BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31
1997 1996
Assets
Cash and Due From Banks $17,745,000 $15,383,000
Federal Funds Sold $4,350,000 --
Other Short Term Investments 48,000 26,000
Total Cash and Cash Equivalents 22,143,000 15,409,000
Investment Securities:
Available for Sale 33,062,000 10,399,000
Held to Maturity (approximate fair value of
$7,950,000 in 1997 and $8,765,000 in 1996) 7,894,000 8,726,000
Loans, Net of Allowance for Credit Losses of $2,936,000
in 1997 and $1,893,000 in 1996. 161,002,000 138,878,000
Bank Premises and Equipment, Net 1,455,000 1,522,000
Interest Receivable and Other Assets 3,367,000 2,439,000
Total Assets $228,923,000 $177,373,000
Liabilities and Shareholder's Equity
Liabilities
Deposits:
Noninterest-bearing $59,847,000 $41,766,000
Interest-bearing:
Money Market Accounts 44,406,000 29,561,000
Savings and NOW Accounts 29,755,000 25,189,000
Time Deposits:
Under $100,000 36,829,000 34,167,000
$100,000 or more 36,635,000 25,208,000
Total Interest-bearing 147,625,000 114,125,000
Total Deposits 207,472,000 155,891,000
Federal Funds Purchased -- 3,600,000
Interest Payable and Other Liabilities 2,003,000 1,472,000
Total Liabilities 209,475,000 160,963,000
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 -
1,233,062 shares in 1997 and 1,016,598 in 1996. 18,603,000 12,172,000
Retained Earnings 706,000 4,231,000
Capital adjustment on available for sale securities 139,000 7,000
Total Shareholders' Equity 19,448,000 16,410,000
Total Liabilities and Shareholders' Equity $228,923,000 $177,373,000
<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,
1997 1996 1995
Interest Income
Loans, Including Fees $16,107,000 $11,604,000 $9,480,000
Investment Securities:
Taxable 1,387,000 967,000 1,389,000
Non-taxable 391,000 495,000 365,000
Federal Funds Sold 383,000 154,000 181,000
Other Short Term Investments 48,000 18,000 76,000
Total Interest Income 18,316,000 13,238,000 11,491,000
Interest Expense
Deposits 5,767,000 3,748,000 3,405,000
Federal Funds Purchased 3,000 16,000 5,000
Total Interest Expense 5,770,000 3,764,000 3,410,000
Net Interest Income 12,546,000 9,474,000 8,081,000
Provision For Credit Losses 1,125,000 650,000 330,000
Net Interest Income After Provision For Credit Losses 11,421,000 8,824,000 7,751,000
Noninterest Income
Service Charges on Deposit Accounts 761,000 651,000 535,000
Other 878,000 695,000 601,000
Total Noninterest Income 1,639,000 1,346,000 1,136,000
Noninterest Expense
Salaries and Related Benefits 4,737,000 3,829,000 3,250,000
Occupancy 812,000 779,000 747,000
Furniture and Equipment 556,000 538,000 439,000
Other 2,401,000 2,178,000 2,008,000
Total Noninterest Expense 8,506,000 7,324,000 6,444,000
Income Before Income Taxes 4,554,000 2,846,000 2,443,000
Provision For Income Taxes 1,629,000 918,000 823,000
Net Income $2,925,000 $1,928,000 $1,620,000
Basic Earnings Per Share $2.37 $1.56 $1.31
Diluted Earnings Per Share $2.06 $1.40 $1.23
Average Basic Shares 1,233,653 1,233,006 1,236,278
Average Diluted Share Equivalents Related to Options 183,849 146,504 82,040
Average Diluted Shares 1,417,502 1,379,510 1,318,318
<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, 1997, 1996 and 1995
Capital
Number Common Retained Adjustment
of Shares Stock Earnings on Securities Total
Balance, January 1, 1995 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
Net Income for 1996 -- -- 1,928,000 -- 1,928,000
10% Stock Dividend, Including
Payment of fractional shares 92,835 1,950,000 (1,954,000) -- (4,000)
Common Stock Purchased by the
Defined Contribution Plan at $15.45 per share 11,736 181,000 -- -- 181,000
Repurchase of shares by the Corporation
at $17.75 to $21.75 per share (23,880) (467,000) -- -- (467,000)
Capital adjustment on available for sale securities -- -- -- (121,000) (121,000)
Balance, December 31, 1996 1,016,598 12,172,000 4,231,000 7,000 16,410,000
Net Income for 1997 -- -- 2,925,000 -- 2,925,000
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 of shares by the Corporation
at $22.50 per share (1,650) (37,000) -- -- (37,000)
Capital adjustment on available for sale securities -- -- -- 132,000 132,000
10% Stock Dividend, Including
Payment of fractional shares (Note 16) 111,932 3,917,620 (3,923,620) -- (6,000)
Balance, December 31, 1997 1,233,062 18,602,620 706,380 139,000 19,448,000
<FN>
The 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,
1997 1996 1995
Operating Activities:
Net Income $2,925,000 $1,928,000 $1,620,000
Adjustments to reconcile net income to
net cash provided:
Amortization of loan fees (1,383,000) (886,000) (691,000)
Provision for credit losses 1,125,000 650,000 330,000
Depreciation and amortization 403,000 386,000 309,000
Gain on sale of securities available-for-sale (11,000) (21,000) (19,000)
Deferred income taxes (575,000) (212,000) (150,000)
Increase in accrued interest
receivable and other assets (929,000) (76,000) (34,000)
Increase in accrued interest
payable and other liabilities 1,107,000 368,000 574,000
Net Cash Provided by Operating Activities 2,662,000 2,137,000 1,939,000
Investing Activities:
Proceeds from the maturities of investment securities 5,123,000 2,805,000 11,800,000
Proceeds from the sales of available-for-sale
investment securities 1,989,000 17,779,000 7,016,000
Purchase of investment securities (28,801,000) (5,216,000) (23,895,000)
Loans originated, net of collections (21,865,000) (38,867,000) (13,143,000)
Purchase of bank premises and equipment (336,000) (446,000) (791,000)
Net Cash Used by Investing Activities (43,890,000) (23,945,000) (19,013,000)
Financing Activities:
Net increase in deposits 51,581,000 21,290,000 14,629,000
Increase (decrease) in Federal Funds Purchased (3,600,000) 3,600,000 --
Proceeds from issuance of common stock 29,000 181,000 196,000
Cash paid for the repurchase of common stock (37,000) (467,000) --
Cash paid in lieu of fractional shares (11,000) (4,000) (4,000)
Net Cash Provided by Financing Activities 47,962,000 24,600,000 14,821,000
Cash and Cash Equivalents:
Increase (decrease) in cash and cash equivalents 6,734,000 2,792,000 (2,253,000)
Cash and cash equivalents at beginning of year 15,409,000 12,617,000 14,870,000
Cash and Cash Equivalents at end of year $22,143,000 $15,409,000 $12,617,000
Additional Cash Flow Information:
Interest Paid $5,542,000 $3,559,000 $3,672,000
Income Taxes Paid $2,140,000 $825,000 $840,000
Loans Transferred to OREO -- -- $108,000
<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 two 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, 1997, and 1996, the minimum average
balance required for the Bank to maintain was $1,591,000 and $874,000
respectively.
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 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 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 fee income on
these loan sales until the 90 day period elapses. On December 31, 1997 the
Corporation was holding $47,000 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. 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 and is in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan (SFAS 114). 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.
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.
Earnings Per Share (EPS). In March 1997, Statement of Financial Accounting
Standards No. 128, Earnings Per Share, was issued (SFAS 128), which was
effective December 15, 1997 and has been adopted by the Corporation in this
1997 fiscal year. As a result of adopting SFAS No 128, two EPS amounts are
reported, a new EPS amount, Basic EPS, and Diluted EPS that is unchanged
from the prior years reported numbers for Net Income Per Common and Common
Equivalent Share.
Net Income Per Basic Share (Basic EPS) is calculated by dividing net income
by weighted average shares outstanding. No dilution for any potentially
dilutive securities is included. Weighted average shares and per share
amounts reflect the 10% stock dividend paid on February 2, 1998, March 31,
1997, July 31, 1996 and June 15, 1995.
Net Income Per Diluted Share (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 10% stock dividend paid on February 2, 1998,
March 31, 1997, July 31, 1996 and 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 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 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.
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 and
the pro forma disclosures required by SFAS 123 are included in Note 9.
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
U.S. Treasury Securities $10,053,000 $66,000 -- $10,119,000
Securities of U.S. Government Agencies 16,478,000 74,000 -- 16,552,000
Taxable Securities of State and
Political Subdivisions 6,320,000 71,000 -- 6,391,000
Total 32,851,000 211,000 -- 33,062,000
Held-to-maturity
Obligations of State and Political
Subdivisions 7,894,000 56,000 -- 7,950,000
Total Investment Securities $40,745,000 $267,000 -- $41,012,000
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
U.S. Treasury Securities $5,540,000 $22,000 -- $5,562,000
Securities of U.S. Government Agencies 1,502,000 6,000 -- 1,508,000
Taxable Securities of State and
Political Subdivisions 3,346,000 -- 17,000 3,329,000
Total 10,388,000 28,000 17,000 10,399,000
Held-to-maturity
Obligations of State and Political
Subdivisions 8,726,000 39,000 -- 8,765,000
Total Investment Securities $19,114,000 $67,000 $17,000 $19,164,000
<FN>
In 1997 and 1996, the Bank received proceeds from sale of investment
securities of $1,989,000 and $17,779,000, respectively, and gains included in
other noninterest income totaled $11,000 and $21,000 respectively.
</FN>
NOTE 2 (Cont)
The maturities of the investment security portfolio at December 31, 1997 follows:
Held-to-maturity
Amortized Fair
Cost Value
Within one year $1,502,000 $1,507,000
After one through five years 5,120,000 5,159,000
Over five years 1,272,000 1,284,000
Total $7,894,000 $7,950,000
Available-for-sale
Amortized Fair
Cost Value
Within one year $8,158,000 $8,170,000
After one through five years 19,993,000 20,157,000
Over five years 4,700,000 4,735,000
Total $32,851,000 $33,062,000
<FN>
At December 31, 1997 and 1996, securities with an approximate book value
of $4,862,000 and $5,568,000 respectively, were pledged to secure public
deposits.
</FN>
NOTE 3: LOANS
The majority of the Bank's loans are to customers in Contra Costa 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
1997 1996
Real Estate Construction $53,894,000 $38,984,000
Real Estate Mortgages 23,648,000 21,591,000
Commercial 56,403,000 48,570,000
Installment 29,993,000 31,626,000
TOTAL 163,938,000 140,771,000
Less: Allowance for Credit Losses (2,936,000) (1,893,000)
NET LOANS $161,002,000 $138,878,000
<FN>
The following table provides further information on past due and nonaccrual
loans.
</FN>
December 31
1997 1996
Loans Past Due 90 Days or More, still
accruing interest $16,000 --
Nonaccrual Loans $232,000 $29,000
TOTAL $248,000 $29,000
<FN>
As of December 31, 1997 and 1996, 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 $24,000 in 1997, $9,000 in 1996, and $9,000 in 1995.
</FN>
NOTE 4: ALLOWANCES FOR CREDIT LOSSES
For the Year Ended December 31
1997 1996 1995
Total loans outstanding at end of period, before
deducting allowance for credit losses $163,938,000 $140,771,000 $101,304,000
Average total loans outstanding during period $149,043,000 $112,356,000 $89,518,000
Analysis of the allowance for credit losses:
Beginning Balance $1,893,000 $1,528,000 $1,498,000
Charge-offs:
Real Estate Construction -- -- 104,000
Real Estate Mortgages -- -- --
Commercial 139,000 263,000 162,000
Installment 54,000 58,000 53,000
TOTAL CHARGE-OFFS 193,000 321,000 319,000
Recoveries:
Real Estate Mortgages 3,000 -- --
Commercial 101,000 29,000 13,000
Installment 7,000 7,000 6,000
TOTAL RECOVERIES 111,000 36,000 19,000
NET CHARGE-OFFS 82,000 285,000 300,000
Provisions charged to operating expense 1,125,000 650,000 330,000
Ending Balance $2,936,000 $1,893,000 $1,528,000
Ratio of net charge-offs to average
total loans 0.06% 0.25% 0.34%
Ratio of allowance for credit losses
to total loans at end of period 1.79% 1.34% 1.51%
<FN>
As of December 31, 1997, 1996 and 1995, the Corporation's recorded investment in impaired loans and the related
valuation allowance calculated under SFAS No. 114 was not material.
</FN>
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
December 31
1997 1996
Leasehold Improvements $1,129,000 $1,125,000
Furniture and Equipment 2,593,000 2,412,000
3,722,000 3,537,000
Accumulated Depreciation and Amortization (2,267,000) (2,015,000)
Premises and Equipment, Net $1,455,000 $1,522,000
<FN>
The amount of depreciation and amortization included in occupancy and
furniture and equipment expense was $403,000 in 1997, $386,000 in 1996,
and $309,000 in 1995.
</FN>
NOTE 6: INVESTMENT IN BWC REAL ESTATE
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. 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, 1997 and 1996. 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.
1997
Carrying Fair
Amount Value
Cash and cash equivalents $ 17,745,000 $ 17,745,000
Investment securities 41,004,000 41,012,000
Loans (net) 161,002,000 164,830,000
Deposit liabilities 207,472,000 207,677,000
Other liabilities 4,350,000 4,350,000
1996
Carrying Fair
Amount Value
Cash and cash equivalents $ 15,383,000 $ 15,383,000
Investment securities 19,151,000 19,164,000
Loans (net) 138,878,000 141,057,000
Deposit liabilities 155,891,000 156,138,000
Other liabilities 947,000 947,000
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, 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 1997, 1996, and 1995 consist of the
following:
1997 1996 1995
CURRENT
Federal $1,574,000 $765,000 $673,000
State 630,000 365,000 300,000
TOTAL CURRENT 2,204,000 1,130,000 973,000
DEFERRED
Federal (431,000) (176,000) (121,000)
State (144,000) (36,000) (29,000)
TOTAL DEFERRED (575,000) (212,000) (150,000)
TOTAL $1,629,000 $918,000 $823,000
<FN>
The components of the net deferred tax assets of the Bank as of
December 31, 1997 and 1996 were as follows:
</FN>
Deferred Tax Assets: 1997 1996
Allowance for credit losses $1,197,000 $729,000
Employee benefits and other 126,000 56,000
State taxes 67,000 67,000
Total deferred tax assets 1,390,000 852,000
Deferred Tax Liabilities:
Depreciation and other (18,000) (28,000)
Accretion and other (10,000) (37,000)
SFAS 115 deferred tax liability (54,000) (4,000)
Total deferred tax liabilities (82,000) (69,000)
Net deferred tax asset $1,308,000 $783,000
<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>
1997 1996 1995
Provision based on the statutory
Federal rate of 34% $1,548,000 $968,000 $831,000
Increases (reduction) in income taxes resulting from:
State franchise taxes, net of
Federal income tax benefit 329,000 216,000 187,000
Non-taxable interest income (130,000) (178,000) (135,000)
Other (118,000) (88,000) (60,000)
TOTAL $1,629,000 $918,000 $823,000
Note 9: STOCK OPTIONS
In 1990, the Board of Directors of the Corporation adopted the 1990 Stock
Option Plan covering an aggregate 354,312 shares (adjusted for subsequent
stock dividends) 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
nontransferrable and are exercisable in installments.
As of December 31, 1997, 109,498 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, 1997 and 1996, which presents changes during the years then ended is
presented in the table below. Figures have been adjusted to reflect the
10% stock dividend issued February 3, 1998 and March 31, 1997.
1997 Weighted 1996 Weighted
Shares average Shares average
exercise exercise
price price
Outstanding at
beginning of year 263,049 $ 6.65 256,394 $ 6.43
Granted 8,525 $21.26 6,655 $14.94
Exercised 5,204 $ 6.19 -- --
Outstanding at
end of year 266,370 $ 6.95 263,049 $ 6.65
Exercisable at
end of year 245,572 $ 6.67 245,243 $ 6.50
Weighted average
fair value of
options granted
during the year $ 9.65 $ 7.92
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:
1997 1996
Net Income:
As reported $2,925,000 $1,928,000
Pro forma 2,901,000 1,920,000
Basic Earnings per share:
As reported $ 2.37 $ 1.56
Pro forma 2.35 1.55
Diluted Earnings per share:
As reported $ 2.06 $ 1.40
Pro forma 2.05 1.39
Because the Statement 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 Corporation did not grant stock options
in 1995, and as such, there is no pro forma reduction of net income.
The following table summarizes information about stock options outstanding
at December 31, 1997.
Options
Outstanding: Options
Weighted Weighted Exercisable: Weighted
Range of Number Average Average Number Average
exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 12/31/97 Life Price at 12/31/97 Price
$ 5.59 to
$ 6.21 217,854 6.08 $ 6.06 207,868 $ 6.06
$ 7.45 to
$11.29 33,337 8.43 $ 9.91 33,337 $ 9.91
$14.93 to
$22.05 15,180 2.07 $18.49 4,367 $17.40
The fair value of each option grant in 1997 and 1996, is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997 and 1996:
risk free rate of 7.00% and 6.75%, no expected dividend yield, expected
life of 8 years and expected volatility of 17.84% and 16.41% respectively.
NOTE 10: COMMITMENTS AND CONTINGENCIES
As of December 31, 1997 the approximate future minimum net rental
payments under non-cancellable operating leases for premises were as
follows:
Year Amount
1998 $658,000
1999 643,000
2000 566,000
2001 193,000
2002 142,000
Thereafter 1,304,000
Total $3,506,000
Rental expense for premises under operating leases included in
occupancy expense was $527,000, $507,000, and $472,000, in 1997,
1996, and 1995, respectively. Minimum rentals may be adjusted for
increases in the lessors' operating costs and/or increases in the
Consumer Price Index.
At December 31, 1997, the Bank had outstanding approximately
$91,230,000 in undisbursed loan commitments and $928,000 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, 1997 was 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
$162,000, $144,000, and $124,000 in 1997, 1996, and 1995. 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:
1997 1996 1995
Data Processing $336,000 $293,000 $229,000
Bus.Development & Education 239,000 235,000 197,000
Telephone and Postage 265,000 241,000 207,000
Professional Fees 244,000 193,000 306,000
Supplies 211,000 192,000 138,000
Marketing 151,000 163,000 123,000
Regulatory Fees 47,000 21,000 153,000
Other 908,000 840,000 655,000
TOTAL $2,401,000 $2,178,000 $2,008,000
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, $6,159,000 of the
Bank's retained earnings were available for dividends at December 31, 1997.
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 $1,846,000 as of December 31,
1997. There were no such extensions of credit by the Bank in 1997 or 1996.
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 1997 1996
ASSETS
Cash on Deposit with the Bank $660,000 $681,000
Investment in the Bank 18,461,000 15,558,000
Investment in BWC Real Estate 333,000 171,000
TOTAL ASSETS $19,454,000 $16,410,000
LIABILITIES
Taxes Payable -- --
SHAREHOLDERS' EQUITY
Common Stock $14,685,000 $12,172,000
Retained Earnings 4,769,000 4,238,000
TOTAL SHAREHOLDERS' EQUITY $19,454,000 $16,410,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $19,454,000 $16,410,000
SUMMARY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
Expenses - General and Administrative $13,000 $13,000 $13,000
Loss before income taxes and
equity in undistributed net income
of Subsidiaries (13,000) (13,000) (13,000)
Income tax benefit (provision) 5,000 8,000 (21,000)
Equity in undistributed net income
of BWC Real Estate 162,000 107,000 91,000
Equity in undistributed net income
of the Bank 2,771,000 1,826,000 1,563,000
NET INCOME $2,925,000 $1,928,000 $1,620,000
NOTE 14 (Continued)
SUMMARY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
OPERATING ACTIVITIES: 1997 1996 1995
Net Income $2,925,000 $1,928,000 $1,620,000
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Equity in undistributed net income
of Subsidiaries (2,933,000) (1,933,000) (1,563,000)
Taxes Payable -- (21,000) 21,000
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (8,000) (26,000) 78,000
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 29,000 181,000 196,000
Cash paid in lieu of fractional shares (5,000) (4,000) (4,000)
Shares repurchased by the Corporation (37,000) (467,000) --
Investment in BWC Real Estate -- (10,000) (29,000)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (13,000) (300,000) 163,000
Increase (Decrease) in Cash (21,000) (326,000) 241,000
CASH ON DEPOSIT WITH THE BANK:
Beginning of year 681,000 1,007,000 766,000
End of year $660,000 $681,000 $1,007,000
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 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, 1997, that the Corporation and the Bank meet all capital
adequacy requirements to which the are subject.
As of December 31, 1997, 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.
NOTE 15: (Continued)
The Bank's actual capital amounts and ratios are also presented in the table.
Minimum
Capital Minimum
Actual Adequacy for Well
Amount Ratio Requirements Capitalized
As of December 31, 1997
Total Capital (to Risk
Weighted Assets)
Consolidated: $21,539,000 12.15% $14,178,000 > 8.0 $17,723,000 >10.0
Bank of Walnut Creek: $20,546,000 11.59% $14,178,000 > 8.0 $17,723,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $19,315,000 10.90% $7,089,000 > 4.0 $10,634,000 > 6.0
Bank of Walnut Creek: $18,322,000 10.34% $7,089,000 > 4.0 $10,634,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated: $19,315,000 9.64% $8,016,000 > 4.0 $10,021,000 > 5.0
Bank of Walnut Creek: $18,322,000 9.15% $8,006,000 > 4.0 $10,008,000 > 5.0
As of December 31, 1996
Total Capital (to Risk
Weighted Assets)
Consolidated: $18,276,000 12.24% $11,943,000 > 8.0 $14,929,000 >10.0
Bank of Walnut Creek: $17,417,000 11.67% $11,943,000 > 8.0 $14,929,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $16,410,000 10.99% $5,972,000 > 4.0 $8,957,000 > 6.0
Bank of Walnut Creek: $15,551,000 10.42% $5,972,000 > 4.0 $8,957,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated: $16,410,000 9.87% $6,651,000 > 4.0 $8,313,000 > 5.0
Bank of Walnut Creek: $15,551,000 9.35% $6,653,000 > 4.0 $8,316,000 > 5.0
1997 1996
Bank Risk weighted assets $177,228,000 $149,290,000
Bank Average assets $200,162,000 $166,320,000
Corp. Risk weighted assets $177,228,000 $149,290,000
Corp. Average assets $200,411,000 $166,320,000
Corp. Mo. Ave. BWCRE Inv. $248,622
NOTE 16: Shareholders' Equity
Dividends and Capital Transactions
On January 27, 1998, the Board of directors declared a 10% stock dividend
to shareholders of record as of February 3, 1998. The distribution date
was set as February 17, 1998 and fractional shares were to be paid in cash
at a value of $35 per share. All share and per share data in the 1997
annual report, as appropriate, reflect this dividend. Accordingly,
$3,924,000 was transferred from retained earnings to common stock, with the
exception of $5,000 which was set aside for the payment of fractional
shares.
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, 1997 and 1996, 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, 1997.
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 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen, LLP
San Francisco, California
March 2, 1998
<FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following is a summary of selected consolidated financial data for the five years ended December 31, 1997. 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.
</FN>
1997 1996 1995 1994 1993
SUMMARY OF EARNINGS
Interest Income $18,316,000 $13,238,000 $11,491,000 $9,673,000 $8,458,000
Interest Expense 5,770,000 3,764,000 3,410,000 2,547,000 2,333,000
Net Interest Income 12,546,000 9,474,000 8,081,000 7,126,000 6,125,000
Provision for Credit Losses 1,125,000 650,000 330,000 255,000 120,000
Net Interest Income after Provision
for Credit Losses 11,421,000 8,824,000 7,751,000 6,871,000 6,005,000
Noninterest Income 1,639,000 1,346,000 1,136,000 651,000 616,000
Noninterest Expense 8,506,000 7,324,000 6,444,000 5,867,000 5,397,000
Income Before Income Taxes 4,554,000 2,846,000 2,443,000 1,655,000 1,224,000
Provision for Income Taxes 1,629,000 918,000 823,000 481,000 377,000
NET INCOME 2,925,000 1,928,000 1,620,000 1,174,000 847,000
Diluted Earnings Per Share (1) $2.06 $1.40 $1.23 $0.91 $0.62
Average Diluted Shares (1) 1,417,502 1,379,510 1,318,318 1,295,579 1,363,606
Book Value Per Diluted Share (1) $13.72 $11.90 $11.30 $9.76 $8.66
SUMMARY BALANCE SHEETS AT DECEMBER 31
Cash and Due from Banks $17,745,000 $15,383,000 $11,377,000 $8,552,000 $5,161,000
Federal Funds Sold 4,350,000 -- 1,230,000 3,300,000 3,965,000
Other short Term Investments 48,000 26,000 10,000 3,018,000 --
Investment Securities 40,956,000 19,125,000 34,471,000 28,754,000 22,974,000
Loans, Net 161,002,000 138,878,000 99,776,000 86,411,000 80,916,000
Other Assets 4,822,000 3,961,000 3,733,000 3,109,000 2,401,000
TOTAL ASSETS $228,923,000 $177,373,000 $150,597,000 $133,144,000 $115,417,000
Noninterest-bearing Deposits $59,847,000 $41,766,000 $36,854,000 $27,340,000 $22,355,000
Interest-bearing Deposits 147,625,000 114,125,000 97,747,000 92,632,000 80,811,000
Federal Funds Purchased -- 3,600,000 -- -- --
Other Liabilities 1,997,000 1,472,000 1,103,000 529,000 437,000
Shareholders' Equity 19,454,000 16,410,000 14,893,000 12,643,000 11,814,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $228,923,000 $177,373,000 $150,597,000 $133,144,000 $115,417,000
<FN>
(1) All share and per-share amounts give effect to 10% stock dividends in February 1998, March 1997, July 1996, June 1995,
and April 1993.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net Income
Net income in 1997 was $2,925,000 which represented an increase of $997,000
over 1996 net income. It reflects a return on average assets of 1.46% and a
return on average equity of 16.46%, as compared to 1996 which saw a return
on average assets of 1.27% and a return on average equity of 12.45%. The
Corporation's average earning assets increased $45,470,000 during 1997 as
compared to 1996.
Net income in 1995 was $1,620,000 which represented a 1.20% return on
average asset and a return on average equity of 11.75%.
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 1997 increased $5,078,000 over 1996. Of this
increase, 87% was related to the increase in the volume of average earning
assets in 1997 as compared to 1996, and 13% was related to higher interest
rates.
Total interest expense in 1997 increased $2,006,000 over 1996. As with
interest income, the majority of the increase, or 80%, was due to the growth
in interest bearing deposits between the respective periods, and 20% due to
higher interest rates.
Based on the above factors affecting interest income and interest expense,
net interest income increased $3,072,000 during 1997 as compared to 1996.
Total interest income in 1996 increased $1,747,000 over 1995. All of this
increase was related to the increase in the volume of average earning assets
in 1996 as compared to 1995.
Total interest expense in 1996 increased $354,000 over 1995. As with
interest income, the entire increase was due to the growth in interest
bearing deposits between the respective periods.
Based on the above factors affecting interest income and interest expense,
net interest income increased $1,393,000 during 1996 as compared to 1995.
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 1997 was 6.82%, relatively
unchanged (.05% lower) from that earned during 1996. During 1997 the prime
rate averaged 8.44% as compared to the average prime rate during 1996 of
8.27%.
The Corporation's net interest margin for 1996 was 6.87% or .24% higher than
during 1995. During 1996 the prime rate averaged 8.27% as compared to the
average prime rate during 1995 of 8.83%.
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, 1997 was 1.79%. Management considers the level of reserves adequate to
provide for potential future losses. Additional provisions of $1,125,000
were made during 1997 against net charge-offs of $82,000.
The ratio of the allowance for credit losses to total loans as of December
31, 1996 was 1.34%. Additional provisions of $650,000 were made during 1996
against net charge-offs of $285,000.
Noninterest Income
Total noninterest income in 1997 of $1,639,000 was $293,000 greater than
earned in 1996. Income from service charges increased $110,000 between the
respective periods and Other Income increased $183,000.
Total noninterest income in 1996 of $1,346,000 was $210,000 greater than
earned in 1995. Income from service charges increased $116,000 between the
respective periods and Other Income increased $170,000.
Noninterest Expense
1997 vs 1996
Total noninterest expense in 1997 increased $1,182,000 over that of 1996.
Officer and staff salaries reflect an increase of $908,000 over that of
1996. 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 growth and expansion in
departments and branch offices, full time equivalent (FTE) averaged 81.3 as
compared to 71.5 during 1996.
Total occupancy expense increased $33,000 between the respective periods.
This is partly related to a full year of lease expense for the Corporation's
office in Fremont, which was opened in midyear 1996. 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 $18,000 from the previous
year, related primarily to additions, replacements, and service of
equipment.
Other operating expenses increased $223,000 over the comparable expenses in
1996. Most categories of operating expenses increased, reflecting the growth
and expansion of the Corporation.
1996 vs 1995
Total noninterest expense in 1996 increased $880,000 over that of 1995.
Officer and staff salaries reflect an increase of $579,000 over that of
1995. 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 growth and expansion in
departments and branch offices, full time equivalent (FTE) averaged 71.5 as
compared to 64.0 during 1995.
Total occupancy expense increased $32,000 between the respective periods.
This is partly related to the new office in Fremont, opened in midyear. 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 $99,000 from the previous
year, related primarily to additions and replacements of computer equipment.
Other operating expenses increased $170,000 in 1996 as compared to 1995.
Most categories of operating expenses increased, reflecting the growth and
expansion of the Corporation.
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 1997 and 1996.
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 1997 and 1996.
See Footnote 15.
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 27%
of total assets at December 31, 1997 as compared to 19% of total assets at
December 31, 1996. The increase in liquidity between the respective periods
was related to a 33% growth in deposits between the respective periods, as
compared to a loan growth of 16%.
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 $13,000,000.
Year 2000 Issue
The Corporation has assessed and continues to assess the impact of the Year
2000 Issue on its reporting systems and operations. The Year 2000 Issue
exists because many computer systems and applications currently use two-
digit date fields to designate a year. As the century date occurs, date
sensitive systems may recognize the year 2000 as 1900 or not at all. This
type of inability to recognize or properly treat the year 2000 could cause
some systems to process critical financial and operations information
incorrectly.
The Corporation is not aware of any Year 2000 Issues in the hardware or
software it uses to process critical financial and operations information.
Assurances have been received from third party vendors that our systems are
Year 2000 compliant. The Corporation will continue to assess and test its
systems throughout this year and the next.
General
1997
The nation, and California, showed continued economic strength and growth.
The Federal Reserve maintained a holding pattern and the national economy
has reflected strong growth with little, if any, signs of inflation.
California has, in particular, shown above average growth and strength in
its economy.
The Federal Reserve held interest rates steady with only one change
occurring in March, 1997, resulting in an increase in the prime rate from
8.25% to 8.50%.
BWC Financial Corp. enjoyed a growth of 29% or $51,550,000, in total assets,
from the prior year. Total deposit growth was 33% and loan growth was 16%.
The Corporation's mortgage financial service subsidiary, BWC Real Estate,
continues to be a profitable addition to the Corporation.
1996
The nation, and California, showed continued economic strength and growth
over 1995. The Federal Reserve maintained a cautious policy that has
avoided inflationary spending and allowed modest but stable growth.
The Federal Reserve held interest rates steady with only one change
occurring in February, 1996, resulting in a decrease in the prime rate from
8.5% to 8.25%.
BWC Financial Corp. enjoyed a growth of 18% or $26,776,000, from the prior
year. Total deposit growth was 16% and loan growth was very strong,
reflecting a 40% increase.
The Corporation's new mortgage financial service subsidiary, BWC Real
Estate, was a profitable addition to the Corporation.
Common Stock Prices
The common stock of BWC Financial Corp. is traded in the over-the-counter
market through market makers.
At December 31, 1997, BWC Financial Corp. had 436 shareholders of record. At
December 31, 1996, BWC Financial Corp. had 472 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.
According to the principal market makers, the high and low bid quotations
for 1997 and 1996 were:
1997
1st Quarter 2nd Quarter
$23.875 - $24.50 $23.75 - $24.75
3rd Quarter 4th Quarter
$24.625 - $26.75 $30.625 - 36.50
1996
1st Quarter 2nd Quarter
$16.75 - $19.25 $18.50 - $20.75
3rd Quarter 4th Quarter
$18.25 - $24.50 $23.25 - 24.25
A 10% stock dividend was granted to shareholders of record on February 2,
1998, March 31, 1997 and on July 31, 1996. 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.
Static gap analysis is one of the tools used for interest rate risk
measurement. 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, 1997,
the cumulative one-year gap ratio of assets to liabilities, was 1.17.
In addition to performing static 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, 1997 estimated that a 2% interest rate decrease could lower pretax
earnings by $710,000, which was 15.6% of 1997 pre tax 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.
<FN>
INTEREST RATE SENSITIVITY
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, 1997. Management believes that the sensitivity ratios
reflected in these schedules fall within acceptable ranges, and represent no undue interest rate
risk to the future earnings prospects of the Corporation.
</FN>
3 3-6 12 1-5 Over 5
Repricing within: months months months years years Totals
December 31, 1997
ASSETS:
FFS and short term investments $4,398 $ -- $ -- $ -- $ -- $4,398
Investment securities 1,001 1,517 2,989 26,996 8,453 40,956
Construction & real estate loans 62,385 8,518 5,330 1,309 -- 77,542
Commercial loans 50,955 4,120 928 400 -- 56,403
Consumer loans 25,468 441 916 3,137 31 29,993
Total interest earning assets 144,207 14,596 10,163 31,842 8,484 209,292
Allowance for loan losses (2,936)
Cash and due from banks 17,745
Other assets 4,822
Total assets $228,923
Savings and Now accounts $29,755 $ -- $ -- $ -- $ -- $29,755
Money market accounts 44,406 -- -- -- -- 44,406
Time deposits <$100,000 9,731 12,894 11,926 2,278 -- 36,829
Time deposits >$100,000 17,883 7,521 10,222 1,009 -- 36,635
Total interest bearing liabilities 101,775 20,415 22,148 3,287 0 147,625
Non-interest bearing deposits 59,847
Non-interest bearing other liabilities 1,997
Shareholders equity 19,454
Total liabilities $228,923
Rate sensitive gap $42,432.00 -$5,819.00 -$11,985.00 $28,555.00 $8,484.00
Cumulative rate sensitive gap $42,432.00 $36,613.00 $24,628.00 $53,183.00 $61,667.00
Cumulative rate sensitivity
ratio 1.42 1.30 1.17 1.36 1.42