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, 1997, 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 offices)
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, 1998: $33,901,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 1, 1998.
Title of Class: Common Stock, no par value Shares Outstanding: 1,233,062
Documents Incorporated by Reference* Incorporated Into:
1997 Annual Report to Shareholders Part II and IV
Definitive Proxy Statement for the 1998 Part III
Annual Meeting of Shareholders to be
filed by March 23, 1998.
* 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 - 12
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Desagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 10 Directors and Executive Officers of
the Registrant 14
Item 11 Executive Compensation 14
Item 12 Security Ownership of Certain Beneficial
Owners and Management 14
Item 13 Certain Relationships and Related Transactions 14
PART IV
Item 13 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 14
Signatures 15
Index to Exhibits 16
<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.
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, Pleasanton and Fremont, 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, 1997, Bank of Walnut Creek employed 86 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 20 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.
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
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
1997 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 1997 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 26 through 30 of the 1997 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 1997 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 1997 1996
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 $6,867,000 $382,901 5.58% $2,894,000 $153,654 5.31%
Other Short Term Investments 881,000 48,124 5.46 346,000 18,032 5.21
Investment Securities:
U.S. Treasury Securities 8,930,000 548,267 6.14 6,429,000 397,223 6.18
Securities of U.S.
Government Agencies 8,653,000 561,987 6.49 4,557,000 290,162 6.37
Obligations of States &
Political Subdivisions (1) 12,408,000 667,707 7.01 14,730,000 775,184 6.99
Loans (2) (3) (4) 149,043,000 16,107,013 10.81 112,356,000 11,603,864 10.33
TOTAL EARNING ASSETS $186,782,000 $18,315,999 9.91% $141,312,000 $13,238,119 9.53%
NONEARNING ASSETS 13,380,000 11,048,000
TOTAL $200,162,000 $152,360,000
</TABLE>
<TABLE>
ITEM 7. (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1997 1996
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 $26,410,000 $436,867 1.65% $23,135,000 $381,316 1.65%
Money Market Accounts 37,899,000 1,409,812 3.72 30,590,000 879,158 2.87
Time 69,874,000 3,919,781 5.61 46,026,000 2,487,655 5.40
TOTAL 134,183,000 5,766,460 4.30 99,751,000 3,748,129 3.76
Funds Purchased 69,000 3,377 4.92 319,000 16,348 5.98
TOTAL INTEREST-BEARING
DEPOSITS AND BORROWINGS $134,252,000 $5,769,837 4.30 $100,070,000 $3,764,477 3.76
NONINTEREST-BEARING DEPOSITS 47,081,000 -- 36,402,000 --
OTHER LIABILITIES 1,062,000 -- 1,318,000 --
SHAREHOLDERS' EQUITY 17,767,000 -- 14,570,000 --
TOTAL $200,162,000 $152,360,000
NET INTEREST INCOME
AND NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS $12,546,162 6.82% $9,473,642 6.87%
<FN>
(1) Minor rate differences from a straight division of interest by average assets are due to
the rounding of average balances.
Amounts calculated on a fully Tax-Equivalent Basis where appropriate (1997 and 1996
Federal Statutory Rate - 34%).
Nonaccrual loans of $248,000 and $29,000 as of December 31, 1997 and 1996 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.
Average loans are net of average deferred loan origination fees of $993,000 and $697,000
in 1997 and 1996 respectively.
Loan interest income includes loan origination fees of $1,383,000 and $886,000 in 1997
and 1996 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 1997 and 1996, and between the years 1996 and 1995.
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 1997 total interest income increased $5,078,000 from 1996. Of this
increase, 87% or $4,397,000 was related to the increase in the volume of
average earning assets in 1997 as compared to 1996. Based on rates alone the
increase in interest income would have been 13% or $681,000, given constant
volume levels between the respective periods.
During 1997 total interest expense increased $2,006,000 from 1996. As with
interest income, 80% or $1,594,000 of 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 20% or $411,000,
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 $3,072,000 during 1997 as
compared to 1996 Of this increase, 91% was related to volume increases and
only 9% due to rate changes between the respective periods.
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.
<PAGE>
<TABLE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
<CAPTION>
1997 over 1996 1996 over 1995
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increases (Decreases) in Interest Income:
Federal Funds Sold $216,000 $13,000 $229,000 ($14,000) ($14,000) ($28,000)
Other Short Term Investments 29,000 1,000 $30,000 (53,000) (5,000) ($58,000)
Investment Securities:
U.S. Treasury Secutities 154,000 (3,000) 151,000 (346,000) 38,000 (308,000)
Securities of U.S. Government Agencies 263,000 9,000 272,000 (253,000) (8,000) (261,000)
Obligations of State and
Political Subdivisions (1) (114,000) 7,000 (107,000) 247,000 31,000 278,000
Loans 3,849,000 654,000 4,503,000 2,340,000 (216,000) 2,124,000
TOTAL INCREASE (DECREASE) 4,397,000 681,000 5,078,000 1,921,000 (174,000) 1,747,000
Increase (Decrease) in Interest Expense
Deposits:
Savings & NOW Accounts 48,000 7,000 55,000 26,000 (46,000) (20,000)
Money Market Accounts 241,000 290,000 531,000 (122,000) (40,000) (162,000)
Time Deposits 1,318,000 114,000 1,432,000 551,000 (26,000) 525,000
Federal Funds Purchased (13,000) -- (13,000) 13,000 (2,000) 11,000
TOTAL INCREASE (DECREASE) 1,594,000 411,000 2,005,000 468,000 (114,000) 354,000
Increase (Decrease) on Net Interest Income $2,803,000 $270,000 $3,073,000 $1,453,000 ($60,000) $1,393,000
<FN>
(1) Amounts calculated on a fully taxable equivalent basis where appropriate.
</FN>
</TABLE>
<PAGE>
<TABLE>
INVESTMENT SECURITIES
Information regarding the book value of investment securities as of December 31, 1997 and 1996 is set
forth in Note 2 on Page 12 of the Corporation's 1997 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, 1997. 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 $4,005,000 6.06% $6,114,000 6.21% -- -- $10,119,000 6.13%
Obligations of U.S. Government
Agencies 4,165,000 6.20 8,312,000 6.46 $4,075,000 7.06 16,552,000 6.60
Obligations of State and
Political Subdivisions:
Tax-exempt* 1,502,000 6.58 5,120,000 6.70 1,272,000 6.39 7,894,000 6.38
Taxable -- -- 5,731,000 6.33 660,000 6.25 6,391,000 6.21
TOTAL $9,672,000 6.20% $25,277,000 6.42% $6,007,000 6.83% $40,956,000 6.38%
<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, 1997 and 1996
is set forth in Note 3 on page 13 of the Corporation's 1997 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, 1997.
<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 $53,894,000 -- -- $53,894,000
Commercial 31,968,000 $10,118,000 $14,317,000 56,403,000
Installment 3,171,000 9,787,000 $17,035,000 29,993,000
Real Estate Mortgages 2,811,000 5,850,000 14,987,000 23,648,000
TOTAL $91,844,000 $25,755,000 $46,339,000 $163,938,000
Loans with Fixed Interest Rates $2,905,000 $5,327,000 $992,000 $9,224,000
Loans with Floating Interest Rates 154,714,000 -- -- 154,714,000
TOTAL $157,619,000 $5,327,000 $992,000 $163,938,000
</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, 1997, 1996 and 1995 is set forth in Note 4 on page 14 of the
Corporation's 1997 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>
1997 1996
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 $630,000 27.69% $396,000 27.69%
Commercial 811,000 34.50 733,000 34.50
Installment 319,000 22.47 297,000 22.47
Real Estate Mortgages 64,000 15.34 57,000 15.34
Unallocated 1,112,000 -- 410,000 --
TOTAL $2,936,000 100.00% $1,893,000 100.00%
<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
1997 1996
Average Average
Balance Rates Balance Rates
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand $47,081,000 -- $36,402,000 --
Savings and NOW Accounts 26,410,000 1.65% 23,135,000 1.65%
Money Market Accounts 37,899,000 3.72 30,590,000 2.87
Time Deposits 69,875,000 5.61 46,026,000 5.40
Total Deposits $181,265,000 3.18% $136,153,000 2.75%
</TABLE>
<TABLE>
FINANCIAL RATIOS
The following table shows key financial ratios for the Corporation for
the years indicated.
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Return on average assets 1.46% 1.26%
Return on average shareholders' equ 16.46% 12.45%
Cash dividend payout ratio 0.00% 0.00%
Average shareholders' equity as % of:
Average total assets 8.87% 10.11%
Average total deposits 9.80% 11.38%
</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
1997 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 1998 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 20, 1998.
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 1997 Annual Report to Shareholders are incorporated by reference
into this report.
BWC FINANCIAL CORP. AND SUBSIDIARIES Page Number*
Independent Public Accountants' Report 25
Independent Public Accountants' Report for the years
ended December 31, 1997 and 1996 is filed herewith 25
Consolidated Balance Sheets as of December 31, 1997 and 1996 6
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 7
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1996 and 1995 8
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 9
Notes to Consolidated Financial Statements 10 - 23
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 1997.
(C) Exhibits Filed:
See Index to Exhibits at page 16 of this Form 10-K.
*Refers to page number in the 1997 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
James L. Ryan Chairman of the Board March 24, 1998
and Director
Leland E. Wines Executive Vice President and March 24, 1998
Chief Financial Officer
Tom Mantor Director March 24, 1998
Richard G. Hill Director March 24, 1998
Reynold C. Johnson III Director March 24, 1998
Craig Lazzareschi Director March 24, 1998
John F. Nohr Director March 24, 1998
John L. Winther Director March 24, 1998
<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.
1997 Annual Report to Shareholders 13.1
Consents of Auditors:
Arthur Andersen LLP Consent dated March 3, 1998 24.1
Report of Independent Public Accountants:
Arthur Andersen LLP Report dated March 3, 1998 25.1
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
<S> 1997 1996
Assets <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<CAPTION> Capital
Number Common Retained Adjustment
of Shares Stock Earnings on Securities Total
<S> <C> <C> <C> <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
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>
</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 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.
<PAGE>
<TABLE>
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
<S> <C> <C> <C> <C>
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
<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
<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>
<CAPTION>
NOTE 2 (Cont)
The maturities of the investment security portfolio at December 31, 1997 follows:
Held-to-maturity
Amortized Fair
Cost Value
<S> <C> <C>
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
<CAPTION>
Available-for-sale
Amortized Fair
Cost Value
<S> <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
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.
<CAPTION>
Outstanding loans by type were: December 31
1997 1996
<S> <C> <C>
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>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
NOTE 4: ALLOWANCES FOR CREDIT LOSSES
<CAPTION>
For the Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
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>
</TABLE>
<PAGE>
<TABLE>
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<CAPTION>
December 31
1997 1996
<S> <C> <C>
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>
</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, 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.
<PAGE>
<TABLE>
NOTE 8: INCOME TAXES
The provisions for income taxes in 1997, 1996, and 1995 consist of the
following:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
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>
<CAPTION>
Deferred Tax Assets: 1997 1996
<S> <C> <C>
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>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
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.
<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
$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.
<PAGE>
<TABLE>
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
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
</TABLE>
<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, $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.
<PAGE>
<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 1997 1996
<S> <C> <C>
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
<CAPTION>
SUMMARY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
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
<CAPTION>
NOTE 14 (Continued)
SUMMARY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
OPERATING ACTIVITIES: 1997 1996 1995
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
<TABLE>
NOTE 15: (Continued)
The Bank's actual capital amounts and ratios are also presented in the table.
<CAPTION>
Minimum
Capital Minimum
Actual Adequacy for Well
Amount Ratio Requirements Capitalized
<S> <C> <C> <C> <C> <C> <C>
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
<CAPTION>
1997 1996
<S> <C> <C>
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
</TABLE>
<PAGE>
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.
<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, 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
<PAGE>
<TABLE>
<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>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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>
</TABLE>
<PAGE>
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.
<PAGE>
<TABLE>
<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>
<CAPTION>
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, 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
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the incorporation by
reference in this Form 10-K and the previously filed registration statement of
BWC Financial Corp. on Form S-8 (File No. 33-22290) of our report dated
February 20, 1998, in BWC Financial Corp.'s 1997 Annual Report. It should be
noted that we have not audited any financial statements of BWC Financial Corp.
subsequent to December 31, 1997, or performed any audit procedures subsequent
to the date of our report.
Arthur Andersen LLP
San Francisco, California,
February 20, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000353650
<NAME> BWC FINANCIAL CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,745,000
<INT-BEARING-DEPOSITS> 147,625,000
<FED-FUNDS-SOLD> 4,350,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,062,000
<INVESTMENTS-CARRYING> 7,894,000
<INVESTMENTS-MARKET> 7,950,000
<LOANS> 163,938,000
<ALLOWANCE> 2,936,000
<TOTAL-ASSETS> 228,923,000
<DEPOSITS> 207,472,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,003,000
<LONG-TERM> 0
0
0
<COMMON> 18,603,000
<OTHER-SE> 845,000
<TOTAL-LIABILITIES-AND-EQUITY> 228,923,000
<INTEREST-LOAN> 16,107,000
<INTEREST-INVEST> 1,778,000
<INTEREST-OTHER> 431,000
<INTEREST-TOTAL> 18,316,000
<INTEREST-DEPOSIT> 5,767,000
<INTEREST-EXPENSE> 5,770,000
<INTEREST-INCOME-NET> 12,546,000
<LOAN-LOSSES> 1,125,000
<SECURITIES-GAINS> 11,000
<EXPENSE-OTHER> 8,506,000
<INCOME-PRETAX> 4,554,000
<INCOME-PRE-EXTRAORDINARY> 4,554,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,925,000
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 6.82
<LOANS-NON> 232,000
<LOANS-PAST> 16,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,575,000
<ALLOWANCE-OPEN> 1,893,000
<CHARGE-OFFS> 193,000
<RECOVERIES> 111,000
<ALLOWANCE-CLOSE> 2,936,000
<ALLOWANCE-DOMESTIC> 1,823,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,113,000
</TABLE>
