>
Accompanying notes are an integral part of these consolidated statements.
</FN>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1999 1998 1997
Operating Activities:
Net Income $ 4,796,000 $ 4,228,000 $ 2,925,000
Adjustments to reconcile net income to
net cash provided:
Amortization of loan fees (1,850,000) (1,657,000) (1,383,000)
Provision for credit losses 600,000 825,000 1,125,000
Depreciation and amortization 488,000 416,000 403,000
Gain on sale of securities available-for-sale (30,000) (216,000) (11,000)
Deferred income taxes (275,000) (543,000) (575,000)
Real estate loans held for sale, net change (480,000) -- --
Increase in accrued interest
receivable and other assets (1,108,000) (669,000) (906,000)
Increase in accrued interest
payable and other liabilities 317,000 221,000 594,000
Net Cash Provided by Operating Activities 2,458,000 2,605,000 2,172,000
Investing Activities:
Proceeds from the maturities of investment securities 11,189,000 3,911,000 5,123,000
Proceeds from the sales of available-for-sale
investment securities 12,776,000 25,833,000 1,989,000
Purchase of investment securities (30,731,000) (47,623,000) (28,801,000)
Loans originated, net of collections (25,184,000) (21,224,000) (21,865,000)
Purchase of bank premises and equipment (2,150,000) (264,000) (336,000)
Net Cash Used by Investing Activities (34,100,000) (39,367,000) (43,890,000)
Financing Activities:
Net increase in deposits 20,528,000 31,161,000 51,738,000
Net increase in borrowings to support
real estate loans held for sale 473,000 -- --
Increase (decrease) in Federal Funds Purchased and other
borrowings 5,427,000 -- (3,600,000)
Proceeds from issuance of common stock 727,000 455,000 29,000
Tax benefit from the exercise of stock options 425,000 72,000 --
Cash paid for the repurchase of common stock -- (56,000) (37,000)
Cash paid in lieu of fractional shares -- -- (11,000)
Net Cash Provided by Financing Activities 27,580,000 31,632,000 48,119,000
Cash and Cash Equivalents:
Increase (decrease) in cash and cash equivalents (4,062,000) (5,130,000) 6,401,000
Cash and cash equivalents at beginning of year 16,680,000 21,810,000 15,409,000
Cash and Cash Equivalents at end of year $12,618,000 $16,680,000 $21,810,000
Additional Cash Flow Information:
Interest Paid $6,844,000 $6,911,000 $5,542,000
Income Taxes Paid $3,202,000 $2,228,000 $2,140,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
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 four branches in Contra Costa
County and three in northern Alameda County. The Corporation's primary
source of revenue is providing loans to customers, who are predominantly small
and middle-market businesses and middle-income 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 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
joint venture interest is shown as minority interest in the 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. On December 31, 1999 the
Corporation was holding $26,000 in pending SBA fees. A gain is recognized
on the sale of SBA loans through collection on the sale of a premium over the
adjusted carrying value, through retention of an ongoing rate differential
less a normal service fee (excess servicing fee) between the rate paid by the
borrower to the Company and the rate paid by the Company to the purchaser,
or both.
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 losses that can be reasonably estimated 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 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 and the new credit products that have been introduced. In the
past few years, the Bank has opened an Asset-Based Lending Department, a
Leasing Department and a Small Business Association lending program. The
Bank also has a high concentration of credit in Construction Real Estate
lending. The uncertainties associated with the new products, coupled with
the Bank's traditionally strong construction concentration, fully support a
strong allowance position.
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.
Other Borrowed Funds originate from the Corporation's subsidiary, BWC
Mortgage Services, which has a revolving line of credit from First Collateral
Services in the amount of four million dollars secured by first deeds of
trust on the mortgages it is funding. All mortgages are pre-sold
and are outstanding on the subsidiary's books for less than a month. The
Corporation's obligation under this line is limited to a guarantee of a
$200,000 undistributed equity in its subsidiary, BWC Mortgage Services.
The other borrowed funds for BWC Mortgage Services represent equipment leases
for systems used in the operation of BWC Mortgage Services.
Income Taxes. The Corporation files consolidated income tax returns which
include both the parent company and its subsidiaries. The parent company
reimburses the Bank for allocations of tax liabilities or benefits as
determined by the parent company. 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). EPS amounts are reported, Basic EPS and Diluted
EPS. Basic EPS is calculated by dividing net income by 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 reflect the
2-for-1 stock split July 10, 1998 and the 10% stock dividends paid on
February 3, 1998, and March 31, 1997.
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 and Alameda, 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, federal 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
are included in Note 9.
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
1999
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
U.S. Treasury Securities $ 8,039,000 -- $ 47,000 $ 7,992,000
Securities of U.S. Government Agencies 29,589,000 -- 507,000 29,082,000
Taxable Securities of State and
Political Subdivisions 11,365,000 -- 143,000 11,222,000
Corporate Debt Securities 5,574,000 -- 153,000 5,421,000
Total 54,567,000 -- 850,000 53,717,000
Held-to-maturity
Obligations of State and Political
Subdivisions 11,739,000 -- 144,000 11,595,000
Total Investment Securities $66,306,000 -- $994,000 $65,312,000
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
U.S. Treasury Securities $ 7,565,000 $ 97,000 -- $ 7,662,000
Securities of U.S. Government Agencies 22,175,000 190,000 -- 22,365,000
Taxable Securities of State and
Political Subdivisions 11,554,000 279,000 -- 11,833,000
Corporate Debt Securities 3,820,000 -- $25,000 3,795,000
Total 45,114,000 566,000 25,000 45,655,000
Held-to-maturity
Obligations of State and Political
Subdivisions 13,592,000 205,000 -- 13,797,000
Total Investment Securities $58,706,000 $771,000 $25,000 $59,452,000
<FN>
In 1999 and 1998, the Bank received proceeds from sale of investment securities of $12,776,000 and $25,833,000 respectively,
and gains included in other noninterest income totaled $30,000 and $216,000 respectively.
</FN>
The maturities of the investment security portfolio at December 31, 1999 follow:
Held-to-maturity
Amortized Fair
Cost Value
Within one year $ 2,257,000 $ 2,266,000
After one through five years 6,234,000 6,164,000
Over five years 3,248,000 3,165,000
Total $11,739,000 $11,595,000
Available-for-sale
Amortized Fair
Cost Value
Within one year $ 9,668,000 $ 9,651,000
After one through five years 37,550,000 37,018,000
Over five years 7,349,000 7,048,000
Total $54,567,000 $53,717,000
<FN>
At December 31, 1999 and 1998, securities with an approximate book value of $9,605,000 and $7,864,000 respectively, were
pledged to secure public deposits.
</FN>
NOTE 3: LOANS
The majority of the Bank's loans are to customers in Contra
Costa and Alameda 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,
1999 1998
Real Estate Construction $78,158,000 $69,054,000
Real Estate Mortgages 24,285,000 21,533,000
Commercial 70,409,000 64,261,000
Installment 34,127,000 30,450,000
Leases 6,980,000 1,679,000
Total 213,959,000 186,977,000
Less: Allowance for Credit Losses (4,466,000) (3,919,000)
Net Loans $209,493,000 $183,058,000
The following table provides further information
on past due and nonaccrual loans.
December 31,
1999 1998
Loans past-due 90 days or more,
still accruing interest $5,000 $0
Nonaccrual Loans 38,000 2,176,000
Total $43,000 $2,176,000
<FN>
As of December 31, 1999 and 1998, the Corporation's recorded investment
in impaired loans was $43,000 and $2,176,000 respectively.
Due to the loans underlying collateral value, no valuation
allowance was required. The average recorded investment in impaired
loans for 1999, 1998 and 1997 was $385,000, $380,000 and $431,000
respectively.
As of December 31, 1999 and 1998, 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 $8,000 in 1999, $89,000 in 1998, and $24,000 in
1997.
</FN>
NOTE 4: ALLOWANCE FOR CREDIT LOSSES
For the Year Ended December 31,
1999 1998 1997
Total loans outstanding at end of period,
before deducting allowance for credit losses $213,959,000 $ 86,977,000 $163,938,000
Average total loans outstanding during period $190,755,000 $166,698,000 $149,043,000
Analysis of the allowance for credit losses:
Beginning Balance $ 3,919,000 $ 2,936,000 $ 1,893,000
Charge-offs:
Commercial 126,000 17,000 139,000
Installment 27,000 96,000 54,000
Total Charge-Offs 153,000 113,000 193,000
Recoveries:
Real Estate Mortgages -- 40,000 3,000
Commercial 96,000 215,000 101,000
Installment 4,000 16,000 7,000
Total Recoveries 100,000 271,000 111,000
Net Charge-Offs (Recoveries) 53,000 (158,000) 82,000
Provisions charged to operating expense 600,000 825,000 1,125,000
Ending Balance $ 4,466,000 $ 3,919,000 $ 2,936,000
Ratio of net charge-offs (recoveries)
to average total loans 0.03% (0.09)% 0.06%
Ratio of allowance for credit losses
to total loans at end of period 2.09% 2.10% 1.79%
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
December 31,
1999 1998
Leasehold Improvements $1,161,000 $1,141,000
Furniture and Equipment 3,625,000 2,834,000
Bank Owned Premises 1,314,000 --
6,100,000 3,975,000
Accumulated Depreciation and Amort (3,135,000 ) (2,672,000)
Premises and Equipment, Net $2,965,000 $1,303,000
<FN>
The amount of depreciation and amortization included in occupancy
and furniture and equipment expense was $488,000 in 1999,
$416,000 in 1998, and $403,000 in 1997.
</FN>
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, 1999, 1998 and 1997 are as follows:
1999 1998 1997
Unrealized gain(loss)
arising during the
period, net of tax $(843,000) $330,000 $139,000
Reclassification
adjustment for net
realized gains on
securities available for
sale included in net
income during the year,
net of tax 19,000 134,000 7,000
Net unrealized gain(loss)
included in other
comprehensive income $(862,000) $196,000 $132,000
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, 1999 and 1998. SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than if a forced or liquidation sale.
1999
Carrying Estimated Fair
Amount Value
Cash and cash equivalents $ 12,618,000 $ 12,618,000
Investment securities 65,456,000 65,312,000
Loans (net) 209,493,000 206,345,000
Deposit liabilities 258,669,000 261,781,000
Other liabilities 8,634,000 8,634,000
1998
Carrying Estimated Fair
Amount Value
Cash and cash equivalents $ 16,680,000 $ 16,680,000
Investment securities 59,247,000 59,452,000
Loans (net) 183,058,000 185,594,000
Deposit liabilities 238,140,000 240,571,000
Other liabilities 2,416,000 2,416,000
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 statement of financial position, 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, accrued interest receivable and payable.
Loans are valued on the basis of estimated future receipts of principal
and interest, discounted at various 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.
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, 1999 was immaterial.
NOTE 8: INCOME TAXES
The provisions for income taxes in 1999, 1998, and 1997
consist of the following:
1999 1998 1997
Current
Federal $ 2,324,000 $ 2,286,000 $1,674,000
State 997,000 936,000 630,000
Total Current 3,321,000 3,222,000 2,304,000
Deferred
Federal (239,000) (383,000) (431,000)
State (36,000) (160,000) (144,000)
Total Deferred (275,000) (543,000) (575,000)
TOTAL $ 3,046,000 $ 2,679,000 $1,729,000
<FN>
The components of the net deferred tax assets of the Bank as of
December 31, 1999 and 1998 were as follows:
</FN>
Deferred Tax Assets:
Allowance for credit losses $ 1,820,000 $1,551,000
Employee benefits and other 206,000 202,000
Available-for-sale securities 323,000 --
State taxes 154,000 152,000
Total deferred tax assets 2,503,000 1,905,000
Deferred Tax Liabilities:
Available-for-sale securities -- (206,000)
Total deferred tax liabilities -- (206,000)
NET DEFERRED TAX ASSETS $ 2,503,000 $1,699,000
<FN>
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:
</FN>
1999 1998 1997
Provision based on the
statutory Federal rate of 34% $2,666,000 $ 2,348,000 $1,582,000
Increases (reduction) in
income taxes resulting from:
State franchise taxes, net of
Federal income tax benefit 561,000 500,000 329,000
Non-taxable interest income (293,000) (188,000) (130,000)
Other 112,000 19,000 (52,000)
TOTAL $3,046,000 $ 2,679,000 $1,729,000
<FN>
The 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 $425,000 and a decrease of taxes payable
of $425,000.
</FN>
NOTE 9: STOCK OPTIONS
In 1990, the Board of Directors of the Corporation adopted the 1990 Stock Option Plan covering an aggregate 708,624 shares
(adjusted for subsequent stock dividends and the stock split) of the Corporation's common stock. Under the 1990 Stock Option
Plan, options to purchase shares of the Corporation's common stock may be granted to certain key employees.
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, 1999 105,478 shares were available for future grant. The options, with the exception of one grant, are
fully vested after five years and expire after ten years. The other grant is fully vested after ten years.
A summary of the status of the Corporation's stock option plan at December 31, 1999, 1998 and 1997, which presents changes
during the years then ended is presented in the table below. Figures have been adjusted to reflect the 2-for-1 stock split
issued July 10, 1998 and the 10% stock dividends given in February 1998 and March 1997.
Weighted Weighted Weighted
Average Average Average
1999 Exercise 1998 Exercise 1997 Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 580,540 $ 4.87 532,740 $ 3.48 526,098 $ 3.33
Granted 10,000 $23.38 64,641 $15.59 17,050 $10.63
Exercised 79,449 $ 3.29 16,841 $ 3.65 10,408 $ 3.10
Outstanding at
end of year 511,091 $ 5.18 580,540 $ 4.87 532,740 $ 3.48
Exercisable at
end of year 453,624 $ 4.27 510,009 $ 3.70 491,144 $ 3.34
Weighted average
fair value of
options granted
during the year $12.41 $ 9.32 $ 4.83
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:
1999 1998 1997
Net Income:
As reported $4,796,000 $4,228,000 $2,925,000
Pro forma 4,718,000 4,110,000 2,901,000
Basic Earnings
per share:
As reported $1.86 $1.70 $ 1.18
Pro forma 1.83 1.65 1.17
Diluted Earnings
per share:
As reported $ 1.61 $1.44 $1.03
Pro forma $ 1.59 $1.40 $1.02
The fair value of each option grant in 1999, 1998 and 1997, is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: risk-free rate of 6.70%
for 1999, 7.00% for 1998 and 1997, no expected dividend yield, expected life of 8 years and expected volatility of 32.61% in
1999, 24.26% in 1998 and 17.84% in 1997. Because SFAS 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting pro forma compensation cost, indicated above, may not be representative of that to be
expected in future years.
The following table summarizes information about stock options outstanding at December 31, 1999.
Options
Outstanding:
Weighted Options
Average Weighted Exercisable: Weighted
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable: Exercise
Prices at 12/31/99 Remaining Years Price at 12/31/99 Price
2.79 - $ 9.92 440,091 2.79 $ 3.40 425,024 $ 3.37
$11.02 - $23.38 71,000 8.65 $ 18.47 28,600 $17.55
NOTE 10: COMMITMENTS AND CONTINGENCIES
As of December 31, 1999 the approximate future minimum net rental payments under Non-cancellable operating leases for
premises were as follows:
Year Amount
2000 $ 772,000
2001 440,000
2002 370,000
2003 300,000
2004 274,000
Thereafter 1,541,000
Total $3,697,000
<FN>
Rental expense for premises under operating leases included in occupancy expense was $612,000, $554,000, and $527,000,
in 1999, 1998 and 1997 respectively. Minimum rentals may be adjusted for increases in the lessors' operating costs and/or
increases in the Consumer Price Index. At December 31, 1999, the Bank had outstanding approximately $137,072,000 in
undisbursed loan commitments and $950,000 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.
</FN>
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 $303,000, $244,000, and $162,000 in 1999, 1998, and 1997,
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:
1999 1998 1997
Data Processing
$ 394,000 327,000 $ 336,000
Professional Fees 397,000 318,000 244,000
Business Development
& Education 347,000 304,000 239,000
Telephone and Postage 345,000 291,000 265,000
Supplies 293,000 240,000 211,000
Marketing 316,000 208,000 151,000
Regulatory Fees 56,000 47,000 47,000
Other 1,427,000 1,226,000 908,000
TOTAL $3,575,000 $2,961,000 $2,401,000
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, $11,301,000 of the
Bank's retained earnings were available for dividends at December 31, 1999.
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 $2,639,000 as of December 31, 1999.
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:
December 31,
Summary Balance Sheets 1999 1998
Assets
Cash on Deposit with the Bank $ 1,719,000 $ 1,007,000
Investment in the Bank 26,815,000 22,656,000
Investment in BWC Real Estate 895,000 680,000
Total Assets $ 29,429,000 $ 24,343,000
Liabilities
Shareholders' Equity
Common Stock $ 20,155,000 $ 19,002,000
Retained Earnings 9,274,000 5,341,000
Total Shareholders' Equity 29,429,000 24,343,000
Total Liabilities and
Shareholders' Equity $ 29,429,000 $24,343,000
Summary Statements of Income
For the year ended December 31,
1999 1998 1997
Expenses -
General and Administrative $ 24,000 $ 74,000 $ 13,000
Loss before income taxes and
equity in undistributed
net income
of Subsidiaries (24,000) (74,000) (13,000)
Income tax benefit 9,000 28,000 5,000
Equity in undistributed net
income of BWC Real Estate 215,000 340,000 162,000
Equity in undistributed net
income of the Bank 4,596,000 3,934,000 2,771,000
Net Income $4,796,000 $4,228,000 $ 2,925,000
NOTE 14 (CONT.)
Summary Statements of Cash Flows
For the year ended December 31,
Operating activities: 1999 1998 1997
Net Income
$ 4,796,000 $ 4,228,000 $ 2,925,000
Adjustments to reconcile
net income to net cash
used by operating
activities:
Equity in undistributed
net income of Subsidiaries (4,811,000) (4,274,000) (2,933,000)
Taxes Payable -- -- --
Net Cash Used by
Operating Activities: (15,000) (46,000) (8,000)
Financing Activities:
Proceeds from issuance
of common stock 727,000 456,000 29,000
Cash paid in lieu
of fractional shares -- -- (12,000)
Shares repurchased
by the Corporation -- (56,000) (37,000)
Net Cash Provided(Used)
by Financing Activities 727,000 400,000 (20,000)
Increase(Decrease) in Cash 712,000 354,000 (28,000)
Cash on Deposit
with the Bank:
Beginning of year 1,007,000 653,000 681,000
End of year $1,719,000 $1,007,000 $653,000
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
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I Capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, 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, 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 institution'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, 1999
Total Capital (to Risk
Weighted Assets)
Consolidated: $33,386,000 13.58% $21,438,000 > 8.0 $26,797,000 >10.0
Bank of Walnut Creek: $30,269,000 12.31% $19,672,000 > 8.0 $24,590,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $30,036,000 12.21% $10,719,000 > 4.0 $16,078,000 > 6.0
Bank of Walnut Creek: $27,195,000 11.06% $9,836,000 > 4.0 $14,754,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated: $30,036,000 10.66% $11,271,000 > 4.0 $14,088,000 > 5.0
Bank of Walnut Creek: $27,195,000 9.65% $11,271,000 > 4.0 $14,088,000 > 5.0
As of December 31, 1998
Total Capital (to Risk
Weighted Assets)
Consolidated: $26,049,000 12.17% $17,121,000 > 8.0 $21,401,000 >10.0
Bank of Walnut Creek: $25,042,000 11.70% $17,121,000 > 8.0 $21,401,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $23,327,000 10.90% $8,560,000 > 4.0 $12,840,000 > 6.0
Bank of Walnut Creek: $22,320,000 10.43% $8,560,000 > 4.0 $12,840,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated: $23,327,000 9.40% $9,925,000 > 4.0 $12,406,000 > 5.0
Bank of Walnut Creek: $22,320,000 9.00% $9,925,000 > 4.0 $12,406,000 > 5.0
NOTE 16: FASB 131 DISCLOSURE
The Corporation is principally engaged in community banking activities through
its seven Bank branches. In addition to its community banking activities, the
Corporation provides mortgage brokerage services through its joint venture,
BWC Mortgage Services. These activities are monitored and reported by
Corporation management as a separate operating segment. As permitted under
the Statement, the separate banking offices have been aggregated into a single
reportable segment, Community Banking. The 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, 1999, 1998
and 1997 concerning the Corporation's reportable segments is shown in the
following table.
Community Mortgage
1999 Banking Services All Other Adjustments Total
Total Interest Income $24,730,000 $63,000 ($9,000) $24,784,000
Commissions Received 3,108,000 3,108,000
Total Interest Expense 6,559,000 75,000 (9,000) 6,625,000
Salaries & Benefits 7,053,000 84,000 7,137,000
Commissions Paid 2,176,000 2,176,000
Segment Profit before Tax 7,509,000 698,000 (15,000) (350,000) 7,842,000
Total Assets (at December 31) $296,276,000 $974,000 $1,719,000 ($2,238,000) $296,731,000
Community Mortgage
1998 Banking Services All Other Adjustments Total
Total Interest Income $21,862,000 $21,862,000
Commissions Received 3,744,000 3,744,000
Total Interest Expense 6,774,000 6,774,000
Salaries & Benefits 5,344,000 5,344,000
Commissions Paid 2,199,000 2,199,000
Segment Profit before Tax 6,405,000 1,097,000 (595,000) 6,907,000
Total Assets (at December 31) $264,758,000 $518,000 $1,007,000 ($1,384,000) $264,899,000
Community Mortgage
1997 Banking Services All Other Adjustments Total
Total Interest Income $18,316,000 $18,316,000
Commissions Received 2,077,000 2,077,000
Total Interest Expense 5,770,000 5,770,000
Salaries & Benefits 4,737,000 4,737,000
Commissions Paid 1,201,000 1,201,000
Segment Profit before Tax 4,400,000 514,000 (260,000) 4,654,000
Total Assets (at December 31) $228,590,000 $150,000 $660,000 ($778,000) $228,622,000
NOTE 17: SFAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 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.
SFAS 133, as amended, was to have been effective for fiscal years beginning
after June 15, 2000. A company may also implement the Statement as of the
beginning of any fiscal quarter.
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.
NOTE 18: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 March 31, June 30, September 30, December 31,
Interest income $5,734,000 $5,966,000 $6,294,000 $6,790,000
Interest expense 1,547,000 1,602,000 1,680,000 1,796,000
Net interest income 4,187,000 4,364,000 4,614,000 4,994,000
Provision for credit losses 150,000 150,000 150,000 150,000
Noninterest income 1,592,000 1,771,000 1,339,000 1,400,000
Noninterest expense 3,676,000 3,823,000 3,749,000 4,221,000
BWC Mortgage Services
- Minority Interest 129,000 130,000 57,000 34,000
Income before income taxes 1,824,000 2,032,000 1,997,000 1,989,000
Provision for income taxes 704,000 790,000 779,000 773,000
Net income $1,120,000 $1,242,000 $1,218,000 $1,216,000
Earnings per common share:
Basic $0.45 $0.48 $0.47 $0.47
Diluted $0.38 $0.42 $0.41 $0.41
Average Basic Shares 2,513,799 2,587,299 2,592,331 2,597,059
Average Diluted Share Equivalents
Related to Options 441,472 390,409 399,983 379,080
Average Diluted Shares 2,955,271 2,977,708 2,992,314 2,976,139
1998 March 31, June 30, September 30, December 31,
Interest income $5,069,000 $5,336,000 $5,785,000 $5,672,000
Interest expense 1,581,000 1,680,000 1,847,000 1,666,000
Net interest income 3,488,000 3,656,000 3,938,000 4,006,000
Provision for credit losses 150,000 225,000 225,000 225,000
Noninterest income 1,200,000 1,342,000 1,547,000 1,866,000
Noninterest expense 2,847,000 3,036,000 3,259,000 3,620,000
BWC Mortgage Services -
Minority Interest 114,000 152,000 150,000 133,000
Income before income taxes 1,577,000 1,585,000 1,851,000 1,894,000
Provision for income taxes 611,000 611,000 737,000 720,000
Net income $966,000 $974,000 $1,114,000 $1,174,000
Earnings per common share:
Basic $0.39 $0.39 $0.45 $0.47
Diluted $0.33 $0.33 $0.38 $0.40
Average Basic Shares 2,482,315 2,489,650 2,496,793 2,482,162
Average Diluted Share Equivalents
Related to Options 424,118 443,127 446,532 441,015
Average Diluted Shares 2,906,433 2,932,777 2,943,325 2,923,177
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, 1999 and 1998, 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, 1999. 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 audit in accordance with generally accepted auditing
standards. 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 testbasis,
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
San Francisco, California
February 18, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following is a summary of selected consolidated financial data for the five years ended December 31, 1999. 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.
Summary of Earnings 1999 1998 1997 1996 1995
Interest Income $ 24,784,000 $ 21,862,000 $ 18,316,000 $ 13,238,000 $ 11,491,000
Interest Expense 6,625,000 6,774,000 5,770,000 3,764,000 3,410,000
Net Interest Income 18,159,000 15,088,000 12,546,000 9,474,000 8,081,000
Provision for Credit Losses 600,000 825,000 1,125,000 650,000 330,000
Net Interest Income after Provision
for Credit Losses 17,559,000 14,263,000 11,421,000 8,824,000 7,751,000
Noninterest Income 6,102,000 5,955,000 3,729,000 2,732,000 1,136,000
Noninterest Expense 15,469,000 12,762,000 10,244,000 8,498,000 6,444,000
Minority Interest 350,000 549,000 252,000 157,000 --
Income Before Income Taxes 7,842,000 6,907,000 4,654,000 2,901,000 2,443,000
Provision for Income Taxes 3,046,000 2,679,000 1,729,000 973,000 823,000
Net Income $ 4,796,000 $ 4,228,000 $ 2,925,000 $ 1,928,000 $ 1,620,000
Diluted Earnings Per Share (1) $1.61 $1.44 $1.03 $0.64 $0.61
Average Diluted Shares (1) 2,975,583 2,926,428 2,842,772 3,034,922 2,636,636
Book Value Per Diluted Share (1) $9.89 $8.32 $6.84 $5.41 $5.65
Summary Balance Sheets at December 31
Cash and Due from Banks $ 12,593,000 $ 14,345,000 $ 17,412,000 $ 15,212,000 $ 11,377,000
Federal Funds Sold -- 2,300,000 4,350,000 -- 1,230,000
Other Short-Term Investments 25,000 35,000 48,000 26,000 10,000
Investment Securities 65,456,000 59,247,000 40,956,000 19,125,000 34,471,000
Loans, Net 209,493,000 183,058,000 161,002,000 138,878,000 99,776,000
Other Assets 9,164,000 5,914,000 4,854,000 4,015,000 3,733,000
Total Assets $296,731,000 $264,899,000 $228,622,000 $177,256,000 $150,597,000
Noninterest-bearing Deposits $ 76,958,000 $ 69,783,000 $ 59,354,000 $ 41,519,000 $ 36,854,000
Interest-bearing Deposits 181,711,000 168,357,000 147,625,000 114,125,000 97,747,000
Federal Funds Purchased 5,350,000 -- -- 3,600,000 --
Other Borrowed Funds 550,000 -- -- -- --
Other Liabilities 2,733,000 2,416,000 2,195,000 1,602,000 1,103,000
Shareholders' Equity 29,429,000 24,343,000 19,448,000 16,410,000 14,893,000
Total Liabilities and
Shareholders' Equity $296,731,000 $264,899,000 $228,622,000 $177,256,000 $150,597,000
<FN>
(1) All share and per-share amounts give effect to the 2-for-1 stock split of July 1998 and to the 10% stock dividends
given in February 1998, March 1997, July 1996, and June 1995.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
General
1999
The nation, and California, showed continued economic strength and growth
throughout 1999. Economic analysts have pointed to productivity as the main
reason for the longevity of our present expansion. Proponents of the "New
Economy" believe that technology and new innovations will continue to push
productivity to higher levels. Other economists and policy makers believe
that productivity will gradually fall in the short run and that business
cycles are very much alive. The consensus forecast calls for the economy to
slow in 2000. Consumers continue their strong spending patterns but
interest-sensitive markets will soften, most notably light-vehicle sales
and housing. Investment spending in equipment will also slow. The trade
sector will somewhat counter these slowdowns through improved exports. The
net impact will be slower real GDP growth through the moderating growth of
domestic demand. Economic growth will be closer to the long-run trend with
unemployment remaining below 5.0 percent.
BWC Financial Corp. enjoyed a growth of 12%, or $31,832,000, in total assets
from the prior year. Total deposit growth was 9%, and loan growth was 14%.
Net income increased 13% over 1998.
The Corporation's mortgage brokerage joint venture, BWC Mortgage Services,
continues to be a profitable addition to the Corporation.
Net Income
Net income in 1999 was $4,796,000 which represented an increase of $568,000
over 1998 net income. It reflects a return on average assets of 1.70% and
a return on average equity of 17.93%. During 1998 the Corporation also
achieved a return on average assets of 1.70% and a return on average equity
of 19.29%. The Corporation's average earning assets increased $30,818,000
during 1999 as compared to 1998.
Net income in 1997 was $2,925,000 which represented a 1.46% return on average
assets and a return on average equity of 16.46%.
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, 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 1999 increased $2,922,000 over 1998. Of this
increase, 115% was related to the increase in the volume of average earning
assets in 1999 as compared to 1998 and -15% was related to a decrease in
average interest rates.
Total interest expense in 1999 decreased $149,000 over 1998. All of this
decrease was related to a decrease in average interest rates between the
respective periods.
Based on the above factors affecting interest income and interest expense,
net interest income increased $3,071,000 during 1999 as compared to 1998.
Total interest income in 1998 increased $3,546,000 over 1997. Of this
increase, 95% was related to the increase in the volume of average earning
assets in 1998 as compared to 1997, and 5% was related to higher interest
rates.
Total interest expense in 1998 increased $1,004,000 over 1997. Of the
increase, 105%, was due to the growth in interest bearing deposits between
the respective periods, and -5% was due to lower interest rates.
Based on the above factors affecting interest income and interest expense,
net interest income increased $2,542,000 during 1998 as compared to 1997.
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 1999 averaged 6.97%, which
represents a 0.41% increase over the margin earned during 1998. During
1999 the prime rate averaged 7.99%, or 0.37% less than during 1998.
The Corporation's net interest margin for 1998 was 6.56%, as compared to
6.82% during 1997. During 1998 the prime rate averaged 8.36% as compared
to the average prime rate during 1997 of 8.44%.
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 on loans, letters
of credit, and commitments to extend credit. 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, 1999 was 2.09%. Management considers the level of the allowance
adequate to provide for losses. An additional provision of $600,000 was
made during 1999 against net charge-offs of $53,000.
The ratio of the allowance for credit losses to total loans as of
December 31, 1998 was 2.14%. Management considers the level of the allowance
adequate to provide for losses. An additional provision of $825,000 was
made during 1998 against net recoveries of $158,000.
Noninterest Income
1999 vs. 1998
Total noninterest income in 1999 was $147,000 greater than earned in 1998.
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 $116,000 in 1999 as compared to 1998.
For Bank of Walnut Creek, income from service charges increased $7,000
between the respective periods and Other Income increased $441,000.
Gains on SBA loan sales accounted for approximately $100,000 of this
increase and capitalization of the cash value of key man life insurance
accounted for approximately $60,000. The Corporation had gains on sale of
securities available for sale of $30,000, as compared to $216,000 in the
prior year.
1998 vs. 1997
Total noninterest income in 1998 was $2,226,000 greater than earned in 1997.
The growth and activities of BWC Mortgage Services accounted for an increase
in noninterest income of $1,868,000 in 1998 as compared to 1997.
For Bank of Walnut Creek, income from service charges increased $71,000
between the respective periods and Other Income increased $467,000.
This increase was the result of income from the Corporation's mortgage
subsidiary. In addition, due to increased funding needs late in
the year the Corporation sold investment securities from its available for
sale category, and realized gains of $216,000, as compared to $11,000 in the
prior year.
Noninterest Expense
1999 vs. 1998
Total noninterest expense in 1999 increased $2,707,000 over that of 1998.
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 $269,000 in 1999 as compared to 1998.
Bank of Walnut Creek, officer and staff salaries reflect an increase of
$1,709,000 over that of 1998. 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 equivalent (FTE) averaged 102.5 as compared to
88.6 during 1998.
Total occupancy expense increased $91,000 between the respective periods.
This is partly related to the purchase of a new office in Livermore and
expanded office space in Walnut Creek. It also reflects increases in
operating leases and costs on other office space based on terms contained in
lease contracts.
Furniture and equipment expense increased $22,000 from the previous year,
related primarily to expanded operations, additions, replacements, and
service of equipment.
Other operating expenses increased $615,000 over the comparable expenses
in 1998. Most categories of operating expenses experienced increases,
reflecting the growth and expansion of the Corporation and its activities.
1998 vs. 1997
Total noninterest expense in 1998 increased $2,518,000 over that of 1997.
The growth and activities associated with BWC Mortgage Services accounted
for an increase in noninterest expense of $1,286,000 in 1998 as compared
to 1997.
For Bank of Walnut Creek, officer and staff salaries reflect an increase
of $607,000 over that of 1997. The increase between the two periods was
related to salary and merit increases on existing staff and 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 equivalent (FTE) averaged 88.6 as compared to 81.3
during 1997.
Total occupancy expense increased $43,000 between the respective periods.
This is partly related to the opening of a new office in Livermore. It also
reflects increases in operating leases and costs on other office space based
on terms contained in lease contracts.
Furniture and equipment expense increased $22,000 from the previous year,
related primarily to expanded operations, additions, replacements, and
service of equipment.
Other operating expenses increased $560,000 over the comparable expenses
in 1997. 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 1999 and 1998.
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 1999 and 1998.
See Footnote 15 of the Consolidated Financial Statements.
Liquidity
Liquidity is a key aspect of the overall financial condition of a bank.
The primary source of liquidity for the Corporation is its marketable
securities, and federal funds sold. Marketable securities are investments
of high grade, which may be sold with minimal risk of market loss.
Cash, investment securities, and other temporary investments represent 26%
of total assets at December 31, 1999 as compared to 29% of total assets at
December 31, 1998.
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.
Year 2000 Issues & Status Report
The Corporation is pleased to report that it experienced no system hardware
or software failures or interruptions due to year 2000 (Y2K) issues.
The year 2000 created challenges with respect to the automated systems
used by financial institutions and other companies. Many software programs
were not able to recognize the year 2000, since many programs and systems
were designed to store calendar years in the 1900's by assuming the "19"
and storing only the last two digits of the year. For example, these
automated systems would recognize a year stored as "00" as the year "1900,"
rather than as the year 2000. If these automated systems were not
appropriately re-coded, updated, or replaced before the year 2000, they could
likely confuse data, crash, or fail in some manner.
The Corporation was committed to addressing these year 2000 challenges
in a prompt and responsible manner and dedicated resources to do so.
Management completed an assessment of its automated systems and implemented
a plan to resolve these issues, including purchasing appropriate computer
technology. The total costs associated with Y2K preparedness were
approximately $800,000. Most of this investment represents expenditures
for systems and equipment that will be used by the Corporation for years
to come. It also reflects replacement of systems or equipment that would
have required upgrading within a few years, in any event.
Based on previous tests of our systems, and their successful performance
over the century-date-change, the Corporation does not anticipate any
disruptions related to future-date change events. The contingency plans
that the Corporation developed for the Y2K event will serve as an
operating guide for our Corporation to use in most disaster situations.
Common Stock Prices
The common stock of BWC Financial Corp. is traded on the NASDAQ exchange.
At December 31, 1999, BWC Financial Corp. had 395 shareholders of record.
At December 31, 1998, BWC Financial Corp. had 403 shareholders of record.
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 high and low bid quotations for 1999 and 1998 were:
1999
1st Quarter $19.000 - $22.250 2nd Quarter $18.125 - $24.250
3rd Quarter $21.000 - $24.500 4th Quarter $19.250 - $22.000
1998
1st Quarter $16.500 - $19.875 2nd Quarter $20.500 - $22.250
3rd Quarter $18.875 - $28.000 4th Quarter $16.000 - $22.125
Stock prices have been adjusted to reflect the 2-for-1 stock split granted
to shareholders July 10, 1998.
A 10% stock dividend was granted to shareholders of record on February 2,
1998. Common stock prices have not been adjusted to reflect the above
stock dividends.
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 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."
The Corporation's policy is to maintain the cumulative one-year Gap ratio
(assets to liabilities) within a .95 to a 1.25 range. The following table
details the Corporation's static Gap position. As of December 31, 1999,
the cumulative one-year Gap ratio of assets to liabilities was 1.21.
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 earnings simulation analysis as of December 31, 1999 estimated
that a 2% interest rate shock (decrease) could lower pretax earnings by
$559,000, which was 11.66% of 1999 pretax net income.
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, 1999. Management
believes that the sensitivity ratios reflected in these schedules fall within
acceptable ranges, and represent no undue interest rate risk to the future
earning prospects of the Corporation.
3 3-6 12 1-5 Over 5
Repricing within: Months Months Months Years Years Totals
Federal funds sold & Short Term Investments $ 25 $ -- $ -- $ -- $ -- $ 25
Investment securities 4,506 1,109 6,293 43,252 10,296 65,456
Construction & real estate loans 91,840 6,461 2,807 1,235 100 102,443
Commercial loans 54,369 4,521 10,006 1,513 -- 70,409
Consumer Loans 32,340 284 393 1,110 -- 34,127
Leases 762 827 1,580 3,811 -- 6,980
Interest-bearing assets 183,842 13,202 21,079 50,921 10,396 279,440
Savings and NOW accounts $ 38,059 $ -- $ -- $ -- $ -- $ 38,059
Money market accounts 93,439 -- -- -- -- 93,439
Time deposits <$100,000 8,798 11,818 7,427 1,311 -- 29,354
Time deposits >$100,000 9,252 6,663 4,742 202 -- 20,859
Interest-bearing liabilities 149,548 18,481 12,169 1,513 -- 181,711
Rate sensitive gap $ 34,294 $ (5,279) $ 8,910 $ 49,408 $ 10,396 $ 97,729
Cumulative rate sensitive gap $ 34,294 $ 29,015 $ 37,925 $ 87,333 $ 97,729
Cumulative rate sensitive ratio 1.23 1.17 1.21 1.48 1.54