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, SBA 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 most of its bank locations, 24 hours a day, and are part of the EDS, Cirrus and Star networks with ATM access at locations throughout the developed World. The Bank offers its clients 24-hour telephone access to their accounts and 24-hour internet banking access with bill payment services. The Bank provides its clients with imaged statements and checks which it delivers to its clients by either postal service, fax or email.
The Bank operates an SBA (Small Business Administration) lending department, and also operates a leasing division. Both of these areas of the Bank add to the Corporation’s range of services to its clients.
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.
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. In 2003 BWC Mortgage Services added mortgage banking to its services.
In accordance with standard accounting practices, 100% of the assets, liabilities, income and expense of the Corporation’s business segment (BWC Mortgage Services) are included in these consolidated financial reports. Net income before income taxes is then reduced by the portion of income belonging to the minority interest.
During 2004 net interest income of the Corporation (before minority interest allocation) was $24,261,000, of which the Bank accounted for $23,094,000 or 95% and the balance by BWC Mortgage Services. In 2003 net interest income was $22,060,000, of which the Bank accounted for $21,800,000, or 99%. BWC Mortgage Services began mortgage banking services during the second quarter of 2003. During 2002, BWC Mortgage Services was not engaged in mortgage banking and net interest income was immaterial.
The Corporation’s net income before tax in 2004 was $9,157,000, of which the Bank contributed $8,289,000, or 90% and (after minority interest allocation) the balance by BWC Mortgage Services. In 2003 net income before tax was $7,637, 000, of which the Bank contributed $6,552,000, or 86% and the balance by BWC Mortgage Services. In 2002 net income before tax was $7,190,000, of which the Bank contributed $6,309,000, or 88% and the balance by BWC Mortgage Services.
See Note 17 for more information on the business segments of the Corporation.
Availability of Financial Information
The Corporation files its financial reports with the Securities and Exchange Commission (SEC), which include the 10-K, 10-Q, 8-K, Form 4 and Form 5. The public may access these reports at the SEC website, www.sec.gov. The Bank also maintains a web site with certain Corporate financial information (annual and quarterly summary reports), located at www.bowc.com. There is also a direct link from this web site to the SEC location containing all SEC Corporate filings. This link is in “Investor Information - BWC Financial Corp” followed by “Official Filings of the Corporation”. Reports may be printed or downloaded at no charge from the SEC website.
Service Area
The primary service area of the Bank and its branches is Contra Costa, Alameda and Santa Clara Counties with limited lending activity also in Solano County. Walnut Creek, California, is the site of the Corporation’s main office and the Bank also operates offices in the cities of Orinda, Danville, San Ramon, Pleasanton, Livermore and San Jose, 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, northern Alameda County and the San Jose area of Santa Clara 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, 2004, the Bank employed 123 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 31 employees and approximately 72 agents working for the joint venture, BWC Mortgage Services.
Effect of Governmental Policies and Legislation
Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank’s portfolio comprise the major portion of the Bank’s earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation.
The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities which effect short term rates such as the Fed Funds rate, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact on the Bank of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, the California legislature and before various bank regulatory and other professional agencies. See “Financial Services Modernization Legislation,” and “Sarbanes-Oxley Act of 2002.”
Supervision and Regulation
The Bank is extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Corporation and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
The Corporation
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such with, and subject to the supervision of, the Federal Reserve Board. The Corporation is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.
The Corporation is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Corporation would own or control more than 5% of the voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Corporation and another bank holding company.
The Corporation is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Corporation may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board may require that the Corporation terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control of the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Corporation must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.
The Corporation is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and files reports and proxy statements pursuant to such Act with the Securities and Exchange Commission (SEC).
The Bank
The Bank is chartered under the laws of the State of California and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The Bank is subject to the supervision of, and is regularly examined by, the California Department of Financial Institutions (DFI) and the FDIC. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank’s business and condition.
Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital.
If, as a result of an examination of a bank, the FDIC or the DFI should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to these regulatory agencies. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California chartered bank would result in a revocation of the bank’s charter.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions including, but not limited to, those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Additionally, a holding company’s inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes certain specific restrictions on transactions and requires federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefit accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.
Premiums for Deposit Insurance
Through the Bank Insurance Fund (“BIF”), the FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. An increase in the assessment rate could have a material adverse effect on the Corporation’s earnings, depending on the amount of the increase.
The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance for the Bank would have a material adverse effect on the Corporation’s condition since it would result in the revocation of the Bank’s charter and the cessation of its operations as a going concern.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “SOA”). The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
The SOA is among the most far-reaching U.S. securities legislation enacted. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934, (the “Exchange Act”). The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
The SOA addresses, among other matters:
the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;
expansion of the power of the audit committee, including the requirements that the audit committee: (i) have direct control of the outside auditor; (ii) be able to hire and replace the auditor; and (iii) approve all non-audit services performed by the outside auditors;
auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients and pre-approval by the audit committee of non-audit related services;
certification of financial statements and internal controls over financial reporting by the chief executive officer and the chief financial officer;
the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement;
a prohibition on insider trading during pension plan black-out periods;
increased protection for whistleblowers and informants;
disclosure of off-balance sheet transactions;
expedited filing requirements for ownership reports by officers and directors;
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
"real time" filing of periodic reports; and
various increased criminal penalties for violations of securities laws.
The SOA contains provisions which became effective upon enactment on July 30, 2002, and provisions which will become effective within 30 days to one year from enactment. The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. The Corporation has implemented procedures to comply with the requirements for expanded disclosure of internal controls and the certification of financial statements. A significant portion of the remaining items in the new legislation became effective during 2003. The Corporation is currently evaluating what impacts the new legislation and its implementing regulations will have upon its operations, including a likely increase in certain outside professional costs.
Financial Services Modernization Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) was signed into law. The Financial Services Modernization Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations. The Financial Services Modernization Act establishes a new type of bank holding company, known as a financial holding company, that may engage in an expanded list of activities that are “financial in nature,” which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking.
The Corporation currently meets all the requirements for financial holding company status. However, the Corporation does not expect to elect financial holding company status unless and until it intends to engage in any of the expanded activities under the Financial Services Modernization Act which require such status. Unless and until it elects such status, the Corporation will only be permitted to engage in non-banking activities that were permissible for bank holding companies as of the date of the enactment of the Financial Services Modernization Act.
The Financial Services Modernization Act also sets forth a system of functional regulation that makes the Federal Reserve Board the “umbrella supervisor” for holding companies, while providing for the supervision of the holding company’s subsidiaries by other federal and state agencies. A bank holding company may not become a financial holding company if any of its subsidiary financial institutions are not well-capitalized or well-managed. Further, each bank subsidiary of the holding company must have received at least a satisfactory Community Reinvestment Financial Services Modernization Act (CRA) rating. The Financial Services Modernization Act also expands the types of financial activities a national bank may conduct through a financial subsidiary, addresses state regulation of insurance, generally prohibits unitary thrift holding companies organized after May 4, 1999 from participating in new financial activities, provides privacy protection for nonpublic customer information of financial institutions, modernizes the Federal Home Loan Bank system and makes miscellaneous regulatory improvements. The Federal Reserve Board and the Secretary of the Treasury must coordinate their supervision regarding approval of new financial activities to be conducted through a financial holding company or through a financial subsidiary of a bank. While the provisions of the Financial Services Modernization Act regarding activities that may be conducted through a financial subsidiary directly apply only to national banks, those provisions indirectly apply to state-chartered banks.
In addition, the Bank is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential customer information, regardless of whether the Corporation elects to become a financial holding company or to conduct activities through a financial subsidiary of the Bank. The Corporation does not, however, currently intend to file notice with the Federal Reserve Board to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank.
The Corporation and the Bank do not believe that the Financial Services Modernization Act has had thus far, or will have in the near term, a material adverse effect on their operations. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Corporation and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Corporation and the Bank.
USA Patriot Act of 2001
In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence community’s abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money-laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Transactions between Affiliates
Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve Board has also recently issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.
Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Corporation is considered to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:
to an amount equal to 10% of the bank's capital and surplus, in the case of covered transactions with any one affiliate; and
to an amount equal to 20% of the bank's capital and surplus, in the case of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:
a loan or extension of credit to an affiliate;
a purchase of, or an investment in, securities issued by an affiliate;
a purchase of assets from an affiliate, with some exceptions;
the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and
the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
In addition, under Regulation W:
a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and
with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.
Regulation W generally excludes all non-bank and non-savings-association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Community Reinvestment Act
The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.
When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution’s lending service and investment performance, resulting in a rating by the appropriate bank regulatory agency of “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance.” At its last examination by the FDIC, the Bank received a CRA rating of “Satisfactory.”
Accounting Changes
From time to time the Financial Accounting Standards Board (“FASB”) issues pronouncements which govern the accounting treatment for the Corporation’s financial statements. For a description of the recent pronouncements applicable to the Corporation, see the Notes to the Financial Statements included in Item 8 of this Report.
ITEM 2.
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 15,130 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 containing 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 November 9, 1998 a branch office was opened in Livermore, California, serving the Livermore area. It is located at 211 South J Street and the premises are in a single, modern building containing 2,100 square feet of office space.
On 20, 2001 a branch office was opened in San Jose, California, serving the San Jose area. The premises are located in a modern office building of which the Bank has leased approximately 2,386 square feet of office space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Corporation nor the Bank is party to any material pending legal proceedings, other than proceedings arising in the ordinary course of the Bank’s business. None of these are expected to have a material adverse impact on the financial position or results of operations of the Corporation or the Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information
The Corporation’s Common Stock trades on the Nasdaq National Market under the symbol “BWCF.”
The following table summarizes those trades of the Corporation’s Common Stock on NASDAQ, setting forth the approximate high and low trade prices for each quarterly period ended since January 1, 2003. The closing price on December 31, 2004 was $23.50, compared to the close one year earlier of $21.47. At December 31, 2004, BWC Financial Corp. had 342 shareholders of record plus approximately 500 street-named shareholders. At December 31, 2003, BWC Financial Corp. had 353 shareholders of record plus approximately 506 street-named shareholders.
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.
During the second half of 2003 the Corporation began paying quarterly cash dividends of $0.06 per share. Two dividends were paid in 2003. During 2004, three quarterly dividends were paid at $0.06 per share and a forth was paid at $0.08 per share. It is anticipated that cash dividends will be declared on a quarterly basis in the future.
2004 2003
------------------------------- ---------------------------- -- ------------------------ ------------------------- 1st Quarter 2nd Quarter 1st Quarter 2nd Quarter
$17.60 - $21.47 $18.68 - $23.33 $13.41 - $16.20 $14.17 - $16.20 ------------------------------- ---------------------------- -- ------------------------ ------------------------- 3rd Quarter 4th Quarter 3rd Quarter 4th Quarter
$17.88 - $20.26 $19.38 - $23.64 $15.55 - $17.05 $15.86 - $21.47 ------------------------------- ---------------------------- -- ------------------------ ------------------------- Stock prices have been adjusted for dividends and splits.
Transfer Agent
American Stock Transfer and Trust Company (AST), serves as the Corporation’s transfer agent. Shareholder inquiries regarding holdings of BWC Financial Corp. can be directed to:
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Tel: 1-800-937-5449
or online at: www.amstock.com
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Board of Directors of the Bank adopted the 1990 Incentive Stock Option Plan (the “1990 Plan”) which was approved by shareholders in May 1990, and the Board of Directors of the Bank adopted the 2000 Stock Option Plan (the “2000 Plan”) which was approved by shareholders in May 2000. The 1990 Plan terminated on April 17, 2000, although options granted under the 1990 Plan remain outstanding. More information regarding activity occurring in the Bank’s equity compensation plan is contained in the Corporation’s 2005 Proxy Statement. The table below summarizes the Corporation’s Equity Compensation Information.
---------------------------------------------------------------------------------------------------------------------- Equity Compensation Plan Information Number of securities remaining available for Number of securities Weighted-average future issuance under to be issued upon exercise price equity compensation plans exercise of of outstanding (excluding securities Plan category outstanding options options reflected in column (a)) ---------------------------------------------------------------------------------------------------------------------- (a) (b) (c ) Equity compensation plans approved by security holders 187,159 $16.61 447,110 Equity compensation plans not approved by security holders none ---------------------------------------------------------------------------------------------------------------------- Total 187,159 $16.61 447,110 ----------------------------------------------------------------------------------------------------------------------
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information with respect to any purchase made by or on behalf of the issuer or any affiliated purchaser.
---------------------------------------------------------------------------------------------------- Period (a) Total (b) Average (c)Total Number (d) Maximum Number Number of Price Paid of Shares of Shares that May Shares per Share Purchased as Yet Be Purchased Purchased Part of Publicly Under the Plan Announced Plans or Programs ----------------------------------------------------------------------------------------------------
October 25, 2004 64,842 $ 22.00 - - ----------------------------------------------------------------------------------------------------
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected consolidated financial data for the five years ended December 31, 2004. 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 report.
(In thousands except share data) Summary of Earnings 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------ Interest Income $ 29,541 $ 26,312 $ 25,416 $ 30,879 $ 32,138 Interest Expense 5,280 4,252 5,003 8,591 9,139 ------------------------------------------------------------------------------ Net Interest Income 24,261 22,060 20,413 22,288 22,999 Provision for Credit Losses 975 1,500 1,200 1,600 1,150 ------------------------------------------------------------------------------ Net Interest Income after Provision for Credit Losses 23,286 20,560 19,213 20,688 21,849 Noninterest Income 15,327 17,377 11,692 9,054 5,885 Noninterest Expense 28,443 29,128 22,745 20,386 17,295 Minority Interest 1,013 1,172 970 695 327 ------------------------------------------------------------------------------ Income before Income Taxes 9,157 7,637 7,190 8,661 10,112 Provision for Income Taxes 3,444 2,838 2,602 3,197 3,677 ------------------------------------------------------------------------------ Net Income $ 5,713 $ 4,799 $ 4,588 $ 5,464 $ 6,435 ============================================================================== Per Share:(1) Net Income - basic $ 1.33 $ 1.11 $ 1.10 $ 1.32 $ 1.53 Net Income - diluted $ 1.32 $ 1.11 $ 1.05 $ 1.20 $ 1.37 Weighted ave. shares for Basic E.P.S. 4,280,595 4,315,772 4,182,243 4,154,059 4,211,501 Weighted ave. shares for Diluted E.P.S. 4,316,256 4,336,572 4,372,727 4,559,076 4,692,028 Book value at period end $ 11.18 $ 10.42 $ 9.59 $ 9.29 $ 8.20 Tangible book value at period end $10.95 $10.34 $9.60 $8.39 $7.29 Ending Shares 4,228,459 4,300,045 4,379,607 4,116,083 4,173,929 Cash Dividends per Common Share $ 0.26 $ 0.12 $ - $ - $ - Dividend Payout Ratio 19.64% 10.84% 0.00% 0.00% 0.00% Summary Balance Sheets at December 31 Cash and Due from Banks $ 10,315 $ 17,959 $ 20,993 $ 15,016 $ 20,684 Federal Funds Sold 8,500 3,470 2,000 6,000 3,268 Other Short-term Investments 173 71 36 33 520 Investment Securities 80,066 86,655 71,105 86,709 67,945 Loans, Net 373,012 330,427 303,583 276,064 247,281 BWC Mortgage Services Loans Held-for Sale 14,966 5,142 - - - Other Assets 14,326 13,432 11,749 11,235 10,815 ------------------------------------------------------------------------------ Total Assets $ 501,358 $ 457,156 $ 409,466 $ 395,057 $ 350,513 ==============================================================================
Noninterest-bearing Deposits $ 131,252 $ 123,496 $ 99,175 $ 87,172 $ 88,143 Interest-bearing Deposits 261,687 246,669 241,778 253,297 221,493 Federal Home Loan Bank Borrowings 43,313 33,352 23,622 12,955 2,424 BWC Mortgage Services Borrowings 14,511 5,071 - - - Other Liabilities 3,314 3,745 2,892 3,381 4,242 Shareholders' Equity 47,281 44,823 41,999 38,252 34,211 ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 501,358 $ 457,156 $ 409,466 $ 395,057 $ 350,513 ============================================================================== Financial Ratios: Return on Average Assets 1.15% 1.09% 1.13% 1.45% 1.97% Return on Average Equity 12.39% 11.14% 11.59% 14.97% 20.45% Average Shareholders' Equity to Average Assets 9.27% 9.76% 9.78% 9.70% 9.64% Net interest margin (taxable equivalent) 5.16% 5.30% 5.43% 6.36% 7.61% Net loan losses to average loans 0.00% 0.24% 0.22% 0.46% 0.25% ALLL as % of total loans 2.01% 1.98% 2.08% 2.01% 2.14% Efficiency ratio (Bank) 62.80% 66.30% 66.37% 60.08% 55.14% (1) All share and per-share amounts give effect to the 10% stock dividends in December 2004 and 2003, July 2002, June 2001, and August 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Except for historical financial information contained herein, certain matters discussed in the Annual Report of BWC Financial Corp. constitute “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially. Such risks and uncertainties with respect to BWC Financial Corp., Bank of Walnut Creek and BWC Real Estate include, but are not limited to, those related to the economic environment - particularly in the areas in which the Corporation and the Bank operate - competitive products and pricing, loan delinquency rates, fiscal and monetary policies of the U.S. government, changes in governmental regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
General
Beginning in July of 2004, the Federal Reserve began raising the rates, by quarter point intervals. The prime rate had been at a 40-year low of 4.00% since June 30, 2003. By the end of 2004 the prime rate had risen by 1.25% to 5.25%. Commensurate with this, because of the asset-sensitive position of the Bank, its net interest spread improved from a low of 4.70% in June to 5.40% in December. Most of the economic news during 2004 was positive, with increases in real GNP, employment and sales. The housing sector continues to be a strong contributor to our economy, and the East Bay also outperformed the State economy and has been a net job contributor to the State employment figures.
The Bay Area economy has strengthened noticeably during 2004 and is projected to continue strengthening in 2005. Industrial production is rising along with exports. Modest but sustained job growth is taking place in computer and electronic equipment manufacturing, and software development. The Northern California housing market appears to be one of the most stable in the state, at this time. A moderate strengthening in employment growth encompassing more industries is expected, though home construction and real estate could experience some job losses.
On the negative side, high oil and home prices present sizable downside risks. The state’s structural budget problems will remain a drag on the economy, as further spending cuts or tax increases seem inevitable. The dollar is likely to fall further against foreign currencies making foreign goods dearer, but could boost exports. The most significant threat to our Corporation’s growth and margins is the increasing competition in our marketplace. A number of new financial institutions have started up and will be aggressive in lending and deposit gathering.
As long as the fear of recession remains small and the economy continues to strengthen, the Fed will keep to its course of raising the Fed Funds rate, by measured steps, until it is at 4%, which is believed to be a neutral level. At this level, the Fed believes that the rate of interest is not predispositioned to act as a stimulus or a retardant to growth or inflation.
During 2004, BWC Financial Corp. experienced a growth of approximately 10% in total assets from the prior year. Gross loans increased 13%, deposits increased 6%, and net income was up 19% from the prior year.
The Corporation’s mortgage brokerage joint venture, BWC Mortgage Services, had a strong year that was comparable to 2003, when the earnings were bolstered by the refinancing boom. This went away for the most part, and 2004 results relied on marketing, growth and increased lending through the mortgage banking activities. BWC Financial Corp. receives 50% of the pre-tax income generated by BWC Mortgage Services.
BWC Mortgage Services has established lines of credit with third-party providers for the purpose of funding sold loans to reduce the time it takes to close mortgages for borrowers. The loans held-for-sale are generally on the books for less than a month and carry virtually no credit risk to the Corporation. For this reason, these loans are reported as a separate line item below the loans and reserves of the Corporation and are evaluated separately in determining the allowance for credit losses. Interest income and fees associated with these loans are included in the “Loans, including Fees” section of the Corporation’s income statement.
The following table shows key financial ratios for the Corporation for the years indicated: For the Year Ended December 31, ---------------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------------- Return on average assets 1.15% 1.09% 1.13% Return on average shareholders' equity 12.39% 11.14% 11.59% Cash dividend payout ratio 17.70% 8.88% - Average shareholders' equity as % of: Average total assets 9.27% 9.76% 9.78% Average total deposits 12.63% 11.80% 11.41%
Results of Operations
Net Income
Net income in 2004 was $5,713,000, which reflects a return on average assets of 1.15% and a return on average equity of 12.39%. The Corporation’s average earning assets increased $56,457,000, or 13%, during 2004 as compared to 2003.
Net income in 2003 was $4,799,000, which reflects a return on average assets of 1.09% and a return on average equity of 11.14%. The Corporation’s average earning assets increased $32,988,000, or 8%, during 2003 as compared to 2002.
Net income in 2002 was $4,588,000, which reflects a return on average assets of 1.13% and a return on average equity of 11.59%. The Corporation’s average earning assets increased $26,216,000, or 7%, during 2002 as compared to 2001.
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 2004 averaged 5.16%, which represents a .14% decrease from the margin earned during 2003. During 2004 the prime rate averaged 4.34%, or 0.21% more than during 2003. Beginning in July of 2004, the Federal Reserve began raising the rates, by quarter point intervals. The prime rate had been at a 40-year low of 4.00% since June 30, 2003. By the end of 2004 the prime rate had risen by 1.25% to 5.25%. Commensurate with this, because of the asset-sensitive position of the Bank, its net interest spread improved from a low of 4.70% in June to 5.40% in December.
The Corporation’s net interest margin for 2003 averaged 5.30%, which represents a .13% decrease from the margin earned during 2002. During 2003 the prime rate averaged 4.13%, or 0.55% less than during 2002. The Corporation’s aggressive control of cost of funds helped support our net interest margin in the face of declining rates.
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
The following is an analysis of net interest earnings for the years ended December 31.
EARNING ASSETS 2004 2003 2002 -------------------------------------------- ----------------------------------------- ----------------------------------------- In thousands Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid(1) Balance Expense Paid(1) Balance Expense Paid(1) -------------------------------------------- ----------------------------------------- -----------------------------------------
Federal Funds Sold $ 12,424 $ 153 1.23% $ 13,258 $ 142 1.08% $ 13,153 $ 219 1.67% Other Short-Term Investments 104 2 1.61 83 1 0.96 181 4 1.49 Investment Securities: U.S. Treasury Securities 272 8 2.93 257 7 2.87 4,295 122 2.84 Securities of U.S. Government Agencies 28,600 769 2.68 23,897 794 3.32 35,549 1,487 4.18 Obligations of States & Political Subdivisions(2) 37,017 1,171 3.93 29,767 1,187 4.79 35,807 1,639 5.22 Corporate Securities 16,316 601 3.67 17,100 664 3.88 11,518 493 4.28 Loans (3) (4) (5) 360,876 24,758 6.86 329,017 22,920 6.97 279,888 21,452 7.67 BWC Mortgage Services Loans Held-for-Sale 20,067 2,079 10.36 6,956 597 8.58 - - - ------------------------------ ------------------------------ ------------------------------
TOTAL EARNING ASSETS $ 475,676 $ 29,541 6.27% $ 420,335 $ 26,312 6.32% $ 380,391 $ 25,416 6.74% =============== =============== ===============
NONEARNING ASSETS 22,110 20,995 24,358 --------------- --------------- ---------------
TOTAL AVERAGE ASSETS $ 497,786 $ 441,330 $ 404,749 =============== =============== ===============
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY (Continued): LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003 2002 -------------------------------------------- ----------------------------------------- ----------------------------------------- Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid(1) Balance Expense Paid(1) Balance Expense Paid(1) -------------------------------------------- ----------------------------------------- ----------------------------------------- INTEREST-BEARING DEPOSITS: Savings and NOW Accounts $ 55,926 $ 97 0.17% $ 52,716 $ 102 0.19% $ 45,258 $ 140 0.31% Money Market Accounts 157,904 1,610 1.02 155,228 1,672 1.08 150,978 2,364 1.57 Time Deposits 54,623 906 1.66 47,900 852 1.78 55,998 1,559 2.78 ------------------------------ ------------------------------ ------------------------------ TOTAL INTEREST-BEARING DEPOSITS 268,453 2,613 0.97 255,844 2,626 1.03 252,234 4,063 1.61
Federal Funds Purchased 399 6 1.38 37 1 1.40 112 2 1.51 FHLB Borrowings 36,128 1,746 4.83 25,940 1,278 4.93 16,861 938 5.56 BWC Mortgage Services Borrowings 20,068 915 4.56 6,749 347 5.14 - - - ------------------------------ ------------------------------ ------------------------------ TOTAL BORROWINGS 56,595 2,667 4.71 32,726 1,626 4.97 16,973 940 5.54
TOTAL AVERAGE INTEREST-BEARING DEPOSITS AND BORROWINGS $ 325,048 $ 5,280 1.62% $ 288,570 $ 4,252 1.47% $ 269,207 $ 5,003 1.86%
NONINTEREST-BEARING DEPOSITS 124,695 - 107,390 - 93,495 -
OTHER LIABILITIES 1,918 - 2,287 - 2,476 -
SHAREHOLDERS' EQUITY 46,126 - 43,082 - 39,571 - ------------------------------ ------------------------------ ------------------------------ TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $ 497,787 $ 441,329 $ 404,749 =============== =============== ===============
NET INTEREST INCOME AND NET INTEREST MARGIN ON AVERAGE EARNING ASSETS $ 24,261 5.16% $ 22,060 5.30% $ 20,413 5.43% ============================= ========================== ==========================
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 (2004 and 2003 Federal Statutory Rate was 34%).
Nonaccrual loans of $25,000 and $687,000 as of December 31, 2004 and 2003 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 $1,624,000 and $1,678,000 in 2004 and 2003, respectively.
Loan interest income includes loan origination fees of $2,247,000 and $2,780,000 in 2004 and 2003, respectively.
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 2004 and 2003, and between the years 2003 and 2002. 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.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES In thousands 2004 over 2003 2003 over 2002 -------------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total -------------------------------------- ------------------------------------- Increases (Decreases) in Interest Income Federal Funds Sold $ (9) $ 20 $ 11 $ 1 $ (78) $ (77) Other Short-Term Investments - 1 1 (2) (1) (3) Investment Securities: U.S. Treasury Securities - - - (116) 1 (115) Securities of U.S. Government Agencies 141 (169) (28) (438) (255) (693) Obligations of State and Political Subdivisions 224 (236) (12) (307) (145) (452) Corporate Debt Securities (29) (34) (63) 228 (57) 171 Loans 2,203 (365) 1,838 3,445 (1,977) 1,468 BWC Mortgage Services Loans Held-for-Sale 1,242 240 1,482 597 - 597 -------------------------------------- ------------------------------------- Total Increase (Decrease) $ 3,772 $ (543) $ 3,229 $ 3,408 $ (2,512) $ 896
Increase (Decrease) in Interest Expense Deposits: Savings and NOW Accounts $ 8 $ (13) $ (5) $ 20 $ (58) $ (38) Money Market Accounts 3 (65) (62) 61 (753) (692) Time Deposits 115 (61) 54 (183) (524) (707) Federal Funds Purchased 5 - 5 (1) - (1) FHLB Borrowings 508 (40) 468 476 (136) 340 BWC Mortgage Services Borrowings 646 (78) 568 347 - 347 -------------------------------------- ------------------------------------- Total Increase (Decrease) $ 1,285 $ (257) $ 1,028 $ 720 $ (1,471) $ (751) Increase (Decrease) on -------------------------------------- ------------------------------------- Net Interest Income $ 2,487 $ (286) $ 2,201 $ 2,688 $ (1,041) $ 1,647 ====================================== =====================================
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 Bank’s depositors, to the FHLB for borrowings under the secured lines the Bank has with them, and for temporary borrowing of Fed Funds on an occasional overnight basis. It also includes borrowings under lines of credit to BWC Mortgage Services. 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 2004 increased $3,229,000 as compared to 2003. This was related in total to the growth in earning assets during the current year. Analysis of the influences of growth and rates shows that interest income was increased by approximately 3.8 million dollars, due to growth, and reduced by approximately $0.5 million, due to lower rates.
Total interest expense in 2004 increased $1,028,000 from 2003. This was related in total to the increase in volume of funds. Analysis of the influence of growth and rates shows that interest expense was increased by approximately $1.3 million, due to increased growth, and decreased by approximately $0.3 million, due to rates.
Based on the above factors affecting interest income and interest expense, net interest income increased $2,201,000 during 2004 as compared to 2003. Had the same average rates been in effect during 2004 as were experienced in 2003, the net interest income of the Corporation would have increased by approximately $2.5 million.
Total interest income in 2003 increased $896,000 as compared to 2002. This was related in total to the growth in earning assets during the current year. Analysis of the influences of growth and rates shows that interest income was increased by approximately $3.4 million, due to growth, and reduced by approximately $2.5 million, due to lower rates.
Total interest expense in 2003 decreased $751,000 from 2002. This was related in total to the drop in interest rates. Analysis of the influence of growth and rates shows that interest expense was decreased by approximately $1.5 million, due to decreased rates, and increased by approximately $0.7 million, due to growth.
Based on the above factors affecting interest income and interest expense, net interest income increased $1,647,000 during 2003 as compared to 2002. Had the same average rates been in effect during 2003 as were experienced in 2002, the net interest income of the Corporation would have increased by approximately $2.6 million.
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 is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Bank employs a variety of modeling tools to monitor interest-rate risks. One of the earlier and more basic models is GAP reporting. The net difference between the amount of assets and liabilities within a cumulative calendar period is typically referred to as the “rate sensitivity position.”
As part of the GAP analysis to help manage interest-rate risk, the Bank also performs an earnings simulation analysis to identify the interest-rate risk exposures resulting from the Bank’s asset and liability positions, such as its loans, investment securities and customer deposits. The Bank’s policy is to maintain a risk of a 2% rate shock to net interest income at risk to a level of not more than 15%. The earnings simulation analysis as of December 31, 2004 estimated that a 2% interest-rate shock (decrease) could lower pretax earnings by $3,245,000, which was 14.9% of the Bank’s 2004 net interest income. Although this percentage is just below the Bank’s policy, management believes this is to our advantage since rates are expected to continue increasing.
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 Bank’s simulated earnings analysis.
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, 2004. In a rising interest-rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. 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.
Repricing within: 3 3-6 12 1-5 Over 5 In thousands Months Months Months Years Years Totals ------------------------------------------------------------------------------------------------------------------------ Assets: Federal Funds Sold & Short-term Investments $ 8,673 $ - $ - $ - $ - $ 8,673 Investment securities 7,049 6,262 11,184 54,677 894 80,066 Construction & Commercial R/E Loans 149,268 10,156 5,878 9,146 33,292 207,740 Commercial Loans 99,619 2,882 2,640 2,337 386 107,864 Installment Loans 46,272 6 10 39 - 46,327 Leases 1,880 2,033 3,630 11,208 - 18,751 BWC Mortgage Loans Held-for-Sale 14,966 - - - - 14,966 ------------------------------------------------------------------------------- Interest-bearing assets $ 327,727 $ 21,339 $ 23,342 $ 77,407 $ 34,572 $ 484,387 -------------------------------------------------------------------------------
Liabilities: Money market accounts $ 78,118 $ 78,118 $ - $ - $ - $ 156,236 Time deposits <$100,000 7,844 7,087 4,547 2,995 - 22,473 Time deposits >$100,000 6,333 5,694 3,470 4,261 - 19,758 Federal Funds Borrowed - - - - - Federal Home Loan Bank Borrowings 285 288 5,435 5,454 31,851 43,313 BWC Mortgage Services Borrowings 14,511 - - - - 14,511 ------------------------------------------------------------------------------- Interest-bearing liabilities $ 107,091 $ 91,187 $ 13,452 $ 12,710 $ 31,851 $ 256,291 -------------------------------------------------------------------------------
Rate-sensitive gap $ 220,636 $(69,848) $ 9,890 $ 64,697 $ 2,721 $ 228,096 Cumulative rate-sensitive gap $ 220,636 $150,788 $160,678 $ 225,375 $ 228,096 ==================================================================
Cumulative rate-sensitive ratio 3.06 1.76 1.76 2.00 1.89
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, 2004. In thousands Loans With a Maturity of ---------------------------------------------------------- One Year One to After Five or Less Five Years Years Total ---------------------------------------------------------- Construction and Real Estate Loans $ 90,378 $ 19,990 $ - $ 110,368 Commercial Real Estate 1,527 11,704 84,141 97,372 Commercial 41,415 25,224 41,225 107,864 Installment 145 8,597 37,585 46,327 Leases 1,054 17,697 - 18,751 ----------------------------------------------------------
TOTAL $ 134,519 $ 83,212 $ 162,951 $ 380,682 ==========================================================
Loans with Fixed Interest Rates $ 1,541 $ 14,962 $ 40,910 $ 57,413 Loans with Floating Interest Rates 132,978 68,250 122,041 323,269 ----------------------------------------------------------
TOTAL $ 134,519 $ 83,212 $ 162,951 $ 380,682 ==========================================================
Outstanding loans by type were: December 31, In thousands 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Real Estate Construction $ 110,368 $ 100,298 $ 82,261 $ 91,673 $ 72,638 Commercial Real Estate 97,372 71,196 72,332 47,028 29,436 Commercial 107,864 103,702 89,505 81,878 94,592 Installment 46,327 47,333 51,857 47,732 43,220 Leases 18,751 14,591 13,605 13,156 12,437 ------------------------------------------------------------------------ Total 380,682 337,120 309,560 281,467 252,323 Less: Allowance for Credit Losses (7,670) (6,693) (5,977) (5,403) (5,042) ------------------------------------------------------------------------ Net Loans $ 373,012 $ 330,427 $ 303,583 $ 276,064 $ 247,281 ========================================================================
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated. 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, 2004 was 2.01%, as compared to 1.98% for the period ending December 31, 2003. The Corporation’s ratios for both periods are considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. As of December 31, 2004, the Corporation had $6,371,000 in allocated reserves and $1,299,000 in unallocated reserves. As of December 31, 2003, the Corporation had $6,270,000 in allocated reserves and $422,000 in unallocated reserves.
During 2004, loans increased by approximately 13% and management believes these loans contain a certain amount of unidentified imbedded loss. Management also believes that the amount of unallocated reserves is reasonable due to the growth of the Bank’s loan portfolio and the higher-risk credit products included in its Leasing Division, Small Business Administration lending program and Commercial Real Estate lending. The Bank also has a high concentration of credit in single family Construction Real Estate lending. In spite of these risk factors, the Bank’s classified loans, non-accrual and past-due loans have decreased over the past year. This is reflected in the low amount of charge-offs during 2004 and the fact that the Bank’s net charge-offs resulted in a modest credit for the year. In view of all these factors, management discontinued additional allowance provisions during the fourth quarter of 2004 and, unless loan growth accelerates or material losses occur, there will likely be no additional provisions made during 2005.
The Corporation had net recoveries of $2,000 during 2004 as compared to net charge-offs of $784,000 during the comparable period in 2003.
ALLOWANCE FOR CREDIT LOSSES
Allocation of allowance for credit losses is based upon estimates of probable 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.
------------------------------------------------------------------------------------------------ 2004 2003 2002 ------------------------------------------------------------------------------------------------ In thousands Allocation Loans as a Allocation Loans as a Allocation Loans as a of Allowance Percent of of Allowance Percent of of Allowance Percent of Type of Loan Balance Total Loans Balance Total Loans Balance Total Loans ------------------------------------------------------------------------------------------------
Commercial $ 3,695 28.33% $ 3,831 30.76% $ 2,813 28.91% Real Estate Construction 584 28.99 591 29.75 420 26.57 Commercial Real Estate 209 25.58 153 21.12 142 23.37 Installment 537 12.17 745 14.04 439 16.75 Leases 1,346 4.93 949 4.33 670 4.40 Unallocated 1,299 - 423 - 1,493 - ------------------------------------------------------------------------------------------------ TOTAL $ 7,670 100.00% $ 6,692 100.00% $ 5,977 100.00% ================================================================================================
--------------------------------------------------------------- 2001 2000 --------------------------------------------------------------- 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 ---------------------------------------------------------------
Commercial $ 3,722 29.09% $ 2,831 37.49% Real Estate Construction 412 32.57 1,098 28.78 Commercial Real Estate 81 16.71 75 11.67 Installment 389 16.96 376 17.13 Leases 612 4.67 434 4.93 Unallocated 187 - 3,059 - --------------------------------------------------------------- TOTAL $ 5,403 100.00% $ 5,042 100.00% ===============================================================
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. 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.
ALLOWANCE FOR CREDIT LOSSES (Cont.) In thousands For the Year Ended December 31, 2004 2003 2002 2001 2000 ------------------------------------------------------------------------ Total loans outstanding at end of period, before deducting allowance for credit losses $ 380,682 $ 337,120 $ 309,560 $ 281,467 $ 252,323 ========================================================================
Average total loans outstanding during period $ 360,876 $ 329,017 $ 279,890 $ 267,177 $ 231,991 ========================================================================
Analysis of the allowance for credit losses: Beginning Balance $ 6,693 $ 5,977 $ 5,403 $ 5,042 $ 4,466 ------------------------------------------------------------------------
Charge-offs: Commercial 202 780 545 1,009 502 Leases 54 281 270 382 125 Installment 14 50 23 75 34 ------------------------------------------------------------------------ Total Charge-Offs 270 1,111 838 1,466 661
Recoveries: Commercial 183 246 82 138 72 Leases 87 78 119 79 8 Installment 2 3 11 10 7 ------------------------------------------------------------------------ Total Recoveries 272 327 212 227 87
Net Charge-Offs (Recoveries) (2) 784 626 1,239 574 ------------------------------------------------------------------------
Provisions charged to expense 975 1,500 1,200 1,600 1,150 ------------------------------------------------------------------------
Ending Balance $ 7,670 $ 6,693 $ 5,977 $ 5,403 $ 5,042 ======================================================================== Ratio of net charge-offs (recoveries) to average total loans 0.00% 0.24% 0.22% 0.46% 0.25% ======================================================================== Ratio of allowance for credit losses to total loans at end of period 2.01% 1.98% 1.93% 1.92% 2.00% ========================================================================
The following table provides further information on past-due and nonaccrual loans.
2004 2003 2002 2001 2000 ------------------------------------------------------------------------ Loans past due 90 days or more, still accruing interest $ 3 $ 89 $ 328 $ 257 $ 26 Nonaccrual Loans 25 687 426 846 2,041 ------------------------------------------------------------------------ Total $ 28 $ 776 $ 754 $ 1,103 $ 2,067 ========================================================================
As of December 31, 2004 and 2003, the Corporation’s recorded investment in impaired loans was $25,000 and $687,000, respectively. As of December 31, 2004 and 2003, the Corporation had established a valuation allowance of $25,000 and $468,000, respectively, against impaired loans. The average recorded investment in impaired loans for 2004 and 2003 was $339,000 and $997,000, respectively.
As of December 31, 2004 and 2003, 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 $0 in 2004, $168,000 in 2003, and $82,000 in 2002.
Allowance for Credit Losses
The Allowance for Loan and Lease Loss Reserve Methodology requires that certain loans be reviewed under the directives of the Federal Financial Institutions Examination Council’s (FFIEC) policy statement dated July 6, 2001and SFAS 114, to determine whether or not the loan is impaired and necessitates a Specific Reserve. By Bank policy all loans and leases that are classified Substandard (Risk Rating 6) or Doubtful (Risk Rating 7) are reviewed to determine if they are impaired. An impaired loan defined by SFAS 114 is one in which, “based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement”. All amounts due according to the contractual terms means “that both the contractual interest payments and contractual principal payments will be collected as scheduled in the loan agreement”.
When a loan is determined to be impaired, the extent of impairment is based on the expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, SFAS 114 permits a creditor to measure impairment based on the fair value of the collateral. It is this latter form of measurement that the Bank has elected to use, as personal or real property assets collateralize a large percentage of the Bank’s loans.
In selecting this approach to determining the necessity of Specific Reserves, the Bank documents:
How the fair value of the collateral was determined, e.g. current appraisal (real property, equipment or inventory), method for valuation of collectable accounts or notes receivable, method for valuation of other assets.
Supporting rationale for adjustments to appraisals or loan-to-value discount applied to determine the collateral value.
The determination of the cost to sell or liquidate the collateral.
The qualifications, expertise and independence of the appraiser.
For purposes of the Bank’s Credit Policy regarding this section of the ALLL methodology, the following practices and definitions apply.
An appraisal will be considered “current” for the initial assessment of a loan under SFAS 114, if it is less than six months old. In subsequent annual assessments, the appraisal may not be older than twelve months. Where we are assessing accounts or notes receivable, we should order a receivables audit to assist in the initial assessment and refresh it every six months.
In developing the rationale to support appraisal adjustments or the loan-to-value discount on personal property, external comps and collateral audits should be used as much as possible.
All costs to sell or liquidate the collateral, except legal expenses, are to be included. An estimate may be used where definitive amounts are not available.
The calculation of the Specific Reserve follows:
Gross Collateral Value
Less: Cost to Sell
Less: Loan-To-Value Discount (1)
Equals: Net Collateral Value
Less: Current Principal Outstanding
If the calculation produces a collateral excess, it is not appropriate to assign a Specific Reserve. If the calculation results in a collateral shortfall, the Specific Reserve should equal the amount of the shortfall.
(1) The loan-to-value discount does not have to follow the Bank standard if the rationale for an adjustment warrants a greater or lesser amount.
Deposits
The Corporation competes with bank and non-bank institutions in terms of its structure of interest rates on deposit products offered.
As discussed in the Income Statement Analysis, most of the Bank’s deposit rates continued to fall, in concert with the general decline in rates during the first half of 2004. This trend began to reverse in the second half of the year although, for the entire year, rates did average less than during 2003. A comparison of the rates paid on the Bank’s deposit products at December 31, 2004, 2003 and 2002 is as follows:
DEPOSITS
The following table shows daily average balances for the various classifications of deposits for the periods indicated. In thousands For the Year Ended December 31, ----------------------------------------------------------------------------------------------------------------------- 2004 2003 2002 ----------------------------------------------------------------------------------------------------------------------- Average Average Average Interest-bearing Deposits: Balance Interest Rates Balance Interest Rates Balance Interest Rates ----------------------------------------------------------------------------------------------------------------------- Savings and NOW Accounts $ 55,926 $ 97 0.17% $ 52,716 $ 102 0.19% $ 45,258 $ 140 30.60% Money Market Accounts 157,904 1,610 1.02 155,228 1,672 0.01 150,978 2,364 0.02 Time Deposits 54,623 906 1.66 47,900 852 0.02 55,998 1,559 2.78 ----------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Deposits $ 268,453 $ 2,613 0.97% $ 255,844 $ 2,626 1.03% $ 252,234 $ 4,063 1.61% -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing Demand 124,695 - - 107,390 - - 93,495 - - ----------------------------------------------------------------------------------------------------------------------- Total Deposits $ 393,148 $ 2,613 0.66% $ 363,234 $ 2,626 0.72% $ 345,729 $ 4,063 1.18% =======================================================================================================================
The following table shows the ending balances for the various classifications of deposits for the periods indicated. In thousands For the Year Ending December 31, ---------------------------------------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------------------------------------- Noninterest-bearing Demand $ 131,252 $ 123,496 $ 99,175 Savings and NOW Accounts 63,220 52,727 50,066 Money Market Accounts 156,236 152,188 141,553 Time Deposits 42,231 41,754 50,159 ---------------- -------------- -------------- Total Deposits $ 392,939 $ 370,165 $ 340,953
Time Deposit Maturity Schedule: In Thousands 3 3-6 6-12 1-5 Months Months Months Years Total ------------------------------------------------------------------------ Time deposits <$100,000 $ 7,844 $ 7,087 $ 4,547 $ 2,995 $ 22,473 Time deposits >$100,000 6,333 5,694 3,470 4,261 19,758 ------------------------------------------------------------------------ Total Time Deposits $ 14,177 $ 12,781 $ 8,017 $ 7,256 $ 42,231
Other Borrowings
The Bank utilizes its ability to borrow from the Federal Home Loan Bank to support its fixed-rate commercial real estate loan program. Qualifying real estate loans are pledged with the FHLB to secure borrowings for the purpose of protecting an interest- rate spread on offsetting fixed-rate commercial real estate loans granted by the Bank with similar amounts and terms. The loans are amortized over a ten-year period and carry interest rates ranging from 2.89% to 6.8%. The cash flow receivable to the Bank, on the underlying loans granted by the Bank to its clients, is designed to meet the cash flow payments due from the Bank on its borrowings from the FHLB. Although the Bank has unused borrowing capacity under this line, management intends to only draw on this line as a funding source for fixed-rate commercial real estate loans the Bank grants to its clients. This borrowing is of a long-term installment nature and, as a result, will not fluctuate materially during the year.
BWC Mortgage Services has established lines of credit with Flagstar Bank, in the amount of $7,000,000 and with First Collateral Services in the amount of $30,000,000. Borrowings under these lines of credit is undertaken to fund pre-sold mortgages pending receipt of funds from the purchasing institution. The duration of the loans funded with these borrowings is approximately two weeks and they are considered to be of extremely low risk, therefore the subsidiary has not established a reserve against these loans.
OTHER BORROWED FUNDS: The following table shows daily average balances for the various classifications of borrowed funds for the periods indicated. 2004 2003 2002 ---------------------------------------------------------------------------------------------------------------------------------- In thousands Weighted Weighted Weighted Average Average Average Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Other Borrowed Funds: Balance Expense Paid(1) Balance Expense Paid(1) Balance Expense Paid(1) ---------------------------------------------------------------------------------------------------------------------------------- Federal Funds Purchased $ 399 $ 6 1.38% $ 37 $ 1 1.40% $ 112 $ 2 1.51% FHLB Borrowings 36,128 1,746 4.83% 25,940 1,278 4.93% 16,861 938 5.56% BWC Mortgage Services Borrowings 20,068 915 4.56% 6,749 347 5.14% - - - ---------------------------------------------------------------------------------------------------------------------------------- Total Other Borrowings $ 56,595 $ 2,667 4.71% $ 32,726 $ 1,626 4.97% $ 16,973 $ 940 5.54% ==================================================================================================================================
Maximum End of Maximum End of Maximum End of (In thousands) Month End Year Amt. Month End Year Amt. Month End Year Amt. ----------------------------- ----------------------------- ----------------------------- Federal Funds Purchased $ 800 $ - $ 500 $ - $ - $ - FHLB Borrowings $ 43,595 $ 43,313 $ 33,352 $ 33,352 $ 23,622 $ 23,622 BWC Mortgage Services Borrowings $ 34,213 $ 14,511 $ 22,041 $ 5,071 $ - $ -
Repricing within: 3 3-6 6-12 1-5 Over 5 In thousands Months Months Months Years Years Totals --------------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank Borrowings $ 285 $ 288 $ 5,435 $ 5,454 $ 31,851 $ 43,313 BWC Mortgage Services Borrowings $ 14,511 $ - $ - $ - $ - $ 14,511
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
The following table presents, as of December 31, 2004, the Corporation's significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Payments Due In --------------------------------------------------------- One to Three to Over Note One Year Three Five Five In thousands Reference or Less Years Years Years Total -------------------------------------------------------------------------------------------------------------------------------- Deposits without a stated maturity - $ 350,708 $ - $ - $ - $ 350,708 Time Deposits - 34,975 7,256 - - 42,231 Operating Leases 11 1,108 1,816 1,531 4,199 8,654 Federal Home Loan Bank Borrowings 10 6,008 2,165 3,289 31,851 43,313 BWC Mortgage Services Borrowings 10 14,511 - - - 14,511
A schedule of significant commitments at December 31, 2004 follows: In thousands ---------------------------------------------------------------------- Commitments to extend credit: Unused real estate construction commitments $ 54,771 Unused commercial loan commitments 77,251 Revolving home equity and credit card lines 67,681 Standby letters of credit 1,136 -------------- Total $ 200,839
Further discussion of these commitments is included in Note 11 to the consolidated financial statements. In addition, the Corporation has commitments and obligations under its Defined Contribution Plan as described in Note 12 to the consolidated financial statements.
Noninterest Income
2004 vs. 2003
Total noninterest income in 2004 was $2,050,000 less than earned in 2003. The noninterest income of the Corporation includes BWC Mortgage Services commissions and their other operating income. The noninterest income associated with BWC Mortgage Services decreased $1,631,000 from the prior year and their other income decreased $358,000. With rising interest rates in 2004, the refinancing market dried up, which was a primary source of noninterest income from BWC Mortgage Services. This decrease was offset in large part by a decrease in their noninterest expense and an increase in income from their mortgage banking operations in the form of interest income.
For Bank of Walnut Creek, income from service charges decreased $92,000 between the respective periods, in part due to the free checking programs sponsored by the Bank caused by competitive pressure. Other noninterest income from various sources was about the same as the prior year. The Bank had gains on security transactions of $21,000 in 2004 as compared to losses of $12,000 the prior year.
2003 vs. 2002
Total noninterest income in 2003 was $5,685,000 greater than earned in 2002. The noninterest income of the Corporation includes BWC Mortgage Services commissions and their other operating income. The noninterest income associated with BWC Mortgage Services accounted for $5,490,000 or most of the increase. With continued low interest rates prevailing throughout 2003, mortgage financing and refinancing activities were at a high level.
For Bank of Walnut Creek, income from service charges increased $73,000 between the respective periods. Other noninterest income from various sources was up $218,000 from the prior year. The Bank had a loss on security transactions of $12,000 in 2003 as compared to a gain of $84,000 the prior year.
Noninterest Expense
2004 vs. 2003
Total noninterest expense in 2004 decreased $685,000 from 2003. The noninterest expense of the Corporation includes BWC Mortgage Services sales commissions and their other operating expenses. The decrease in refinancing activities associated with BWC Mortgage Services accounted for a decrease in noninterest expense of approximately $2,000,000 in 2004 as compared to 2003.
Salaries and related benefits reflect an increase of $775,000 over that of 2003. Of this, approximately $606,000 originated from BWC Mortgage Services, and the remainder was from the Bank and related to salary and merit increases on existing staff plus material increases in medical insurance premiums. Full time equivalents (FTE) in the Bank averaged approximately 120 during 2004 and 124 during 2003.
Total occupancy expense increased $305,000 between the respective periods. Of this increase, BWC Mortgage Services accounted for $169,000 and the balance from the Bank of Walnut Creek. This reflects expansion of operations, improvements to the Bank’s headquarters and increases in operating leases and costs of other office space based on terms contained in lease contracts.
Furniture and equipment expense increased $100,000 during the respective periods. BWC Mortgage Services accounted for approximately $71,000 of this increase and the balance from the Bank of Walnut Creek. In both cases, the increases primarily represented investments in technology.
Other operating expenses decreased $124,000 from the comparable expenses in 2003. Other operating expenses of BWC Mortgage Services increased approximately $110,000, offset by decreases from the Bank of approximately $234,000. The largest segment of decrease in the Bank was in legal and professional fees which were down approximately $156,000 from the prior year and other fees which were down approximately $146,000. A reclassification to reserve for undisbursed loan commitments was made in the amount of $100,000, which was charged to noninterest expense in 2004. This reserve in the Bank’s other liabilities is to provide for probable losses in the Bank’s off-balance sheet commitments.
2003 vs. 2002
Total noninterest expense in 2003 increased $6,383,000 over that of 2002. The noninterest expense of the Corporation includes BWC Mortgage Services sales commissions and their other operating expenses. The growth and activities associated with BWC Mortgage Services accounted for an increase in noninterest expense of $5,346,000 in 2003 as compared to 2002.
Salaries and related benefits reflect an increase of $1,771,000 over that of 2002. Of this, approximately $931,000 originated from BWC Mortgage Services, and the remainder was from the Bank and related to salary and merit increases on existing staff plus material increases in medical insurance premiums. Full time equivalents (FTE) in the Bank averaged approximately 124 during 2003 and 120 during 2002.
Total occupancy expense increased $360,000 between the respective periods. Of this increase, BWC Mortgage Services accounted for $136,000 and the balance from the Bank of Walnut Creek. This reflects expansion of operations and increases in operating leases and costs of other office space based on terms contained in lease contracts.
Furniture and equipment expense remained about the same as the prior year.
Other operating expenses increased $886,000 over the comparable expenses in 2002 of which all but $23,000 was related to BWC Mortgage Services. Most categories of operating expenses experienced increases, reflecting the growth and expansion of the Corporation and its activities. The largest segment of increase in the Bank was in legal and professional fees which were up approximately $273,000 from the prior year. Reduction in other categories of other operating expenses reduced the effect of this increase. The Bank pursued litigation on a number of problem credits throughout the year. This area of expense is expected to decrease in the coming year.
Capital Adequacy
The Federal Deposit Insurance Corporation (FDIC) has established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two Tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the Bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital consists of the eligible allowance for credit losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 8% at December 31, for both 2004 and 2003.
The FDIC also has 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.
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 2004 and 2003.
See Note 16 of the Consolidated Financial Statements.
Liquidity
The objective of liquidity management is to ensure the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met, taking into account all on- and off-balance-sheet funding demands.
Liquidity management also includes ensuring cash flow needs are met at a reasonable cost. Liquidity risk arises from the possibility the Corporation may not be able to satisfy current or future financial commitments, or the Corporation may become unduly reliant on alternative funding sources. The Corporation maintains a liquidity risk management policy to address and manage this risk. The policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements which comply with regulatory guidance. The policy also includes a contingency funding plan to address liquidity needs in the event of an institution-specific or a systemic financial market crisis. The liquidity position is continually monitored and reported on monthly to the Management Committee and Board of Directors.
Funds are available from a number of sources, including the securities portfolio, the core deposit base, the capital markets, the Federal Home Loan Bank, the Federal Reserve Bank, and through the sale and securitization of various types of assets. Funding sources did not change significantly during 2004. Core deposits, the most significant source of funding, comprised approximately 74% and 77% of funding in 2004 and 2003, respectively.
Cash, investment securities, and other temporary investments represent 20% of total assets as of December 31, 2004 and 23% the prior year.
Cash flows from operations contribute significantly to liquidity as well as proceeds from maturities of securities and increasing customer deposits. As indicated on the Corporation’s Consolidated Statement of Cash Flows, net cash from operating activities for the year ended December 31, 2004 decreased liquidity by $2,675,000 compared to an increase of $4,059,000 in 2003. The primary area of operations using liquidity was from the increase in BWC Mortgage Services loans held-for-sale which increased $9,587,000 between the respective periods.
The majority of the Corporation’s funding comes from customer deposits within its operating region. Customer deposits provided $22,774,000 for the year ended December 31, 2004 compared to $29,212,000 for 2003. Borrowing activities also provide a source of funding and, in the period ending December 31, 2004, borrowed funds contributed $19,402,000 as compared to $14,801,000 for 2003. Other important sources of liquidity are investments in federal funds, other short-term investments and the Corporation’s securities portfolio. The Corporation maintains a ladder of securities that provides prepayments and payments at maturity and a portfolio of available-for-sale securities that could be converted to cash quickly. Proceeds from maturity and sale of securities provided $54,967,000 for the year ended December 31, 2004 compared to $33,147,000 for 2003.
The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. The Corporation has available from correspondent banks Federal Fund lines of credit totaling $20,000,000. In addition, the Corporation has approximately $13,000,000 secured borrowing capacity with the Federal Home Loan Bank and a $1,000,000 secured borrowing line with the Federal Reserve Bank. The Corporation also has a source of liquidity in its ability to sell SBA and Commercial Real Estate loans to other investors.
At the holding company level, the Corporation uses cash to repurchase common stock and pay for professional services and miscellaneous expenses. The main sources of funding for the Corporation include dividends and returns on investment from its subsidiaries.
The primary source of funding for the Corporation has been the declaration of dividends from its subsidiaries. The subsidiaries of the Corporation declared dividends to the holding company in 2004, 2003, and 2002 of $4,000,000, $2,260,000, and $1,000,000, respectively. The subsidiaries also provided liquidity to the Corporation in the form of returns of capital during 2004, 2003, and 2002 of $4,885,000, $4,678,000, and $5,514,000, respectively. Another source of funding for the Corporation has been receipts from stock options exercised.
During 2004, 2003, and 2002, stock options exercised generated cash to the Corporation of $197,000, $89,000, and $928,000, respectively. As of January 1, 2005, the amount of dividends the bank subsidiary can pay to the parent company without prior regulatory approval was $13,410,000, versus $13,319,000 at January 1, 2004. As discussed in Note 14 to the consolidated financial statements, the subsidiary bank is subject to regulation and, among other things, may be limited in their ability to pay dividends or transfer funds to the holding company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows in Note 15 may not represent cash immediately available to the holding company.
Application of Critical Accounting Policies
The Corporation’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses that require the most subjective and complex judgments, and as such could be most subject to revision as new information becomes available.
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in Note 4.
Lease financing receivables may include a residual value component and may contain some risk associated with the valuation of leased asset residuals. Most of the Corporation’s lease receivables carry a nominal residual of $1; however, on some, a 10% residual of the original purchase price is applied, which management estimates to represent a conservative amount. At the end of the lease term, the lessee may have the option to buy the equipment at the residual price, or return it. The resale value of equipment returned may exceed or be less than the amount of residual taken. The Corporation's lease portfolio contains no automobile financings. As of December 31, 2004 the Corporation’s lease financing residual value was $338,000 against lease receivables of $21,587,000.
Any material effect on the financial statements related to these critical accounting areas is also discussed in this financial review.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain information concerning market risk is contained in the notes to the financial statements which are included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BWC FINANCIAL CORP. AND SUBSIDIARIES Page Number
Consolidated Balance Sheets as of December 31, 2004 and 2003 34
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 35
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 36
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 37
Notes to Consolidated Financial Statements 38-56
Report of Independent Registered Public Accounting Firm for the years ended December 31, 2004, 2003 and 2002 57
BWC FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS In thousands December 31, December 31, Assets 2004 2003 -----------------------------
Cash and Due From Banks $ 10,315 $ 17,959 Federal Funds Sold 8,500 3,470 Other Short-term Investments 173 71 ----------------------------- Total Cash and Cash Equivalents 18,988 21,500
Investment Securities: Available-for-Sale 62,220 67,684 Held-to-Maturity (approximate fair value of $17,947 in 2004 and $19,245 in 2003) 17,846 18,971 Loans, Net of Allowance for Credit Losses of $7,670 in 2004 and $6,693 in 2003 373,012 330,427 BWC Mortgage Services Loans Held-for-Sale 14,966 5,142 Premises and Equipment, Net 4,051 3,892 Interest Receivable and Other Assets 10,275 9,540 ----------------------------- Total Assets $ 501,358 $ 457,156 =============================
Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest-bearing $ 131,252 $ 123,496 ----------------------------- Interest-bearing: Money Market Accounts 156,236 152,188 Savings and NOW Accounts 63,220 52,727 Time Deposits: Under $100,000 22,473 23,225 $100,000 or more 19,758 18,529 ----------------------------- Total Interest-bearing 261,687 246,669
Total Deposits 392,939 370,165
Federal Home Loan Bank Borrowings 43,313 33,352 BWC Mortgage Services Borrowings 14,511 5,071 Interest Payable and Other Liabilities 3,314 3,745 -----------------------------
Total Liabilities 454,077 412,333 ----------------------------- 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 - 4,228,459 shares in 2004 and 4,300,045 in 2003 47,054 39,019 Retained Earnings 436 5,305 Accumulated other comprehensive (loss) income (209) 499 ----------------------------- Total Shareholders' Equity 47,281 44,823 ----------------------------- Total Liabilities and Shareholders' Equity $ 501,358 $ 457,156 =============================
The accompanying notes are an integral part of these consolidated statements. Shares outstanding for 2003 have been adjusted to reflect the 10% stock dividend granted in December 2004.
BWC FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME In thousands except per-share amounts For the Year Ended December 31, Interest Income 2004 2003 2002 --------------------------------------------------- Loans, including Fees $ 26,837 $ 23,517 $ 21,452 Investment Securities: Taxable 1,999 2,189 3,292 Non-taxable 550 463 449 Federal Funds Sold 153 142 219 Other Short-term Investments 2 1 4 --------------------------------------------------- Total Interest Income 29,541 26,312 25,416
Interest Expense Deposits 2,613 2,626 4,063 Federal Funds Purchased 6 1 2 FHLB Borrowings 1,746 1,278 938 BWC Mortgage Services Borrowings 915 347 -- --------------------------------------------------- Total Interest Expense 5,280 4,252 5,003
Net Interest Income 24,261 22,060 20,413 Provision for Credit Losses 975 1,500 1,200 --------------------------------------------------- Net Interest Income After Provision For Credit Losses 23,286 20,560 19,213
Noninterest Income BWC Mortgage Services - Commissions 8,957 10,588 7,844 BWC Mortgage Services - Fees & Other 3,816 4,174 1,428 Service Charges on Deposit Accounts 923 1,015 942 Other 1,610 1,612 1,394 Gain/(loss) on Security Transactions 21 (12) 84 --------------------------------------------------- Total Noninterest Income 15,327 17,377 11,692
Noninterest Expense Salaries and Related Benefits 11,950 11,195 9,424 BWC Mortgage Services - Commissions 7,536 8,728 5,479 BWC Mortgage Services - Fees & Other 290 819 700 Occupancy 2,317 2,012 1,652 Furniture and Equipment 869 769 771 Other 5,481 5,605 4,719 --------------------------------------------------- Total Noninterest Expense 28,443 29,128 22,745 --------------------------------------------------- BWC Mortgage Services - Minority Interest 1,013 1,172 970
Income Before Income Taxes 9,157 7,637 7,190 Provision for Income Taxes 3,444 2,838 2,602 --------------------------------------------------- Net Income $ 5,713 $ 4,799 $ 4,588 =================================================== Basic Earnings Per Share Diluted Earnings Per Share $ 1.33 $ 1.11 $ 1.10 $ 1.32 $ 1.11 $ 1.05 ===================================================
Weighted Average Basic Shares 4,280,595 4,315,772 4,182,243 Weighted Average Diluted Share Equivalents Related to Options 35,661 20,800 190,484 Weighted Average Diluted Shares 4,316,256 4,336,572 4,372,727 ===================================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the periods ending December 31, 2002, 2003, and 2004 In thousands except share amounts Accumulated Other Number Common Retained Comprehensive Comprehensive of Shares Stock Earnings Income/(Loss) Total Income ------------------------------------------------------------------------- Balance, January 1, 2002 3,092,474 $ 27,160 $ 10,391 $ 701 $ 38,252
Net Income as of December 31, 2002 -- -- 4,588 -- 4,588 4,588 Other Comprehensive Income, net of tax liability of $519 -- -- -- 153 153 153 -------------- Comprehensive Income -- -- -- -- -- $ 4,741 Stock options exercised 335,721 928 -- -- 928 Repurchase and retirement of shares by the Corporation (117,723) (2,396) -- -- (2,396) 10% stock dividend including payment of fractional shares 309,038 6,404 (6,409) -- (5) Tax benefit from the exercise of stock options -- 479 -- -- 479 ----------------------------------------------------------- Balance, December 31, 2002 3,619,510 $ 32,575 $ 8,570 $ 854 $ 41,999
Net Income as of December 31, 2003 -- -- 4,799 -- 4,799 4,799 Other Comprehensive Income, net of tax liability of $301 -- -- -- (355) (355) (355) -------------- Comprehensive Income -- -- -- -- -- $ 4,444 Stock options exercised 6,140 89 -- -- 89 Repurchase and retirement of shares by the Corporation (71,700) (1,292) -- -- (1,292) Cash Dividend Paid -- -- (426) -- (426) 10% stock dividend including payment of fractional shares 355,182 7,633 (7,638) -- (5) Tax benefit from the exercise of stock options -- 14 -- -- 14 ----------------------------------------------------------- Balance, December 31, 2003 3,909,132 $ 39,019 $ 5,305 $ 499 $ 44,823
Net Income as of December 31, 2004 -- -- 5,713 -- 5,713 5,713 Other Comprehensive Income, net of tax benefit of $133 -- -- -- (708) (708) (708) -------------- Comprehensive Income -- -- -- -- -- $ 5,005 Stock options exercised 15,008 197 -- -- 197 Repurchase and retirement of shares by the Corporation (79,842) (1,749) -- -- (1,749) Cash Dividend Paid -- -- (1,011) -- (1,011) 10% stock dividend including payment of fractional shares 384,161 9,567 (9,571) -- (4) Tax benefit from the exercise of stock options -- 20 -- -- 20 -----------------------------------------------------------
Balance, December 31, 2004 4,228,459 $ 47,054 $ 436 $(209) $ 47,281 ===========================================================
The accompanying notes are an integral part of these consolidated statements.
BWC FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands For the Year Ended December 31, Operating Activities: 2004 2003 2002 ----------------------------------------------- Net Income $ 5,713 $ 4,799 $ 4,588 Adjustments to reconcile net income to net cash provided: Provision for credit losses 975 1,500 1,200 Depreciation on fixed assets 735 613 658 Amortization and accretion on securities 913 1,044 1,121 (Gain)/loss on sale of securities available-for-sale (21) 12 (84) Increase in BWC Mtg. loans held-for-sale (9,824) (5,142) - Decrease/(increase) in interest receivable and other assets (735) (952) (617) Increase/(decrease) in interest payable and other liabilities (431) 853 (489) ----------------------------------------------- Net Cash From Operating Activities (2,675) 2,727 6,377 -----------------------------------------------
Investing Activities: Proceeds from the maturities of investment securities 26,544 32,659 34,893 Proceeds from the sales of available-for-sale investment securities 28,424 488 32,037 Purchase of investment securities (49,960) (48,886) (51,383) Loans originated, net of collections (43,559) (29,373) (29,362) Purchase of bank premises and equipment (894) (1,523) (260) ----------------------------------------------- Net Cash From Investing Activities (39,445) (46,635) (14,075) -----------------------------------------------
Financing Activities: Net increase in deposits 22,774 29,212 484 Increase in Federal Home Loan Bank Borrowings 9,961 9,730 10,667 Increase in BWC Mortgage Services borrowings 9,440 5,071 - Cash paid for the repurchase of common stock (1,749) (1,292) (2,396) Cash Dividend Paid (1,011) (426) - Proceeds from the exercise of stock options 197 89 928 Cash paid in lieu of fractional shares (4) (5) (5) -----------------------------------------------
Net Cash From by Financing Activities 39,608 42,379 9,678 -----------------------------------------------
Cash and Cash Equivalents: Increase (decrease) in cash and cash equivalents (2,512) (1,529) 1,980 Cash and cash equivalents at beginning of year 21,500 23,029 21,049 ----------------------------------------------- Cash and Cash Equivalents at end of year $ 18,988 $ 21,500 $ 23,029 ===============================================
Additional Cash Flow Information: Interest Paid $ 5,212 $ 4,403 $ 5,667 =============================================== Income Taxes Paid $ 3,812 $ 2,716 $ 2,055 ===============================================
The accompanying notes are an integral part of these consolidated statements.
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
The Corporation operates in Northern California with four branches in Contra Costa County, two in Alameda County and one in Santa Clara County, in the city of San Jose. The Corporation’s primary source of revenue is providing loans to small and middle-market businesses, home construction lending, and home equity lines.
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 wholly owned 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. Since BWC Real Estate owns 51% of this joint venture, BWC Mortgage Services financials are consolidated into the Corporation’s financials with income reduced by the minority interest. The real estate brokerage firm’s interest in the joint venture is shown as minority interest in the consolidated financial statements.
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.
Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. If negative evidence outweighs positive evidence that the carrying amount is recoverable within a reasonable period of time, the impairment is deemed to be other-than-temporary and the security is written down in the period in which such determination is made.
Amortization and accretion are included in interest income, while gains and losses on disposition are included in noninterest 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
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, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
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 keeps both the guaranteed portion and the un-guaranteed portion in its own portfolio; however, it retains the option to sell the guaranteed portion to a third party. 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.
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.
Allowance for Credit Losses
Allowance for Credit Losses is maintained at a level considered adequate to provide for probable losses that can be reasonably estimated. 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 Corporation performs a quarterly analysis of the adequacy of its allowance for credit losses. The Corporation’s management believes that the amount of allowance is reasonable, based on its evaluation of the Bank’s loan portfolio, the composition of credit products that have been introduced and overall credit quality. In the past few years, the Bank has opened a Leasing Division, a Small Business Administration lending program and a Commercial Real Estate lending program. The Bank has a high concentration of credit in single family Construction Real Estate lending. The uncertainties associated with the new products, coupled with the Bank’s traditionally strong construction concentration are considered in determining the allowance.
Premises and Equipment
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. Deferred income taxes are recorded for all significant income and expense items recognized in different periods for financial reporting and income tax purposes under the liability method.
Earnings Per Share (EPS)
Basic EPS is calculated by dividing net income by the weighted average shares outstanding. No dilution for any potentially dilutive securities is included. Diluted EPS is calculated by dividing net income by the weighted average shares outstanding during the period including the dilutive effect of stock options under the treasury stock method. Weighted average shares and per-share amounts presented for all periods reflect the 10% stock dividend paid in December 2004, December 2003 and July 2002.
Letters of Credit and Commitments to Extend Credit
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, Alameda and Santa Clara, 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, Fed Funds sold and other short-term investments, with original maturities of three months or less.
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. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held-for-sale, management obtains independent appraisals for significant properties.
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. The pro forma disclosures illustrating the impact on net income of applying the fair-value method are reflected in the following table.
Accounting for Stock-based Compensation
Had the Corporation used the fair value method prescribed by SFAS 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Net Income: 2004 2003 2002 -----------------------------------------------
As reported $ 5,713,000 $ 4,799,000 $ 4,588,000 Compensation expense 150,000 161,000 177,000 -----------------------------------------------
Pro forma $ 5,563,000 $ 4,638,000 $ 4,411,000
Basic Earnings per share: As reported $ 1.33 $ 1.11 $ 1.10 Pro forma $ 1.29 $ 1.07 $ 1.01
Diluted Earnings per share: As reported $ 1.32 $ 1.11 $ 1.05 Pro forma $ 1.29 $ 1.07 $ 1.01
Weighted Average Basic Shares 4,280,595 4,315,772 4,182,243 Weighted Average Diluted Shares 4,316,256 4,336,570 4,372,727
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
New Accounting Pronouncement Disclosures:
“The meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”- In March 2004, the Financial Accounting Standards Board (“FASB”) ratified the consensuses reached by the Emerging Issues Task Force (“EITF”) regarding Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. Issue 03-1 provides guidance on recognition and measurement of other-than-temporary impairment and its application to certain investments, including all debt securities and equity securities that are subject to the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.
On September 30, 2004, FASB issued a proposed Board-directed Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The proposed FSP will provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board has delayed the effective date to provide further implementation guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10-20 of Issue 03-1 will be superseded concurrent with the final issuance of FSB EITF Issue 03-1-a.
“Application of Accounting Principles to Loan Commitments” (SAB105) - On March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 “Application of Accounting Principles to Loan Commitments” (SAB 105), which specifies that servicing assets embedded in commitments for loans to be held for sale should be recognized only when the servicing asset has been contractually separated from the associated loans by sale or securitization. SAB 105 is effective for commitments entered into after March 31, 2004. SAB 105 has had no effect on the Corporation’s results of operations or financial condition.
“Statement of Financial Accounting Standards No. 123 (revised 2004)” - In December 2004 the FASB revised SFAS No. 123, Accounting for Stock-based Compensation. This statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
This Statement is effective for public entities that do not file as small business users as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Management estimates that the effect of adopting this Statement will result in approximately $106,000 in additional compensation expense during 2005.
Loans Held for Sale - Loans originated and intended for sale in the secondary market, as reflected on the books of BWC Mortgage Services, are carried at the same value for cost or market because cost approximates market due to their short-term nature.
Transfers of financial assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Marketing costs - The Company expenses marketing costs as they are incurred. Marketing expense was $247,000, $345,000 and $359,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 2: INVESTMENT SECURITIES
An analysis of the investment security portfolio at December 31 follows:
In thousands 2004 Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Losses Value ---------------------------------------------------------------------- U.S. Treasury Securities $ 268 $ - $ 2 $ 266 Securities of U.S. Government Agencies 31,808 12 191 31,629 Taxable Securities of State and Political Subdivisions 16,085 32 185 15,932 Corporate Debt Securities 14,401 66 74 14,393 ---------------------------------------------------------------------- Total 62,562 110 452 62,220 Held-to-maturity Obligations of State and Political Subdivisions 17,846 157 56 17,947 ---------------------------------------------------------------------- Total Investment Securities $ 80,408 $ 267 $ 508 $ 80,167 ======================================================================
Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Losses Value ---------------------------------------------------------------------- U.S. Treasury Securities $ 274 $ 1 $ - $ 275 Securities of U.S. Government Agencies 32,132 246 46 32,332 Taxable Securities of State and Political Subdivisions 16,477 244 74 16,647 Corporate Debt Securities 18,001 431 2 18,430 ---------------------------------------------------------------------- Total 66,884 922 122 67,684 Held-to-maturity Obligations of State and Political Subdivisions 18,971 315 41 19,245 ---------------------------------------------------------------------- Total Investment Securities $ 85,855 $ 1,237 $ 163 $ 86,929 ======================================================================
Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-sale Cost Gains Losses Value ---------------------------------------------------------------------- Securities of U.S. Government Agencies $ 26,664 $ 475 $ 4 $ 27,135 Taxable Securities of State and Political Subdivisions 15,158 546 - 15,704 Corporate Debt Securities 17,095 356 - 17,451 ---------------------------------------------------------------------- Total 58,917 1,377 4 60,290 Held-to-maturity Obligations of State and Political Subdivisions 10,815 455 - 11,270 ---------------------------------------------------------------------- Total Investment Securities $ 69,732 $ 1,832 $ 4 $ 71,560 ======================================================================
In 2004, 2003, and 2002, the Corporation received proceeds from sale of available-for-sale investment securities of $28,424,000, $488,000 and $32,037,000, respectively. Gains and losses included in other noninterest income for 2004 were $149,000 in gains and $128,000 in losses. For 2003 gains were $0 and losses were $12,000. For 2002 gains were $120,000 and losses were $36,000.
NOTE 2: INVESTMENT SECURITIES (Cont.)
The maturities of the investment security portfolio at December 31, 2004 follow: In thousands After one year Over five years Available-for-sale Within one year through five years through 10 years Total ------------------------------------------------------------------------------------------------------------------------------ Estimated Estimated Estimated Estimated Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair Value ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ - $ - $ 268 $ 266 $ - $ - $ 268 $ 266 Securities of U.S. Government Agencies 6,031 6,017 25,777 25,612 - - 31,808 31,629 Taxable Securities of State and - - Political Subdivisions 3,429 3,437 12,656 12,495 - - 16,085 15,932 Corporate Debt Securities 9,092 9,137 5,309 5,256 - - 14,401 14,393 ------------------------------------------------------------------------------------------------------------------------------ Total $ 18,552 $ 18,591 $ 44,010 $ 43,629 $ - $ - $ 62,562 $ 62,220 Effective Weighted-Average Yield 3.45% 3.21% 0.00% 3.28%
After one year Over five years Held-to-maturity Within one year through five years through 10 years Total ------------------------------------------------------------------------------------------------------------------------------ Estimated Estimated Estimated Estimated Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair Value ------------------------------------------------------------------------------------------------------------------------------
Obligations of State and Political Subdivisions $ 5,904 $ 5,923 $ 11,048 $ 11,096 $ 894 $ 928 $ 17,846 $ 17,947 Effective Weighted-Average Yield 3.52% 3.77% 5.13% 3.81%
------------------------------------------------------------------------------------------------------------------------------ Total Investment Securities $ 24,456 $ 24,514 $ 55,058 $ 54,725 $ 894 $ 928 $ 80,408 $ 80,167 Effective Weighted-Average Yield 3.47% 3.32% 5.13% 3.40% ==============================================================================================================================
At December 31, 2004, 2003 and 2002, securities with a book value of $17,001,000, $17,110,000, and $14,321,000, respectively, were pledged to secure public deposits. Market value of these same securities on those dates were $16,875,000 and $17,110,000 and $14,744,000, respectively.
SECURITY UNREALIZED LOSS POSITIONS
The following summarizes temporarily impaired investment securities at December 31, 2004 In thousands Less than 12 months 12 months or more Total ------------------------------------------------------------------------------- Unrealized Unrealized Unrealized Description of Securities Fair Value Loss Fair Value Loss Fair Value Loss ------------------------------------------------------------------------------- US Treasury Securities and Securities of U.S. Government Agencies $ 4,488 $ 18 $ 20,711 $ 175 $ 25,199 $ 193 Obligations of State and Political Subdivisions 3,020 16 5,151 40 8,171 56 Taxable Obligations of State and Political Subdivisions 2,036 3 11,525 182 13,561 185 Corporate debt securities - - 4,209 74 4,209 74 Total temporarily impaired securities $ 9,544 $ 37 $ 41,596 $ 471 $ 51,140 $ 508 -------------------------------------------------------------------------------
Certain investment securities shown above currently have fair values less than amortized cost and therefore contain unrealized losses. The Corporation has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. At December 31, 2004, there are approximately 63 investment securities with unrealized losses. The Corporation anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.
Management periodically evaluates each available-for-sale or held-to-maturity investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Corporation has the ability and intent to hold all investment securities with identified impairments resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security.
NOTE 3: LOANS
The majority of the Bank’s loans are to customers in Contra Costa, Alameda, and Santa Clara 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, In thousands 2004 2003 ---------------------------------------------------------------------------------------------------------------- Real Estate Construction $ 110,368 $ 100,298 Commercial Real Estate 97,372 71,196 Commercial 107,864 103,702 Installment 46,327 47,333 Leases 18,751 14,591 ------------------------------------------ Total 380,682 337,120 Less: Allowance for Credit Losses (7,670) (6,693) ------------------------------------------ Net Loans $ 373,012 $ 330,427 ==========================================
Netted from the above loan totals were deferred loan fees of $1,725,000 in 2004 and $1,602,000 in 2003.
The following table provides further information on past-due and nonaccrual loans.
2004 2003 ------------------------------------------ Loans past due 90 days or more, still accruing interest $ 3 $ 89 Nonaccrual Loans 25 687 ------------------------------------------ Total $ 28 $ 776 ==========================================
As of December 31, 2004 and 2003, the Corporation’s recorded investment in impaired loans was $25,000 and $687,000, respectively. As of December 31, 2004 and 2003, the Corporation had established a valuation allowance of $25,000 and $468,000, respectively, against impaired loans. The average recorded investment in impaired loans for 2004 and 2003 was $339,000 and $997,000, respectively.
As of December 31, 2004 and 2003, 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 $0 in 2004, $168,000 in 2003, and $82,000 in 2002.
NOTE 4: ALLOWANCE FOR CREDIT LOSSES In thousands For the Year Ended December 31, 2004 2003 2002 ------------------------------------------- Total loans outstanding at end of period, before deducting allowance for credit losses $ 380,682 $ 337,120 $ 309,560 ===========================================
Average total loans outstanding during period $ 360,876 $ 329,017 $ 279,890 ===========================================
Analysis of the allowance for credit losses: Beginning Balance $ 6,693 $ 5,977 $ 5,403 -------------------------------------------
Charge-offs: Commercial 202 780 545 Leases 54 281 270 Installment 14 50 23 ------------------------------------------- Total Charge-Offs 270 1,111 838
Recoveries: Commercial 183 246 82 Leases 87 78 119 Installment 2 3 11 ------------------------------------------- Total Recoveries 272 327 212
Net Charge-Offs (Recoveries) (2) 784 626 -------------------------------------------
Provisions charged to expense 975 1,500 1,200 -------------------------------------------
Ending Balance $ 7,670 $ 6,693 $ 5,977 =========================================== Ratio of net charge-offs (recoveries) to average total loans 0.00% 0.24% 0.22% =========================================== Ratio of allowance for credit losses to total loans at end of period 2.01% 1.98% 1.93% ===========================================
NOTE 5: Premises and Equipment A summary of premises and equipment follows: In thousands December 31, 2004 2003 ----------------------------- Land and Leasehold Improvements $ 2,793 $ 2,539 Furniture and Equipment 5,787 5,201 Bank-owned Premises 1,326 1,326 ----------------------------- 9,906 9,066 Accumulated Depreciation and Amortization (5,855) (5,174) ----------------------------- Premises and Equipment, Net $ 4,051 $ 3,892 =============================
The amount of depreciation and amortization included in occupancy and furniture and equipment expense was $735,000 in 2004, $613,000 in 2003, and $658,000 in 2002.
NOTE 6: COMPREHENSIVE INCOME
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, 2004, 2003 and 2002 are as follows: In thousands 2004 2003 2002 ------------------------------------------------------------------------------------------------------------------- Unrealized gain(loss) arising during the period, net of tax $ (695) $ (362) $ (205) ------------------------------------------------------------------------------------------------------------------- Reclassification adjustment for net realized gains of securities available-for-sale included in net income during the year, net of tax 13 (7) 52
Net unrealized gain(loss) included in other comprehensive income $ (708) $ (355) $ 153 -------------------------------------------------------------------------------------------------------------------
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, 2004 and 2003. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than if a forced or liquidation sale.
In thousands 2004 Carrying Estimated Fair Amount Value
Cash and cash equivalents $ 18,988 $ 18,988 Investment securities 80,066 80,167 Loans (net) 373,012 384,509 BWC Mortgage Services Loans Held-for-Sale 14,966 14,966 Deposit liabilities 392,939 392,658 Federal Home Loan Bank borrowings 43,313 44,925 BWC Mortgage Services borrowings 14,511 14,511
In thousands 2003 Carrying Estimated Fair Amount Value
Cash and cash equivalents $ 21,500 $ 21,500 Investment securities 86,655 86,929 Loans (net) 330,427 337,462 BWC Mortgage Services Loans Held-for-Sale 5,142 5,142 Deposit liabilities 370,165 370,287 Federal Home Loan Bank borrowings 33,352 35,299 BWC Mortgage Services borrowings 5,071 5,071
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 consolidated balance sheet, 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 and other liabilities. It also applies to the borrowings by BWC Mortgage Services, which have an average duration of less than 30 days.
Loans, net of lease financing receivable, are valued on the basis of estimated future receipts of principal and interest, discounted at current 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. Fair value is also net of the allowance for credit losses which is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain loans in the portfolio.
BWC Mortgage Services Loans Held-for-Sale are generally on the books for less than a month and carry virtually no credit risk to the Corporation. Due to their short-term holding period, the carrying amount and estimated fair values are identical. This same situation applies to their borrowings under lines of credit which are used to fund these short-term advances.
Investment securities are valued at quoted market prices, if available. For securities not quoted, 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.
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, 2004 and 2003 was immaterial.
The fair value of Federal Home Loan Bank borrowings is based on the scheduled future payments of principal and interest, discounted at current rates.
NOTE 8: INCOME TAXES In thousands
The provisions for income taxes in 2004, 2003, and 2002 consist of the following: Current 2004 2003 2002 ------------------------------------------------------------ Federal $ 2,858 $ 2,219 $ 2,002 State 1,060 853 759 ------------------------------------------------------------ Total Current 3,918 3,072 2,761 ------------------------------------------------------------ Deferred Federal (304) (215) (83) State (170) (19) (76) ------------------------------------------------------------ Total Deferred (474) (234) (159) ------------------------------------------------------------ TOTAL $ 3,444 $ 2,838 $ 2,602 ============================================================
The components of the net deferred tax assets of the Bank as of December 31, 2004 and 2003 were as follows: Deferred Tax Assets: 2004 2003 ---------------------------------------- Allowance for credit losses $ 2,906 $ 2,460 Employee benefits and other 151 193 State taxes 360 290 Available-for-sale securities 170 - ---------------------------------------- Total deferred tax assets 3,587 2,943 Deferred Tax Liabilities: Available-for-sale securities - (301) ---------------------------------------- Net Deferred Tax Assets $ 3,587 $ 2,642 ========================================
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: 2004 2003 2002 ------------------------------------------------------------ Provision based on the statutory Federal rate of 34% $ 3,113 $ 2,597 $ 2,445 Increases (reductions) in income taxes resulting from: State franchise taxes, net of Federal income tax benefit 637 542 514 Non-taxable interest income (341) (366) (499) Other 35 65 142 ------------------------------------------------------------
TOTAL $ 3,444 $ 2,838 $ 2,602 ============================================================
The current tax provision does not reflect the deduction for tax purposes of non-qualified stock options exercised by directors. The benefit of the tax deduction is reflected as a direct increase to equity in the amount of $20,000, $14,000 and $479,000 respectively, for the years ended December 31, 2004, 2003 and 2002, and a decrease in taxes payable of the same amounts.
NOTE 9: STOCK OPTIONS
In 2000, the Board of Directors of the Corporation adopted the 2000 Stock Option Plan, approved by shareholders in 2000, authorizing the issuance of up to 15% of the Corporation’s issued and outstanding shares. Under the 2000 Stock Option Plan, options to purchase shares of the Corporation’s common stock may be granted to certain key employees or directors. 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, 2004, 447,110 shares were available for future grant. The options are fully vested in either four or five years, depending on the terms granted, and expire after ten years.
A summary of the status of the Corporation’s stock option plan at December 31, 2004, 2003, and 2002, which presents changes during the years then ended, is presented in the table below. Figures have been adjusted to reflect the 10% stock dividend given in December 2004, December 2003 and July 2002.
Weighted Weighted Weighted Average Average Average 2004 Exercise 2003 Exercise 2002 Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------------- Outstanding at beginning of year 145,922 $ 14.32 150,304 $ 5.32 542,905 $ 4.83 Granted 59,675 $ 20.97 18,851 $ 15.22 38,630 $ 16.94 Exercised 16,424 $ 12.04 7,429 $ 16.42 416,881 $ 2.23 Forfeited 2,014 $ 12.34 15,803 $ 16.44 14,349 $ 14.93 -------------- -------------- --------------- Outstanding at end of year 187,159 $ 16.61 145,922 $ 14.32 150,304 $ 14.21 ============== ============== =============== Exercisable at end of year 76,971 $ 13.79 75,835 $ 13.05 65,439 $ 12.42 ============== ============== =============== Weighted average fair value of options granted during the year $ 6.78 $ 6.45 $ 7.65
The fair value of each option grant in 2004, 2003, and 2002, is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003, and 2002: risk-free rate of 3.90% for 2004, 3.71% for 2003 and 4.88% for 2002, $0.24 expected dividend yield, expected life of 8 years and expected volatility of 21.38% in 2004, 25.85% in 2003 and 25.76% in 2002.
The following table summarizes information about stock options outstanding at December 31, 2004.
Options Outstanding: Options Weighted Weighted Exercisable: Weighted Range of Number Average Average Number Average Exercise Outstanding Contractual Life Exercise Exercisable Exercise Prices at 12/31/04 Remaining Years Price at 12/31/04 Price ---------------------- ----------------- -------------------- ------------- ----------------- --------------- $11.88 - $15.11 76,361 4.98 $13.20 56,565 $12.77 $15.70 - $18.50 61,023 7.47 $16.92 20,406 $16.62 $20.04 - $22.64 49,775 9.56 $21.46 - -
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Corporation had collateralized lines of credit of $56,293,000 at December 31, 2004. Of this, $12,980,000 was comprised of the unused borrowing capacity the Bank had with the FHLB, due to the Bank’s excess collateral position.
Qualifying real estate loans are pledged with the FHLB to secure borrowings for the purpose of protecting an interest rate spread on offsetting fixed-rate commercial real estate loans granted by the Bank with similar amounts and terms. The loans are amortized over a ten-year period and carry interest rates ranging from 2.89% to 6.8%. The cash flow receivable to the Bank, on the underlying loans granted by the Bank to its clients, is designed to meet the cash flow payments due from the Bank on its borrowings from the FHLB. Although the Bank has unused borrowing capacity under this line, management intends to only draw on this line as a funding source for fixed-rate commercial real estate loans the Bank grants to its clients. This borrowing is of a long-term installment nature, and as a result, will not fluctuate materially during the year.
The table below provides further detail of the Bank’s FHLB borrowings:
In thousands 2004 2003 ------------------------------------------------------------------------------------------------- Bank - FHLB Borrowings: Outstanding: Average outstanding loans during the period $ 36,128 $ 25,940 Outstanding at year-end $ 43,313 $ 33,352 Interest rates: Weighted average rate on borrowings during the period 4.83% 4.93% Weighted average rate on borrowings outstanding at year-end 4.70% 4.81%
The Bank has Federal Funds lines of $15,000,000. These are available on an overnight basis and are on an “as available” basis and can be revoked by the grantor at any time. The Bank also has securities pledged for additional “overnight” borrowing needs with the Federal Reserve Bank of $1,000,000. These credit sources generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. As of December 31, 2004 and 2003, the Bank had no borrowings outstanding under these lines.
The table below provides further detail of BWC Mortgage Services borrowings:
In thousands 2004 2003 ------------------------------------------------------------------------------------------------- BWC Mortgage Services - Borrowings: Outstanding: Average outstanding loans during the period $ 20,068 $ 6,796 Outstanding at year-end $ 14,511 $ 5,071 Interest rates: Weighted average rate on borrowings during the period 4.56% 5.14% Weighted average rate on borrowings outstanding at year-end 8.38% 5.11%
BWC Mortgage Services has established lines of credit with Flagstar Bank, in the amount of $7,000,000 and with First Collateral Services in the amount of $30,000,000. Borrowings under these lines of credit is undertaken to fund pre-sold mortgages pending receipt of funds from the purchasing institution. The duration of the loans funded with these borrowings is approximately two weeks and they are considered to be of extremely low risk; therefore, the subsidiary has not established a reserve against these loans.
As of December 31, 2004 the approximate future repricing of borrowings from the Federal Home Loan Bank and BWC Mortgage Services borrowings were as follows:
Repricing within: 3 3-6 6-12 1-5 Over 5 In thousands Months Months Months Years Years Totals --------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank Borrowings $ 285 $ 288 $ 5,435 $ 5,454 $ 31,851 $ 43,313 BWC Mortgage Services Borrowings $ 14,511 $ - $ - $ - $ - $ 14,511
NOTE 11: COMMITMENTS AND CONTINGENCIES
As of December 31, 2004 the approximate future minimum net rental payments under non-cancelable operating leases for premises were as follows:
In thousands Year Amount --------------- ---------------- 2005 $ 1,453 2006 1,205 2007 1,094 2008 976 2009 779 Thereafter 4,199 --------------- ---------------- Total $ 9,706 =============== ================
Rental expense for premises under operating leases included in occupancy expense was $1,756,000, $1,477,000, and $1,156,000 in 2004, 2003, and 2002, respectively. Minimum rentals may be adjusted for increases in the lessors’ operating costs and/or increases in the Consumer Price Index.
At December 31, 2004, the Bank had outstanding approximately $195,810,000 in undisbursed loan commitments and $1,136,000 in standby letters of credit and $4,092,000 in unused Visa account lines, which are not reflected in the accompanying consolidated balance sheets. Management does not anticipate any material losses to result from these transactions.
NOTE 12: DEFINED CONTRIBUTION PLAN
Substantially all eligible, salaried employees of the Corporation are covered by the Bank of Walnut Creek Employee Stock Ownership and Savings Plan, 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 $380,000, $340,000, and $298,000 in 2004, 2003, and 2002, 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.
NOTE 13: OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following: In thousands 2004 2003 2002 ------------------------------------------- Professional Fees $ 914 $ 1,070 $ 625 Data Processing 903 847 753 Telephone and Postage 644 602 441 Business Development & Education 615 443 368 Supplies 344 273 271 Marketing 247 345 359 Regulatory Fees 115 117 85 Other 2,613 2,978 2,442 ------------------------------------------- Total $ 5,481 $ 5,605 $ 4,719 ===========================================
NOTE 14: 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, $13,410,000 of the Bank’s retained earnings was available for cash dividends at December 31, 2004.
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 $4,281,000 as of December 31, 2004. The Corporation has never received such extensions of credit by the Bank.
NOTE 15: PARENT-COMPANY-ONLY CONDENSED FINANCIAL INFORMATION A summary of the financial statements of BWC Financial Corp.- parent-company-only follows: In thousands December 31, Summary Balance Sheets 2004 2003 --------------------------------------------------- Assets Cash on Deposit with the Bank $ 2,481 $ 1,138 Investment in the Bank 42,815 42,328 Investment in BWC Real Estate 1,985 1,357 ---------------- ----------------- Total Assets $ 47,281 $ 44,823 ================ =================
Shareholders' Equity Common Stock $ 47,054 $ 39,019 Retained Earnings 227 5,804 ---------------- ----------------- Total Shareholders' Equity $ 47,281 $ 44,823 ================ =================
Summary Statements of Income For the year ended December 31, 2004 2003 2002 --------------------------------------------------- Expenses - General and Administrative $ 146 $ 139 $ 138 ---------------------------------------------------
Loss before income taxes and equity in net income of Subsidiaries (146) (139) (138) Income tax benefit 55 53 49
Equity in earnings of subsidiaries Distributed: Bank 4,000 2,260 - BWC Real Estate - - 1,000 Undistributed: Bank 1,176 1,899 4,076 BWC Real Estate 628 726 (399) --------------------------------------------------- Net Income $ 5,713 $ 4,799 $ 4,588 ===================================================
Summary Statements of Cash Flows For the year ended December 31, Operating activities: 2004 2003 2002 --------------------------------------------------- Net Income $ 5,713 $ 4,799 $ 4,588 Adjustments to reconcile net income to net cash used by operating activities: Equity in undistributed net income of Subsidiaries (1,803) (2,625) (3,677) Net Cash Provided(Used) by --------------------------------------------------- Operating Activities: 3,910 2,174 911 ---------------------------------------------------
Financing Activities: Proceeds from issuance of common stock 197 89 928 Cash dividends paid (1,011) (426) - Cash paid in lieu of fractional shares (4) (5) (5) Shares repurchased by the Corporation (1,749) (1,292) (2,396) --------------------------------------------------- Net Cash Provided(Used) by Financing Activities (2,567) (1,634) (1,473) --------------------------------------------------- Increase(Decrease) in Cash 1,343 540 (562)
Cash on Deposit with the Bank: Beginning of year 1,138 598 1,160 --------------------------------------------------- End of year $ 2,481 $ 1,138 $ 598 ===================================================
NOTE 16: 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’s 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 to risk-weighted assets and of Tier I Capital to average assets (as defined). Management believes that the Corporation and the Bank, as of December 31, 2004 meet all capital adequacy requirements to which they are subject.
As of December 31, 2004 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 and 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 Corporation’s or Bank’s category.
The Corporation’s and Bank’s actual capital amounts and ratios are presented in the following table:
Minimum Capital Minimum Actual Adequacy for Well Amount Ratio Requirements Capitalized -------------------------------------------------------------------------------- As of December 31, 2004 Total Capital (to Risk-weighted Assets) Consolidated: $53,113 11.65% $36,465 > 8.0 $45,581 >10.0 Bank of Walnut Creek: $48,647 10.87% $35,815 > 8.0 $44,769 >10.0
Tier 1 Capital (to Risk-weighted Assets) Consolidated: $47,490 10.42% $18,233 > 4.0 $27,349 > 6.0 Bank of Walnut Creek: $43,024 9.61% $17,908 > 4.0 $26,862 > 6.0
Tier 1 Capital (to Average Assets) Consolidated: $47,490 9.22% $20,599 > 4.0 $25,749 > 5.0 Bank of Walnut Creek: $43,024 8.75% $19,659 > 4.0 $24,574 > 5.0
As of December 31, 2003 Total Capital (to Risk-weighted Assets) Consolidated: $49,252 12.42% $36,465 > 8.0 $45,581 >10.0 Bank of Walnut Creek: $46,757 11.89% $35,815 > 8.0 $44,769 >10.0
Tier 1 Capital (to Risk-weighted Assets) Consolidated: $44,313 11.18% $18,233 > 4.0 $27,349 > 6.0 Bank of Walnut Creek: $41,818 10.63% $17,908 > 4.0 $26,862 > 6.0
Tier 1 Capital (to Average Assets) Consolidated: $44,313 9.63% $20,599 > 4.0 $25,749 > 5.0 Bank of Walnut Creek: $41,818 9.18% $19,659 > 4.0 $24,574 > 5.0
NOTE 17: BUSINESS SEGMENTS
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. 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 credit, 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, 2004, 2003, and 2002 concerning the Corporation’s reportable segments is shown in the following table.
Community Mortgage 2004 Banking Services All Other Adjustments Total -------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 27,470 $ 2,091 $ - $ (20) $ 29,541 Commissions Received - 8,957 - - 8,957 Total Interest Expense 4,376 924 - (20) 5,280 Salaries & Benefits 9,520 2,430 - - 11,950 Commissions Paid - 7,536 - - 7,536 Segment Profit(loss) before Tax 8,289 2,027 (146) (1,013) 9,157 Total Assets (at December 31) $ 485,602 $ 17,061 $ 2,156 $ (3,461) $ 501,358 --------------------------------------------------------------------------------------------------------------------------
Community Mortgage 2003 Banking Services All Other Adjustments Total -------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 25,715 $ 609 $ - $ (12) $ 26,312 Commissions Received - 10,588 - - 10,588 Total Interest Expense 3,916 348 - (12) 4,252 Salaries & Benefits 9,371 1,824 - - 11,195 Commissions Paid - 8,728 - - 8,728 Segment Profit(loss) before Tax 6,552 2,343 (86) (1,172) 7,637 Total Assets (at December 31) $ 451,228 $ 7,739 $ 1,582 $ (3,393) $ 457,156 --------------------------------------------------------------------------------------------------------------------------
Community Mortgage 2002 Banking Services All Other Adjustments Total -------------------------------------------------------------------------------------------------------------------------- Total Interest Income $ 25,418 $ 4 $ - $ (6) $ 25,416 Commissions Received - 7,844 - - 7,844 Total Interest Expense 5,007 3 - (7) 5,003 Salaries & Benefits 8,531 893 - - 9,424 Commissions Paid - 5,479 - - 5,479 Segment Profit(loss) before Tax 6,309 1,940 (89) (970) 7,190 Total Assets (at December 31) $ 409,164 $ 875 $ 835 $ (1,408) $ 409,466 --------------------------------------------------------------------------------------------------------------------------
NOTE 18: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) In thousands except share and per-share amounts
2004 March 31, June 30, September 30, December 31, --------------------------------------------------------------------- Interest income $ 6,818 $ 7,178 $ 7,341 $ 8,204 Interest expense 1,108 1,381 1,191 $ 1,600 --------------------------------------------------------------------- Net interest income 5,710 5,797 6,150 6,604 Provision for credit losses 450 375 150 - Noninterest income 3,451 4,510 3,654 3,713 Noninterest expense 6,772 7,640 6,896 7,135 BWC Mortgage Services - Minority Interest 187 377 211 239 --------------------------------------------------------------------- Income before income taxes 1,752 1,915 2,547 2,943 Provision for income taxes 678 699 979 1,088 --------------------------------------------------------------------- Net income $ 1,074 $ 1,216 $ 1,568 $ 1,855 ===================================================================== Earnings per common share: Basic $ 0.25 $ 0.28 $ 0.36 $ 0.44 Diluted $ 0.25 $ 0.28 $ 0.36 $ 0.43 Weighted-average Basic Shares 4,300,045 4,301,767 4,301,890 4,239,260 Weighted-average Diluted Shares Equivalents Related to Options 39,537 37,656 31,257 44,051 Weighted-average Diluted Shares 4,339,583 4,339,423 4,333,146 4,283,311
2003 March 31, June 30, September 30, December 31, --------------------------------------------------------------------- Interest income $ 6,158 $ 6,466 $ 7,031 $ 6,657 Interest expense 1,015 1,054 1,212 $ 971 --------------------------------------------------------------------- Net interest income 5,143 5,412 5,819 5,686 Provision for credit losses 300 300 450 450 Noninterest income 4,096 4,310 5,322 3,649 Noninterest expense 6,881 7,337 7,942 6,968 BWC Mortgage Services - Minority Interest 291 288 481 112 --------------------------------------------------------------------- Income before income taxes 1,767 1,797 2,268 1,805 Provision for income taxes 688 678 850 622 --------------------------------------------------------------------- Net income $ 1,079 $ 1,119 $ 1,418 $ 1,183 ===================================================================== Earnings per common share: Basic $ 0.25 $ 0.26 $ 0.33 $ 0.28 Diluted $ 0.25 $ 0.26 $ 0.33 $ 0.27 Weighted-average Basic Shares 4,371,333 4,293,333 4,298,375 4,300,045 Weighted-average Diluted Shares Equivalents Related to Options 11,955 18,851 18,063 34,332 Weighted-average Diluted Shares 4,383,288 4,312,184 4,316,439 4,334,377
All share and per-share amounts give effect to the 10% stock dividend in December, 2004 and 2003.
MOSS ADAMS LLP REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
MOSS ADAMS LLP
Stockton, California
January 21, 2005
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES:
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Registrant's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Registrant's Chief Executive Officer, Chief Financial Officer and several other members of the Registrant's senior management within the 90-day period preceding the filing date of this annual report. The Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Registrant in the reports it files or submits under the Act is (i) accumulated and communicated to the Registrant's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: During the year ended December 31, 2004, the Registrant did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.
ITEM 9B.
ITEM 9B. OTHER INFORMATION:
There were no events in the fourth quarter which were required to be reported on an 8-K and were not so reported. There were two 8-K’s filed during the fourth quarter, one announcing a 10% Stock Dividend and a second announcing a $0.08 per share Cash Dividend.
PART III ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by reference from the information contained in the Bank’s Proxy Statement for the 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Audit Committee Members and Financial Expert (Sarbanes/Oxley)
Members of the Audit Committee are comprised of all outside directors. While the Audit Committee does not have a member who is a “financial expert” as defined by the Sarbanes-Oxley Act of 2002 (the “Act”), (such financial expert defined as a person who has, through education and experience as a public accountant or auditor or a principal financial officer, controller, or principal accounting officer of a company...) the Board of Directors believes that the level of financial knowledge and experience possessed by a number of the members of the Audit Committee is sufficient for the Audit Committee to properly carry out the duties, obligations, responsibilities and oversight intended by the Act. The Board does not believe that it is necessary to increase the number of Board members so as to add a person who would meet the “financial expert” definition.
Code of Ethics for senior management officers in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Corporation has a written Code of Ethics (the “Senior Financial Officer Code of Ethics”) that applies to the Corporation’s Chief Executive Officer and senior financial officers (including the Corporation’s Chief Financial Officer, Controller and persons performing similar functions) (collectively, the “Senior Financial Officers”). In addition to the Code of Ethics being available on the Corporation’s website, www.bowc.com, the Corporation will provide a copy of the Code, without charge, upon written request to Leland E. Wines, EVP/CFO, Bank of Walnut Creek, 1400 Civic Drive, Walnut Creek, CA 94596. If the Corporation changes the Senior Financial Officer Code of Ethics in any material respect or waives any provision of the Senior Financial Officer Code of Ethics for any of its Senior Financial Officers, the Corporation expects to provide the public with notice of any such change or waiver by publishing an appropriate description of such event on its corporate website, www.bowc.com, or by other appropriate means as required or permitted under applicable rules of the Commission. The Corporation does not currently expect to make any such waivers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the Bank’s Proxy Statement for the 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the Bank’s Proxy Statement for the 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the Bank’s Proxy Statement for the 2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information related to Audit fees and services appearing in the Proxy Statement, is incorporated herein by reference.
PART IV ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this Form 10-K:
1) Financial Statements:
Reference is made to the Index to Consolidated Financial Statements under Item 8 in Part II of this Form 10-K.
2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3) Exhibits:
See Index to Exhibits at page 63 of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BWC FINANCIAL CORP.
-------------------------- By Leland E. Wines Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
___________________ Chairman of the Board March 1, 2005 James L. Ryan and Director
___________________ Executive Vice President and March 1, 2005 Leland E. Wines Chief Financial Officer
___________________ Director March 1, 2005 Tom Mantor
___________________ Director March 1, 2005 Richard G. Hill
___________________ Director March 1, 2005 Reynold C. Johnson III
___________________ Director March 1, 2005 Craig Lazzareschi
___________________ Director March 1, 2005 John F. Nohr
___________________ Director March 1, 2005 John L. Winther
Certification: I, Leland E. Wines, EVP/CFO, certify that:
1. I have reviewed this annual report on Form 10-K of BWC Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-13(e) and 15(d)-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-13(f) and 15(d)-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervisions, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 4, 2005
Leland E. Wines
EVP/CFO
Exhibit 31.1
Certification: I, James L. Ryan, Chairman and CEO, certify that:
1. I have reviewed this annual report on Form 10-K of BWC Financial Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-13(e) and 15(d)-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13(a)-13(f) and 15(d)-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervisions, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 4, 2005
James L. Ryan
Chairman and CEO
Exhibit 31.2
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.
Consent of Independent Public Accountants: Moss Adams LLP Consent dated March 21, 2005 23.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.1-32.2
MOSS ADAMS LLP CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation of our report dated January 21, 2005 incorporated by reference in this Form 10-K into the previously filed registration statements on Form S-8 for BWC Financial Corp.‘s 1990 Stock Option Plan (Registration Statement File No. 33-22290) and 2000 Stock Option Plan (Registration Statement File No. 333-42830).
Moss Adams LLP
Stockton, California,
March 21, 2005
Exhibit 23.1
WHERE YOU CAN FIND MORE INFORMATION
Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Corporation electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 11-K (Annual Report for Employees’ Stock Purchase and Savings Plans), Form 8-K (Report of Unscheduled Material Events), and Form DEF 14A (Proxy Statement). The Corporation may file additional forms. The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information is available free of charge on the Corporation’s website: www.bowc.com. The Corporation posts these reports to its website as soon as reasonably practicable after filing them with the SEC. None of the information on or hyperlinked from the Corporation’s website is incorporated into this Annual Report on Form 10-K.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BWC Financial Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leland E. Wines, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1)The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.
DATE: March 4, 2005
__________________
LELAND E. WINES
EVP/CFO & Corp. Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of BWC Financial Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Ryan, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1)The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.
DATE: March 4, 2005
__________________
JAMES L. RYAN
Chairman and CEO
Exhibit 32.2