Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended December 31, 2004,
Commission File Number 0-10658
BWC FINANCIAL CORP.
Incorporated pursuant to the Laws of California
Internal Revenue Service - Employer Identification No. 94-2621001
1400 Civic Drive, Walnut Creek, California 94596
(925) 932-5353
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act).[ ] Yes [X] No
State the aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2004: $58,598,000.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 31, 2004.
Title of Class: Common Stock, no par value Shares Outstanding: 4,228,459
| Documents Incorporated by Reference* | Incorporated Into: | |
| Definitive Proxy Statement for the 2005 | Part III | |
| Annual Meeting of Shareholders to be | ||
| filed by April 8, 2005. |
* Only selected portions of the document specified are incorporated by reference into this report, as more particularly described herein.
Certain statements contained in this Annual Report on Form 10-K (“Annual Report”), including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar impact, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Corporation operates, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Corporation’s business, economic, political and global changes. The Corporation disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
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 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:
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:
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.
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.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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:
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.
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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
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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.
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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 - -
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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. 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
2004
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%
============================= ========================== ==========================
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%
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Ratio of allowance for credit losses
to total loans at end of period 2.01% 1.98% 1.93% 1.92% 2.00%
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The following table provides further information on past-due and nonaccrual loans.
2004 2003 2002 2001 2000
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Loans past due 90 days or more, still accruing interest $ 3 $ 89 $ 328 $ 257 $ 26
Nonaccrual Loans 25 687 426 846 2,041
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Total $ 28 $ 776 $ 754 $ 1,103 $ 2,067
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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:
For purposes of the Bank’s Credit Policy regarding this section of the ALLL methodology, the following practices and definitions apply.
| 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,
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2004 2003 2002
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Average Average Average
Interest-bearing Deposits: Balance Interest Rates Balance Interest Rates Balance Interest Rates
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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
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Total Interest-bearing Deposits $ 268,453 $ 2,613 0.97% $ 255,844 $ 2,626 1.03% $ 252,234 $ 4,063 1.61%
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Noninterest-bearing Demand 124,695 - - 107,390 - - 93,495 - -
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