BWC FINANCIAL CORP CONSOLIDATED BALANCE SHEETS December 31 ASSETS 1995 1994 Cash and Due From Banks $11,377,000 $8,552,000 Federal Funds Sold 1,230,000 3,300,000 Other Short Term Investments 10,000 3,018,000 Total Cash and Cash Equivalents 12,617,000 14,870,000 Investment Securities: Available for Sale 23,500,000 17,419,000 Held to Maturity (approximate fair value of $11,061,000 in 1995 and $10,892,000 in 1994) 10,971,000 11,335,000 Loans, Net of Allowance for Credit Losses of $1,528,000 in 1995 and $1,498,000 in 1994. 99,776,000 86,411,000 Bank Premises and Equipment, Net 1,475,000 993,000 Interest Receivable and Other Assets 2,258,000 2,116,000 Total Assets $150,597,000 $133,144,000 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $36,854,000 $27,340,000 Interest-bearing: Money Market Accounts 33,917,000 37,062,000 Savings and NOW Accounts 21,224,000 24,681,000 Time Deposits: Under $100,000 21,733,000 16,862,000 $100,000 or more 20,873,000 14,027,000 Total Interest-bearing 97,747,000 92,632,000 Total Deposits 134,601,000 119,972,000 Interest Payable and Other Liabilities 1,103,000 529,000 Total Liabilities 135,704,000 120,501,000 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 - 935,907 shares in 1995 and 830,737 in 1994. 10,508,000 9,026,000 Retained Earnings 4,257,000 3,927,000 Capital adjustment on available for sale securities 128,000 (310,000) Total Shareholders' Equity 14,893,000 12,643,000 Total Liabilities and Shareholders' Equity $150,597,000 $133,144,000 <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, 1995 1994 1993 INTEREST INCOME Loans, Including Fees $9,480,000 $8,293,000 $7,338,000 Investment Securities: Taxable 1,389,000 744,000 684,000 Non-taxable 365,000 375,000 341,000 Federal Funds Sold 181,000 185,000 95,000 Other Short Term Investments 76,000 76,000 -- Total Interest Income 11,491,000 9,673,000 8,458,000 INTEREST EXPENSE Deposits 3,405,000 2,545,000 2,331,000 Federal Funds Purchased 5,000 2,000 2,000 Total Interest Expense 3,410,000 2,547,000 2,333,000 NET INTEREST INCOME 8,081,000 7,126,000 6,125,000 PROVISION FOR CREDIT LOSSES 330,000 255,000 120,000 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 7,751,000 6,871,000 6,005,000 NONINTEREST INCOME Service Charges on Deposit Accounts 535,000 391,000 378,000 Gain on SBA Loan Sales 189,000 -- -- Other 412,000 260,000 238,000 Total Noninterest Income 1,136,000 651,000 616,000 NONINTEREST EXPENSE Salaries and Related Benefits 3,250,000 2,903,000 2,602,000 Occupancy 747,000 683,000 589,000 Furniture and Equipment 439,000 452,000 381,000 Other 2,008,000 1,829,000 1,825,000 Total Noninterest Expense 6,444,000 5,867,000 5,397,000 INCOME BEFORE INCOME TAXES 2,443,000 1,655,000 1,224,000 PROVISION FOR INCOME TAXES 823,000 481,000 377,000 NET INCOME $1,620,000 $1,174,000 $847,000 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $1.64 $1.21 $0.91 Average common and common equivalent shares 990,472 973,388 931,361 <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 years ended December 31, 1995, 1994 and 1993 Capital Number Common Retained Adjustment of Shares Stock Earnings on Securities Total Balance, January 1, 1993 757,825 $8,461,000 $2,574,000 -- $11,035,000 Net Income for 1993 -- -- 847,000 -- 847,000 10% Stock Dividend, Including Payment of fractional shares 75,931 666,000 (668,000) -- (2,000) Common Stock Purchased by the Defined Contribution Plan at $8.00 to $9.00 per share 6,036 52,000 -- -- 52,000 Stock Options Exercised at $5.08 to $5.64 per share 9,742 52,000 -- -- 52,000 Repurchase of shares by the Corporation at $9.25 to $9.60 per share (17,900) (170,000) -- -- (170,000) Balance, December 31, 1993 831,634 9,061,000 2,753,000 -- 11,814,000 Net Income for 1994 -- -- 1,174,000 -- 1,174,000 Common Stock Purchased by the Defined Contribution Plan at $8.77 per share 10,103 88,000 -- -- 88,000 Repurchase of shares by the Corporation at $10.38 to $12.25 per share (11,000) (123,000) -- -- (123,000) Capital adjustment on available for sale securities -- -- (310,000) (310,000) Balance, December 31, 1994 830,737 9,026,000 3,927,000 (310,000) 12,643,000 Net Income for 1995 -- -- 1,620,000 -- 1,620,000 10% Stock Dividend, Including Payment of fractional shares 84,393 1,286,000 (1,290,000) -- (4,000) Common Stock Purchased by the Defined Contribution Plan at $12.90 per share 10,990 142,000 -- -- 142,000 Stock Options Exercised at $5.13 to $5.93 per share 9,787 54,000 -- -- 54,000 Capital adjustment on available for sale securities -- -- -- 438,000 438,000 Balance, December 31, 1995 935,907 $10,508,000 $4,257,000 $128,000 $14,893,000 <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 (see Note 6), 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. BWC Financial Corp. operates four branches in Contra Costa County and one in northern Alameda County. The Corporation's primary source of revenue is providing loans to customers, who are predominately 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. Cash and Due from Banks includes balances with the Federal Reserve. The Bank is required by federal regulations to maintain certain minimum average balances with the Federal Reserve, based primarily on the Bank's average daily deposit balances. At December 31, 1995, the Bank had balances with the Federal Reserve of $1,044,000 as compared to $491,000 at December 31, 1994. Investment Securities. In accordance with the Statement of Financial Accounting Standards No. 115 (FASB 115), "Accounting for Certain Investments in Debt and Equity Securities" the Corporation classifies its investments in debt and equity securities as "held-to-maturity," "trading" or "available-for- sale." Investments classified as held-to-maturity are reported at amortized cost; investments classified as trading are reported at fair value with unrealized gains and losses included in earnings; 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 non-interest 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 to hold such securities to maturity and management's current intent to hold such securities for the foreseeable future. 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 fee income on these loan sales until the 90 day period elapses. On December 31, 1995 the Corporation was holding $52,000 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 market 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. In the event of future prepayments, the unearned servicing fee is realized as additional fee income at the time of prepayment. The Corporation is using as its estimate of a normal servicing fee 1.00%, which is the standard recommended by the SBA. Allowance for Credit Losses is based upon estimates of potential credit losses and is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate and other conditions to determine the adequacy of the allowance. The allowance is based on estimates, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in the periods in which they become known. Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114 as amended by No. 118, Accounting by Creditors for Impairment of a Loan. The Corporation adopted this statement effective January 1, 1995. There was no material impact on its financial position or results of operations as a result of this adoption. 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. 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. Net Income Per Common and Common Equivalent Share 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 10% stock dividend paid on June 15, 1995. 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 which is not dependent on any industry or group of customers. Statement of Cash Flows. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. 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. Pending Financial Accounting Pronouncements. In November, 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. The Company will adopt the statement on January 1, 1996. The statement requires that companies either change the accounting method for their stock- based compensation plans or disclose proforma information. The Company has decided to maintain its current accounting policies and will disclose pro forma information in the footnotes, as described in SFAS No. 123. NOTE 2: INVESTMENT SECURITIES An analysis of the investment security portfolio at December 31 follows: 1995 Gross Amortized Unrealized Fair Available-for-sale Cost Losses Value U.S. Treasury Securities $8,511,000 $80,000 $8,591,000 Securities of U.S. Government Agencies 11,143,000 92,000 11,235,000 Taxable Securities of State and Political Subdivisions 3,653,000 21,000 3,674,000 Total 23,307,000 193,000 23,500,000 Held-to-maturity Obligations of State and Political Subdivisions 10,971,000 90,000 11,061,000 Total Investment Securities $34,278,000 $283,000 $34,561,000 1994 Gross Amortized Unrealized Fair Available-for-sale Cost Losses Value U.S. Treasury Securities $13,636,000 ($284,000) $13,352,000 Securities of U.S. Government Agencies 4,239,000 (172,000) 4,067,000 Total 17,875,000 (456,000) 17,419,000 Held-to-maturity Obligations of State and Political Subdivisions 11,335,000 (353,000) 10,982,000 Total Investment Securities $29,210,000 ($809,000) $28,401,000 <FN> In 1995 and 1994, the Bank received proceeds from the sale of investment securities of $7,016,000 and $4,995,000, respectively, and gains included in other noninterest income totaled $19,000 and $5,000 respectively. There were no sales of held-to-maturity securities in 1995 or 1994. </FN> NOTE 2 (Cont) The maturities of the investment security portfolio at December 31, 1995 follows: Held-to-maturity Amortized Fair Cost Value Within one year $2,141,000 $2,150,000 After one through five years 8,219,000 8,297,000 Over five years 611,000 614,000 Total $10,971,000 $11,061,000 Available-for-sale Amortized Fair Cost Value Within one year $5,195,000 $5,229,000 After one through five years 16,612,000 16,768,000 Over five years 1,500,000 1,503,000 Total $23,307,000 $23,500,000 At December 31, 1995 and 1994, securities with an approximate book value of $6,439,000 and $6,985,000 respectively, were pledged to secure public deposits. The FASB permitted a one-time opportunity, effective November 15, 1995, allowing institutions to reassess appropriateness of the designations of all securities held, and allowed institutions to reclassify securities prior to December 31, 1995 without calling into question their intent to hold other debt securities to maturity. Under this ruling, the Corporation reclassified $3,653,000 of held-to-maturity investments to held-for-sale investments during the month of December, 1995. NOTE 3: LOANS The majority of the Bank's loans are to customers in Contra Costa County 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 1995 1994 Real Estate Construction $21,417,000 $17,904,000 Real Estate Mortgages 15,439,000 14,150,000 Commercial 33,473,000 28,538,000 Installment 30,975,000 27,317,000 TOTAL 101,304,000 87,909,000 Less: Allowance for Credit Losses (1,528,000) (1,498,000) NET LOANS $99,776,000 $86,411,000 The following table provides further information on past due and nonaccrual loans. December 31 1995 1994 Loans Past Due 90 Days or More, still accruing interest $9,000 $14,000 Nonaccrual Loans 181,000 533,000 TOTAL $190,000 $547,000 As of December 31, 1995 and 1994, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 1995 remains uncollected. Interest foregone on nonaccrual loans was approximately $9,000 in 1995, $73,000 in 1994, and $52,000 in 1993. NOTE 4: ALLOWANCES FOR CREDIT LOSSES For the Year Ended December 31 1995 1994 1993 Total loans outstanding at end of period, before deducting allowance for credit losses $101,304,000 $87,909,000 $82,334,000 Average total loans outstanding during period $89,518,000 $85,893,000 $79,270,000 Analysis of the allowance for credit losses: Beginning Balance $1,498,000 $1,418,000 $1,502,000 Charge-offs: Real Estate Construction 104,000 -- -- Real Estate Mortgages -- 140,000 -- Commercial 162,000 6,000 109,000 Installment 53,000 84,000 162,000 TOTAL CHARGE-OFFS 319,000 230,000 271,000 Recoveries: Real Estate Construction -- -- -- Commercial 13,000 17,000 59,000 Installment 6,000 38,000 8,000 TOTAL RECOVERIES 19,000 55,000 67,000 NET CHARGE-OFFS 300,000 175,000 204,000 Provisions charged to operating expense 330,000 255,000 120,000 Ending Balance $1,528,000 $1,498,000 $1,418,000 Ratio of net charge-offs to average total loans 0.34% 0.20% 0.26% Ratio of allowance for credit losses to total loans at end of period 1.51% 1.70% 1.72% NOTE 4 (Cont.) The Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The Corporation had previously measured the allowance for credit losses using methods similar to those prescribed in FASB No. 114. As a result of adopting these statements, no additional allowance for loan losses was required as of January 1, 1995. As of December 31, the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 are as follows: 1995 Recorded Valuation Investment Allowance Impaired Loans- Valuation allowance required $389,000 $129,000 No valuation allowance required $181,000 -- The average recorded investment in impaired loans for the year ended 1995 was $816,000. Interest payment received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of principal. The Corporation recognized interest income on impaired loans of $31,000 for the year ended December 31, 1995. NOTE 5: PREMISES AND EQUIPMENT A summary of premises and equipment follows: December 31 1995 1994 Leasehold Improvements $1,083,000 $562,000 Furniture and Equipment 2,424,000 2,184,000 3,507,000 2,746,000 Accumulated Depreciation and Amortization (2,032,000) (1,753,000) Premises and Equipment, Net $1,475,000 $993,000 The amount of depreciation and amortization included in occupancy and furniture and equipment expense was $309,000 in 1995, $302,000 in 1994, and $283,000 in 1993. NOTE 6: INVESTMENT IN BWC REAL ESTATE BWC Real Estate, a subsidiary of the Corporation, was formed to enter into a joint venture arrangement with a real estate brokerage firm, creating a company called BWC Mortgage Services. BWC Real Estate owns 51% of this joint venture. The business purpose of BWC Mortgage Services is the origination and placement of long-term financing for real estate mortgages. 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, 1995. 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. 1995 Carrying Fair Amount Value Cash and cash equivalents $ 12,617,000 $ 12,617,000 Loans (net) 99,776,000 101,591,000 Investment securities 34,471,000 34,571,000 Deposit liabilities 134,601,000 134,826,000 Other liabilities 646,000 646,000 The carrying amounts in the table are included in the statement of financial position 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, such as motor vehicle 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 unquoted securities, 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. Other liabilities include deferred and unearned fees in relation to loan commitments. The unamortized carrying value of deferred and unearned fees approximates its fair value. NOTE 8: INCOME TAXES The provisions for income taxes in 1995, 1994, and 1993 consist of the following: 1995 1994 1993 CURRENT Federal $673,000 $392,000 $264,000 State 300,000 214,000 140,000 TOTAL CURRENT 973,000 606,000 404,000 DEFERRED Federal (121,000) (93,000) (15,000) State (29,000) (32,000) (12,000) TOTAL DEFERRED (150,000) (125,000) (27,000) TOTAL $823,000 $481,000 $377,000 The components of the net deferred tax assets of the Bank as of December 31, 1995 and 1994 were as follows: Deferred Tax Assets: 1995 1994 Allowance for credit losses $520,000 $559,000 Employee benefits and other 59,000 100,000 State taxes 41,000 66,000 Total deferred tax assets 620,000 725,000 Deferred Tax Liabilities: Depreciation and other (29,000) (76,000) Accretion and other (16,000) (224,000) SFAS 115 deferred tax (liability) asset (66,000) 146,000 Total deferred tax liabilities (111,000) (154,000) Net deferred tax asset $509,000 $571,000 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: 1995 1994 1993 Provision based on the statutory Federal rate of 34% $831,000 $563,000 $416,000 Increases (reduction) in income taxes resulting from: State franchise taxes, net of Federal income tax benefit 187,000 125,000 91,000 Non-taxable interest income (135,000) (135,000) (115,000) Other (60,000) (72,000) (15,000) TOTAL $823,000 $481,000 $377,000 NOTE 9: STOCK OPTION PLAN The Corporation's stock option plan provides for the granting of options to key employees for the purchase of the Corporation's shares at a price not less than the fair market value on the date of grant. Options expire ten years from the grant date, and vest over a five year period. A summary of option activity follows: Number of Shares Option Price Per Share (Low) (High) Outstanding at January 1, 1993 213,578 $4.62 $15.03 Exercised 10,716 $4.62 $5.13 Outstanding at December 31, 1993 202,862 $5.13 $15.03 Outstanding at December 31, 1994 202,862 $5.13 $15.03 Exercised 10,230 $5.13 $5.93 Outstanding at December 31, 1995 192,632 $7.44 $15.03 <FN> At December 31, 1995, options for 151,613 shares were exercisable, and 89,540 shares were available for additional option grants under the Corporation's 1990 Stock Option Plan (provides for the grant of both incentive and non- qualified stock options). The share and per-share amounts as of each December 31 above have been adjusted for stock dividends. </FN> NOTE 10: COMMITMENTS AND CONTINGENCIES As of December 31, 1995, the approximate future minimum net rental payments under non-cancellable operating leases for premises were as follows: Year Amount 1996 $612,000 1997 612,000 1998 612,000 1999 612,000 2000 548,000 Thereafter 1,652,000 Total $4,948,000 Rental expense for premises under operating leases included in occupancy expense was $472,000, $419,000, and $366,000, in 1995, 1994, and 1993, respectively. Minimum rentals may be adjusted for increases in the lessors' operating costs and/or increases in the Consumer Price Index. At December 31, 1995, the Bank had outstanding approximately $49,782,000 in undisbursed loan commitments and $713,000 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. 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, 1995 were immaterial. 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 $124,000, $84,000, and $63,000 in 1995, 1994, and 1993. 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: 1995 1994 1993 Data Processing $229,000 $208,000 $233,000 Regulatory Fees 153,000 255,000 231,000 Professional Fees 306,000 247,000 265,000 Memberships/Conferences/ Education/Business Development 197,000 175,000 142,000 Telephone and Postage 207,000 168,000 157,000 Advertising and Promotion 123,000 160,000 73,000 Office Supplies 138,000 139,000 142,000 Other 655,000 477,000 582,000 TOTAL $2,008,000 $1,829,000 $1,825,000 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, $3,608,000 of the Bank's retained earnings were available for dividends at December 31, 1995. 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 $1,385,000 as of December 31, 1995. There were no such extensions of credit by the Bank in 1995 or 1994. 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 1995 1994 ASSETS Cash on Deposit with the Bank $1,007,000 $766,000 Investment in the Bank 13,852,000 11,851,000 Investment in BWC Real Estate 55,000 26,000 TOTAL ASSETS $14,914,000 $12,643,000 LIABILITIES Reserve for Taxes Payable $21,000 -- SHAREHOLDERS' EQUITY Common Stock $10,508,000 $9,026,000 Retained Earnings 4,385,000 3,617,000 TOTAL SHAREHOLDERS' EQUITY $14,893,000 $12,643,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,914,000 $12,643,000 SUMMARY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 1994 1993 Expenses - General and Administrative $13,000 $14,000 $16,000 Loss before income taxes and equity in undistributed net income of Subsidiaries (13,000) (14,000) (16,000) Income tax benefit (provision) (21,000) 6,000 5,000 Equity in undistributed net income of BWC Real Estate 91,000 (5,000) -- Equity in undistributed net income of the Bank 1,563,000 1,187,000 858,000 NET INCOME $1,620,000 $1,174,000 $847,000 NOTE 14 (Continued) SUMMARY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, OPERATING ACTIVITIES: 1995 1994 1993 Net Income $1,620,000 $1,174,000 $847,000 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed net income of Subsidiaries (1,563,000) (1,187,000) (858,000) Reserve for Taxes Payable 21,000 -- -- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 78,000 (13,000) (11,000) FINANCING ACTIVITIES: Proceeds from issuance of common stock 196,000 88,000 104,000 Cash paid in lieu of fractional shares (4,000) -- (1,000) Shares repurchased by the Corporation -- (123,000) (170,000) Investment in BWC Real Estate (29,000) (26,000) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 163,000 (61,000) (67,000) Increase (Decrease) in Cash 241,000 (74,000) (78,000) CASH ON DEPOSIT WITH THE BANK: Beginning of year 766,000 840,000 918,000 End of year $1,007,000 $766,000 $840,000 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 banking corporation) and Subsidiaries (the Corporation) as of December 31, 1995 and 1994, 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, 1995. 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 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 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, 1995 and 1994, and the results of their operations and their cash flows each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. San Francisco, California, March 15, 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS The following is a summary of selected consolidated financial data for the five years ended December 31, 1995. 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 annual report. 1995 1994 1993 1992 1991 SUMMARY OF EARNINGS Interest Income $11,491,000 $9,673,000 $8,458,000 $8,232,000 $9,934,000 Interest Expense 3,410,000 2,547,000 2,333,000 2,792,000 4,541,000 Net Interest Income 8,081,000 7,126,000 6,125,000 5,440,000 5,393,000 Provision for Possible Credit Losses 330,000 255,000 120,000 -- 135,000 Net Interest Income after Provision for Possible Credit Losses 7,751,000 6,871,000 6,005,000 5,440,000 5,258,000 Noninterest Income 1,136,000 651,000 616,000 828,000 506,000 Noninterest Expense 6,444,000 5,867,000 5,397,000 4,942,000 4,963,000 Income Before Income Taxes 2,443,000 1,655,000 1,224,000 1,326,000 801,000 Provision for Income Taxes 823,000 481,000 377,000 516,000 317,000 NET INCOME 1,620,000 1,174,000 847,000 810,000 484,000 PER SHARE: Net Income (1) $1.64 $1.21 $0.91 $0.88 $0.53 Average Common and Common Equivalent Shares (1) 990,472 973,388 931,361 924,331 918,634 Book Value Per Common Share (1) $15.04 $12.99 $12.68 $11.94 $11.07 SUMMARY BALANCE SHEETS AT DECEMBER 31 Cash and Due from Banks $11,377,000 $8,552,000 $5,161,000 $6,326,000 $6,288,000 Federal Funds Sold 1,230,000 3,300,000 3,965,000 4,700,000 1,775,000 Other short Term Investments 10,000 3,018,000 -- -- -- Interest-earning Deposits -- -- -- -- -- Investment Securities 34,471,000 28,754,000 22,974,000 22,277,000 20,705,000 Loans, Net 99,776,000 86,411,000 80,916,000 71,733,000 65,735,000 Other Assets 3,733,000 3,109,000 2,401,000 3,474,000 3,693,000 TOTAL ASSETS $150,597,000 $133,144,000 $115,417,000 $108,510,000 $98,196,000 Noninterest-bearing Deposits $36,854,000 $27,340,000 $22,355,000 $16,706,000 $15,959,000 Interest-bearing Deposits 97,747,000 92,632,000 80,811,000 80,195,000 71,109,000 Other Liabilities 1,103,000 529,000 437,000 574,000 959,000 Shareholders' Equity 14,893,000 12,643,000 11,814,000 11,035,000 10,169,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $150,597,000 $133,144,000 $115,417,000 $108,510,000 $98,196,000 <FN> (1) All share and per-share amounts give effect to 10% stock dividends in June 1995, April 1993 and March 1991. </FN> MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Net Income Net income in 1995 was $1,620,000 which represented a 1.20% return on average assets and a return on average equity of 11.75% as compared to 1994 which saw a return on average assets of .94% and a return on average equity of 9.54%. This represents an increase of $446,000 over the 1994 figure. Net interest margins increased .28% between the respective periods. In addition, the Corporation's average earning assets increased an average of $9,698,000 during 1995 as compared to 1994. Net income 1993 was 847,000 which represented a .75% return on average assets and a return on average equity of 7.32%. 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 1995 increased $1,818,000 over 1994. Of this increase 34% was related to an increase in the volume of average earning assets and 66% was the result of interest rate changes. Total interest income in 1994 increased $1,215,000 over 1993. Of this increase, 53% was related to an increase in the volume of average earning assets, and 47% was the result of interest rate changes. Total interest expense in 1995 increased $863,000 over 1994. Of this increase, 40% was related to an increase in the volume of average earning assets, and 60% was due to interest rate changes. Total interest expense in 1994 increased $214,000 over 1993. Of this increase, 92% was related to an increase in the volume of average earning assets and 8% was due to interest rate changes. Based on a combination of the above factors affecting interest income and interest expense, net interest income increased $955,000 during 1995 as compared to 1994. Of this increase, 28% was related to volume increases, and 72% was related to rate changes. Based on a combination of the above factors affecting interest income and interest expense, net interest income increased $1,001,000 during 1994 as compared to 1993. Of this increase, 44% was related to volume increases and 56% was related to rate changes. 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 1995 was 6.63% or .29% higher than during 1994. During 1995 prime rate averaged 8.83% as compared to the average prime rate during 1994 of 7.14%. Since the Corporation is slightly asset rate sensitive, this worked in favor of improved net interest income during 1995 as compared to 1994. The Corporation's net interest margin for 1994 was 6.34% or .21% higher than during 1993. During 1994 the prime rate averaged 7.14% as compared to 6.00% for 1993. This also worked in favor of the Corporation's net interest income during 1994 as compared to 1993. 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, 1995 was 1.51%. This reflects a conservative attitude on the part of management and is considered adequate to provide for potential future losses. Additional provisions of $330,000 were made during 1995 against net charge- offs of $300,000. The ratio of the allowance for credit losses to total loans as of December 31, 1994 was 1.70%. Additional provisions of $255,000 were made during 1994 against net charge-offs of $175,000. Noninterest Income Total noninterest income in 1995 of $1,136,000 was $485,000 greater than earned in 1994. Income from service charges on deposit accounts increased $144,000 over 1993 partly due to growth and partly due to pricing changes and analysis of business accounts. A new area of noninterest income for the Corporation is gains on the sale of SBA loans, which earned $189,000 during the 1995 calendar year. Other noninterest income from fees and services, exclusive of gains on the sale of securities available for sale of $19,000, which are the result of growth and expanded services, increased $138,000 over 1994, reflecting growth and increased activity in financial services other than lending. Total noninterest income in 1994 of $651,000 was $35,000 greater than earned in 1993. As a result of deposit growth, income from service charges increased $13,000 over 1993. Other noninterest income, exclusive of gains on the sale of securities available for sale of $5,000, which are the result of growth and expanded services, increased $36,000 over the prior year. Noninterest Expense 1995 vs. 1994 Total noninterest expense in 1995 increased $577,000 over that of 1994. Officer and staff salaries reflect an increase of $347,000 over that of 1994. The increase between the two periods was partly related to salary and merit increases on existing staff and bonuses paid under incentive and performance plans and to staff number increases. Due to growth and expansion in departments and branch offices, full time equivalent (FTE) averaged 64.0 as compared to 1994 which averaged 59.8. Total occupancy expense increased $64,000 between the respective periods. This is partly related to the new and expanded banking quarters in Orinda, to a five year adjustment on the Corporation's office in Danville, plus Consumer Price Index and operating price increases based on terms of leases. Furniture Fixtures & Equipment expense were relatively stable, decreasing $13,000 from the previous year. Other operating expenses increased $179,000 in 1995 as compared to 1994 even though the Corporation's expenses related to FDIC insurance premiums decreased approximately $100,000. Most categories of operating expenses increased, reflecting the growth and expansion of the Corporation. A few categories however, reflect greater increases accounted for by growth alone, and are explained in the following. Expenses for professional services increased $59,000 over the prior year, most of which was related to consulting services to enhance future earnings of the Corporation. Most of this expense was recovered by improved noninterest earnings during the 1995 calendar year. Fees for other services increased $91,000 over the prior year, most of which were related to increases in correspondent bank service charges, fees associated with the Corporation's Prestige account program and charges related to the Corporation's Visa card program. Miscellaneous expenses and operating losses reflect an increase of $84,000 over the prior year. Operating losses, due to bad checks, fraud and cash losses amounted to $48,000 of this increase. The major other areas of increase were in messenger service, check printing costs associated with the Corporation's Prestige account program, and SBA commissions paid. 1994 vs. 1993 Total noninterest expense in 1994 increased $470,000 over that of 1993. Officer and staff salaries reflect an increase of $301,000 over the previous year. In addition to merit increases on existing staff and bonuses paid under incentive and performance plans, the Corporation opened a new office in Pleasanton and formed a new SBA division in the Bank. Total occupancy expense increased $94,000 between the respective periods; the new Pleasanton office accounted for $57,000 of this. The balance is related to consumer price index and operating expense increases. FF&E expense increased approximately $71,000 over the previous year, related to in-house data processing and the new Pleasanton office. Also, per regulatory reporting requirements, the inclusion of insurance expense on equipment is now included in this category, instead of the insurance expense category as was the previous practice. Other expenses are relatively the same as incurred during 1993. Reviewing specific components in this category, however, provides information on areas of change from the prior year. The most significant of these are discussed below. The Bank's activities in marketing increased significantly in 1994 over 1993 related, not only to the Pleasanton opening, but to a number of deposit- gathering promotions and equity line programs. Total marketing expenses were up approximately $86,000 over the previous year. Regulatory fees based on higher deposit levels increased $24,000 over 1993. Business development, education, conference and staff expense increased $32,000 over 1993. Professional fees, primarily attorneys' fees, were down during 1994 as compared to 1993, resulting in a total decrease in all professional fees of approximately $32,000 from the 1993 period, and other expenses decreased over $75,000 from the previous year. 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 1995 and 1994. The FDIC also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by the quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3% for the highest rated banks. The Bank's leverage ratio surpassed the regulatory minimum of 3% at December 31, for both 1995 and 1994. The following table shows the risk-based capital ratios and leverage ratio as of December 31, 1995 and 1994. Risk-based capital ratios: Risk-based capital ratios: 	 Capital Ratios		Minimum 		December 31, regulatory 	1994	 1995	 requirements Tier 1 capital:	12.51% 12.70%	 4.00% Total capital:	13.76% 13.95%	 8.00% Leverage ratio:	 9.51% 9.35%	 3.00% 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, bankers' acceptances, 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 31% of total assets at December 31, 1995 as compared to 33% of total assets at December 31, 1994. 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 $8,000,000. General 1995 as compared to 1994 During 1995 the nation, and California, showed economic strength and moderate growth. The Fed has maintained a cautious policy that has thus far avoided inflationary spending and allowed modest but stable growth. During 1995, the Federal Reserve raised the Prime Rate to 9.00% but when it became clear that inflation was not a current concern and the economy was sluggish, the Federal Reserve lowered rates again to 8.50% where they were at the end of 1994. The long term outlook is for continued moderate growth and stable interest rates. BWC Financial Corporation has enjoyed a growth of over 13% or $17,453,000, from the prior year. Total deposit growth was in excess of 12% and loan growth was 15%. The Corporation's new mortgage financial service subsidiary, BWC Real Estate, was profitable in its first year of operation. The Corporation's SBA department (through Bank of Walnut Creek), was also a contributor to the profits of the Corporation. During 1995 the Corporation established a 24-hour voice response system that has been well received by its clients as indicated by its heavy usage. During 1996, the Corporation will continue to explore banking technology opportunities. We believe that technology will play an increasingly important role in our services, and that as a community bank we can meet those technology needs yet continue to provide the personal service expected from a community bank. 1994 as compared to 1993 During 1994 the nation, and finally California, showed continued growth and economic strength following the recession gripping the country the beginning of this decade. Although California was lagging the rest of the country, 1994 statistics indicated that the state was on the path to recovery. The Federal Reserve was concerned that inflation was just around the corner and in a preemptive strike successively moved rates on five different occasions during 1994 resulting in the Prime Rate increasing from 6.00% at the beginning of the year to 8.50% by year end. A reflection of the economic conditions was the Corporation's growth of over 15% or $17,727,000 in total assets. The Corporation also founded a new branch office in Pleasanton, California on April 15, 1994. Total deposit growth was in excess of 16% which exceeded loan demand of approximately 7%. Common Stock Prices The common stock of BWC Financial Corp. is traded in the over-the-counter market through market makers. At December 31, 1995, BWC Financial Corp. had 511 shareholders of record of common stock. At December 31, 1994, BWC Financial Corp. had 564 shareholders of record of common stock. 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. According to the principal market makers, the high and low bid quotations for 1995 and 1994 were: 1995 1st Quarter		2nd Quarter $13.50 - $14.50	$13.50 - $15.75 3rd Quarter 4th Quarter $14.75 - $16.50	$16.00 - 17.50 1994 1st Quarter		2nd Quarter $10.75-$12.00	$12.50-$13.50 3rd Quarter 4th Quarter $13.37-$14.00	$13.37-14.75 A 10% stock dividend was granted to shareholders of record June 30, 1995. Common stock prices have not been adjusted to reflect the above stock dividends.