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, 1998, 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 15, 1999: $35,385,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 15, 1999.
Title of Class: Common Stock, no par value Shares Outstanding: 2,522,879
Documents Incorporated by Reference* Incorporated Into:
1998 Annual Report to Shareholders Part II and IV
Definitive Proxy Statement for the 1999 Part III
Annual Meeting of Shareholders to be
filed by March 22, 1999.
* 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, ("Bank") 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
(925) 932-5353.
The Bank 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, leases, 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. The Bank also offers an auto deposit pick-up service to its
professional and business clients. Automatic teller machines are available at
all bank locations, 24 hours a day, and are part of the EDS and Cirrus
networks with ATM access at locations throughout the United States and Canada.
The Bank offers its clients 24 hour telephone access to their accounts
through a system called Telebanc, and PC banking access through a system
called PCBanc.
The Bank operates an SBA (Small Business Administration) lending department,
and also has a "Business Credit" department which provides asset based
(factoring)loans with assignment of receivable. Both of these areas of the
Bank add to the Corporations range of services to its clients.
The Corporation also operates, through its subsidiary, BWC Real Estate, a
joint venture brokerage service called "BWC Mortgage Services". This
brokerage division not only provides long term mortgage placement services for
the Bank's construction loan clients but for non-clients seeking long term
mortgage financing. The long term financing is placed through the most
competitive mortgage investors available in the market.
The Bank is not at this time authorized to conduct trust business and has no
present intention to apply to regulatory authorities to do so. Although the
Bank does not directly offer international banking services, the Bank does
make such services available to its customers through other financial
institutions with which the Bank has correspondent banking relations.
<PAGE>
Service Area
The primary service area of The Bank and its branches is Contra Costa County
and Alameda County with limited lending activity also in 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, Fremont and Livermore 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.
The Bank 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, 1998, The Bank employed 96 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 25 persons employed by the joint
venture BWC Mortgage Services either directly or as independent contractors.
Supervision and Regulation
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking
Department. The Bank is also subject to regulation, supervision, and periodic
examination by the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank is not a member of the Federal Reserve System, but is nevertheless
subject to certain regulations of the Board of Governors of the Federal
Reserve System. As a state bank, the Bank's deposits are insured by the FDIC
to the maximum amount permitted by law, which is currently $100,000.
<PAGE>
The regulations of those state and federal bank regulatory agencies govern
most aspects of the Bank's business and operations, including, but not limited
to, requiring the maintenance of non-interest bearing reserves on deposits,
limiting the nature and amount of investments and loans which may be made,
regulating the issuance of securities, restricting the payment of dividends,
regulating bank expansion and bank activities, including real estate
development activities and determining characteristics of certain deposit
accounts.
ITEM 2. PROPERTIES
The principal office of the Bank is located at 1400 Civic Drive, in the
financial district of downtown Walnut Creek. The Bank opened for business on
December 12, 1980 and its 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 The Bank in its principal
office.
On September 24, 1982, a branch office was opened at 224 Brookwood Road,
Orinda, California serving the Orinda area. The premises are located in a new
facility which was constructed on this site in 1994 with 2,186 square feet of
office space.
On November 12, 1985, a branch office was opened at 3130 Crow Canyon Place,
San Ramon, California serving the San Ramon area. The premises are located in
a modern building of which the Bank has leased approximately 3,375 square feet
of office space.
On June 8, 1990, a branch office was opened at 424 Hartz Avenue, Danville,
California serving the Danville area. The premises are located in a modern
building comprising 2,263 square feet of office space.
On April 15, 1994 a branch office was opened at 249 Main Street, Pleasanton,
California serving the Pleasanton area. The premises are located in a single
building containing 3,880 square feet of office space.
On June 15, 1996 a branch office was opened at 4030 Clipper Court, Fremont,
California serving the Fremont area. The premises are located in an office
park where the Bank leased 2,240 square feet of office space. 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.
On November 9, 1998 a branch office was opened at 1770 First Street in
Livermore, California serving the Livermore area. The premises are located in
a building comprising 1,100 square feet of office space. This is a temporary
location and a more permanent facility is being sought.
ITEM 3. LEGAL PROCEEDINGS
At this time there are no pending or threatened legal proceedings to which the
Corporation is a party or to which any of the Corporation's properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The information required to be furnished pursuant to this item is set forth
under the caption "Common Stock Prices" on page 35 of the Corporation's 1998
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
31 of the Corporation's 1998 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
<FN>
For management's discussion and analysis of financial condition and results of operations, see
"Management's Discussion and Analysis of Operations" at pages 31 through 36 of the 1998 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 1998 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.
</FN>
<CAPTION>
EARNING ASSETS 1998 1997
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 $7,825,000 $421,383 5.39% $6,867,000 $382,901 5.58%
Other Short Term Investments 4,075,000 218,448 5.36 881,000 48,124 5.46
Investment Securities:
U.S. Treasury Securities 10,617,000 636,752 6.00 8,930,000 548,267 6.14
Securities of U.S.
Government Agencies 21,919,000 1,333,073 6.08 8,653,000 561,987 6.49
Obligations of States &
Political Subdivisions (2) 21,968,000 1,180,327 6.55 12,408,000 667,707 7.01
Other Securities 910,000 51,987 5.71
Loans (3) (4) (5) 166,697,000 18,020,067 10.81 149,043,000 16,107,013 10.81
TOTAL EARNING ASSETS $234,011,000 $21,862,037 9.45% $186,782,000 $18,315,999 9.91%
NONEARNING ASSETS 14,105,000 13,380,000
TOTAL $248,116,000 $200,162,000
</TABLE>
<PAGE>
<TABLE>
ITEM 7. (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1998 1997
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 $32,522,000 $535,932 1.65% $26,410,000 $436,867 1.65%
Money Market Accounts 61,706,000 2,466,753 4.00 37,899,000 1,409,812 3.72
Time 70,534,000 3,767,981 5.34 69,874,000 3,919,781 5.61
TOTAL 164,762,000 6,770,666 4.11 134,183,000 5,766,460 4.30
Funds Purchased 85,000 3,792 4.46 69,000 3,377 4.92
TOTAL INTEREST-BEARING
DEPOSITS AND BORROWINGS $164,847,000 $6,774,458 4.11 $134,252,000 $5,769,837 4.30
NONINTEREST-BEARING DEPOSITS 59,098,000 -- 47,081,000 --
OTHER LIABILITIES 2,248,000 -- 1,062,000 --
SHAREHOLDERS' EQUITY 21,923,000 -- 17,767,000 --
TOTAL $248,116,000 $200,162,000
NET INTEREST INCOME
AND NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS $15,087,579 6.56% $12,546,162 6.82%
<FN>
(1) Minor rate differences from a straight division of interest by average assets are due to
the rounding of average balances.
(2) Amounts calculated on a fully Tax-Equivalent Basis where appropriate (1998 and 1997
Federal Statutory Rate - 34%).
(3) Nonaccrual loans of $2,176,000 and $248,000 as of December 31, 1998 and 1997 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.
(4) Average loans are net of average deferred loan origination fees of $859,000 and $993,000
in 1998 and 1997 respectively.
(5) Loan interest income includes loan origination fees of $1,657,000 and $1,383,000 in 1998
and 1997 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 1998 and 1997, and between the years 1997 and 1996.
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 1998 total interest income increased $3,546,000 over 1997. Of this
increase, 95% was related to the increase in the volume of average earning
assets in 1998 as compared to 1997 and 5% was related to interest rates.
During 1998 total interest expense increased $1,004,000 over 1997. Of this
increase, 105% was due to the growth in interest bearing deposits between the
respective periods and -5% was due to lower interest rates.
Based on the above factors affecting interest income and interest expense, net
interest income increased $2,542,000 during 1998 as compared to 1997.
During 1997 total interest income increased $5,078,000 from 1996. Of this
increase, 87% or $4,418,000 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 $2,005,000 from 1996. As with
interest income, 80% or $1,604,000 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.
<PAGE>
<TABLE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
<CAPTION>
1998 over 1997 1997 over 1996
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increases (Decreases) in Interest Income
Federal Funds Sold $52,000 ($14,000) $38,000 $216,000 $13,000 $229,000
Other Short Term Investments 173,000 (2,000) 171,000 29,000 1,000 30,000
Investment Securities:
U.S. Treasury Securities 102,000 (14,000) 88,000 154,000 (3,000) 151,000
Secutities of U.S. Government Agencies 834,000 (63,000) 771,000 263,000 9,000 272,000
Obligations of State and
Political subdivisions (1) 551,000 (38,000) 513,000 (114,000) 7,000 (107,000)
Corporate Debit Securities 26,000 26,000 52,000 -- -- --
Loans 1,615,000 298,000 1,913,000 3,849,000 654,000 4,503,000
Total Increase $3,353,000 $193,000 $3,546,000 $4,397,000 $681,000 $5,078,000
Increase (Decrease) in Interest Expense
Deposits:
Savings and NOW Accounts $102,000 ($3,000) $99,000 $48,000 $7,000 $55,000
Money Market Accounts 919,000 138,000 1,057,000 241,000 290,000 531,000
Time Deposits 32,000 (184,000) (152,000) 1,318,000 114,000 1,432,000
Federal Funds Purchases 1,000 (1,000) -- (13,000) -- (13,000)
Total Increase (Decrease) $1,054,000 ($50,000)$1,004,000 $1,594,000 $411,000 $2,005,000
Increase in Net Interest Income $2,299,000 $243,000 $2,542,000 $2,803,000 $270,000 $3,073,000
<FN>
(1) Amounts calculated on a fully taxable equivalent basis where appropriate.
</FN>
</TABLE>
<PAGE>
<TABLE>
INVESTMENT SECURITIES
<FN>
Information regarding the book value of investment securities as of December 31, 1998 and 1997 is set
forth in Note 2 on Page 14 of the Corporation's 1998 Annual Report to Shareholders and is incorporated
herein by reference.
The following table is a summary of the relative maturities and yields on the Bank's investment securities
as of December 31, 1998. 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.
</FN>
<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 $4,588,000 6.03% $3,074,000 6.02% -- -- $7,662,000 6.03%
Obligations of U.S. Government
Agencies -- -- 10,401,000 6.04 11,964,000 7.29 22,365,000 6.23
Obligations of State and
Political Subdivisions:
Tax-exempt* 2,355,000 6.93 3,638,000 6.21 7,599,000 6.12 13,592,000 6.30
Taxable 719,000 6.17 8,655,000 6.13 2,459,000 6.09 11,833,000 6.13
Other Securities -- -- 2,268,000 6.26 1,527,000 6.26 3,795,000 6.26
TOTAL $7,662,000 6.32% $28,036,000 6.11% $23,549,000 6.72% $59,247,000 6.20%
<FN>
* Interest is exempt from Federal Income Taxes.
</FN>
</TABLE>
<PAGE>
<TABLE>
LOAN PORTFOLIO
<FN>
Information regarding the loan portfolio of the Corporation as of December 31, 1998 and 1997
is set forth in Note 3 on page 15 of the Corporation's 1998 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, 1998.
</FN>
<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 $68,743,000 $311,000 -- $69,054,000
Commercial 37,054,000 $12,105,000 $15,102,000 64,261,000
Installment 4,047,000 8,461,000 $19,621,000 32,129,000
Real Estate Mortgages 3,711,000 4,641,000 13,181,000 21,533,000
TOTAL $113,555,000 $25,518,000 $47,904,000 $186,977,000
Loans with Fixed Interest Rates $3,297,000 $3,861,000 $909,000 $8,067,000
Loans with Floating Interest Rates 178,910,000 -- -- 178,910,000
TOTAL $182,207,000 $3,861,000 $909,000 $186,977,000
</TABLE>
<PAGE>
<TABLE>
ALLOWANCE FOR CREDIT LOSSES
<FN>
Information regarding the analysis of the allowance for credit losses of the Corporation for
the years ended December 31, 1998, 1997 and 1996 is set forth in Note 4 on page 16 of the
Corporation's 1998 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 reasonably
anticipated. The allowance is increased by provisions charged to expense and reduced by net
charge-offs. Management continually evaluates the economic climate and other conditions to
determine the adequacy of the allowance. Ultimate losses may vary from current estimates.
</FN>
<CAPTION>
1998 1997
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 $952,000 36.93% $630,000 27.69%
Commercial 1,113,000 34.37 811,000 34.50
Installment 333,000 17.18 319,000 22.47
Real Estate Mortgages 55,000 11.52 64,000 15.34
Unallocated 1,466,000 -- 1,112,000 --
TOTAL $3,919,000 100.00% $2,936,000 100.00%
<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
1998 1997
Average Average
Balance Rates Balance Rates
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand $60,439,000 -- $47,081,000 --
Savings and NOW Accounts 32,522,000 1.65% 26,410,000 1.65%
Money Market Accounts 61,706,000 4.00 37,899,000 3.72
Time Deposits 70,534,000 5.34 69,875,000 5.61
Total Deposits $225,201,000 3.01% $181,265,000 3.18%
FINANCIAL RATIOS
The following table shows key financial ratios for the Corporation for
the years indicated.
<CAPTION>
Year Ended December 31,
1998 1997
<S> <C> <C>
Return on average assets 1.70% 1.46%
Return on average shareholders' equity 19.29% 16.46%
Cash dividend payout ratio 0.00% 0.00%
Average shareholders' equity as % of:
Average total assets 8.84% 8.87%
Average total deposits 9.73% 9.80%
</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 8 through 27 of the Corporation's
1998 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 1999 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, 1999.
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 1998 Annual Report to Shareholders are incorporated by reference
into this report.
BWC FINANCIAL CORP. AND SUBSIDIARIES Page Number*
Independent Public Accountants' Report for the years
ended December 31, 1998 and 1997 is filed herewith 29
Consolidated Balance Sheets as of December 31, 1998 and 1997 8
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 9
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 10
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 11
Notes to Consolidated Financial Statements 12 - 27
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 1998.
(C) Exhibits Filed:
See Index to Exhibits at page 16 of this Form 10-K.
*Refers to page number in the 1998 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 March 23, 1999
Chairman of the Board ________________
James L. Ryan and Director
Leland E. Wines March 23, 1999
Executive Vice President and ________________
Leland E. Wines Chief Financial Officer
Tom Mantor March 23, 1999
Director ________________
Tom Mantor
Richard G. Hill March 23, 1999
Director ________________
Richard G. Hill
Reynold C. Johnson III March 23, 1999
Director ________________
Reynold C. Johnson III
Craig Lazzareschi March 23, 1999
Director ________________
Craig Lazzareschi
John F. Nohr March 23, 1999
Director ________________
John F. Nohr
John L. Winther March 23, 1999
Director ________________
John L. Winther
<PAGE>
INDEX TO EXHIBITS
EXHIBIT EXHIBIT NUMBER
Articles of Incorporation and Amendments Refer to 10K filing
of March, 1994.
By-Laws Refer to 10K filing
of March, 1994.
1998 Annual Report to Shareholders 13.1
Consents of Independent Public Accountants:
Arthur Andersen LLP Consent dated February 22, 1999 24.1
Report of Independent Public Accountants:
Arthur Andersen LLP Report dated February 22, 1999 25.1
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, 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 22, 1999, in BWC Financial Corp.'s 1998 Annual
Report. It should be noted that we have not audited any financial
statements of BWC Financial Corp. subsequent to December 31, 1998, or
performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
San Francisco, California,
February 22, 1999
<PAGE>
ARTHUR ANDERSEN LLP
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 as of December
31, 1998 and 1997, 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, 1998. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement ; presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BWC
Financial Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
San Francisco, California,
February 22, 1999
<PAGE>
<TABLE>
<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31
Assets 1998 1997
<S> <C> <C>
Cash and Due From Banks $14,345,000 $17,412,000
Federal Funds Sold 2,300,000 4,350,000
Other Short Term Investments 35,000 48,000
Total Cash and Cash Equivalents 16,680,000 21,810,000
Investment Securities:
Available for Sale 45,655,000 33,062,000
Held to Maturity (approximate fair value of
$13,797,000 in 1998 and $7,950,000 in 1997) 13,592,000 7,894,000
Loans, Net of Allowance for Credit Losses of $3,919,000
in 1998 and $2,936,000 in 1997. 183,058,000 161,002,000
Bank Premises and Equipment, Net 1,303,000 1,455,000
Interest Receivable and Other Assets 4,611,000 3,399,000
Total Assets $264,899,000 $228,622,000
Liabilities and Shareholder's Equity
Liabilities
Deposits:
Noninterest-bearing $69,783,000 $59,354,000
Interest-bearing:
Money Market Accounts 64,687,000 44,406,000
Savings and NOW Accounts 37,139,000 29,755,000
Time Deposits:
Under $100,000 34,293,000 36,829,000
$100,000 or more 32,238,000 36,635,000
Total Interest-bearing 168,357,000 147,625,000
Total Deposits 238,140,000 206,979,000
Interest Payable and Other Liabilities 2,416,000 2,195,000
Total Liabilities 240,556,000 209,174,000
Commitments and Contingent Liabilities (Note 10)
Shareholders' Equity
Preferred Stock, no par value:
5,000,000 shares authorized, none outstanding. -- --
Common Stock, no par value:
25,000,000 shares authorized; issued and outstanding -
2,511,151 shares in 1998 and 1,233,051 in 1997. 19,002,000 18,603,000
Retained Earnings 5,006,000 706,000
Capital adjustment on available for sale securities 335,000 139,000
Total Shareholders' Equity 24,343,000 19,448,000
Total Liabilities and Shareholders' Equity $264,899,000 $228,622,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest Income
Loans, Including Fees $18,020,000 $16,107,000 $11,604,000
Investment Securities:
Taxable 2,698,000 1,387,000 967,000
Non-taxable 504,000 391,000 495,000
Federal Funds Sold 421,000 383,000 154,000
Other Short Term Investments 219,000 48,000 18,000
Total Interest Income 21,862,000 18,316,000 13,238,000
Interest Expense
Deposits 6,770,000 5,767,000 3,748,000
Federal Funds Purchased 4,000 3,000 16,000
Total Interest Expense 6,774,000 5,770,000 3,764,000
Net Interest Income 15,088,000 12,546,000 9,474,000
Provision For Credit Losses 825,000 1,125,000 650,000
Net Interest Income After Provision For Credit Losses 14,263,000 11,421,000 8,824,000
Noninterest Income
BWC Mortgage Services - Commissions 3,744,000 2,077,000 1,367,000
BWC Mortgage Services - Fees & Other 376,000 175,000 127,000
Service Charges on Deposit Accounts 832,000 761,000 651,000
Other 787,000 705,000 566,000
Gains on Security Transactions 216,000 11,000 21,000
Total Noninterest Income 5,955,000 3,729,000 2,732,000
Noninterest Expense
Salaries and Related Benefits 5,344,000 4,737,000 3,829,000
BWC Mortgage Services - Commissions 2,199,000 1,201,000 785,000
BWC Mortgage Services - Fees & Other 825,000 537,000 389,000
Occupancy 855,000 812,000 779,000
Furniture and Equipment 578,000 556,000 538,000
Other 2,961,000 2,401,000 2,178,000
Total Noninterest Expense 12,762,000 10,244,000 8,498,000
BWC Mortgage Services - Minority Interest 549,000 252,000 157,000
Income Before Income Taxes 6,907,000 4,654,000 2,901,000
Provision For Income Taxes 2,679,000 1,729,000 973,000
Net Income $4,228,000 $2,925,000 $1,928,000
Basic Earnings Per Share $1.70 $1.18 $0.71
Diluted Earnings Per Share $1.44 $1.03 $0.64
Average Basic Shares 2,487,730 2,475,075 2,712,615
Average Diluted Share Equivalents Related to Options 438,698 367,697 322,307
Average Diluted Shares 2,926,428 2,842,772 3,034,922
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996 Accumulated
Other
Number Common Retained Comprehensive Comprehensive
of Shares Stock Earnings Income Total Income
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 935,907 $10,508,000 $4,257,000 $128,000 $14,893,000
Net Income for 1996 -- -- 1,928,000 -- 1,928,000 $1,928,000
Other Comprehensive Income, net of tax
benefit of $74,000 -- -- -- (121,000) (121,000) (121,000)
Comprehensive Income -- -- -- -- -- 1,807,000
10% Stock Dividend, Including
Payment of fractional shares 92,835 1,950,000 (1,954,000) -- (4,000)
Common Stock Issued and sold to the
Defined Contribution Plan at $15.45 per share 11,736 181,000 -- -- 181,000
Repurchase and retirement of shares by the
Corporation at $17.75 to $21.75 per share (23,880) (467,000) -- -- (467,000)
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 2,925,000
Other Comprehensive Income, net of tax
liability of $68,000 -- -- -- 132,000 132,000 132,000
Comprehensive Income -- -- -- -- -- 3,057,000
10% Stock Dividend, Including
Payment of fractional shares 101,882 2,521,000 (2,526,000) -- (5,000)
Stock Options Exercised at $6.76 per share 4,300 29,000 -- -- 29,000
Repurchase and retirement of shares by the
Corporation at $22.50 per share (1,650) (37,000) -- -- (37,000)
10% Stock Dividend, Including
Payment of fractional shares 111,921 3,918,000 (3,924,000) -- (6,000)
Balance, December 31, 1997 1,233,051 18,603,000 706,000 139,000 19,448,000
(CHANGES IN SHAREHOLDERS' EQUITY CONTINUED)
Net Income for 1998 -- -- 4,228,000 -- 4,228,000 4,228,000
Other Comprehensive Income, net of tax
liability of $134,000 -- -- -- 196,000 196,000 196,000
Comprehensive Income -- -- -- -- -- $4,424,000
Two for one Stock Split 1,248,832 -- -- --
Stock Options Exercised at $3.50 to $5.59 per share 15,741 57,000 -- -- 57,000
Common Stock Issued and sold to the
Defined Contribution Plan at $24.06 per share 16,527 398,000 -- -- 398,000
Repurchase and retirement of shares by the
Corporation at $18.25 to $19.00 per share (3,000) (56,000) -- -- (56,000)
Adjustment for tax benefit resulting from the exercises
of incentive stock options. -- -- 72,000 -- 72,000
Balance, December 31, 1998 2,511,151 $19,002,000 $5,006,000 $335,000 $24,343,000
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BWC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
1998 1997 1996
Operating Activities:
<S> <C> <C> <C>
Net Income $4,228,000 $2,925,000 $1,928,000
Adjustments to reconcile net income to
net cash provided:
Amortization of loan fees (1,657,000) (1,383,000) (886,000)
Provision for credit losses 825,000 1,125,000 650,000
Depreciation and amortization 416,000 403,000 386,000
Gain on sale of securities available-for-sale (216,000) (11,000) (21,000)
Deferred income taxes (543,000) (575,000) (212,000)
Increase in accrued interest
receivable and other assets (669,000) (906,000) (76,000)
Increase in accrued interest
payable and other liabilities 221,000 594,000 368,000
Net Cash Provided by Operating Activities 2,605,000 2,172,000 2,137,000
Investing Activities:
Proceeds from the maturities of investment securities 3,983,000 5,123,000 2,805,000
Proceeds from the sales of available-for-sale
investment securities 25,833,000 1,989,000 17,779,000
Purchase of investment securities (47,623,000) (28,801,000) (5,216,000)
Loans originated, net of collections (21,224,000) (21,865,000) (38,867,000)
Purchase of bank premises and equipment (264,000) (336,000) (446,000)
Net Cash Used by Investing Activities (39,295,000) (43,890,000) (23,945,000)
Financing Activities:
Net increase in deposits 31,161,000 51,738,000 21,290,000
Increase (decrease) in Federal Funds Purchased -- (3,600,000) 3,600,000
Proceeds from issuance of common stock 455,000 29,000 181,000
Cash paid for the repurchase of common stock (56,000) (37,000) (467,000)
Cash paid in lieu of fractional shares -- (11,000) (4,000)
Net Cash Provided by Financing Activities 31,560,000 48,119,000 24,600,000
Cash and Cash Equivalents:
Increase (decrease) in cash and cash equivalents (5,130,000) 6,401,000 2,792,000
Cash and cash equivalents at beginning of year 21,810,000 15,409,000 12,617,000
Cash and Cash Equivalents at end of year $16,680,000 $21,810,000 $15,409,000
Additional Cash Flow Information:
Interest Paid $6,911,000 $5,542,000 $3,559,000
Income Taxes Paid $2,228,000 $2,140,000 $825,000
<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,
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 three 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. BWC Real Estate, a subsidiary of the
Corporation, was formed in 1994 to enter into a joint venture arrangement
with a real estate brokerage firm, creating a company called BWC Mortgage
Services. As BWC Real Estate owns 51% of this joint venture, the
Corporation has consolidated BWC Mortgage Services for the years then ended
December 31, 1998, 1997 and 1996. The real estate brokerage firm's joint
venture interest is shown as minority interests in the financial
statements. Previously issued financial statements for the years ended
December 31, 1997 and 1996 accounted for BWC Mortgage Services using the
equity method, as the subsidiary was not considered material. The
restatement of prior years has no effect on net income.
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 gain or
loss on these loan sales until the 90 day period elapses. On December 31,
1998 the Corporation was holding $142,000 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.
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 accordance with SFAS No. 128, two EPS amounts
are reported, Basic EPS, and Diluted EPS.
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 2 for 1 stock split on July 10, 1998 and the 10% stock
dividend paid on February 3, 1998, March 31, 1997, and July 31, 1996.
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 2 for 1 stock split July 10, 1998 and the 10%
stock dividend paid on February 3, 1998, March 31, 1997, and July 31, 1996.
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>
<CAPTION>
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities $7,565,000 $97,000 -- $7,662,000
Securities of U.S. Government Agencies 22,175,000 190,000 -- 22,365,000
Taxable Securities of State and
Political Subdivisions 11,554,000 279,000 -- 11,833,000
Corporate Debt Securities 3,820,000 -- 25,000 3,795,000
Total 45,114,000 566,000 25,000 45,655,000
Held-to-maturity
Obligations of State and Political
Subdivisions 13,592,000 205,000 -- 13,797,000
Total Investment Securities $58,706,000 $771,000 25,000 $59,452,000
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Loss Value
U.S. Treasury Securities $10,053,000 $66,000 -- $10,119,000
Securities of U.S. Government Agencies 16,478,000 74,000 -- 16,552,000
Taxable Securities of State and
Political Subdivisions 6,320,000 71,000 -- 6,391,000
Total 32,851,000 211,000 -- 33,062,000
Held-to-maturity
Obligations of State and Political
Subdivisions 7,894,000 56,000 -- 7,950,000
Total Investment Securities $40,745,000 $267,000 -- $41,012,000
<FN>
In 1998 and 1997, the Bank received proceeds from sale of investment
securities of $25,833,000 and $1,989,000 respectively, and gains included in
other noninterest income totaled $216,000 and $11,000 respectively.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The maturities of the investment security portfolio at December 31, 1998 follow:
Held-to-maturity
Amortized Fair
Cost Value
<S> <C> <C>
Within one year $2,356,000 $2,371,000
After one through five years 5,374,000 5,463,000
Over five years 5,862,000 5,963,000
Total $13,592,000 $13,797,000
Available-for-sale
Amortized Fair
Cost Value
Within one year $5,258,000 $5,307,000
After one through five years 26,686,000 26,716,000
Over five years 13,170,000 13,632,000
Total $45,114,000 $45,655,000
<FN>
At December 31, 1998 and 1997, securities with an approximate book value
of $7,864,000 and $4,862,000 respectively, were pledged to secure public
deposits.
</FN>
</TABLE>
<PAGE>
NOTE 3: LOANS
The majority of the Bank's loans are to customers in Contra Costa and
Alameda Counties and surrounding areas. Depending upon the type of loan,
the Bank generally obtains a secured interest in the general assets of the
borrower and/or in any assets being financed.
Outstanding loans by type were: December 31
1998 1997
Real Estate Construction $69,054,000 $53,894,000
Real Estate Mortgages 21,533,000 23,648,000
Commercial 64,261,000 56,403,000
Installment 32,129,000 29,993,000
TOTAL 186,977,000 163,938,000
Less: Allowance for Credit Losses (3,919,000) (2,936,000)
NET LOANS $183,058,000 $161,002,000
The following table provides further information on past due and nonaccrual
loans.
December 31
1998 1997
Loans Past Due 90 Days or More, still
accruing interest $0 $16,000
Nonaccrual Loans $2,176,000 $232,000
TOTAL $2,176,000 $248,000
As of December 31, 1998, the Corporation's recorded investment in impaired
loans was $2,176,000. Due to the loans underlying collateral value, no
valuation allowance was required. For the years ending December 31, 1997
and 1996, the Corporation's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 was not material.
As of December 31, 1998 and 1997, 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 $89,000 in 1998, $24,000 in 1997, and $9,000 in 1996.
<PAGE>
<TABLE>
<CAPTION>
NOTE 4: ALLOWANCES FOR CREDIT LOSSES
For the Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Total loans outstanding at end of period, before
deducting allowance for credit losses $186,977,000 $163,938,000 $140,771,000
Average total loans outstanding during period $166,698,000 $149,043,000 $112,356,000
Analysis of the allowance for credit losses:
Beginning Balance $2,936,000 $1,893,000 $1,528,000
Charge-offs:
Real Estate Construction -- -- --
Real Estate Mortgages -- -- --
Commercial 17,000 139,000 263,000
Installment 96,000 54,000 58,000
TOTAL CHARGE-OFFS 113,000 193,000 321,000
Recoveries:
Real Estate Mortgages 40,000 3,000 --
Commercial 215,000 101,000 29,000
Installment 16,000 7,000 7,000
TOTAL RECOVERIES 271,000 111,000 36,000
NET CHARGE-OFFS (RECOVERIES) (158,000) 82,000 285,000
Provisions charged to operating expense 825,000 1,125,000 650,000
Ending Balance $3,919,000 $2,936,000 $1,893,000
Ratio of net charge-offs (recoveries)
to average total loans (0.09)% 0.06% 0.25%
Ratio of allowance for credit losses
to total loans at end of period 2.10% 1.79% 1.34%
</TABLE>
<PAGE>
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
December 31,
1998 1997
Leasehold Improvements $1,141,000 $1,129,000
Furniture and Equipment 2,834,000 2,593,000
3,975,000 3,722,000
Accumulated Depreciation and Amortization (2,672,000) (2,267,000)
Premises and Equipment, Net $1,303,000 $1,455,000
The amount of depreciation and amortization included in occupancy and
furniture and equipment expense was $416,000 in 1998, $403,000 in 1997,
and $386,000 in 1996.
<PAGE>
NOTE 6: COMPREHENSIVE INCOME
The Bank has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), as of January 1, 1998. This
statement established standards for the reporting and display of
comprehensive income and its components in the financial statements.
For the Bank, comprehensive income includes net income reported on the
statements of income and changes in the fair value of its available-for-sale
investments reported as a component of shareholders' equity.
The components of other comprehensive income for the years ended December 31,
1998, 1997 and 1996, are as follows:
1998 1997 1996
Unrealized gain (loss) arising
during the period, net of tax. $330,000 $139,000 ($108,000)
Reclassification adjustment for
net realized gains on securities
available for sale included in
net income during the year, net
of tax. 134,000 7,000 13,000
Net unrealized gain (loss)
included in other comprehensive
income. $ 196,000 $132,000 ($121,000)
<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, 1998 and 1997. 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.
1998
Carrying Fair
Amount Value
Cash and cash equivalents $ 16,680,000 $ 16,680,000
Investment securities 59,247,000 59,452,000
Loans (net) 183,058,000 185,594,000
Deposit liabilities 238,140,000 240,571,000
Other liabilities 2,416,000 2,416,000
1997
Carrying Fair
Amount Value
Cash and cash equivalents $ 21,810,000 $ 21,810,000
Investment securities 40,956,000 41,012,000
Loans (net) 161,002,000 164,830,000
Deposit liabilities 206,979,000 207,677,000
Other liabilities 2,195,000 2,195,000
The carrying amounts in the table are included in the consolidated balance
sheets under the indicated captions.
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.
Short-term financial instruments are valued at their carrying amounts
included in the statement of financial position, which are reasonable
estimates of fair value due to the relatively short period to maturity of
the instruments. This approach applies to cash and cash equivalents,
accrued interest receivable and payable.
Loans are valued on the basis of estimated future receipts of principal and
interest, discounted at various rates. Loan prepayments are assumed to
occur at the same rate as in previous periods when interest rates were at
levels similar to current levels. Future cash flows for homogeneous
categories of consumer loans, are estimated on a portfolio basis and
discounted at current rates offered for similar loan terms to new borrowers
with similar credit profiles. The fair value of nonaccrual loans also is
estimated on a present value basis, using higher discount rates appropriate
to the higher risk involved.
Investment securities are valued at quoted market prices if available. For
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.
<PAGE>
NOTE 8: INCOME TAXES
The provisions for income taxes in 1998, 1997, and 1996 consist of the
following:
1998 1997 1996
CURRENT
Federal $2,286,000 $1,674,000 $820,000
State 936,000 630,000 365,000
TOTAL CURRENT 3,222,000 2,304,000 1,185,000
DEFERRED
Federal (383,000) (431,000) (176,000)
State (160,000) (144,000) (36,000)
TOTAL DEFERRED (543,000) (575,000) (212,000)
TOTAL $2,679,000 $1,729,000 $973,000
The components of the net deferred tax assets of the Bank as of
December 31, 1998 and 1997 were as follows:
Deferred Tax Assets: 1998 1997
Allowance for credit losses $1,551,000 $1,197,000
Employee benefits and other 202,000 126,000
State taxes 152,000 67,000
Total deferred tax assets 1,905,000 1,390,000
Deferred Tax Liabilities:
Depreciation and other -- (18,000)
Accretion and other -- (10,000)
SFAS 115 deferred tax liability (206,000) (54,000)
Total deferred tax liabilities (206,000) (82,000)
Net deferred tax asset $1,699,000 $1,308,000
The provisions for income taxes differ from the amounts computed by
applying the statutory Federal income tax rate to income before taxes.
The reasons for these differences are as follows:
1998 1997 1996
Provision based on the statutory
Federal rate of 34% $2,348,000 $1,582,000 $986,000
Increases (reduction) in income taxes resulting from:
State franchise taxes, net of
Federal income tax benefit 500,000 329,000 216,000
Non-taxable interest income (188,000) (130,000) (178,000)
Other 19,000 (52,000) (51,000)
TOTAL $2,679,000 $1,729,000 $973,000
<PAGE>
Note 9: STOCK OPTIONS
In 1990, the Board of Directors of the Corporation adopted the 1990 Stock
Option Plan covering an aggregate 708,624 shares (adjusted for subsequent
stock dividends and the stock split) of the Corporation's common stock.
Under the 1990 Stock Option Plan, options to purchase shares of the
Corporation's common stock may be granted to certain key employees. The
options may be incentive stock options or nonqualified stock options. If
incentive options are granted, the exercise price of the options will be the
fair market value of the shares on the date the option is granted. The
exercise price of nonqualified stock options to be granted can be below the
fair market value of the shares at the grant date. To date all options
granted have been at the fair market value of the shares at the grant date,
and are nontransferable and are exercisable in installments.
As of December 31, 1998, 100,837 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, 1998, 1997 and 1996, which presents changes during the years then ended
is presented in the table below. Figures have been adjusted to reflect the 2
for 1 stock split issued July 10, 1998 and to the 10% stock dividends given
in February 1998, March 1997 and July 1996.
Weighted Weighted Weighted
average average average
1998 exercise 1997 exercise 1996 exercise
Shares price Shares price Shares price
Outstanding at
beginning of
year 532,740 $ 3.48 526,098 $ 3.33 512,788 $ 3.22
Granted 64,641 $15.59 17,050 $10.63 13,310 $ 7.47
Exercised 16,841 $ 3.65 10,408 $ 3.10 -- $ --
Outstanding at
end of year 580,540 $ 4.87 532,740 $ 3.48 526,098 $ 3.33
Exercisable at
end of year 510,009 $ 3.70 491,144 $ 3.34 490,486 $ 3.25
Weighted average
fair value of
options granted
during the year $ 9.32 $ 4.83 $ 3.96
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:
1998 1997 1996
Net Income:
As reported $4,228,000 $2,925,000 $1,928,000
Pro forma 4,110,000 2,901,000 1,920,000
Basic Earnings per share:
As reported $ 1.70 $ 1.18 $ 0.71
Pro forma 1.65 1.17 0.70
Diluted Earnings per share:
As reported $ 1.44 $ 1.02 $ 0.64
Pro forma 1.40 1.02 0.63
The fair value of each option grant in 1998, 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 1998, 1997 and
1996: risk free rate of 7.00% for 1998 and 1997 and 6.75% for 1996, no
expected dividend yield, expected life of 8 years and expected volatility of
24.26% in 1998, 17.84% in 1997 and 16.41% in 1996.
Because SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost,
indicated above, may not be representative of that to be expected in future
years.
The following table summarizes information about stock options outstanding at
December 31, 1998.
Options
Outstanding: Options
Weighted Weighted Exercisable: Weighted
Range of Number Average Average Number Average
exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 12/31/98 Life Remaining Price at 12/31/98 Price
$ 2.79 to
$ 9.92 519,540 2.76 $ 3.49 495,609 $ 3.32
$11.02 to
$19.13 61,000 8.38 $17.66 14,400 $16.65
<PAGE>
NOTE 10: COMMITMENTS AND CONTINGENCIES
As of December 31, 1998 the approximate future minimum net rental
payments under non-cancellable operating leases for premises were as
follows:
Year Amount
1999 $677,000
2000 583,000
2001 205,000
2002 154,000
2003 154,000
Thereafter 1,046,000
Total $2,819,000
Rental expense for premises under operating leases included in
occupancy expense was $554,000, $527,000, and $507,000, in 1998,
1997, and 1996, respectively. Minimum rentals may be adjusted for
increases in the lessors' operating costs and/or increases in the
Consumer Price Index.
At December 31, 1998, the Bank had outstanding approximately
$113,968,000 in undisbursed loan commitments and $3,673,000 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, 1998 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
$244,000, $162,000, and $144,000 in 1998, 1997, and 1996, respectively.
Amounts vary from year to year based on such factors as employees entering
and leaving the plan, profits earned by the Corporation, and variances of
estimates from the final results.
<PAGE>
NOTE 12: OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following:
1998 1997 1996
Data Processing $327,000 $336,000 $293,000
Business Development & Education 304,000 239,000 235,000
Telephone and Postage 291,000 265,000 241,000
Professional Fees 318,000 244,000 193,000
Supplies 240,000 211,000 192,000
Marketing 208,000 151,000 163,000
Regulatory Fees 47,000 47,000 21,000
Other 1,226,000 908,000 840,000
TOTAL $2,961,000 $2,401,000 $2,178,000
<PAGE>
NOTE 13: RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
The Bank is subject to legal limitations on the amount of dividends that
can be paid to the Corporation without prior approval from regulatory
authorities. The limitations for a given year equal the lesser of the
Bank's net profits (as defined in the regulations) for the current year,
combined with the retained net profits for the preceding two years or the
Bank's retained earnings. Under these restrictions, $8,531,000 of the
Bank's retained earnings were available for dividends at December 31, 1998.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, the Corporation is prohibited from borrowing from the Bank,
unless the loans are secured by specified types of collateral. Such
secured loans and other advances from the Bank are limited to 10% of the
Bank's shareholders equity. Under these provisions, secured loans and
advances to the Corporation were limited to $2,265,000 as of December 31,
1998. There were no such extensions of credit by the Bank in 1998 or 1997.
<PAGE>
<TABLE>
<CAPTION>
NOTE 14: PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
A summary of the financial statements of BWC Financial Corp.
(parent company only) follows:
December 31
SUMMARY BALANCE SHEETS 1998 1997
<S> <C> <C>
ASSETS
Cash on Deposit with the Bank $1,007,000 $660,000
Investment in the Bank 22,656,000 18,461,000
Investment in BWC Real Estate 680,000 333,000
TOTAL ASSETS $24,343,000 $19,454,000
LIABILITIES
SHAREHOLDERS' EQUITY
Common Stock $19,002,000 $18,603,000
Retained Earnings 5,341,000 851,000
TOTAL SHAREHOLDERS' EQUITY $24,343,000 $19,454,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $24,343,000 $19,454,000
<CAPTION>
SUMMARY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Expenses - General and Administrative $74,000 $13,000 $13,000
Loss before income taxes and
equity in undistributed net income
of Subsidiaries (74,000) (13,000) (13,000)
Income tax benefit 28,000 5,000 8,000
Equity in undistributed net income
of BWC Real Estate 340,000 162,000 107,000
Equity in undistributed net income
of the Bank 3,934,000 2,771,000 1,826,000
NET INCOME $4,228,000 $2,925,000 $1,928,000
<CAPTION>
SUMMARY STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
OPERATING ACTIVITIES: 1998 1997 1996
<S> <C> <C> <C>
Net Income $4,228,000 $2,925,000 $1,928,000
Adjustments to reconcile net income
to net cash used by operating activities:
Equity in undistributed net income
of Subsidiaries (4,274,000) (2,933,000) (1,933,000)
Taxes Payable -- -- (21,000)
NET CASH USED BY
OPERATING ACTIVITIES (46,000) (8,000) (26,000)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 455,000 29,000 181,000
Cash paid in lieu of fractional shares 0 (12,000) (4,000)
Shares repurchased by the Corporation (56,000) (37,000) (467,000)
Investment in BWC Real Estate -- -- (10,000)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 399,000 (20,000) (300,000)
Increase (Decrease) in Cash 353,000 (28,000) (326,000)
CASH ON DEPOSIT WITH THE BANK:
Beginning of year 653,000 681,000 1,007,000
End of year $1,006,000 $653,000 $681,000
</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, 1998, that the Corporation and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from FDIC categorized
the Corporation and the Bank as "Well Capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "Well
Capitalized" the Corporation and the Bank must maintain minimum total risk-
based, Tier I risk-based, Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
NOTE 15 (Continued)
The Corporation's and Bank's actual capital amounts and ratios are
presented in the following table:
<PAGE>
<TABLE>
<CAPTION>
Minimum
Capital Minimum
Actual Adequacy for Well
Amount Ratio Requirements Capitalized
<S> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk
Weighted Assets)
Consolidated: $26,049,000 12.17% $17,121,000 > 8.0 $21,401,000 >10.0
Bank of Walnut Creek: $25,042,000 11.70% $17,121,000 > 8.0 $21,401,000 >10.0
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated: $23,327,000 10.90% $8,560,000 > 4.0 $12,840,000 > 6.0
Bank of Walnut Creek: $22,320,000 10.43% $8,560,000 > 4.0 $12,840,000 > 6.0
Tier 1 Capital (to
Average Assets)
Consolidated: $23,327,000 9.40% $9,925,000 > 4.0 $12,406,000 > 5.0
Bank of Walnut Creek: $22,320,000 9.00% $9,925,000 > 4.0 $12,406,000 > 5.0
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 9.65% $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
<PAGE>
Note 16: FASB 131 DISCLOSURE
The Corporation adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131) as of January 1, 1998. This statement establishes standards for the
reporting and display of information about operating segments in financial
statements and related disclosures.
The Corporation is principally engaged in community banking activities
through its seven Bank branches. In addition to its community banking
activities, the Corporation provides mortgage brokerage services through its
joint venture, BWC Mortgage Services. These activities are monitored and
reported by Corporation management as a separate operating segment. As
permitted under the Statement, the separate banking offices have been
aggregated into a single reportable segment, Community Banking. The other
operating segments do not meet the prescribed aggregation or materiality
criteria and therefore are reported as "All other" in the following table.
The Corporation's community banking segment provides loans, leases and lines
of credit to local businesses and individuals. This segment also derives
revenue by investing funds, that are not loaned to others in the form of
loans, leases or lines of credits, into investment securities. The business
purpose of BWC Mortgage Services is the origination and placement of long-
term financing for real estate mortgages.
Summarized financial information for the years ended December 31, 1998, 1997
and 1996 concerning the Corporation's reportable segments is shown in the
following table.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Community Mortgage
1998 Banking Services All Other Adjustments Total
<S> <C> <C> <C> <C> <C>
Total Interest Income $21,862,000 $21,862,000
Commissions Received $3,744,000 3,744,000
Total Interest Expense 6,774,000 6,774,000
Salaries & Benefits 5,344,000 5,344,000
Commissions Paid 2,199,000 2,199,000
Segment Profit before Tax 6,405,000 1,097,000 ($595,000) 6,907,000
Total Assets (at December 31) $264,758,000 $518,000 $1,007,000 ($1,384,000) $264,899,000
Community Mortgage
1997 Banking Services All Other Adjustments Total
Total Interest Income $18,316,000 $18,316,000
Commissions Received $2,077,000 2,077,000
Total Interest Expense 5,770,000 5,770,000
Salaries & Benefits 4,737,000 4,737,000
Commissions Paid 1,201,000 1,201,000
Segment Profit before Tax 4,400,000 514,000 ($260,000) 4,654,000
Total Assets (at December 31) $228,590,000 $150,000 $660,000 ($778,000) $228,622,000
Community Mortgage
1996 Banking Services All Other Adjustments Total
Total Interest Income $13,238,000 $13,238,000
Commissions Received $1,367,000 1,367,000
Total Interest Expense 3,764,000 3,764,000
Salaries & Benefits 3,829,000 3,829,000
Commissions Paid 785,000 785,000
Segment Profit before Tax 2,744,000 320,000 ($163,000) $2,901,000
Total Assets (at December 31) $177,202,000 $111,000 $682,000 ($739,000) $177,256,000
</TABLE>
<PAGE>
NOTE 17: SFAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS 133) Accounting for
Derivative Instruments and Hedging Activities. The Statement establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the Corporation's
election, before January 1, 1998).
The Corporation has no derivative or hedged instruments and therefore the
implementation of this statement is not expected to have a material impact
on the Corporation's financial position or results of operations.
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN, LLP
San Francisco, California
February 22, 1999
<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, 1998.
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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Interest Income $21,862,000 $18,316,000 $13,238,000 $11,491,000 $9,673,000
Interest Expense 6,774,000 5,770,000 3,764,000 3,410,000 2,547,000
Net Interest Income 15,088,000 12,546,000 9,474,000 8,081,000 7,126,000
Provision for Credit Losses 825,000 1,125,000 650,000 330,000 255,000
Net Interest Income after Provision
for Credit Losses 14,263,000 11,421,000 8,824,000 7,751,000 6,871,000
Noninterest Income 5,955,000 3,729,000 2,732,000 1,136,000 651,000
Noninterest Expense 12,762,000 10,244,000 8,498,000 6,444,000 5,867,000
Minority Interest 549,000 252,000 157,000 -- --
Income Before Income Taxes 6,907,000 4,654,000 2,901,000 2,443,000 1,655,000
Provision for Income Taxes 2,679,000 1,729,000 973,000 823,000 481,000
NET INCOME 4,228,000 2,925,000 1,928,000 1,620,000 1,174,000
Diluted Earnings Per Share (1) $1.44 $1.03 $0.64 $0.61 $0.45
Average Diluted Shares (1) 2,926,428 2,842,772 3,034,922 2,636,636 2,591,158
Book Value Per Diluted Share (1) $8.32 $6.84 $5.41 $5.65 $4.88
SUMMARY BALANCE SHEETS AT DECEMBER 31
Cash and Due from Banks $14,345,000 $17,412,000 $15,212,000 $11,377,000 $8,552,000
Federal Funds Sold 2,300,000 4,350,000 -- 1,230,000 3,300,000
Other short Term Investments 35,000 48,000 26,000 10,000 3,018,000
Investment Securities 59,247,000 40,956,000 19,125,000 34,471,000 28,754,000
Loans, Net 183,058,000 161,002,000 138,878,000 99,776,000 86,411,000
Other Assets 5,914,000 4,854,000 4,015,000 3,733,000 3,109,000
TOTAL ASSETS $264,899,000 $228,622,000 $177,256,000 $150,597,000 $133,144,000
Noninterest-bearing Deposits $69,783,000 $59,354,000 $41,519,000 $36,854,000 $27,340,000
Interest-bearing Deposits 168,357,000 147,625,000 114,125,000 97,747,000 92,632,000
Federal Funds Purchased -- -- 3,600,000 -- --
Other Liabilities 2,416,000 2,195,000 1,602,000 1,103,000 529,000
Shareholders' Equity 24,343,000 19,448,000 16,410,000 14,893,000 12,643,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $264,899,000 $228,622,000 $177,256,000 $150,597,000 $133,144,000
<FN>
(1) All share and per-share amounts give effect to the 2 for 1 stock split of July, 1998 and to the 10% stock
dividends given in February 1998, March 1997, July 1996, and June 1995.
</FN>
</TABLE>
<PAGE>
<TABLE>
<FN>
INTEREST RATE SENSITIVITY
(in thousands except share and per share data)
Proper management of the rate sensitivity and maturities of assets and liabilities is required
to provide an optimum and stable net interest margin. Interest rate sensitivity spread management
is an important tool for achieving this objective and for developing strategies and means to
improve profitability. The schedules shown below reflect the interest rate sensitivity position
of the Corporation as of December 31, 1998. 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>
ASSETS:
Federal funds sold & Short Term Inv. $2,335 $- $- $- $- $2,335
Investment securities 500 2,315 4,847 32,091 19,699 59,452
Construction & real estate loans 78,951 6,190 3,778 1,280 388 90,587
Commercial loans 54,881 3,929 4,934 517 - 64,261
Consumer Loans 27,555 391 722 1,780 2 30,450
Leases 165 193 379 942 - 1,679
Interest-bearing assets 164,387 13,018 14,660 36,610 20,089 248,764
Savings and Now accounts $37,139 $- $- $- $- $37,139
Money market accounts 64,687 - - - - 64,687
Time deposits <$100,000 10,373 11,503 10,517 1,900 - 34,293
Time deposits >$100,000 16,276 8,678 6,136 1,148 - 32,238
Interest-bearing liabilities 128,475 20,181 16,653 3,048 - 168,357
Rate sensitive gap $35,912 ($7,163) ($1,993) $33,562 $20,089 $80,407
Cumulatire rate sensitive gap $35,912 $28,749 $26,756 $60,318 $80,407
Cumulative rate sensitive ratio 1.28 1.19 1.16 1.36 1.48
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, 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 22, 1999, in BWC Financial Corp.'s 1998 Annual
Report. It should be noted that we have not audited any financial
statements of BWC Financial Corp. subsequent to December 31, 1998, or
performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
San Francisco, California,
February 22, 1999
<PAGE>
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