SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996, Commission file number 0-10658
BWC FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 94-2621001
(State of other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
1400 Civic Drive, Walnut Creek, California 94596
(Address of principal executive office)
Registrant's telephone number, including area code: (510) 932-5353
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 1, 1997: $18,475,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 1, 1997.
Title of Class: Common Stock, no par value Shares Outstanding: 1,016,598
Documents Incorporated by Reference* Incorporated Into:
1996 Annual Report to Shareholders Part II and IV
Definitive Proxy Statement for the 1997 Part III
Annual Meeting of Shareholders to be
filed by March 24, 1997.
* Only selected portions of the document specified are incorporated by
reference into this report, as more particularly described herein.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 1
Item 2 Properties 3
Item 3 Legal Proceedings 3
Item 4 Submissions of Matters to a Vote of Shareholders 3
PART II
Item 5 Market for the Registrant's Common Stock and
Related Shareholder Matters 4
Item 6 Selected Financial Data 4
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5 - 13
Item 8 Financial Statements and Supplementary Data 14
Item 9 Changes in and Desagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10 Directors and Executive Officers of
the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial
Owners and Management 15
Item 13 Certain Relationships and Related Transactions 15
PART IV
Item 13 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
<PAGE>
PART I
ITEM 1. BUSINESS
BWC Financial Corp. ("Corporation") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. It is a holding company for
Bank of Walnut Creek, which was incorporated under the laws of the State of
California on November 26, 1979. Its principal office is located at 1400
Civic Drive, Walnut Creek, California 94596, and its telephone number is (510)
932-5353.
Bank of Walnut Creek has conducted the business of a commercial bank since
December 12, 1980. The Bank's primary focus is to engage in wholesale
commercial banking, serving small to middle-sized businesses, professionals,
high net worth individuals and general retail banking business. Rather than
concentrate on any specific industry, the Bank has solicited and attracted
customers from a wide variety of light manufacturing, wholesaling, retailing,
contracting, real estate development and service businesses, accountants,
physicians and dentists.
The Bank offers a full range of commercial banking services emphasizing the
banking needs of individuals, and the business and professional community in
Walnut Creek, California and surrounding areas of Contra Costa County. The
Bank accepts checking and savings deposits, makes construction loans, mortgage
real estate loans, commercial loans, and installment loans, and offers safe
deposit services, including oversize boxes for short-term storage. It sells
travelers checks, issues drafts, and offers other customary banking services.
The Bank offers its depositors a wide selection of deposit instruments
including money market accounts, NOW accounts, and time certificates of
deposit. Bank of Walnut Creek also offers an auto deposit pick-up service to
its professional and business clients. Automatic teller machines are
available at all bank locations, 24 hours a day, and are part of the EDS and
Cirrus networks with ATM access at locations throughout the United States and
Canada. The Bank offers its clients 24 hour telephone access to their
accounts through a system called Telebanc, and PC banking access through a
system called PCBanc.
The Bank operates an SBA (Small Business Administration) lending department,
and also has a "Business Credit" department which provides asset based
(factoring)loans with assignment of receivable. Both of these areas of the
Bank add to the Corporations range of services to its clients.
The Corporation also operates, through its subsidiary, BWC Real Estate, a
joint venture brokerage service called "BWC Mortgage Services". This
brokerage division not only provides long term mortgage placement services for
the Bank's construction loan clients but for non-clients seeking long term
mortgage financing. The long term financing is placed through the most
competitive mortgage investors available in the market.
The Bank is not at this time authorized to conduct trust business and has no
present intention to apply to regulatory authorities to do so. Although the
Bank does not directly offer international banking services, the Bank does
make such services available to its customers through other financial
institutions with which the Bank has correspondent banking relations.
<PAGE>
Service Area
Contra Costa County represents the primary service area of Bank of Walnut
Creek and its branches, however, the service area also extends into Alameda
County and Solano County. Walnut Creek, California, is site of the
Corporation's main office and the Bank also operates offices in the cities of
Orinda, Danville, San Ramon and Pleasanton, California.
BWC Financial Corp. has no foreign or international activities or operations.
Competition
The banking business in the Bank's primary service area, consisting of Contra
Costa County, Southern Solano County, and Northern Alameda County, is highly
competitive with respect to both loans and deposits. The area is dominated by
the major California banks, all of which have multiple branch offices
throughout our defined service area. Additionally, there are many thrifts
representing most of the major thrift institutions operating in the California
market. There are also a number of other independent banks that are a source
of competition due to the similarity of the market served.
Among the advantages of major banks are their abilities to finance wide-
ranging advertising campaigns, to offer certain services (for example, trust
services) which are not offered directly by the Bank and to have substantially
higher legal lending limits due to their greater capitalizations. In addition
to major banks, some of the nation's largest savings and loan associations are
located in California and compete for mortgage business along with smaller
savings and loan associations.
Bank of Walnut Creek is in direct competition with all these financial
institutions. Management believes the Bank competes successfully with these
institutions because of sound management techniques and the flexibility to
adjust to changing economic situations. The dedication of founders,
directors, and bank personnel has been instrumental in the Bank's ability to
compete. The Bank is dedicated to providing personal attention to the
financial needs of businesses, professionals, and individuals in its service
area.
Employees
At December 31, 1996, Bank of Walnut Creek employed 77 people. At the present
time there are no employees directly employed by BWC Financial Corp. or by its
mortgage subsidiary BWC Real Estate. There are 19 persons employed by the
joint venture BWC Mortgage Services either directly on as independent
contractors.
Supervision and Regulation
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking
Department. The Bank is also subject to regulation, supervision, and periodic
examination by the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank is not a member of the Federal Reserve System, but is nevertheless
subject to certain regulations of the Board of Governors of the Federal
Reserve System. As a state bank, the Bank's deposits are insured by the FDIC
to the maximum amount permitted by law, which is currently $100,000.
<PAGE>
The regulations of those state and federal bank regulatory agencies govern
most aspects of the Bank's business and operations, including, but not limited
to, requiring the maintenance of non-interest bearing reserves on deposits,
limiting the nature and amount of investments and loans which may be made,
regulating the issuance of securities, restricting the payment of dividends,
regulating bank expansion and bank activities, including real estate
development activities and determining characteristics of certain deposit
accounts.
ITEM 2. PROPERTIES
The principal office of the Bank of Walnut Creek is located at 1400 Civic
Drive, in the financial district of downtown Walnut Creek. The premises are
located in a modern building of which the Bank has leased approximately 11,917
square feet.
BWC Financial Corp. shares common quarters with Bank of Walnut Creek in its
principal office.
On September 24, 1982, a branch office was opened at 224 Brookwood Road,
Orinda, California. The branch serves the Orinda area. The premises are
located in a remodeled building of approximately 320 square feet.
On November 12, 1985, a branch office was opened at 3130 Crow Canyon Place,
San Ramon, California. The branch serves the San Ramon area. The premises
are located in a modern building of which the Bank has leased approximately
3,375 square feet.
On June 8, 1990, the Bank leased 2263 square feet of office space located at
424 Hartz Avenue, Danville, California, to house the Bank's Danville office,
serving the community of Danville.
On January 6, 1994 the Bank leased 3880 square feet of office space located at
249 Main Street, Pleasanton, California to house the Bank's Pleasanton office,
serving the community of Pleasanton.
On June 15, 1996 the Bank leased 2,240 square feet of office space located at
4030 Clipper Court, Fremont, California. A full service charter was approved,
however, at this time the facility is being used for the development of loans
to the surrounding business community.
ITEM 3. LEGAL PROCEEDINGS
At this time there are no pending or threatened legal proceedings to which the
Corporation is a party or to which any of the Corporation's properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The information required to be furnished pursuant to this item is set forth
under the caption "Common Stock Prices" on page 27 of the Corporation's 1996
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Operations" on page
24 of the Corporation's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
<PAGE>
<TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For management's discussion and analysis of financial condition and results of operations, see
"Management's Discussion and Analysis of Operations" at pages 24 through 27 of the 1996 Annual
Report to Shareholders which is incorporated herein by reference. The following statistical
disclosures should be read in conjunction with the consolidated financial statements and notes
thereto of the 1996 Annual Report to Shareholders which is incorporated herein by reference.
The following is an analysis of net interest earnings for the years ended December 31.
<CAPTION>
EARNING ASSETS 1996 1995
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid (1) Balance Expense Paid (1)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $2,894,000 $153,654 5.31% $3,139,000 $181,000 5.77%
Other Short Term Investments 346,000 18,032 5.21 1,314,000 76,000 5.78
Investment Securities:
U.S. Treasury Securities 6,429,000 397,223 6.18 12,209,000 705,000 5.77
Securities of U.S.
Government Agencies 4,557,000 290,162 6.37 8,496,000 551,000 6.48
Obligations of States &
Political Subdivisions (1) 14,730,000 775,184 6.99 10,125,000 498,000 6.78
Loans (2) (3) (4) 112,356,000 11,603,864 10.33 89,518,000 9,480,000 10.59
TOTAL EARNING ASSETS $141,312,000 $13,238,119 9.53% $124,801,000 $11,491,000 9.36%
NONEARNING ASSETS 11,048,000 9,759,000
TOTAL $152,360,000 $134,560,000
</TABLE>
<PAGE>
<TABLE>
ITEM 7. (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1996 1995
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid (1) Balance Expense Paid (1)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING DEPOSITS:
Savings and NOW Accounts $23,135,000 $381,316 1.65% $21,587,000 $402,000 1.86%
Money Market Accounts 30,590,000 879,158 2.87 34,756,000 1,041,000 3.00
Time 46,026,000 2,487,655 5.40 35,882,000 1,962,000 5.47
TOTAL 99,751,000 3,748,129 3.76 92,225,000 3,405,000 3.69
Funds Purchased 319,000 16,348 5.98 82,000 5,000 5.98
TOTAL INTEREST-BEARING
DEPOSITS AND BORROWINGS $100,070,000 $3,764,477 3.76 $92,307,000 $3,410,000 3.69
NONINTEREST-BEARING DEPOSITS 36,402,000 -- 28,347,000 --
OTHER LIABILITIES 1,318,000 -- 1,047,000 --
SHAREHOLDERS' EQUITY 14,570,000 -- 12,860,000 --
TOTAL $152,360,000 $134,561,000
NET INTEREST INCOME
AND NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS $9,473,642 6.87% $8,081,000 6.34%
<FN>
Note: Minor rate differences from a straight division of interest by average assets are due to
the rounding of average balances.
(1) Amounts calculated on a fully Tax-Equivalent Basis where appropriate (1996 and 1995
Federal Statutory Rate - 34%).
(2) Nonaccrual loans of $29,000 and $181,000 as of December 31, 1996 and 1995 have been
included in the average loan balance. Interest income is included on nonaccrual loans
only to the extent to which cash payments have been received.
(3) Average loans are net of average deferred loan origination fees of $697,000 and $546,000
in 1996 and 1995 respectively.
(4) Loan interest income includes loan origination fees of $886,000 and $691,000 in 1996
and 1995 respectively.
</FN>
</TABLE>
<PAGE>
Change in Interest and Expense
Due to Volume Change and Rate Change
The following table provides pertinent information about interest income and
expense between the years 1996 and 1995, and between the years 1995 and 1994.
The change resulting primarily from growth in each asset or liability category
is expressed as a volume change. The change resulting primarily from changes
in rates is expressed as a rate change. The change attributed to both rate
and volume is allocated equally between both rate and volume changes.
During 1996 total interest income increased $1,747,000 from 1995. All of this
increase was related to the increase in the volume of average earning assets
in 1996 as compared to 1995. Based on rates alone the increase in interest
income would have been 10% less, given constant volume levels between the
respective periods.
During 1996 total interest expense increased $354,000 from 1995. As with
interest income the increase was attributed to the growth in interest bearing
deposits between the respective periods. Based on rates alone the increase in
interest expense would have been 32% less, given constant volume levels
between the respective periods.
Based on a combination of the above factors affecting interest income and
interest expense, net interest income increased $1,393,000 during 1996 as
compared to 1995. Of this increase all was related to volume increases and
was actually reduced by approximately 5% based on rates.
During 1995 total interest income increased $1,818,000 from 1994. Of this
increase $618,000 or 34% was related to volume increases of interest earning
assets and $1,200,000 or 66% was related to rate changes.
During 1995 total interest expense increased $863,000 from 1994. Of this
increase $346,000 or 40% was related to volume increases in deposits and
$517,000 or 60% was related to rate changes.
The result of the above is that net interest income increased $955,000 during
1995 as compared to 1994. Net volume increases accounted for an increase of
$271,000 whereas net rate changes accounted for $684,000.
<PAGE>
<TABLE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
<CAPTION>
1996 over 1995 1995 over 1994
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increases (Decreases) in Interest Income:
Federal Funds Sold ($14,000) ($14,000) ($28,000) ($64,000) $60,000 ($4,000)
Other Short Term Investments (53,000) (5,000) ($58,000) (14,000) 14,000 --
Investment Securities:
U.S. Treasury Secutities (346,000) 38,000 (308,000) 114,000 95,000 209,000
Securities of U.S. Government Agencies (253,000) (8,000) (261,000) 403,000 33,000 436,000
Obligations of State and
Political Subdivisions (1) 247,000 31,000 278,000 (45,000) 35,000 (10,000)
Loans 2,340,000 (216,000) 2,124,000 226,000 961,000 1,187,000
TOTAL INCREASE (DECREASE) 1,921,000 (174,000) 1,747,000 620,000 1,198,000 1,818,000
Increase (Decrease) in Interest Expense
Deposits:
Savings & NOW Accounts 26,000 (46,000) (20,000) 43,000 (37,000) 6,000
Money Market Accounts (122,000) (40,000) (162,000) (264,000) 92,000 (172,000)
Time Deposits 551,000 (26,000) 525,000 566,000 460,000 1,026,000
Federal Funds Purchased 13,000 (2,000) 11,000 1,000 2,000 3,000
TOTAL INCREASE (DECREASE) 468,000 (114,000) 354,000 346,000 517,000 863,000
Increase (Decrease) on Net Interest Income $1,453,000 ($60,000) $1,393,000 $274,000 $681,000 $955,000
<FN>
(1) Amounts calculated on a fully taxable equivalent basis where appropriate.
</FN>
</TABLE>
<PAGE>
<TABLE>
INTEREST RATE SENSITIVITY
(in thousands except share and per share data)
Proper management of the rate sensitivity and maturities of assets and liabilities are 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, 1996. 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.
<CAPTION>
Interest Rate Sensitivity 3 3-6 12 1-5 Over 5
Repricing within: months months months years years Totals
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
ASSETS:
Federal funds sold $0 $0 $0 $0 $0 $0
Investment securities $1,012 $966 $2,814 $12,940 $1,393 $19,125
Construction & real estate loans $43,817 $7,964 $6,679 $1,416 $699 $60,575
Commercial loans $43,733 $2,795 $1,069 $910 $63 $48,570
Consumer loans $26,169 $408 $855 $4,083 $111 $31,626
Interest-bearing assets $114,731 $12,133 $11,417 $19,349 $2,266 $159,896
Savings and Now accounts $25,189 $0 $0 $0 $0 $25,189
Money market accounts $29,561 $0 $0 $0 $0 $29,561
Time deposits <$100,000 $7,608 $9,427 $15,812 $1,320 $0 $34,167
Time deposits >$100,000 $10,460 $6,392 $7,823 $533 $0 $25,208
Interest-bearing liabilities $72,818 $15,819 $23,635 $1,853 $0 $114,125
Rate sensitive gap $41,913 ($3,686) ($12,218) $17,496 $2,266 $45,771
Cumulative rate sensitiveity gap $41,913 $38,227 $26,009 $43,505 $45,771 $91,542
Cumulative position to average
earning assets 26.21% 23.91% 16.27% 27.21% 28.63%
</TABLE>
<PAGE>
<TABLE>
INVESTMENT SECURITIES
Information regarding the book value of investment securities as of December 31, 1996 and 1995 is set
forth in Note 2 on Page 12 of the Corporation's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
The following table is a summary of the relative maturities and yields on BWC Financial Corp.'s
investment securities as of December 31, 1996. Yields have been computed by dividing annual interest
income, adjusted for amortization of premium and accretion of discount, by book values of the related
securities.
<CAPTION>
Maturing
After One but Within
Within one Year Five Years Over Five Years Total
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $3,501,000 6.25% $2,000,000 5.93% -- -- $5,501,000 6.13%
Obligations of U.S. Government
Agencies -- -- $1,500,000 6.6 -- -- $1,500,000 6.6
Obligations of State and
Political Subdivisions:
Tax-exempt* 1,281,000 6.27 7,323,000 6.39 $122,000 7.36 $8,726,000 6.38
Taxable -- -- 2,117,000 6.16 $1,270,000 6.31 $3,387,000 6.21
TOTAL $4,782,000 6.26% $12,940,000 6.31% $1,392,000 6.40% $19,114,000 6.30%
<FN>
* Interest is exempt from Federal Income Taxes.
</FN>
</TABLE>
<PAGE>
<TABLE>
LOAN PORTFOLIO
Information regarding the loan portfolio of the Corporation as of December 31, 1996 and 1995
is set forth in Note 3 on page 13 of the Corporation's 1996 Annual Report to Shareholders and
is incorporated herein by reference.
Maturity Distribution and Interest Rate Sensitivity of Loans
The following table shows the maturity distribution and interest rate sensitivity of loans
of the Corporation on December 31, 1996.
<CAPTION>
LOANS WITH A MATURITY OF
One Year One to After Five
or Less Five Years Years Total
<S> <C> <C> <C> <C>
Real Estate Construction $39,064,000 -- -- $39,064,000
Commercial 36,291,000 $1,207,000 -- 37,498,000
Installment 26,636,000 5,470,000 $112,000 32,218,000
Real Estate Mortgages 29,527,000 1,335,000 1,129,000 31,991,000
TOTAL $131,518,000 $8,012,000 $1,241,000 $140,771,000
Loans with Fixed Interest Rates $3,340,000 $6,801,000 $1,241,000 $11,382,000
Loans with Floating Interest Rates 128,178,000 1,211,000 0 129,389,000
TOTAL $131,518,000 $8,012,000 $1,241,000 $140,771,000
</TABLE>
<PAGE>
<TABLE>
ALLOWANCE FOR CREDIT LOSSES
Information regarding the analysis of the allowance for credit losses of the Corporation for
the years ended December 31, 1996, 1995 and 1994 is set forth in Note 4 on page 14 of the
Corporation's 1996 Annual Report to Shareholders and is incorporated herein by reference.
Allocation of 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 reasonable
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. Ultimate losses may vary from current estimates.
<CAPTION>
1996 1995
Allocation Loans As A Allocation Loans As A
of Allowance Percent Of of Allowance Percent Of
Type of Loan Balance Total Loans Balance Total Loans
<S> <C> <C> <C> <C>
Real Estate Construction $396,000 27.69% $247,000 21.14%
Commercial 733,000 34.50 490,000 33.04
Installment 297,000 22.47 298,000 30.58
Real Estate Mortgages 57,000 15.34 39,000 15.24
Unallocated 410,000 -- 454,000 --
TOTAL $1,893,000 100.00% $1,528,000 100.00%
<FN>
BWC Financial Corp. believes that any breakdown or allocation of the allowance into loan
categories lends an appearance of exactness which does not exist, in that the allowance is
utilized as a single unallocated reserve available for all loans and commitments to extend
credit. The allowance breakdown shown above should not be interpreted as an indication of
the specific amount or specific loan categories in which future charge-offs may ultimately
occur.
</FN>
</TABLE>
<PAGE>
<TABLE>
DEPOSITS
The following table shows daily average balances for the various
classifications of deposits for the periods indicated.
<CAPTION>
For the Year Ended December 31
1996 1995
Average Average
Balance Rates Balance Rates
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand $36,402,000 -- $28,347,000 --
Savings and NOW Accounts 23,135,000 1.65% 21,587,000 1.86%
Money Market Accounts 30,590,000 2.87 34,756,000 3.00
Time Deposits 46,026,000 5.40 35,882,000 5.47
Total Deposits $136,153,000 2.75% $120,572,000 2.82%
</TABLE>
<TABLE>
Time Certificates in Amounts of $100,000 or More
<CAPTION>
December 31,
Time Remaining to Maturity 1996
<S> <C>
Less than three months $10,460,000
Three to six months 6,392,000
Six to twelve months 7,823,000
More than twelve months 533,000
TOTAL $25,208,000
</TABLE>
<TABLE>
FINANCIAL RATIOS
The following table shows key financial ratios for the Corporation for
the years indicated.
<CAPTION>
Year Ended December 31,
1996 1995
<S> <C> <C>
Return on average assets 1.26% 1.20%
Return on average shareholders' equ 12.45% 11.75%
Cash dividend payout ratio 0.00% 0.00%
Average shareholders' equity as % of:
Average total assets 10.11% 10.18%
Average total deposits 11.38% 11.44%
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in this item is set forth in the
Consolidated Financial Statements on pages 6 through 23 of the Corporation's
1996 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
Pursuant to General Instruction G(3), the information in Items 10, 11, 12
and 13 of Part III is furnished by way of incorporation by reference to
those sections of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders which contain the information required by Items 401,
402, 403, 404 and 405 of Regulation S-K. The Registrant intends to file a
definitive copy of such Proxy Statement, pursuant to Regulation 14A, by
March 24, 1997.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) Documents Filed as Part of this Report
1. Financial Statements
The consolidated financial statements of BWC Financial Corp. and
subsidiary listed below and appearing at the indicated page number in
BWC's 1996 Annual Report to Shareholders are incorporated by reference
into this report.
BWC FINANCIAL CORP. AND SUBSIDIARIES Page
Number*
Independent Public Accountants' Report 23
Independent Public Accountants' Report for the years
ended December 31, 1996 and 1995 is filed herewith 23
Consolidated Balance Sheets as of December 31, 1996 and 1995 6
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 7
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 8
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 9
Notes to Consolidated Financial Statements 10 - 22
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are
inapplicable or the required information is included in the consolidated
financial statements or notes thereto.
(B) Reports on Form 8-K
No reports on form 8-K were filed by BWC Financial Corp. during the fourth
quarter of 1996.
(C) Exhibits Filed:
See Index to Exhibits at page 17 of this Form 10-K.
*Refers to page number in the 1996 Annual Report to Shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BWC FINANCIAL CORP.
By
Leland E. Wines
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
Chairman of the Board ________________
James L. Ryan and Director
Executive Vice President and ________________
Leland E. Wines Chief Financial Officer
Director ________________
Tom Mantor
Director ________________
Richard G. Hill
Director ________________
Reynold C. Johnson III
Director ________________
Craig Lazzareschi
Director ________________
John F. Nohr
Director ________________
John L. Winther
<PAGE>
INDEX TO EXHIBITS
EXHIBIT EXHIBIT NUMBER
Articles of Incorporation and Amendments Refer to 10K filing
of March, 1994.
By-Laws Refer to 10K filing
of March, 1994.
1996 Annual Report to Shareholders 13.1
Consents of Auditors:
Arthur Andersen LLP Consent dated March 3, 1997 24.1
Report of Independent Public Accountants:
Arthur Andersen LLP Report dated March 3, 1997 25.1
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<CAPTION> December 31,
ASSETS 1996 1995
<S> <C> <C>
Cash and Due From Banks $15,383,000 $11,377,000
Federal Funds Sold -- 1,230,000
Other Short Term Investments 26,000 10,000
Total Cash and Cash Equivalents 15,409,000 12,617,000
Investment Securities:
Available for Sale 10,399,000 23,500,000
Held to Maturity (approximate fair value of
$8,765,000 in 1996 and $11,061,000 in 1995) 8,726,000 10,971,000
Loans, Net of Allowance for Credit Losses of $1,893,000
in 1996 and $1,528,000 in 1995. 138,878,000 99,776,000
Bank Premises and Equipment, Net 1,522,000 1,475,000
Interest Receivable and Other Assets 2,439,000 2,258,000
Total Assets $177,373,000 $150,597,000
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $41,766,000 $36,854,000
Interest-bearing:
Money Market Accounts 29,561,000 33,917,000
Savings and NOW Accounts 25,189,000 21,224,000
Time Deposits:
Under $100,000 34,167,000 21,733,000
$100,000 or more 25,208,000 20,873,000
Total Interest-bearing 114,125,000 97,747,000
Total Deposits 155,891,000 134,601,000
Federal Funds Purchased 3,600,000 --
Interest Payable and Other Liabilities 1,472,000 1,103,000
Total Liabilities 160,963,000 135,704,000
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 -
1,016,598 shares in 1996 and 935,907 in 1995. 12,172,000 10,508,000
Retained Earnings 4,231,000 4,257,000
Capital adjustment on available for sale securities 7,000 128,000
Total Shareholders' Equity 16,410,000 14,893,000
Total Liabilities and
Shareholders' Equity $177,373,000 $150,597,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION> For the Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $11,604,000 $9,480,000 $8,293,000
Investment Securities:
Taxable 967,000 1,389,000 744,000
Non-taxable 495,000 365,000 375,000
Federal Funds Sold 154,000 181,000 185,000
Other Short Term Investments 18,000 76,000 76,000
Total Interest Income 13,238,000 11,491,000 9,673,000
INTEREST EXPENSE
Deposits 3,748,000 3,405,000 2,545,000
Federal Funds Purchased 16,000 5,000 2,000
Total Interest Expense 3,764,000 3,410,000 2,547,000
NET INTEREST INCOME 9,474,000 8,081,000 7,126,000
PROVISION FOR CREDIT LOSSES 650,000 330,000 255,000
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 8,824,000 7,751,000 6,871,000
NONINTEREST INCOME
Service Charges on Deposit Accounts 651,000 535,000 391,000
Gain on SBA Loan Sales 95,000 189,000 --
Other 600,000 412,000 260,000
Total Noninterest Income 1,346,000 1,136,000 651,000
NONINTEREST EXPENSE
Salaries and Related Benefits 3,829,000 3,250,000 2,903,000
Occupancy 779,000 747,000 683,000
Furniture and Equipment 538,000 439,000 452,000
Other 2,178,000 2,008,000 1,829,000
Total Noninterest Expense 7,324,000 6,444,000 5,867,000
INCOME BEFORE INCOME TAXES 2,846,000 2,443,000 1,655,000
PROVISION FOR INCOME TAXES 918,000 823,000 481,000
NET INCOME $1,928,000 $1,620,000 $1,174,000
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $1.69 $1.49 $1.10
Average common and common equivalent shares 1,140,091 1,089,519 1,070,727
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<CAPTION> Capital
Number Common Retained Adjustment
of Shares Stock Earnings on Securitie Total
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 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
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
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION> For the Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,928,000 $1,620,000 $1,174,000
Adjustments to reconcile net income to
net cash provided (used):
Amortization of loan fees (886,000) (691,000) (830,000)
Provision for credit losses 650,000 330,000 255,000
Depreciation and amortization 386,000 309,000 302,000
Gain on sale of securities available-for-sale (21,000) (19,000) (5,000)
Deferred income taxes (212,000) (150,000) (125,000)
Decrease (increase) in accrued interest
receivable and other assets (76,000) (34,000) (650,000)
Increase (decrease) in accrued interest
payable and other liabilities 368,000 574,000 364,000
Net Cash Provided (Used) by Operating Activities 2,137,000 1,939,000 485,000
INVESTING ACTIVITIES:
Proceeds from the maturities of investment securities 2,805,000 11,800,000 9,794,000
Proceeds from the sales of available-for-sale
investment securities 17,779,000 7,016,000 4,995,000
Purchase of investment securities (5,216,000) (23,895,000) (21,021,000)
Loans originated, net of collections (38,867,000) (13,143,000) (4,920,000)
Purchase of bank premises and equipment (446,000) (791,000) (360,000)
Net Cash Provided(Used) by Investing Activities (23,945,000) (19,013,000) (11,512,000)
FINANCING ACTIVITIES:
Net increase in deposits 21,290,000 14,629,000 16,806,000
Increase in Federal Funds Purchased 3,600,000 -- --
Proceeds from issuance of common stock 181,000 196,000 88,000
Cash paid for the repurchase of common stock (467,000) -- (123,000)
Cash paid in lieu of fractional shares (4,000) (4,000) --
Net Cash Provided(Used) by Financing Activities 24,600,000 14,821,000 16,771,000
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents 2,792,000 (2,253,000) 5,744,000
Cash and cash equivalents at beginning of year 12,617,000 14,870,000 9,126,000
Cash and Cash Equivalents at end of year $15,409,000 $12,617,000 $14,870,000
ADDITIONAL CASH FLOW INFORMATION:
Interest Paid $3,559,000 $3,672,000 $2,345,000
Income Taxes Paid $825,000 $840,000 $630,000
Loans Transferred to OREO -- $108,000 --
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
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 Corporations 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, 1996, the Bank had balances with
the Federal Reserve of $874,000 as compared to $1,044,000 at December 31,
1995.
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 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.
<PAGE>
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, 1996 the
Corporation was holding $65,000 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 FAS 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.
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 July 31, 1996.
<PAGE>
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.
Accounting for Stock-based Compensation. 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 adopted 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 disclose pro forma
information in the footnotes, as described in SFAS No. 123, if it is a
material amount. See Note 15.
<PAGE>
<TABLE>
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
<CAPTION> 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION> 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
<S> <C> <C> <C> <C>
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
<FN>
In 1996 and 1995, the Bank received proceeds from sale of investment
securities of $17,779,000 and $7,016,000, respectively, and gains included in
other noninterest income totaled $21,000 and $19,000 respectively. There were
no sales of held-to-maturity securities in 1996 or 1995.
</FN>
</TABLE>
<TABLE>
The maturities of the investment security portfolio at December 31, 1996 follows:
<CAPTION> Held-to-maturity
Amortized Fair Fair
Cost Value Value
<S> <C> <C> <C>
Within one year $1,281,000 $1,284,000 $1,284,000
After one through five years 7,323,000 7,359,000 7,359,000
Over five years 122,000 122,000 122,000
Total $8,726,000 $8,765,000 $8,765,000
</TABLE>
<TABLE>
<CAPTION> Available-for-sale
Amortized Fair Fair
Cost Value Value
<S> <C> <C> <C>
Within one year $3,501,000 $3,513,000 $3,513,000
After one through five years 5,617,000 5,624,000 5,624,000
Over five years 1,270,000 1,262,000 1,262,000
Total $10,388,000 $10,399,000 $10,399,000
<FN>
At December 31, 1996 and 1995, securities with an approximate book value
of $5,568,000 and $6,439,000 respectively, were pledged to secure public
deposits.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOTE 3: LOANS
<FN>
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.
</FN>
<CAPTION>
Outstanding loans by type were: December 31
1996 1995
<S> <C> <C>
Real Estate Construction $38,984,000 $21,417,000
Real Estate Mortgages 21,591,000 15,439,000
Commercial 48,570,000 33,473,000
Installment 31,626,000 30,975,000
TOTAL 140,771,000 101,304,000
Less: Allowance for Credit Losses (1,893,000) (1,528,000)
NET LOANS $138,878,000 $99,776,000
<FN>
The following table provides further information on past due and nonaccrual
loans.
</FN>
<CAPTION> December 31
1996 1995
<S> <C> <C>
Loans Past Due 90 Days or More, still
accruing interest -- $9,000
Nonaccrual Loans $29,000 181,000
TOTAL $29,000 $190,000
<FN>
As of December 31, 1996 and 1995, no loans were outstanding that had been
restructured. No interest earned on nonaccrual loans that was recorded in
income during 1996 remains uncollected. Interest foregone on nonaccrual
loans was approximately $9,000 in 1996, $9,000 in 1995, and $73,000 in 1994.
</FN>
</TABLE>
<PAGE>
<TABLE>
NOTE 4: ALLOWANCES FOR CREDIT LOSSES
<CAPTION>
For the Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Total loans outstanding at end of period, before
deducting allowance for credit losses $140,772,000 $101,304,000 $87,909,000
Average total loans outstanding during period $112,356,000 $89,518,000 $85,893,000
Analysis of the allowance for credit losses:
Beginning Balance $1,528,000 $1,498,000 $1,418,000
Charge-offs:
Real Estate Construction -- 104,000 --
Real Estate Mortgages -- -- 140,000
Commercial 263,000 162,000 6,000
Installment 58,000 53,000 84,000
TOTAL CHARGE-OFFS 321,000 319,000 230,000
Recoveries:
Commercial 29,000 13,000 17,000
Installment 7,000 6,000 38,000
TOTAL RECOVERIES 36,000 19,000 55,000
NET CHARGE-OFFS 285,000 300,000 175,000
Provisions charged to operating expense 650,000 330,000 255,000
Ending Balance $1,893,000 $1,528,000 $1,498,000
Ratio of net charge-offs to average
total loans 0.25% 0.34% 0.20%
Ratio of allowance for credit losses
to total loans at end of period 1.34% 1.51% 1.70%
<FN>
As of December 31, 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>
</TABLE>
<PAGE>
<TABLE>
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Leasehold Improvements $1,125,000 $1,083,000
Furniture and Equipment 2,412,000 2,424,000
3,537,000 3,507,000
Accumulated Depreciation and Amortization (2,015,000) (2,032,000)
Premises and Equipment, Net $1,522,000 $1,475,000
<FN>
The amount of depreciation and amortization included in occupancy and
furniture and equipment expense was $340,000 in 1996, $309,000 in 1995,
and $302,000 in 1994.
</FN>
</TABLE>
<PAGE>
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.
<PAGE>
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.
1996
Carrying Fair
Amount Value
Cash and cash equivalents $ 15,383,000 $ 15,383,000
Loans (net) 138,878,000 141,057,000
Investment securities 19,151,000 19,190,000
Deposit liabilities 155,891,000 156,138,000
Other liabilities 947,000 947,000
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.
<PAGE>
<TABLE>
NOTE 8: INCOME TAXES
The provisions for income taxes in 1996, 1995, and 1994 consist of the
following:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CURRENT
Federal $765,000 $673,000 $392,000
State 365,000 300,000 214,000
TOTAL CURRENT 1,130,000 973,000 606,000
DEFERRED
Federal (176,000) (121,000) (93,000)
State (36,000) (29,000) (32,000)
TOTAL DEFERRED (212,000) (150,000) (125,000)
TOTAL $918,000 $823,000 $481,000
<FN>
The components of the net deferred tax assets of the Bank as of
December 31, 1996 and 1995 were as follows:
</FN>
<CAPTION>
Deferred Tax Assets: 1996 1995
<S> <C> <C>
Allowance for credit losses $729,000 $520,000
Employee benefits and other 56,000 59,000
State taxes 67,000 41,000
Total deferred tax assets 852,000 620,000
Deferred Tax Liabilities:
Depreciation and other (28,000) (29,000)
Accretion and other (37,000) (16,000)
SFAS 115 deferred tax (liability) asset (4,000) (66,000)
Total deferred tax liabilities (69,000) (111,000)
Net deferred tax asset $783,000 $509,000
<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>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Provision based on the statutory
Federal rate of 34% $968,000 $831,000 $563,000
Increases (reduction) in income taxes resulting from:
State franchise taxes, net of
Federal income tax benefit 216,000 187,000 125,000
Non-taxable interest income (178,000) (135,000) (135,000)
Other (88,000) (60,000) (72,000)
TOTAL $918,000 $823,000 $481,000
</TABLE>
<PAGE>
Note 9: STOCK OPTIONS
In 1990, the Board of Directors of BWC Financial Corp. adopted the 1990
Stock Option Plan covering an aggregate 292,820 shares (adjusted for
subsequent stock dividends) of BWC Financial Corp. common stock. Under the
1990 Stock Option, options to purchase shares of BWC Financial Corp. 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 as
such, no compensation expense has been recognized as accounted for under
APB Opinion No. 25. The options are nontransferrable and are exercisable
in installments.
In October, 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(FAS 123). As permitted by FAS 123, the Corporation will not change its
method of accounting for stock options.
The additional compensation costs that would have been recorded if the
Corporation had adopted FAS 123 are not material.
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 may not be representative of that to be expected in
future years.
As of December 31, 1996, 92,994 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, 1996 and 1995 changes during the years then ended is presented in the
table below:
1996 Weighted 1995 Weighted
Shares average Shares average
exercise exercise
price price
Outstanding at
beginning of year 211,895 $ 7.79 223,148 $ 7.64
Granted 5,500 $18.07 -- --
Exercised -- -- 11,253 $ 4.77
Canceled -- -- -- --
Outstanding at
end of year 217,395 $ 8.06 211,895 $ 7.80
Exercisable at
end of year 202,680 $ 7.33 166,774 $ 7.95
Weighted average
fair value of
options granted
during the year $ 4.77 --
The following table summarizes information about stock options outstanding
at December 31, 1996.
Range of Number Options
exercise Outstanding Outstanding: Options
prices at 12/31/96 Weighted Weighted Exercisable: Weighted
Average Average Number Average
Contractual Exercise Exercisable Exercise
Life Price At 12/31/96 Price
$ 6.76 to
$ 9.02 194,326 4.82 $ 7.27 184,011 $ 7.25
$13.66 to
$18.07 23,069 3.69 $14.71 18,669 $13.92
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk free rate of 6.50%, no expected
dividend yield, expected life of 4 years and expected volatility of 16.41%.
<PAGE>
NOTE 10: COMMITMENTS AND CONTINGENCIES
As of December 31, 1996 the approximate future minimum net rental
payments under non-cancellable operating leases for premises were as
follows:
Year Amount
1997 $651,000
1998 651,000
1999 635,000
1999 557,000
2000 169,000
Thereafter 1,466,000
Total $4,129,000
Rental expense for premises under operating leases included in
occupancy expense was $507,000, $472,000, and $419,000, in 1996,
1995, and 1994, respectively. Minimum rentals may be adjusted for
increases in the lessors' operating costs and/or increases in the
Consumer Price Index.
At December 31, 1996, the Bank had outstanding approximately
$68,759,000 in undisbursed loan commitments and $357,000 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, 1996 was immaterial.
<PAGE>
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
$144,000, $124,000, and $84,000 in 1996, 1995, and 1994. 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.
<PAGE>
<TABLE>
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Data Processing $293,000 $229,000 $208,000
Bus.Dev./Ed/Staff 235,000 197,000 175,000
Marketing 163,000 123,000 160,000
Supplies 192,000 138,000 139,000
Professional Fees 193,000 306,000 247,000
Regulatory Fees 21,000 153,000 255,000
Telephone and Postage 241,000 207,000 168,000
Other 840,000 655,000 477,000
TOTAL $2,178,000 $2,008,000 $1,829,000
<PAGE>
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, $4,576,000 of the Bank's
retained earnings were available for dividends at December 31, 1996.
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 $1,556,000 as of December 31, 1996. There
were no such extensions of credit by the Bank in 1996 or 1995.
<PAGE>
</TABLE>
<TABLE>
NOTE 14: PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
A summary of the financial statements of BWC Financial Corp.
(parent company only) follows:
<CAPTION>
December 31
SUMMARY BALANCE SHEETS 1996 1995
<S> <C> <C>
ASSETS
Cash on Deposit with the Bank $681,000 $1,007,000
Investment in the Bank 15,558,000 13,852,000
Investment in BWC Real Estate 171,000 55,000
TOTAL ASSETS $16,410,000 $14,914,000
LIABILITIES
Taxes Payable -- $21,000
SHAREHOLDERS' EQUITY
Common Stock $12,172,000 $10,508,000
Retained Earnings 4,238,000 4,385,000
TOTAL SHAREHOLDERS' EQUITY $16,410,000 $14,893,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $16,410,000 $14,914,000
</TABLE>
<TABLE>
<CAPTION>
SUMMARY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Expenses - General and Administrative $13,000 $13,000 $14,000
Loss before income taxes and
equity in undistributed net income
of Subsidiaries (13,000) (13,000) (14,000)
Income tax benefit (provision) 8,000 (21,000) 6,000
Equity in undistributed net income
of BWC Real Estate 107,000 91,000 (5,000)
Equity in undistributed net income
of the Bank 1,826,000 1,563,000 1,187,000
NET INCOME $1,928,000 $1,620,000 $1,174,000
</TABLE>
<TABLE>
<CAPTION>
SUMMARY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,928,000 $1,620,000 $1,174,000
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Equity in undistributed net income
of Subsidiaries (1,933,000) (1,563,000) (1,187,000)
Taxes Payable (21,000) 21,000 --
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (26,000) 78,000 (13,000)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 181,000 196,000 88,000
Cash paid in lieu of fractional shares (4,000) (4,000) --
Shares repurchased by the Corporation (467,000) -- (123,000)
Investment in BWC Real Estate (10,000) (29,000) (26,000)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (300,000) 163,000 (61,000)
Increase (Decrease) in Cash (326,000) 241,000 (74,000)
CASH ON DEPOSIT WITH THE BANK:
Beginning of year 1,007,000 766,000 840,000
End of year $681,000 $1,007,000 $766,000
</TABLE>
<PAGE>
NOTE 15: Regulatory Matters
The Bank is 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative.
measures of the Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. 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 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, 1996,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from FDIC categorized
the Bank as "Well Capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "Well Capitalized" 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.
<PAGE>
<TABLE>
NOTE 15: (Continued)
The Bank's actual capital amounts and ratios are also presented in the table.
<CAPTION>
Actual Minimum Capital Minimum for
Amount Ratio Adequacy Requirements "Well Capitalized"
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk
Weighted Assets)
Consolidated: $18,276,000 12.24% 11,945,000 > 8.0 14,931,000 >10.0
Bank of Walnut Creek: $17,417,000 11.67% 11,940,000 > 8.0 14,925,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $16,410,000 10.99% 5,973,000 > 4.0 8,959,000 > 6.0
Bank of Walnut Creek: $15,551,000 10.42% 5,969,000 > 4.0 8,954,000 > 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
As of December 31, 1995
Total Capital(to Risk
Weighted Assets)
Consolidated: $16,267,000 14.82% 8,781,000 > 8.0 10,976,000 >10.0
Bank of Walnut Creek: $15,098,000 13.76% 8,778,000 > 8.0 10,972,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $14,893,000 13.57% 4,390,000 _>4.0 6,585,000 > 6.0
Bank of Walnut Creek $13,724,000 12.51% 4,388,000 _>4.0 6,582,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated $14,893,000 10.32% 5,772,000 _>4.0 7,216,000 > 5.0
Bank of Walnut Creek $13,724,000 9.50% 5,779,000 _>4.0 7,223,000 > 5.0
</TABLE>
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
San Francisco, California,
March 1, 1997
<PAGE>
<TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The following is a summary of selected consolidated financial data for the five years ended December 31, 1996. 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.
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest Income $13,238,000 $11,491,000 $9,673,000 $8,458,000 $8,232,000
Interest Expense 3,764,000 3,410,000 2,547,000 2,333,000 2,792,000
Net Interest Income 9,474,000 8,081,000 7,126,000 6,125,000 5,440,000
Provision for Credit Losses 650,000 330,000 255,000 120,000 --
Net Interest Income after Provision
for Credit Losses 8,824,000 7,751,000 6,871,000 6,005,000 5,440,000
Noninterest Income 1,346,000 1,136,000 651,000 616,000 828,000
Noninterest Expense 7,324,000 6,444,000 5,867,000 5,397,000 4,942,000
Income Before Income Taxes 2,846,000 2,443,000 1,655,000 1,224,000 1,326,000
Provision for Income Taxes 918,000 823,000 481,000 377,000 516,000
NET INCOME 1,928,000 1,620,000 1,174,000 847,000 810,000
PER SHARE:
Net Income (1) $1.69 $1.49 $1.10 $0.83 $0.80
Average Common and Common
Equivalent Shares (1) 1,140,091 1,089,519 1,070,727 1,024,497 1,016,764
Book Value Per Common Share (1) $14.39 $13.67 $11.81 $11.53 $10.85
SUMMARY BALANCE SHEETS AT DECEMBER 31
Cash and Due from Banks $15,383,000 $11,377,000 $8,552,000 $5,161,000 $6,326,000
Federal Funds Sold -- 1,230,000 3,300,000 3,965,000 4,700,000
Other short Term Investments 26,000 10,000 3,018,000 -- --
Interest-earning Deposits -- -- -- -- --
Investment Securities 19,125,000 34,471,000 28,754,000 22,974,000 22,277,000
Loans, Net 138,878,000 99,776,000 86,411,000 80,916,000 71,733,000
Other Assets 3,961,000 3,733,000 3,109,000 2,401,000 3,474,000
TOTAL ASSETS $177,373,000 $150,597,000 $133,144,000 $115,417,000 $108,510,000
Noninterest-bearing Deposits $41,766,000 $36,854,000 $27,340,000 $22,355,000 $16,706,000
Interest-bearing Deposits 114,125,000 97,747,000 92,632,000 80,811,000 80,195,000
Federal Funds Purchased 3,600,000 -- -- -- --
Other Liabilities 1,472,000 1,103,000 529,000 437,000 574,000
Shareholders' Equity 16,410,000 14,893,000 12,643,000 11,814,000 11,035,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $177,373,000 $150,597,000 $133,144,000 $115,417,000 $108,510,000
<FN>
(1) All share and per-share amounts give effect to 10% stock dividends in July 1996, June 1995, and April 1993.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net Income
Net income in 1996 was $1,928,000 which represented a 1.27% return on
average assets and a return on average equity of 12.45% as compared to 1995
which saw a return on average assets of 1.20% and a return on average equity
of 11.75%. This represents an increase of $308,000 over the 1995 figure.
Net interest margins increased .24% between the respective periods. In
addition, the Corporation's average earning assets increased $16,512,000
during 1996 as compared to 1995.
Net income in 1994 was $1,174,000 which represented a .94% return on average
asset and a return on average equity of 9.54%.
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 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. Based on rates alone the increase in interest
income would have been 10% less, given constant volume levels between the
respective periods.
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 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 rate differences
alone the increase in interest expense would have been 32% less given
constant volume levels between the respective periods.
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.
Based on the above factors affecting interest income and interest expense,
net interest income increased $1,393,000 during 1996 as compared to 1995.
All of the net increase was related to volume increases and actually was
reduced by approximately 5% due to lower rates.
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.
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 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%. Since the Corporation is more
asset than liability rate sensitive, this worked slightly against an
improved net interest income during 1996 as compared to 1995, and is more
fully explained above in the discussion regarding interest changes due to
rate and volume.
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.
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, 1996 was 1.34%. Management considers the level of reserves adequate to
provide for potential future losses. Additional provisions of $650,000 were
made during 1996 against net charge-offs of $285,000.
The ratio of the allowance for credit losses to total loans as of December
31, 1995 was 1.51%. Additional provisions of $330,000 were made during 1995
against net charge-offs of $300,000.
Noninterest Income
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.
Total noninterest income in 1995 of $1,136,000 was $485,000 greater than
earned in 1994 and included gains on the sale of SBA loans of $189,000.
Noninterest Expense
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 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 71.5 as compared to 64.0 during 1995.
Total Occupancy Expense increased $32,000 between the respective periods.
This is partly related to our new office in Fremont but also to increases in
operating leases and costs on other office space based on terms contained in
lease contracts.
Furniture Fixtures & 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. The exception was professional fees which
decreased $31,000 from the prior year during which time additional
consulting services had been utilized.
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
and to a renewal of our office in Danville, also to increases in operating
leases and costs on other office space based on terms contained in lease
contracts.
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
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 1996 and 1995.
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 1996 and 1995.
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, 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 19%
of total assets at December 31, 1996 as compared to 31% of total assets at
December 31, 1995. The decrease in liquidity between the respective periods
was related to strong loan demand during the fourth quarter of 1996 with the
resulting transfer of funds from liquid investments into loans. Actions
have and will be taken to increase deposit levels or take other steps as
indicated.
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.
General
During 1996 the nation, and California, showed continued economic strength
and growth. The Federal Reserve has maintained a cautious policy that has
thus far avoided inflationary spending and allowed modest but stable growth.
The Federal Reserve has 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 40%.
The Corporation's new mortgage financial service subsidiary, BWC Real
Estate, continues to be a profitable addition to 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 continued to explore and invest in banking
technology opportunities including opening a WEB site on the internet,
installing email capabilities for its personnel, including internet email
capability, and in early 1997 is introducing its home banking PC software to
its clients. 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.
During 1995 the nation, and California, showed economic strength and
moderate growth. The Fed maintained a cautious policy that 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.
BWC Financial Corp. enjoyed a growth of over 13% or $17,453,000, from the
period ending 1994. Total deposit growth was in excess of 12% and loan
growth was 15%.
Common Stock Prices
The common stock of BWC Financial Corp. is traded in the over-the-counter
market through market makers.
At December 31, 1996, BWC Financial Corp. had 472 shareholders of record of
common stock. At December 31, 1995, BWC Financial Corp. had 511
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 1996 and 1995 were:
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
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
A 10% stock dividend was granted to shareholders of record on July 31, 1996
and on June 30, 1995. Common stock prices have not been adjusted to reflect
the above stock dividends.
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
San Francisco, California,
March 1, 1997
<PAGE>
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0
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