| UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION
| WASHINGTON, D.C. 20549 |
| FORM 10-K |
(Mark One)
_X_ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
| EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005
or
___ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
| EXCHANGE ACT OF 1934 |
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For the transition period from N/A to N/A
Commission file number 0-10658
| BWC FINANCIAL CORP. |
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| (Exact name of registrant as specified in its charter) | ||
California | 94-2621001 |
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(State of other jurisdiction of | (I.R.S. Employee |
| |
incorporation or organization) | Identification No.) | ||
1400 Civic Drive, Walnut Creek, California 94596
(Address of principal executive offices)
925-932-5353
Registrant's telephone number, including area code:
NONE
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Name of each exchange on which registered
NASDAQ National Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
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 o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 126-2 of the Act. (Check one)
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 30, 2005: $51,892,000.
The number of shares outstanding of each of the registrant's classes of common stock, as of March 6, 2005 was 4,128,829
Documents Incorporated by Reference
None
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TABLE OF CONTENTS | PAGE |
PART I |
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4 | |
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11-15 | |
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15 | |
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15 | |
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15 | |
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15 | |
PART II |
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Item 5 Market for the Registrant's Common Equity and Related |
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16-17 | |
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18-19 | |
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20-37 | |
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37 | |
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38-63 | |
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64 | |
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64 | |
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64 | |
PART III |
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64-65 | |
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67 | |
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68 | |
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68-69 | |
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69 | |
PART IV |
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Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K | 69 |
70 | |
71 | |
72 | |
73-74 | |
75 | |
76 |
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| PART I |
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 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, it does make such services available to its customers through other financial institutions with which it 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 also 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.
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During 2005 net interest income of the Corporation (before minority interest allocation) was $28,349,000, of which the Bank accounted for $27,038,000, or 95%, and the balance by BWC Mortgage Services. In 2004 net interest income was $24,261,000, of which the Bank accounted for $23,094,000, also 95%. 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.
The Corporation’s net income before tax in 2005 was $14,066,000, of which the Bank contributed $12,967,000, or 92% and (after minority interest allocation) the balance by BWC Mortgage Services. In 2004 net income before tax was $9,157, 000, of which the Bank contributed $8,289,000, or 91%, and 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.
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 website with certain Corporate financial information (annual and quarterly summary reports), located at www.bowc.com. There is also a direct link from this website 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, 2005, the Bank employed an FTE of 118. At the present time there are no employees directly employed by BWC Financial Corp. or by its mortgage subsidiary, BWC Real Estate. There are 49 employees and approximately 115 agents working for the joint venture, BWC Mortgage Services.
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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 affect 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
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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
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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, 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; |
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| • | 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 two years 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 2004. 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 to structure 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
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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: |
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| • | 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 1 A. |
In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors:
Our profitability is dependent upon the health of the markets in which we operate.
We operate primarily in Contra Costa County, southern Solano County, northern Alameda County and the San Jose area of Santa Clara County and, as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
Our growth must be effectively managed and our growth strategy involves risks that may impact our net income.
As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets to take advantage of expanding market share by opening new offices. To the extent that we undertake additional office openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations for a period of time, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Our current growth strategies involve internal growth from our current offices
11
and the addition of new branch offices over time, so that the additional overhead expenses associated with these openings is absorbed prior to opening other new offices.
We must compete with other banks and financial institutions in all lines of business.
The banking and financial services business in our market is highly competitive. Our competitors include large regional banks, local community banks, savings institutions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions we are and are able to provide customers with an alternative to traditional banking services. In addition, there is an increased importance on remaining current on technological changes because such technological advances may diminish the importance of depository institutions and financial intermediaries in the transfer of funds between parties.
Increased competition in our market and market changes, such as interest rate changes, force management to better control costs in order to absorb any resultant narrowing of our net interest margin, i.e., the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Without effective management and cost controls, net income may be adversely impacted by changing conditions and competition.
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of net interest margin. Like most banking institutions, our net interest margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of investment terms and the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations, is presented at “Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by external parties as well as external auditors. However, we cannot assure such approval and monitoring procedures will eliminate these credit risks.
The majority of the bank’s loan portfolio is invested in construction real estate, commercial real estate, general commercial and consumer lending. The maximum amount of the commercial loans we can offer is smaller than loans that our national and regional competitors with larger lending limits can offer. While there is little demand for loans over our legal lending limit, we can and have engaged in participation loans with other financial institutions to respond to customer requirements. However, there are some loans and relationships that we cannot effectively compete for due to our size. Our lending activity and the risks commonly associated with such lending are further described in the “Business” section included under Item 1 of Part I of this Form 10-K.
Our allowance for loan losses must be managed to provide a sufficient amount to absorb potential losses in our loan portfolio.
We established our allowance for loan losses in consultation with management and external auditor recommendations, and maintain it at a level considered adequate by management to absorb potential loan losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions within our market, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2005, our allowance for loan losses as a percentage of total loans was 1.86%. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty, and we cannot assure that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely
12
affect our business, financial condition and results of operations. Additional information regarding our allowance for loan losses and the methodology we use to determine an appropriate level of reserves is located in the “Management’s Discussion and Analysis” section included under Item 7 of Part II of this Form 10-K.
Our continued pace of growth may require us to raise additional capital in the future, which may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, our growth rate may create a need for additional capital from the capital markets. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. There may not always be capital available or available on favorable terms. These conditions may alter our strategic direction and require us to manage our growth to remain within capital limits by relying solely on our earnings for capital formation, thereby materially reducing our growth rate.
Our ability to attract and retain management and key personnel may affect future growth and earnings.
Much of our success to date has been influenced strongly by our ability to attract and retain management experienced in banking and financial services who are familiar with the communities in our market areas. Our ability to retain executive officers, the current management teams, office managers and loan officers of our bank subsidiary will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the California Department of Financial Institutions and the Federal Deposit Insurance Corporation. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability.
Technology is continually changing and we must effectively implement new technologies.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. In order to anticipate and develop new technology, we employ a qualified staff of internal information system specialists and consider this area a core part of our business. We do not develop our own software products, but have been able to respond to technological changes in a timely manner, through association with leading technology vendors. We must continue to make substantial investments in technology which may affect our net income.
There is a limited trading market for our common shares, and shareholders may not be able to resell shares at or above the price shareholders paid for them.
The trading in our common shares has less liquidity than many other companies quoted on the national securities exchanges or markets. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot ensure volume of trading in our common shares will increase in the future.
13
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. We employ external auditors to conduct extensive auditing and testing for any weaknesses in our systems, controls, firewalls and encryption to reduce the likelihood of any security failures or breaches. Although we, with the help of third-party service providers and auditors, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse affect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Real estate lending (including commercial and construction) is a large portion of our loan portfolio. These categories constitute $245,427,000, or approximately 61% of our total loan portfolio as of December 31, 2005. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans is secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, commercial real estate lending typically involves larger loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Our construction and development loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
At December 31, 2005, residential construction loans, including land acquisition and development, totaled $126,098,000 or 31%, of our total loan portfolio. This was comprised of 22 % owner-occupied and 78% speculative construction and land loans. Construction, land acquisition and development lending involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real
14
property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, speculative construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the completion of the project and the ability of the borrower to sell the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. We have attempted to address these risks through our underwriting procedures and by limiting the amount of construction development lending.
ITEM 1 B. UNRESOLVED STAFF COMMENTS
None
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 March 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
15
| PART II |
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, 2004. The closing price on December 31, 2005 was $35.58, compared to the close one year earlier of $23.50. At December 31, 2005, BWC Financial Corp. had 329 shareholders of record plus approximately 649 street-named shareholders. At December 31, 2004, BWC Financial Corp. had 342 shareholders of record plus approximately 500 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 2005, two quarterly dividends were paid at $0.08 per share and two at $0.09 per share. During 2004, three quarterly dividends were paid at $0.06 per share and one at $0.08 per share. It is anticipated that cash dividends will be declared on a quarterly basis in the future.
| 2005 | 2004 |
1st Quarter $21.65 - $25.76 | 2nd Quarter $24.83 - $25.84 |
| 1st Quarter $17.60 - $21.47 | 2nd Quarter $18.68 - $23.33 |
3rd Quarter $24.60 - $31.32 | 4th Quarter $27.67 - $36.50 |
| 3rd Quarter $17.88 - $20.26 | 4th Quarter $19.38 - $23.64 |
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
16
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 2006 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 | 156,267 | $18.97 | 463,057 |
Equity compensation plans not |
|
|
|
approved by security holders | none |
|
|
Total | 156,267 | $18.97 | 463,057 |
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 |
|
|
|
|
|
|
March-05 | 6,500 | $ 25.00 | - | - |
April-05 | 31,105 | $ 25.88 | - | - |
May-05 | 8,700 | $ 25.88 | - | - |
June-05 | 33,033 | $ 25.58 | - | - |
September-05 | 32,137 | $ 28.30 | - | - |
October-05 | 20,700 | $ 30.00 | - | - |
| 132,175 | $27.00 |
|
|
17
|
|
|
|
| |
|
|
|
|
|
|
The following is a summary of selected consolidated financial data for the five years ended December 31, 2005. 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 | 2005 | 2004 | 2003 | 2002 | 2001 |
Interest Income | $ 36,088 | $ 29,541 | $ 26,312 | $ 25,416 | $ 30,879 |
Interest Expense | 7,739 | 5,280 | 4,252 | 5,003 | 8,591 |
Net Interest Income | 28,349 | 24,261 | 22,060 | 20,413 | 22,288 |
Provision for Credit Losses | - | 975 | 1,500 | 1,200 | 1,600 |
Net Interest Income after Provision |
|
|
|
|
|
for Credit Losses | 28,349 | 23,286 | 20,560 | 19,213 | 20,688 |
Noninterest Income | 19,167 | 15,327 | 17,377 | 11,692 | 9,054 |
Noninterest Expense | 32,230 | 28,443 | 29,128 | 22,745 | 20,386 |
Minority Interest | 1,220 | 1,013 | 1,172 | 970 | 695 |
Income before Income Taxes | 14,066 | 9,157 | 7,637 | 7,190 | 8,661 |
Provision for Income Taxes | 5,420 | 3,444 | 2,838 | 2,602 | 3,197 |
Net Income | $ 8,646 | $ 5,713 | $ 4,799 | $ 4,588 | $ 5,464 |
Per Share:(1) |
|
|
|
|
|
Net Income - basic | $ 2.07 | $ 1.33 | $ 1.11 | $ 1.10 | $ 1.32 |
Net Income - diluted | $ 2.04 | $ 1.32 | $ 1.11 | $ 1.05 | $ 1.20 |
Weighted ave. shares for Basic E.P.S. | 4,182,661 | 4,280,595 | 4,315,772 | 4,182,243 | 4,154,059 |
Weighted ave. shares for Diluted E.P.S. | 4,243,315 | 4,316,256 | 4,336,572 | 4,372,727 | 4,559,076 |
Book value at period end | $ 12.37 | $ 11.18 | $ 10.42 | $ 9.59 | $ 9.29 |
Tangible book value at period end | $ 12.04 | $ 10.95 | $ 10.34 | $ 9.60 | $ 8.39 |
Ending Shares | 4,128,829 | 4,228,459 | 4,300,045 | 4,379,607 | 4,116,083 |
Cash Dividends per Common Share | $ 0.34 | $ 0.26 | $ 0.12 | $ - | $ - |
Dividend Payout Ratio | 16.46% | 17.70% | 8.89% | 0.00% | 0.00% |
Summary Balance Sheets at December 31 |
|
|
|
|
|
Cash and Due from Banks | $ 16,511 | $ 10,315 | $ 17,959 | $ 20,993 | $ 15,016 |
Federal Funds Sold | - | 8,500 | 3,470 | 2,000 | 6,000 |
Other Short-term Investments | 143 | 173 | 71 | 36 | 33 |
Investment Securities | 106,704 | 80,066 | 86,655 | 71,105 | 86,709 |
Loans, Net | 395,479 | 373,012 | 330,427 | 303,583 | 276,064 |
BWC Mortgage Services Loans Held-for-Sale | 7,274 | 14,966 | 5,142 | - | - |
Other Assets | 15,686 | 14,326 | 13,432 | 11,749 | 11,235 |
Total Assets | $ 541,797 | $ 501,358 | $ 457,156 | $ 409,466 | $ 395,057 |
18
Noninterest-bearing Deposits | $ 149,715 | $ 131,252 | $ 123,496 | $ 99,175 | $ 87,172 |
Interest-bearing Deposits | 271,461 | 261,687 | 246,669 | 241,778 | 253,297 |
Federal Home Loan Bank Borrowings | 56,307 | 43,313 | 33,352 | 23,622 | 12,955 |
BWC Mortgage Services Borrowings | 7,210 | 14,511 | 5,071 | - | - |
Federal Funds Purchased | 1,500 | - | - | - | - |
Other Liabilities | 4,516 | 3,314 | 3,745 | 2,892 | 3,381 |
Shareholders' Equity | 51,088 | 47,281 | 44,823 | 41,999 | 38,252 |
Total Liabilities and |
|
|
|
|
|
Shareholders' Equity | $ 541,797 | $ 501,358 | $ 457,156 | $ 409,466 | $ 395,057 |
Financial Ratios: |
|
|
|
|
|
Return on Average Assets | 1.61% | 1.15% | 1.09% | 1.13% | 1.45% |
Return on Average Equity | 17.69% | 12.39% | 11.14% | 11.59% | 14.97% |
Average Shareholders' Equity to Average Assets | 9.12% | 9.27% | 9.76% | 9.78% | 9.70% |
Net interest margin (taxable equivalent) | 5.67% | 5.16% | 5.30% | 5.43% | 6.36% |
Net loan losses to average loans | 0.05% | 0.00% | 0.24% | 0.22% | 0.46% |
ALLL as % of total loans | 1.86% | 2.01% | 1.98% | 2.08% | 2.01% |
Efficiency ratio (Bank) | 55.49% | 62.80% | 66.30% | 66.37% | 60.08% |
| |||||
(1) All share and per-share amounts give effect to the 10% stock dividends in December 2004 and 2003, July 2002 and June 2001. |
19
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
2005
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%. By the end of 2005 the prime rate had risen an additional 2.00% to 7.25%. 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, 2004 to 5.40% by December of that year. By December of 2005 the Bank’s net interest spread was 5.87%. Most of the economic news during 2005 was positive, with increases in real GNP, employment and sales.
The housing sector continued to be a strong contributor to our economy during 2005, although there are current indications of softening in this sector. UCLA Anderson Forecast calls for the median sales prices for a Bay Area home to increase from 5 to 7 percent in 2006. At the same time, it forecasts that sales volumes will drop by 5 to 7 percent. Home appreciation has slowed in the majority of the country’s 50 largest housing markets, yet another sign of a slowing market. We believe that a soft landing will take place in the housing market, based on the continued strength of the economy, an outlook that is in line with that of most analysts. What we are seeing is a slowing of appreciation, not a reversal of a trend.
The Bay Area economy continued to strengthen during 2005 and is projected to continue strong during 2006. Unemployment is low, corporate profits are up, and investors have a great deal of confidence that inflation is under control. Industrial production is expected to continue improving along with exports in 2006. The high tech industry is showing resurgence in job growth in both electronic equipment manufacturing and software development.
On the negative side, high energy costs, a slowdown in consumer spending and over-inflated home prices present sizable downside risks. The most significant threat to our Corporation’s growth and margins continues to be increasing competition in our marketplace. A number of new financial institutions have started up and will be aggressive in lending and deposit gathering.
There are signs that the Fed is reaching the top in interest rate increases. As long as the fear of recession remains small and the economy is not overheated, it is unlikely the Fed will increase rates much over their current levels. Two main goals of the Federal Reserve, through its fiscal activities, are (1) keep inflation under control, and (2) stimulate long-term growth. These two objectives always involve a balancing act.
During 2005, BWC Financial Corp. experienced a growth of approximately 8.1% in total assets from the prior year. Gross loans increased 5.9%, deposits increased 7.2%, and net income was up 51% from the prior year.
The Corporation’s mortgage servicing joint venture, BWC Mortgage Services, had a strong year with net income up $413,000 over 2004. The Corporation 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 approximately two weeks 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, | |||
| 2005 | 2004 | 2003 | |
Return on average assets | 1.61% | 1.15% | 1.09% | |
Return on average shareholders' equity | 17.69% | 12.39% | 11.14% | |
Cash dividend payout ratio | 16.46% | 17.70% | 8.89% | |
Average shareholders' equity as % of: |
|
|
| |
Average total assets | 9.12% | 9.27% | 9.76% | |
Average total deposits | 11.72% | 12.63% | 11.80% | |
Results of Operations
Net Income
Net income in 2005 was $8,646,000, which reflects a return on average assets of 1.61% and a return on average equity of 17.69%. The Corporation’s average earning assets increased $28,949,000, or 8%, during 2005 as compared to 2004.
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 $55,341,000, 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 Interest Margin
Net interest margin is the ratio of net interest income divided by average earning assets.
The Corporation’s net interest margin for 2005 averaged 5.67%, which represents a .51% increase from the margin earned during 2004. During 2005 the prime rate averaged 6.19%, or 1.85% more than during 2004. At the end of 2005 the prime rate stood at 7.25%, up a full 2% from the prior yearend. Coupled with growth, this rate increase resulted in an increase in net interest income of $4,088,000 over 2004.
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.
21
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: |
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The following is an analysis of net interest earnings for the years ended December 31. |
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EARNING ASSETS |
| 2005 |
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| 2004 |
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| 2003 |
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In thousands |
| Interest | Rates |
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| Interest | Rates |
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| Interest | Rates |
| Average | Income/ | Earned/ |
| Average | Income/ | Earned/ |
| Average | Income/ | Earned/ |
| Balance | Expense | Paid(1) |
| Balance | Expense | Paid(1) |
| Balance | Expense | Paid(1) |
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Federal Funds Sold | $ 25,513 | $ 858 | 3.32% |
| $ 12,424 | $ 153 | 1.23% |
| $ 13,258 | $ 142 | 1.08% |
Other Short-Term Investments | 144 | 4 | 2.82% |
| 104 | 2 | 1.61% |
| 83 | 1 | 0.96% |
Investment Securities: |
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U.S. Treasury Securities | 260 | 8 | 3.07% |
| 272 | 8 | 2.93% |
| 257 | 7 | 2.87% |
Securities of U.S. |
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Government Agencies | 37,394 | 1,318 | 3.53% |
| 28,600 | 769 | 2.68% |
| 23,897 | 794 | 3.32% |
Obligations of States & |
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Political Subdivisions (2) | 33,498 | 1,045 | 3.85% |
| 37,017 | 1,171 | 3.93% |
| 29,767 | 1,187 | 4.79% |
Corporate Securities | 7,894 | 262 | 3.31% |
| 16,316 | 601 | 3.67% |
| 17,100 | 664 | 3.88% |
Loans (3) (4) (5) | 387,952 | 30,694 | 7.91% |
| 360,876 | 24,758 | 6.86% |
| 329,017 | 22,920 | 6.97% |
BWC Mortgage Services Loans |
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Held-for-Sale | 11,970 | 1,899 | 15.86% |
| 20,067 | 2,079 | 10.36% |
| 6,956 | 597 | 8.58% |
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TOTAL EARNING ASSETS | $ 504,625 | $ 36,088 | 7.20% |
| $ 475,676 | $ 29,541 | 6.27% |
| $ 420,335 | $ 26,312 | 6.32% |
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NONEARNING ASSETS | 23,057 |
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| 22,110 |
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| 20,995 |
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TOTAL AVERAGE ASSETS | $ 527,682 |
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| $ 497,786 |
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| $ 441,330 |
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22
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY (Continued): |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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| |
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| 2005 |
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| 2004 |
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| 2003 |
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| Interest | Rates |
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| Interest | Rates |
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| 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: |
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Savings and NOW Accounts | $ 56,826 | $ 128 | 0.23% |
| $ 55,926 | $ 97 | 0.17% |
| $ 52,716 | $ 102 | 0.19% |
Money Market Accounts | 171,315 | 3,522 | 2.06% |
| 157,904 | 1,610 | 1.02% |
| 155,228 | 1,672 | 1.08% |
Time Deposits | 43,317 | 1,030 | 2.38% |
| 54,623 | 906 | 1.66% |
| 47,900 | 852 | 1.78% |
TOTAL INTEREST-BEARING DEPOSITS | 271,458 | 4,680 | 1.72% |
| 268,453 | 2,613 | 0.97% |
| 255,844 | 2,626 | 1.03% |
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Federal Funds Purchased | 196 | 5 | 2.62% |
| 399 | 6 | 1.38% |
| 37 | 1 | 1.40% |
FHLB Borrowings | 49,994 | 2,448 | 4.90% |
| 36,128 | 1,746 | 4.83% |
| 25,940 | 1,278 | 4.93% |
BWC Mortgage Services Borrowings | 11,973 | 606 | 5.06% |
| 20,068 | 915 | 4.56% |
| 6,749 | 347 | 5.14% |
TOTAL BORROWINGS | 62,163 | 3,059 | 4.92% |
| 56,595 | 2,667 | 4.71% |
| 32,726 | 1,626 | 4.97% |
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TOTAL AVERAGE INTEREST-BEARING |
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DEPOSITS AND BORROWINGS | $ 333,621 | $ 7,739 | 2.32% |
| $ 325,048 | $ 5,280 | 1.62% |
| $ 288,570 | $ 4,252 | 1.47% |
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NONINTEREST-BEARING DEPOSITS | 144,498 | - |
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| 124,695 | - |
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| 107,390 | - |
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OTHER LIABILITIES | 2,771 | - |
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| 1,918 | - |
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| 2,287 | - |
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SHAREHOLDERS' EQUITY | 48,788 | - |
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| 46,126 | - |
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| 43,082 | - |
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TOTAL AVERAGE LIABILITIES |
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AND SHAREHOLDERS' EQUITY | $ 529,678 |
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| $ 497,787 |
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| $ 441,329 |
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NET INTEREST INCOME |
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AND NET INTEREST MARGIN |
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ON AVERAGE EARNING ASSETS |
| $ 28,349 | 5.67% |
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| $ 24,261 | 5.15% |
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| $ 22,060 | 5.30% |
23
| 1) | Minor rate differences from a straight division of interest by average assets are due to the rounding of average balances. |
| 2) | Amounts calculated on a fully tax-equivalent basis where appropriate (2005 and 2004 Federal Statutory Rate was 34%). |
| 3) | Nonaccrual loans as of December 31, 2005 were $0 and as of 2004 were $25,000 have been included in the average loan balance. Interest income is included on nonaccrual loans only to the extent to which cash payments have been received. |
| 4) | Average loans are net of average deferred loan origination fees of $1,645,000 and $1,624,000 in 2005 and 2004, respectively. |
| 5) | Loan interest income includes loan origination fees of $3,393,000 and $3,362,000 in 2005 and 2004, 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 2005 and 2004, and between the years 2004 and 2003. 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 |
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| 2005 over 2004 |
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| 2004 over 2003 |
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| Volume | Rate | Total |
| Volume | Rate | Total | ||||||
Increase/(Decrease) in Interest Income |
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Investment Securities, Fed Funds, Other | $ 354 | $ 437 | $ 791 |
| $ 328 | $ (419) | $ (91) | ||||||
Loans | 2,000 | 3,936 | 5,936 |
| 2,203 | (365) | 1,838 | ||||||
BWC Mortgage Services Loans Held-for-Sale | (1,062) | 882 | (180) |
| 1,242 | 240 | 1,482 | ||||||
Total Increase (Decrease) | $ 1,292 | $ 5,255 | $ 6,547 |
| $ 3,773 | $ (544) | $ 3,229 | ||||||
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Increase (Decrease) in Interest Expense |
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Interest-bearing Deposits | 41 | 2,026 | 2,067 |
| 126 | (139) | (13) | ||||||
FHLB and Other Borrowings - Bank | 662 | 39 | 701 |
| 513 | (40) | 473 | ||||||
BWC Mortgage Services Borrowings | (389) | 80 | (309) |
| 646 | (78) | 568 | ||||||
Total Increase (Decrease) | $ 314 | $ 2,145 | $ 2,459 |
| $ 1,285 | $ (257) | $ 1,028 | ||||||
Increase (Decrease) on |
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Net Interest Income | $ 978 | $ 3,110 | $ 4,088 |
| $ 2,488 | $ (287) | $ 2,201 | ||||||
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 2005 increased $6,547,000 as compared to 2004. This was related to both to the growth in earning assets and rate increases. Analysis of the influences of growth and rates shows that interest income was increased by $1,292,000, due to growth, and increased by $5,255,000, due to higher rates.
Total interest expense in 2005 increased $2,459,000 from 2004. This was also related to both the increase in volume of funds and increases in rates. Analysis of the influence of growth and rates shows that interest expense was increased by $313,000, due to increased growth, and increased by $2,146,000, due to rates.
Based on the above factors affecting interest income and interest expense, net interest income increased $4,088,000 during 2005 as compared to 2004. Had the same average rates been in effect during 2005 as were experienced in 2004, the net interest income of the Corporation would have increased by $979,000.
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 $3,773,000, due to growth, and reduced by $544,000, due to lower rates.
24
Total interest expense in 2004 decreased $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 $1,285,000, due to increased growth, and decreased by $257,000, 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 $2,488,000.
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, 2005 estimated that a 2% interest-rate shock (decrease) could lower net interest income by $1,123,000, which was 4.0% of the Bank’s 2005 net interest income.
This earnings simulation does not account for the potential impact of loan prepayments, deposit drifts, or other balance sheet movements in response to modeled changes in interest rates, and the resulting effect, if any, on the 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, 2005. 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 |
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In thousands | Months | Months | Months | Years | Years | Totals |
Assets: |
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Federal Funds Sold & Short-term |
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Investments | $ 43 | $ - | $ 100 | $ - | $ - | $ 143 |
Investment securities | 5,016 | 12,359 | 31,742 | 57,129 | 458 | 106,704 |
Construction & Real Estate Loans | 150,253 | 10,088 | 1,043 | 36,632 | 47,411 | 245,427 |
Commercial Loans | 81,340 | 492 | 790 | 6,481 | 2,896 | 91,999 |
Installment Loans | 44,992 | 4 | 8 | 30 | - | 45,034 |
Leases | 2,088 | 2,167 | 4,079 | 12,178 | - | 20,512 |
BWC Mortgage Loans Held-for-Sale | 7,274 | - | - | - | - | 7,274 |
Interest-bearing assets | $ 291,006 | $ 25,110 | $ 37,762 | $ 112,450 | $ 50,765 | $ 517,093 |
25
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Liabilities: |
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Money market accounts | $ 84,196 | $ 84,195 | $ - | $ - | $ - | $ 168,391 |
Time deposits <$100,000 | 6,475 | 7,596 | 5,426 | 1,832 | - | 21,329 |
Time deposits >$100,000 | 7,011 | 6,783 | 5,722 | 1,351 | - | 20,867 |
Federal Funds Borrowed | - |
| - | - | - | - |
Federal Home Loan Bank Borrowings | 379 | 383 | 782 | 9,768 | 44,995 | 56,307 |
BWC Mortgage Services Borrowings | 7,210 | - | - | - | - | 7,210 |
Interest-bearing liabilities | $ 105,271 | $ 98,957 | $ 11,930 | $ 12,951 | $ 44,995 | $ 274,104 |
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Rate-sensitive gap | $ 185,735 | $ (73,847) | $ 25,832 | $ 99,499 | $ 5,770 | $ 242,989 |
Cumulative rate-sensitive gap | $ 185,735 | $ 111,888 | $ 137,720 | $ 237,219 | $ 242,989 |
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Cumulative rate-sensitive ratio | 2.76 | 1.55 | 1.64 | 2.04 | 1.89 |
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Maturity Distribution and Interest-Rate Sensitivity of Loans |
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The following table shows the maturity distribution and interest-rate sensitivity of loans |
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of the Corporation on December 31, 2005. |
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In thousands |
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| Loans With a Maturity of |
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| One Year | One to | After Five |
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| or Less | Five Years | Years | Total |
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Real Estate Construction | $ 107,367 | $ 18,731 | $ - | $ 126,098 |
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Commercial Real Estate | 2,599 | 20,733 | 95,997 | 119,329 |
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Commercial | 30,811 | 23,971 | 37,217 | 91,999 |
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Installment | 1,243 | 7,697 | 36,094 | 45,034 |
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Leases | 618 | 19,894 | - | 20,512 |
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TOTAL | $ 142,638 | $ 91,026 | $ 169,308 | $ 402,972 |
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Loans with Fixed Interest Rates | $ 3,516 | $ 39,139 | $ 59,126 | $ 101,781 |
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Loans with Floating Interest Rates | 139,122 | 51,887 | 110,182 | 301,191 |
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TOTAL | $ 142,638 | $ 91,026 | $ 169,308 | $ 402,972 |
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Outstanding loans by type were: |
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| December 31, |
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In thousands | 2005 | 2004 | 2003 | 2002 | 2001 |
Real Estate Construction | $ 126,098 | $ 110,368 | $ 100,298 | $ 82,261 | $ 91,673 |
Commercial Real Estate | 119,329 | 97,372 | 71,196 | 72,332 | 47,028 |
Commercial | 91,999 | 107,864 | 103,702 | 89,505 | 81,878 |
Installment | 45,034 | 46,327 | 47,333 | 51,857 | 47,732 |
Leases | 20,512 | 18,751 | 14,591 | 13,605 | 13,156 |
Total | 402,972 | 380,682 | 337,120 | 309,560 | 281,467 |
Less: Allowance for Credit Losses | (7,493) | (7,670) | (6,693) | (5,977) | (5,403) |
Net Loans | $ 395,479 | $ 373,012 | $ 330,427 | $ 303,583 | $ 276,064 |
26
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, 2005 was 1.86%, as compared to 2.01% for the period ending December 31, 2004. 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, 2005, the Corporation had $6,222,000 in allocated reserves and $1,270,000 in unallocated reserves. As of December 31, 2004, the Corporation had $6,371,000 in allocated reserves and $1,299,000 in unallocated reserves.
During 2005, loans increased by approximately 6% 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 2005 and that the Bank’s net charge-offs resulted in a modest charge for the year. In view of all these factors, management discontinued additional allowance provisions during 2005 and, unless loan growth accelerates or material losses occur, there will likely be no additional provisions made during 2006.
The Corporation had net charge-offs of $177,000 during 2005 as compared to net recoveries of $2,000 during 2004.
NOTE 4: ALLOWANCE FOR CREDIT LOSSES |
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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. | ||||||
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| 2005 |
| 2004 |
| 2003 |
|
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 |
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Commercial | $ 3,042 | 99.23% | $ 3,695 | 99.28% | $ 3,832 | 30.76% |
Real Estate Construction | 672 | 31.29% | 584 | 28.99% | 591 | 29.75% |
Commercial Real Estate | 369 | 29.61% | 209 | 25.58% | 153 | 21.12% |
Installment | 555 | 11.18% | 537 | 12.17% | 745 | 14.04% |
Leases | 1,048 | 5.09% | 1,346 | 4.93% | 949 | 4.33% |
Unallocated | 1,807 | - | 1,299 | - | 423 | - |
TOTAL | $ 7,493 | 100.00% | $ 7,670 | 100.00% | $ 6,693 | 31.45% |
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| 2002 |
| 2001 |
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| Allocation | Loans as a | Allocation | Loans as a |
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|
| of Allowance | Percent of | of Allowance | Percent of |
|
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Type of Loan | Balance | Total Loans | Balance | Total Loans |
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Commercial | $ 2,813 | 28.91% | $ 3,722 | 29.09% |
|
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Real Estate Construction | 420 | 26.57% | 412 | 32.57% |
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Commercial Real Estate | 142 | 23.37% | 81 | 16.71% |
|
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Installment | 439 | 16.75% | 389 | 16.96% |
|
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Leases | 670 | 4.40% | 612 | 4.67% |
|
|
Unallocated | 1,493 | - | 187 | - |
|
|
TOTAL | $ 5,977 | 29.62% | $ 5,403 | 29.80% |
|
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27
ALLOWANCE FOR CREDIT LOSSES (Cont.) |
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In thousands | For the Year Ended December 31, | ||||
| 2005 | 2004 | 2003 | 2002 | 2001 |
Total loans outstanding at end of period, before |
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deducting allowance for credit losses | $ 402,972 | $ 380,682 | $ 337,120 | $ 309,560 | $ 281,467 |
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Average total loans outstanding during period | $ 387,952 | $ 360,876 | $ 329,017 | $ 279,890 | $ 267,177 |
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Analysis of the allowance for credit losses: |
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Beginning Balance | $ 7,670 | $ 6,693 | $ 5,977 | $ 5,403 | $ 5,042 |
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Charge-offs: |
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Commercial | - | 202 | 780 | 545 | 1,009 |
Leases | 372 | 54 | 281 | 270 | 382 |
Installment | 16 | 14 | 50 | 23 | 75 |
Total Charge-Offs | 388 | 270 | 1,111 | 838 | 1,466 |
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Recoveries: |
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Commercial | 81 | 183 | 246 | 82 | 138 |
Leases | 128 | 87 | 78 | 119 | 79 |
Installment | 2 | 2 | 3 | 11 | 10 |
Total Recoveries | 211 | 272 | 327 | 212 | 227 |
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Net Charge-Offs (Recoveries) | 177 | (2) | 784 | 626 | 1,239 |
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Provisions charged to expense | - | 975 | 1,500 | 1,200 | 1,600 |
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Ending Balance | $ 7,493 | $ 7,670 | $ 6,693 | $ 5,977 | $ 5,403 |
Ratio of net charge-offs (recoveries) |
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to average total loans | 0.05% | 0.00% | 0.24% | 0.22% | 0.46% |
Ratio of allowance for credit losses |
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to total loans at end of period | 1.85% | 2.01% | 1.98% | 1.93% | 1.92% |
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The following table provides further information on past-due and nonaccrual loans. |
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| 2005 | 2004 | 2003 | 2002 | 2001 |
Loans past due 90 days or more, still |
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accruing interest | $ - | $ 3 | $ 89 | $ 328 | $ 257 |
Nonaccrual Loans | - | 25 | 687 | 426 | 846 |
Total | $ - | $ 28 | $ 776 | $ 754 | $ 1,103 |
As of December 31, 2005 and 2004, the Corporation's recorded investment in impaired loans was $0 and $25,000, respectively. As of December 31, 2005 and 2004, the Corporation had established a valuation allowance of $0 and $25,000, respectively, against impaired loans. The average recorded investment in impaired loans for 2005 and 2004 was $0 and $339,000, respectively.
As of December 31, 2005 and 2004, 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 $0 in 2005, $0 in 2004, and $168,000 in 2003.
28
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, 2001 and 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 increased, in concert with the general increase in rates which began in mid 2004. A comparison of the rates paid on the Bank’s deposit products at December 31, 2005, 2004 and 2003 is as follows:
29
DEPOSITS |
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The following table shows daily average balances for the various classifications of deposits for the periods indicated. |
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In thousands |
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| For the Year Ended December 31, |
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| 2005 |
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| 2004 |
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| 2003 |
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| Average |
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Interest-bearing Deposits: | Balance | Interest | Rates | Balance | Interest | Rates | Balance | Interest | Rates |
Savings and NOW Accounts | $ 56,826 | $ 128 | 0.23% | $ 55,926 | $ 97 | 0.17% | $ 52,716 | $ 102 | 0.19% |
Money Market Accounts | 172,394 | 3,522 | 2.04% | 157,904 | 1,610 | 1.02% | 155,228 | 1,672 | 0.01% |
Time Deposits | 43,317 | 1,030 | 2.38% | 54,623 | 906 | 1.66% | 47,900 | 852 | 0.02% |
Total Interest-bearing Deposits | $ 272,537 | $ 4,680 | 1.72% | $ 268,453 | $ 2,613 | 0.97% | $ 255,844 | $ 2,626 | 1.03% |
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Noninterest-bearing Demand | 144,498 | - | - | 124,695 | - | - | 107,390 | - | - |
Total Deposits | $ 417,035 | $ 4,680 | 1.12% | $ 393,148 | $ 2,613 | 0.66% | $ 363,234 | $ 2,626 | 0.72% |
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The following table shows the ending balances for the various classifications of deposits for the |
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periods indicated. |
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In thousands |
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| For the Year Ending December 31, |
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| 2005 |
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| 2004 |
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| 2003 |
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Noninterest-bearing Demand | $ 149,715 |
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| $ 131,252 |
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| $ 123,496 |
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Savings and NOW Accounts | 60,874 |
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| 63,220 |
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| 52,727 |
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Money Market Accounts | 168,391 |
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| 156,236 |
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| 152,188 |
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Time Deposits | 42,196 |
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| 42,231 |
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| 41,754 |
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Total Deposits | $ 421,176 |
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| $ 392,939 | �� |
| $ 370,165 |
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Time Deposit Maturity Schedule: |
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In thousands | 3 | 3-6 | 6-12 | 1-5 |
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| Months | Months | Months | Years | Total |
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Time deposits <$100,000 | $ 6,475 | $ 7,596 | $ 5,426 | $ 1,832 | $ 21,329 |
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Time deposits >$100,000 | 7,011 | 6,783 | 5,722 | 1,351 | 20,867 |
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Total Time Deposits | $ 13,486 | $ 14,379 | $ 11,148 | $ 3,183 | $ 42,196 |
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30
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 Countrywide in the amount of $20,000,000 and with First Collateral Services in the amount of $10,000,000. 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.
31
OTHER BORROWED FUNDS: |
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The following table shows daily average balances for the various classifications of borrowed funds for the |
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periods indicated. |
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| 2005 |
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| 2004 |
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| 2003 |
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In thousands |
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| Weighted |
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| Average |
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| 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 | $ 196 | $ 5 | 2.62% | $ 399 | $ 6 | 1.38% | $ 37 | $ 1 | 1.40% |
FHLB Borrowings | 49,994 | 2,448 | 4.90% | 36,128 | 1,746 | 4.83% | 25,940 | 1,278 | 4.93% |
BWC Mortgage Services Borrowings | 11,973 | 606 | 5.06% | 20,068 | 915 | 4.56% | 6,749 | 347 | 5.14% |
Total Other Borrowings | $ 62,163 | $ 3,059 | 4.92% | $ 56,595 | $ 2,667 | 4.71% | $ 32,726 | $ 1,626 | 4.97% |
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| Maximum | End of |
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In thousands | Month End | Year Amt. |
| Month End | Year Amt. |
| Month End | Year Amt. |
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Federal Funds Purchased | $ 2,650 | $ 1,500 |
| $ 800 | $ - |
| $ 500 | $ - |
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FHLB Borrowings | $ 56,307 | $ 56,307 |
| $ 43,595 | $ 43,313 |
| $ 33,352 | $ 33,352 |
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BWC Mortgage Services Borrowings | $ 26,123 | $ 7,210 |
| $ 34,213 | $ 14,511 |
| $ 22,041 | $ 5,071 |
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Repricing within: | 3 | 3-6 | 6-12 | 1-5 | Over 5 |
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In thousands | Months | Months | Months | Years | Years | Totals |
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Federal Home Loan Bank Borrowings | $ 379 | $ 383 | $ 782 | $ 17,465 | $ 37,298 | $ 56,307 |
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BWC Mortgage Services Borrowings | $ 7,210 | $ - | $ - | $ - | $ - | $ 7,210 |
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| 1) | Minor rate differences from a straight division of interest by average assets are due to the rounding of average balances. |
| 1) |
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32
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements | ||||||
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The following table presents, as of December 31, 2005, 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. |
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| Payments Due In |
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| One to | Three to | Over |
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| Note | One Year | Three | Five | Five |
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In thousands | Reference | or Less | Years | Years | Years | Total |
Deposits without a stated maturity | - | $ 378,980 | $ - | $ - | $ - | $ 378,980 |
Time Deposits | - | 39,013 | 3,183 | - | - | 42,196 |
Operating Leases | 11 | 1,759 | 3,074 | 2,259 | 3,516 | 10,608 |
Federal Home Loan Bank Borrowings | 10 | 1,544 | 4,258 | 5,510 | 44,995 | 56,307 |
BWC Mortgage Services Borrowings | 10 | 7,210 | - | - | - | 7,210 |
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A schedule of significant commitments at December 31, 2005 follows: |
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In thousands |
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Commitments to extend credit: |
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Unused real estate construction commitments | $ 60,014 |
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Unused commercial loan commitments | 76,165 |
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Revolving home equity and credit card lines | 67,982 |
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Standby letters of credit |
| 3,724 |
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Total |
| $ 207,885 |
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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
2005 vs. 2004
Total noninterest income in 2005 was $3,840,000 more than earned in 2004. The noninterest income of the Corporation includes BWC Mortgage Services commissions and their other operating income. The noninterest income associated with BWC Mortgage Services increased $3,991,000 from the prior year, whereas the Bank’s noninterest income decreased $151,000 from the prior year. BWC Mortgage Services noninterest income increased due to the growth in their mortgage banking operations. The Bank’s reduction in this category of income is due to a decrease in service charge income due to its free checking program. Other income is lower primarily because there were fewer SBA loan sales in 2005 as compared to 2004, resulting in lower gains of loan sales than in the prior year, and the gains on security sales were $18,000 less then the prior year.
33
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 program 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.
Noninterest Expense
2005 vs. 2004
Total noninterest expense in 2005 increased $3,787,000 from 2004. The noninterest expense of the Corporation includes BWC Mortgage Services sales commissions and their other operating expenses. Mortgage banking services, associated with BWC Mortgage Services, increased approximately $3,722,000 in 2005 as compared to 2004, accounting for most of the increase in noninterest expense.
Salaries and related benefits reflect an increase of $944,000 over that of 2004. Of this, $720,000 originated from BWC Mortgage Services, and the remainder was from the Bank and related to salary and merit increases on existing staff plus bonus programs of the Bank. Full time equivalents (FTE) in the Bank averaged approximately 118 during 2005 and 120 during 2004. On the other hand, the growth in BWC Mortgage Services increased their total staff from 31 employees and 72 agents to 49 employees and 115 agents.
Total occupancy expense increased $148,000 between the respective periods. Of this increase, BWC Mortgage Services accounted for $211,000 and there was a decrease from the Bank of $61,000. The Bank’s occupancy expense was greater in the prior year due primarily to temporary increases in expenses related to remodeling activities and expansions of operations, which occurred that year.
Furniture and equipment expense increased $71,000 during the respective periods. BWC Mortgage Services accounted for approximately $54,000 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 increased $259,000 from the comparable expenses in 2004. Other operating expenses of BWC Mortgage Services increased approximately $371,000, offset by decreases from the Bank of approximately $88,000. The balance of the change was a decrease in operating expenses within the parent company of $24,000. Most categories of other expenses within BWC Mortgage Services were up from the prior year, reflecting their growth and expansion during 2005. Within the Bank, the largest segment of decrease was in legal and professional fees which were down approximately $44,000 from the prior year and other fees which were down approximately $52,000.
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.
34
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.
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 2005 and 2004.
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.
The Bank’s leverage ratio surpassed the regulatory minimum of 3% at December 31, for both 2005 and 2004.
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 2005. Core deposits, the most significant source of funding, comprised approximately 73% and 74% of funding in 2005 and 2004, respectively.
Cash, investment securities, and other temporary investments represent 22.8% of total assets as of December 31, 2005 and 20% 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, 2005 increased liquidity by $17,362,000 compared to a decrease of $2,675,000 in 2004. The primary areas of operations using liquidity were from the purchase of investment securities of $71,639,000 and the origination of loans of $22,467,000.
The majority of the Corporation’s funding comes from customer deposits within its operating region. Customer deposits provided $28,237,000 for the year ended December 31, 2005 compared to $22,774,000 for 2004. Borrowing activities also provide a source of funding and, in the period ending December 31, 2005, borrowed funds contributed $7,194,000 as compared to $19,401,000 for 2004. 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 $44,191,000 for the year ended December 31, 2005 compared to $54,967,000 for 2004.
35
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 $30,000,000. In addition, the Corporation has approximately $38,000,000 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 2005, 2004, and 2003 of $3,000,000, $4,000,000, and $2,260,000, respectively. The subsidiaries also provided liquidity to the Corporation in the form of returns of capital during 2005, 2004, and 2003 of $8,721,000, $5,804,000, and $4,885,000, respectively. Another source of funding for the Corporation has been receipts from stock options exercised.
During 2005, 2004, and 2003, stock options exercised generated cash to the Corporation of $437,000, $197,000, and $89,000, respectively. As of January 1, 2005, the amount of dividends the bank subsidiary can pay to the parent company without prior regulatory approval was $17,298,000, versus $13,410,000 at January 1, 2005. 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, 2005 the Corporation’s lease financing residual value was $335,000 against lease receivables of $20,512,000.
36
Any material effect on the financial statements related to these critical accounting areas is also discussed in this financial review.
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 of this Report and in Management Discussion and Analysis of Financial Condition and Results of Operations which is included in Item 7 of this Report.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Table of Contents |
BWC FINANCIAL CORP. AND SUBSIDIARIES | Page Number |
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Consolidated Balance Sheets as of December 31, 2005 and 2004 | 39 |
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Report of Independent Registered Public Accounting Firm for the years |
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38
BWC FINANCIAL CORP. |
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| |
In thousands | December 31, | December 31, |
Assets | 2005 | 2004 |
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Cash and Due From Banks | $ 16,511 | $ 10,315 |
Federal Funds Sold | - | 8,500 |
Other Short-term Investments | 143 | 173 |
Total Cash and Cash Equivalents | 16,654 | 18,988 |
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Investment Securities: |
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Available-for-Sale | 93,714 | 62,220 |
Held-to-Maturity (approximate fair value of |
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$12,868 in 2005 and $17,947 in 2004) | 12,990 | 17,846 |
Loans, Net of Allowance for Credit Losses of $7,493 |
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in 2005 and $7,670 in 2004 | 395,479 | 373,012 |
BWC Mortgage Services Loans Held-for-Sale | 7,274 | 14,966 |
Premises and Equipment, Net | 3,921 | 4,051 |
Interest Receivable and Other Assets | 11,765 | 10,275 |
Total Assets | $ 541,797 | $ 501,358 |
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Liabilities and Shareholders' Equity |
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Liabilities |
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Deposits: |
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Noninterest-bearing | $ 149,715 | $ 131,252 |
Interest-bearing: |
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Money Market Accounts | 168,391 | 156,236 |
Savings and NOW Accounts | 60,874 | 63,220 |
Time Deposits: |
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Under $100,000 | 21,329 | 22,473 |
$100,000 or more | 20,867 | 19,758 |
Total Interest-bearing | 271,461 | 261,687 |
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Total Deposits | 421,176 | 392,939 |
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Federal Funds Purchased | 1,500 | - |
Federal Home Loan Bank borrowings | 56,307 | 43,313 |
BWC Mortgage Services borrowings | 7,210 | 14,511 |
Interest Payable and Other Liabilities | 4,516 | 3,314 |
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Total Liabilities | 490,709 | 454,077 |
Shareholders' Equity |
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Preferred Stock, no par value: |
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5,000,000 shares authorized, none outstanding | - | - |
Common Stock, no par value: |
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25,000,000 shares authorized; issued and outstanding - |
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4,128,829 shares in 2005 and 4,228,459 in 2004 | 44,036 | 47,054 |
Retained Earnings | 7,662 | 436 |
Accumulated other comprehensive (loss) income | (610) | (209) |
Total Shareholders' Equity | 51,088 | 47,281 |
Total Liabilities and Shareholders' Equity | $ 541,797 | $ 501,358 |
The accompanying notes are an integral part of these consolidated statements. |
39
BWC FINANCIAL CORP. |
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In thousands except per-share amounts |
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| For the Year Ended December 31, | ||
Interest Income | 2005 | 2004 | 2003 |
Loans, including Fees | $ 32,593 | $ 26,837 | $ 23,517 |
Investment Securities: |
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|
Taxable | 2,155 | 1,999 | 2,189 |
Non-taxable | 478 | 550 | 463 |
Federal Funds Sold | 858 | 153 | 142 |
Other Short-term Investments | 4 | 2 | 1 |
Total Interest Income | 36,088 | 29,541 | 26,312 |
Interest Expense |
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Deposits | 4,680 | 2,613 | 2,626 |
Federal Funds Purchased | 5 | 6 | 1 |
FHLB Borrowings | 2,448 | 1,746 | 1,278 |
BWC Mortgage Services Borrowings | 606 | 915 | 347 |
Total Interest Expense | 7,739 | 5,280 | 4,252 |
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Net Interest Income | 28,349 | 24,261 | 22,060 |
Provision for Credit Losses | - | 975 | 1,500 |
Net Interest Income After Provision For Credit Losses | 28,349 | 23,286 | 20,560 |
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Noninterest Income |
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BWC Mortgage Services - Commissions | 11,207 | 8,957 | 10,588 |
BWC Mortgage Services - Fees & Other | 5,557 | 3,816 | 4,174 |
Service Charges on Deposit Accounts | 828 | 923 | 1,015 |
Other | 1,572 | 1,610 | 1,612 |
Gain/(loss) on Security Transactions | 3 | 21 | (12) |
Total Noninterest Income | 19,167 | 15,327 | 17,377 |
Noninterest Expense |
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Salaries and Related Benefits | 12,894 | 11,950 | 11,195 |
BWC Mortgage Services - Commissions | 9,901 | 7,536 | 8,728 |
Occupancy | 2,465 | 2,317 | 2,012 |
Furniture and Equipment | 940 | 869 | 769 |
Other | 6,030 | 5,771 | 6,424 |
Total Noninterest Expense | 32,230 | 28,443 | 29,128 |
BWC Mortgage Services - Minority Interest | 1,220 | 1,013 | 1,172 |
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Income Before Income Taxes | 14,066 | 9,157 | 7,637 |
Provision for Income Taxes | 5,420 | 3,444 | 2,838 |
Net Income | $ 8,646 | $ 5,713 | $ 4,799 |
Basic Earnings Per Share |
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Diluted Earnings Per Share | $ 2.07 | $ 1.33 | $ 1.11 |
| $ 2.04 | $ 1.32 | $ 1.11 |
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Weighted Average Basic Shares | 4,182,661 | 4,280,595 | 4,315,772 |
Weighted Average Diluted Share Equivalents |
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Related to Options | 60,655 | 35,661 | 20,800 |
Weighted Average Diluted Shares | 4,243,316 | 4,316,256 | 4,336,572 |
The accompanying notes are an integral part of these consolidated statements. |
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40
BWC FINANCIAL CORP. |
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For the periods ending December 31, 2003, 2004, and 2005 |
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In thousands except share amounts |
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| Accumulated |
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| Other |
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| Number | Common | Retained | Comprehensive |
| Comprehensive |
| of Shares | Stock | Earnings | Income/(Loss) | Total | Income |
Balance, January 1, 2003 | 3,619,510 | $ 32,575 | $ 8,570 | $ 854 | $41,999 |
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Net Income as of December 31, 2003 | - | - | 4,799 | - | 4,799 | 4,799 |
Other Comprehensive Income, net of tax |
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liability of $301 | - | - | - | (355) | (355) | (355) |
Comprehensive Income | - | - | - | - | - | $ 4,444 |
Stock options exercised | 6,140 | 89 | - | - | 89 |
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Repurchase and retirement of shares by the |
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Corporation | (71,700) | (1,292) | - | - | (1,292) |
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Cash Dividend Paid | - | - | (426) | - | (426) |
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10% stock dividend including payment of |
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fractional shares | 355,182 | 7,633 | (7,638) | - | (5) |
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Tax benefit from the exercise of stock options | - | 14 | - | - | 14 |
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Balance, December 31, 2003 | 3,909,132 | $ 39,019 | $ 5,305 | $ 499 | $44,823 |
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Net Income as of December 31, 2004 | - | - | 5,713 | - | 5,713 | 5,713 |
Other Comprehensive Income, net of tax |
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benefit of $133 | - | - | - | (708) | (708) | (708) |
Comprehensive Income | - | - | - | - | - | $ 5,005 |
Stock options exercised | 15,008 | 197 | - | - | 197 |
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Repurchase and retirement of shares by the |
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Corporation | (79,842) | (1,749) | - | - | (1,749) |
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Cash Dividend Paid | - | - | (1,011) | - | (1,011) |
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10% stock dividend including payment of |
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fractional shares | 384,161 | 9,567 | (9,571) | - | (4) |
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Tax benefit from the exercise of stock options | - | 20 | - | - | 20 |
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Balance, December 31, 2004 | 4,228,459 | $ 47,054 | $ 436 | $ (209) | $47,281 |
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Net Income as of December 31, 2005 | - | - | 8,646 | - | 8,646 | 8,646 |
Other Comprehensive Income, net of tax |
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benefit of $374 | - | - | - | (401) | (401) | (401) |
Comprehensive Income | - | - | - | - | - | $ 8,245 |
Stock options exercised | 32,525 | 437 | - | - | 437 |
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Repurchase and retirement of shares by the |
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Corporation | (132,155) | (3,568) | - | - | (3,568) |
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Cash Dividend Paid | - | - | (1,420) | - | (1,420) |
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Tax benefit from the exercise of stock options | - | 113 | - | - | 113 |
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Balance, December 31, 2005 | 4,128,829 | $ 44,036 | $ 7,662 | $ (610) | $51,088 |
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The accompanying notes are an integral part of these consolidated statements. |
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41
BWC FINANCIAL CORP. |
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CONSOLIDATED STATEMENTS OF CASH FLOWS |
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In thousands | For the Year Ended December 31, | ||
Operating Activities: | 2005 | 2004 | 2003 |
Net Income | $ 8,646 | $ 5,713 | $ 4,799 |
Adjustments to reconcile net income to |
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|
|
net cash provided: |
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|
Provision for credit losses | - | 975 | 1,500 |
Depreciation on fixed assets | 791 | 735 | 613 |
Amortization and accretion on securities | 412 | 913 | 1,044 |
(Gain)/loss on sale of securities available-for-sale | (3) | (21) | 12 |
Decrease/(increase) in BWC Mtg. loans held-for-sale | 7,692 | (9,824) | (5,142) |
Decrease/(increase) in interest receivable |
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and other assets | (1,378) | (735) | (952) |
Increase/(decrease) in interest payable |
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and other liabilities | 1,202 | (431) | 853 |
Net Cash From Operating Activities | 17,362 | (2,675) | 2,727 |
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Investing Activities: |
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Proceeds from the maturities of investment securities | 22,700 | 26,544 | 32,659 |
Proceeds from the sales of available-for-sale |
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investment securities | 21,491 | 28,424 | 488 |
Purchase of investment securities | (71,639) | (49,960) | (48,886) |
Loans originated, net of collections | (22,467) | (43,559) | (29,373) |
Purchase of bank premises and equipment | (661) | (894) | (1,523) |
Net Cash From Investing Activities | (50,576) | (39,445) | (46,635) |
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Financing Activities: |
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Net increase in deposits | 28,237 | 22,774 | 29,212 |
Increase in Federal Funds Borrowed | 1,500 | - | - |
Increase in Federal Home Loan Bank Borrowings | 12,994 | 9,961 | 9,730 |
Increase/(decrease) in BWC Mortgage Services borrowings | (7,300) | 9,440 | 5,071 |
Cash paid for the repurchase of common stock | (3,568) | (1,749) | (1,292) |
Cash Dividend Paid | (1,420) | (1,011) | (426) |
Proceeds from the exercise of stock options | 437 | 197 | 89 |
Cash paid in lieu of fractional shares | - | (4) | (5) |
Net Cash From Financing Activities | 30,880 | 39,608 | 42,379 |
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Cash and Cash Equivalents: |
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Increase (decrease) in cash and cash equivalents | (2,334) | (2,512) | (1,529) |
Cash and cash equivalents at beginning of year | 18,988 | 21,500 | 23,029 |
Cash and Cash Equivalents at end of year | $ 16,654 | $ 18,988 | $ 21,500 |
Additional Cash Flow Information: |
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Interest Paid | $ 7,854 | $ 5,212 | $ 4,403 |
Income Taxes Paid | $ 4,734 | $ 3,812 | $ 2,716 |
The accompanying notes are an integral part of these consolidated statements. |
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42
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.
43
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 and December 2003.
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
44
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 |
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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: |
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Net Income: | 2005 | 2004 | 2003 |
As reported | $ 8,646,000 | $ 5,713,000 | $ 4,799,000 |
Compensation expense | 163,000 | 150,000 | 161,000 |
Pro forma | $ 8,483,000 | $ 5,563,000 | $ 4,638,000 |
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Basic Earnings per share: |
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As reported | $ 2.07 | $ 1.33 | $ 1.11 |
Pro forma | $ 2.03 | $ 1.30 | $ 1.07 |
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Diluted Earnings per share: |
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As reported | $ 2.04 | $ 1.32 | $ 1.11 |
Pro forma | $ 2.00 | $ 1.29 | $ 1.07 |
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Weighted Average Basic Shares | 4,182,661 | 4,280,595 | 4,315,772 |
Weighted Average Diluted Shares | 4,243,316 | 4,316,256 | 4,336,572 |
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 Corporation expenses marketing costs as they are incurred. Marketing expense was $358,000, $247,000 and $345,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
45
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
New Accounting Pronouncement Disclosures:
“Application of Accounting Principles to Loan Commitments” (SAB105) - On March 9, 2005, 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, 2005. SAB 105 has had no effect on the Corporation’s results of operations or financial condition.
“Statement of Financial Accounting Standards No. 123 (revised 2005)” - In December 2005 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).
The Corporation will adopt this Statement on January 1, 2006 using the modified prospective transition method. Management estimates that the effect of adopting this Statement will result in approximately $228,000 in additional compensation expense during 2006.
46
NOTE 2: INVESTMENT SECURITIES |
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An analysis of the investment security portfolio at December 31 follows: |
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In thousands |
| 2005 |
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| Gross | Gross | Estimated |
| Amortized | Unrealized | Unrealized | Fair |
Available-for-sale | Cost | Gains | Losses | Value |
U.S. Treasury Securities | $ 262 | $ - | $ 7 | $ 255 |
Securities of U.S. Government Agencies | 72,811 | 4 | 602 | 72,213 |
Taxable Securities of State and |
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Political Subdivisions | 17,468 | 1 | 292 | 17,177 |
Corporate Debt Securities | 4,161 | - | 92 | 4,069 |
Total | 94,702 | 5 | 993 | 93,714 |
Held-to-maturity |
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Obligations of State and Political Subdivisions | 12,990 | 17 | 139 | 12,868 |
Total Investment Securities | $ 107,692 | $ 22 | $ 1,132 | $ 106,582 |
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In thousands |
| 2004 |
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| 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 |
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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 |
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Obligations of State and Political Subdivisions | 17,846 | 157 | 56 | 17,947 |
Total Investment Securities | $ 80,408 | $ 267 | $ 508 | $ 80,167 |
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In thousands |
| 2003 |
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| 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 |
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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 |
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Obligations of State and Political Subdivisions | 18,971 | 315 | 41 | 19,245 |
Total Investment Securities | $ 85,855 | $ 1,237 | $ 163 | $ 86,929 |
In 2005, 2004 and 2003 the Corporation received proceeds from the sale of available-for-sale securities of |
| |||
$21,491,000, $28,424,000 and $488,000, respectively. Gains and losses included in other noninterest income for | ||||
2005 were $37,000 in gains and $34,000 in losses. For 2004 gains were $149,000 and losses were $128,000. For 2003 | ||||
gains were $0 and losses were $12,000. |
|
|
|
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47
NOTE 2: INVESTMENT SECURITIES (Cont.) |
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| |
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|
The maturities of the investment security portfolio at December 31, 2005 follow: |
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|
|
|
| |||
|
| Within |
| After one year |
| Over five years |
|
|
Available-for-sale |
| one year |
| through five years |
| through 10 years |
| Total |
In thousands |
| Estimated |
| Estimated |
| Estimated |
| Estimated |
| Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value |
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities | $ - | $ - | $ 262 | $ 255 | $ - | $ - | $ 262 | $ 255 |
Securities of U.S. Government Agencies | 35,839 | 35,625 | 36,972 | 36,588 | - | - | 72,811 | 72,213 |
Taxable Securities of State and |
|
|
|
|
|
| - | - |
Political Subdivisions | 6,879 | 6,851 | 10,589 | 10,326 | - | - | 17,468 | 17,177 |
Corporate Debt Securities | 2,017 | 2,005 | 2,144 | 2,064 | - | - | 4,161 | 4,069 |
Total | $ 44,735 | $ 44,481 | $ 49,967 | $ 49,233 | $ - | $ - | $ 94,702 | $ 93,714 |
Effective Weighted-Average Yield | 3.80% |
| 3.87% |
| 0.00% |
| 3.84% |
|
|
|
|
|
|
|
|
|
|
|
| Within |
| After one year |
| Over five years |
|
|
Held-to-maturity |
| one year |
| through five years |
| through 10 years |
| Total |
In thousands |
| Estimated |
| Estimated |
| Estimated |
| Estimated |
| Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | Cost | Fair Value |
|
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|
|
|
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|
|
Obligations of State and Political Subdivisions | $ 4,637 | $ 4,617 | $ 7,896 | $ 7,788 | $ 457 | $ 463 | $ 12,990 | $ 12,868 |
Effective Weighted-Average Yield | 3.86% |
| 3.99% |
| 5.20% |
| 3.99% |
|
|
|
|
|
|
|
|
|
|
Total Investment Securities | $ 49,372 | $ 49,098 | $ 57,863 | $ 57,021 | $ 457 | $ 463 | $ 107,692 | $ 106,582 |
Effective Weighted-Average Yield | 3.80% |
| 3.89% |
| 5.20% |
| 3.85% |
|
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|
|
|
|
|
|
|
At December 31, 2005, 2004 and 2003, securities with a book value of $17,884,300, $17,001,000 and $17,110,000, respectively, were pledged to secure public | ||||||||
deposits. Market value of these same securities on those dates were $17,492,497, $16,875,000 and $17,110,000, respectively. |
|
|
48
SECURITY UNREALIZED LOSS POSITIONS |
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| |
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|
The following summarizes temporarily impaired investment securities at December 31, 2005 |
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| ||||
In thousands |
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|
|
|
|
|
| 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 | $ 35,624 | $ 216 | $ 32,757 | $ 393 | $ 68,381 | $ 609 |
Obligations of State and Political |
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|
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|
|
|
Subdivisions | 2,892 | 24 | 7,245 | 115 | 10,137 | 139 |
Taxable Obligations of State and |
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|
|
Political Subdivisions | 5,590 | 29 | 10,326 | 263 | 15,916 | 292 |
Corporate debt securities | 2,005 | 12 | 2,064 | 80 | 4,069 | 92 |
Total temporarily impaired securities | $ 46,111 | $ 281 | $ 52,392 | $ 851 | $ 98,503 | $ 1,132 |
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|
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, 2005, there are approximately 91 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.
49
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 | 2005 | 2004 |
Real Estate Construction | $ 126,098 | $ 110,368 |
Commercial Real Estate | 119,329 | 97,372 |
Commercial | 91,999 | 107,864 |
Installment | 45,034 | 46,327 |
Leases | 20,512 | 18,751 |
Total | 402,972 | 380,682 |
Less: Allowance for Credit Losses | (7,493) | (7,670) |
Net Loans | $ 395,479 | $ 373,012 |
|
|
|
Netted from the above loan totals were deferred loan fees of $1,644,000 in 2005 and $1,725,000 in 2004. | ||
|
|
|
The following table provides further information on past-due and nonaccrual loans. | ||
|
|
|
| 2005 | 2004 |
Loans past due 90 days or more, still accruing interest | $ - | $ 3 |
Nonaccrual Loans | - | 25 |
Total | $ - | $ 28 |
As of December 31, 2005 and 2004, the Corporation's recorded investment in impaired loans was $0 and $25,000, respectively. As of December 31, 2005 and 2004, the Corporation had established a valuation allowance of $0 and $25,000, respectively, against impaired loans. The average recorded investment in impaired loans for 2005 and 2004 was $0 and $339,000, respectively.
As of December 31, 2005 and 2004, 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 2005, $0 in 2004, and $168,000 in 2003.
50
ALLOWANCE FOR CREDIT LOSSES (Cont.) |
|
|
|
In thousands | For the Year Ended December 31, | ||
| 2005 | 2004 | 2003 |
Total loans outstanding at end of period, before |
|
|
|
deducting allowance for credit losses | $ 402,972 | $ 380,682 | $ 337,120 |
|
|
|
|
Average total loans outstanding during period | $ 388,058 | $ 360,876 | $ 329,017 |
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|
|
|
Analysis of the allowance for credit losses: |
|
|
|
Beginning Balance | $ 7,670 | $ 6,693 | $ 5,977 |
|
|
|
|
Charge-offs: |
|
|
|
Commercial | - | 202 | 780 |
Leases | 372 | 54 | 281 |
Installment | 16 | 14 | 50 |
Total Charge-Offs | 388 | 270 | 1,111 |
|
|
|
|
Recoveries: |
|
|
|
Commercial | 81 | 183 | 246 |
Leases | 128 | 87 | 78 |
Installment | 2 | 2 | 3 |
Total Recoveries | 211 | 272 | 327 |
|
|
|
|
Net Charge-Offs (Recoveries) | 177 | (2) | 784 |
|
|
|
|
Provisions charged to expense | - | 975 | 1,500 |
|
|
|
|
Ending Balance | $ 7,493 | $ 7,670 | $ 6,693 |
Ratio of net charge-offs (recoveries) |
|
|
|
to average total loans | 0.05% | 0.00% | 0.24% |
Ratio of allowance for credit losses |
|
|
|
to total loans at end of period | 1.85% | 2.01% | 1.98% |
NOTE 5: PREMISES AND EQUIPMENT |
|
|
A summary of premises and equipment follows: |
|
|
In thousands |
|
|
| December 31, | |
| 2005 | 2004 |
Land and Leasehold Improvements | $ 2,819 | $ 2,793 |
Furniture and Equipment | 6,289 | 5,787 |
Bank-owned Premises | 1,326 | 1,326 |
| 10,434 | 9,906 |
Accumulated Depreciation and Amortization | (6,513) | (5,855) |
Premises and Equipment, Net | $ 3,921 | $ 4,051 |
|
|
|
The amount of depreciation and amortization included in occupancy and furniture and | ||
equipment expense was $791,000 in 2005, $735,000 in 2004, and $613,000 in 2003. |
|
51
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, 2005, 2004 and 2003 are | |||
as follows: |
|
|
|
In thousands | 2005 | 2004 | 2003 |
Unrealized gain(loss) arising during the period, |
|
|
|
net of tax | $ (399) | $ (695) | $ (362) |
Reclassification adjustment for net realized |
|
|
|
gains of securities available-for-sale included |
|
|
|
in net income during the year, net of tax | 2 | 13 | (7) |
|
|
|
|
Net unrealized gain(loss) included in other |
|
|
|
comprehensive income | $ (401) | $ (708) | $ (355) |
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, 2005 and 2004. 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 | 2005 | |
| Carrying | Estimated Fair |
| Amount | Value |
Cash and cash equivalents | $ 16,654 | $ 16,654 |
Investment securities | 106,704 | 106,582 |
Loans (gross) | 402,972 | 408,987 |
BWC Mortgage Services Loans Held-for-Sale | 7,274 | 7,274 |
Deposit liabilities | 423,380 | 423,102 |
Federal Home Loan Bank borrowings | 56,307 | 55,682 |
BWC Mortgage Services borrowings | 7,210 | 7,210 |
Federal Funds Purchased | 1,500 | 1,500 |
In thousands | 2004 | |
| Carrying | Estimated Fair |
| Amount | Value |
Cash and cash equivalents | $ 18,988 | $ 18,988 |
Investment securities | 80,066 | 80,167 |
Loans (gross) | 380,682 | 387,508 |
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 |
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
52
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, 2005 and 2004 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.
53
NOTE 8: INCOME TAXES |
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|
|
In thousands |
|
|
|
The provisions for income taxes in 2005, 2004, and 2003 consist of the |
|
| |
following: |
|
|
|
Current | 2005 | 2004 | 2003 |
Federal | $ 4,058 | $ 2,858 | $ 2,219 |
State | 1,501 | 1,060 | 853 |
Total Current | 5,559 | 3,918 | 3,072 |
Deferred |
|
|
|
Federal | (144) | (304) | (215) |
State | 5 | (170) | (19) |
Total Deferred | (139) | (474) | (234) |
TOTAL | $ 5,420 | $ 3,444 | $ 2,838 |
|
|
|
|
The components of the net deferred tax assets of the Bank as of December 31, 2005 and 2004 were as follows: | |||
Deferred Tax Assets: |
| 2005 | 2004 |
Allowance for credit losses |
| $ 2,888 | $ 2,906 |
Employee benefits |
| 260 | 229 |
State taxes |
| 510 | 360 |
Fixed Assets |
| 71 | (48) |
Available-for-sale securities |
| 378 | 170 |
Total deferred tax assets |
| 4,107 | 3,617 |
Deferred Tax Liabilities: |
|
|
|
FHLB Dividends |
| (111) | (69) |
Accretion on Securities |
| (38) | (13) |
Investment in Partnership |
| (24) | 52 |
Total Deferred Tax Liabilities |
| (173) | (30) |
Net Deferred Tax Assets |
| $ 3,934 | $ 3,587 |
|
|
|
|
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: |
| ||
| 2005 | 2004 | 2003 |
Provision based on the statutory |
|
|
|
Federal rate of 34% | $ 4,782 | $ 3,113 | $ 2,597 |
Increases (reductions) in income taxes resulting from: |
|
|
|
State franchise taxes, net of |
|
|
|
Federal income tax benefit | 978 | 637 | 542 |
Non-taxable interest income | (267) | (341) | (366) |
Other | (73) | 35 | 65 |
|
|
|
|
TOTAL | $ 5,420 | $ 3,444 | $ 2,838 |
|
|
|
|
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 $113,000, $20,000 and $14,000 respectively, for the years ended December 31, 2005, 2004 | |||
and 2003, and a decrease in taxes payable of the same amounts. |
|
|
54
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, 2005, 463,057 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, 2005, 2004, and 2003, 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 and December 2003.
|
| Weighted |
| Weighted |
| Weighted |
|
| Average |
| Average |
| Average |
| 2005 | Exercise | 2004 | Exercise | 2003 | Exercise |
| Shares | Price | Shares | Price | Shares | Price |
Outstanding at beginning of year | 187,159 | $ 14.32 | 145,922 | $ 14.32 | 150,304 | $ 5.32 |
Granted | 17,000 | $ 33.99 | 59,675 | $ 20.97 | 18,851 | $ 15.22 |
Exercised | 32,525 | $ 13.46 | 16,424 | $ 12.04 | 7,429 | $ 16.42 |
Forfeited | 15,367 | $ 16.96 | 2,014 | $ 12.34 | 15,803 | $ 16.44 |
Outstanding at end of year | 156,267 | $ 19.25 | 187,159 | $ 16.61 | 145,922 | $ 14.32 |
Exercisable at end of year | 76,610 | $ 15.37 | 76,971 | $ 13.79 | 75,835 | $ 13.05 |
Weighted average fair value of |
|
|
|
|
|
|
options granted during the year |
| $ 11.16 |
| $ 6.78 |
| $ 6.45 |
The fair value of each option grant in 2005, 2004, and 2003, is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2005, 2004, and 2003: risk-free rate of 4.33% for 2005, 3.90% for 2004 and 3.71% for 2003, $0.36 expected dividend yield, expected life of 8 years and expected volatility of 26.44% in 2005, 21.38% in 2004 and 25.85% in 2003.
The following table summarizes information about stock options outstanding at December 31, 2005.
Range of Exercise Prices |
Number Outstanding at 12/31/05 | Options Outstanding: Weighted Average Contractual Life Remaining Years |
Weighted Average Exercise Price |
Options Exercisable: Number Exercisable at 12/31/05 |
Weighted Average Exercise Price |
$11.88 - $15.11 | 46,431 | 4.24 | $13.30 | 39,645 | $13.05 |
$15.70 - $18.50 | 51,311 | 6.39 | $17.07 | 28,659 | $16.81 |
$20.04 - $22.64 | 43,025 | 8.59 | $21.62 | 8,306 | 21.50 |
$34.85 - $34.85 | 15,500 | 9.96 | $34.85 | - | - |
TOTAL | 156,267 |
|
| 76,610 |
|
55
NOTE 10: FEDERAL HOME LOAN BANK BORROWINGS (FHLB) AND OTHER BORROWINGS
The Corporation had a collateralized line of credit of $97,253,000 at December 31, 2005. Of this, $40,946,000 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 | 2005 | 2004 |
Bank - FHLB Borrowings: |
|
|
Outstanding: |
|
|
Average outstanding loans during the period | $ 49,994 | $ 36,128 |
Outstanding at year-end | $ 56,307 | $ 43,313 |
Interest rates: |
|
|
Weighted average rate on borrowings during the period | 4.83% | 4.83% |
Weighted average rate on borrowings outstanding at year-end | 5.06% | 4.70% |
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, 2005 and 2004, the Bank had no borrowings outstanding under these lines.
The table below provides further detail of BWC Mortgage Services borrowings:
In thousands | 2005 | 2004 |
BWC Mortgage Services - Borrowings: |
|
|
Outstanding: |
|
|
Average outstanding loans during the period | $ 11,973 | $ 20,068 |
Outstanding at year-end | $ 7,210 | $ 14,511 |
Interest rates: |
|
|
Weighted average rate on borrowings during the period | 5.06% | 4.56% |
Weighted average rate on borrowings outstanding at year-end | 4.72% | 8.38% |
BWC Mortgage Services has established lines of credit with Countrywide Warehouse Line, in the amount of $20,000,000 and with First Collateral Services in the amount of $10,000,000. 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, 2005 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 | $ 379 | $ 383 | $ 782 | $ 17,465 | $ 37,298 | $ 56,307 |
BWC Mortgage Services Borrowings | $ 7,210 | $ - | $ - | $ - | $ - | $ 7,210 |
56
NOTE 11: COMMITMENTS AND CONTINGENCIES
As of December 31, 2005 the approximate future minimum net rental payments under non-cancelable operating leases for premises were as follows:
In thousands
Year |
| Amount |
2006 |
| $1,759 |
2007 |
| 1,614 |
2008 |
| 1,460 |
2009 |
| 1,241 |
2010 |
| 1,018 |
Thereafter |
| 3,516 |
Total |
| $10,608 |
Rental expense for premises under operating leases included in occupancy expense was $1,893,000, $1,756,000, and $1,477,000 in 2005, 2004, and 2003, respectively. Minimum rentals may be adjusted for increases in the lessors' operating costs and/or increases in the Consumer Price Index.
At December 31, 2005, the Bank had outstanding approximately $204,161,000 in undisbursed loan commitments and $3,724,000 in standby letters of credit, which are not reflected in the accompanying consolidated balance sheets. Management does not anticipate any material losses to result from these transactions.
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 $485,000, $380,000, and $340,000 in 2005, 2004, and 2003, 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 |
|
|
|
| 2005 | 2004 | 2003 |
Professional Fees | $ 827 | $ 914 | $ 1,070 |
Data Processing | 825 | 903 | 847 |
Telephone and Postage | 631 | 644 | 602 |
Business Development & Education | 648 | 615 | 443 |
Supplies | 361 | 344 | 273 |
Marketing | 358 | 247 | 345 |
Regulatory Fees | 150 | 115 | 117 |
Other | 2,230 | 1,989 | 2,727 |
Total | $ 6,030 | $ 5,771 | $ 6,424 |
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
57
current year, combined with the retained net profits for the preceding two years or the Bank's retained earnings. Under these restrictions, $17,598,000 of the Bank's retained earnings was available for cash dividends at December 31, 2005.
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 $4,799,000 as of December 31, 2005. The Corporation has never received such extensions of credit by the Bank.
58
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 | 2005 |
| 2004 |
Assets |
|
|
|
Cash on Deposit with the Bank | $ 353 |
| $ 2,481 |
Investment in the Bank | 47,993 |
| 42,815 |
Investment in BWC Real Estate | 2,742 |
| 1,985 |
Total Assets | $ 51,088 |
| $ 47,281 |
|
|
|
|
Shareholders' Equity |
|
|
|
Common Stock | $ 44,036 |
| $ 47,054 |
Retained Earnings | 7,052 |
| 227 |
Total Shareholders' Equity | $ 51,088 |
| $ 47,281 |
|
|
|
|
Summary Statements of Income | For the year ended December 31, | ||
| 2005 | 2004 | 2003 |
Expenses - General and Administrative | $ 121 | $ 146 | $ 139 |
|
|
|
|
Loss before income taxes and |
|
|
|
equity in net income of Subsidiaries | (121) | (146) | (139) |
Income tax benefit | 46 | 55 | 53 |
|
|
|
|
Equity in earnings of subsidiaries |
|
|
|
Distributed: |
|
|
|
Bank | 2,500 | 4,000 | 2,260 |
BWC Real Estate | - | - | - |
Undistributed: |
|
|
|
Bank | 5,465 | 1,176 | 1,899 |
BWC Real Estate | 756 | 628 | 726 |
Net Income | $ 8,646 | $ 5,713 | $ 4,799 |
|
|
|
|
Summary Statements of Cash Flows | For the year ended December 31, | ||
Operating activities: | 2005 | 2004 | 2003 |
Net Income | $ 8,646 | $ 5,713 | $ 4,799 |
Adjustments to reconcile net income |
|
|
|
to net cash used by operating activities: |
|
|
|
Equity in undistributed net income |
|
|
|
of Subsidiaries | (6,223) | (1,803) | (2,625) |
Net Cash Provided(Used) by |
|
|
|
Operating Activities: | 2,423 | 3,910 | 2,174 |
Financing Activities: |
|
|
|
Proceeds from issuance of common stock | 437 | 197 | 89 |
Cash dividends paid | (1,420) | (1,011) | (426) |
Cash paid in lieu of fractional shares | - | (4) | (5) |
Shares repurchased by the Corporation | (3,568) | (1,749) | (1,292) |
Net Cash Provided(Used) by |
|
|
|
Financing Activities | (4,551) | (2,567) | (1,634) |
Increase(Decrease) in Cash | (2,128) | 1,343 | 540 |
Cash on Deposit with the Bank: |
|
|
|
Beginning of year | 2,481 | 1,138 | 598 |
End of year | $ 353 | $ 2,481 | $ 1,138 |
59
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, 2005 meet all capital adequacy requirements to which they are subject.
As of December 31, 2005 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, 2005 |
|
|
|
|
|
|
Total Capital (to Risk-weighted Assets) |
|
|
|
|
|
|
Consolidated: | $57,594 | 12.07% | $38,175 | > 8.0 | $47,718 | >10.0 |
Bank of Walnut Creek: | $54,498 | 11.60% | $37,599 | > 8.0 | $46,999 | >10.0 |
|
|
|
|
|
|
|
Tier 1 Capital (to Risk-weighted Assets) |
|
|
|
|
|
|
Consolidated: | $51,698 | 10.83% | $19,087 | > 4.0 | $28,631 | > 6.0 |
Bank of Walnut Creek: | $48,602 | 10.34% | $18,800 | > 4.0 | $28,199 | > 6.0 |
|
|
|
|
|
|
|
Tier 1 Capital (to Average Assets) |
|
|
|
|
|
|
Consolidated: | $51,698 | 9.23% | $22,405 | > 4.0 | $28,007 | > 5.0 |
Bank of Walnut Creek: | $48,602 | 8.98% | $21,645 | > 4.0 | $27,056 | > 5.0 |
|
|
|
|
|
|
|
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 |
60
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, 2005, 2004, and 2003 concerning the Corporation’s reportable segments is shown in the following table.
In thousands | Community | Mortgage |
|
|
|
2005 | Banking | Services | All Other | Adjustments | Total |
Total Interest Income | $ 34,199 | $ 1,927 | $ - | $ (38) | $ 36,088 |
Commissions Received | - | 11,207 | - | - | 11,207 |
Total Interest Expense | 7,161 | 616 | - | (38) | 7,739 |
Salaries & Benefits | 9,744 | 3,150 | - | - | 12,894 |
Commissions Paid | - | 9,901 | - | - | 9,901 |
Segment Profit(loss) before Tax | 12,967 | 2,440 | (121) | (1,220) | 14,066 |
Total Assets (at December 31) | $ 533,194 | $ 9,651 | $ 54,096 | $ (55,144) | $ 541,797 |
|
|
|
|
|
|
| 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 |
61
NOTE 18: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
|
| ||
In thousands except share and per-share amounts |
|
|
| |
|
|
|
|
|
2005 | March 31, | June 30, | September 30, | December 31, |
Interest income | $ 8,008 | $ 8,585 | $ 9,618 | $ 9,877 |
Interest expense | 1,500 | 1,790 | 2,238 | 2,211 |
Net interest income | 6,508 | 6,795 | 7,380 | 7,666 |
Provision for credit losses | - | - | - | - |
Noninterest income | 3,402 | 4,224 | 6,086 | 5,455 |
Noninterest expense | 7,015 | 7,552 | 9,189 | 8,474 |
BWC Mortgage Services - Minority Interest | 104 | 237 | 551 | 328 |
Income before income taxes | 2,791 | 3,230 | 3,726 | 4,319 |
Provision for income taxes | 1,111 | 1,249 | 1,395 | 1,665 |
Net income | $ 1,680 | $ 1,981 | $ 2,331 | $ 2,654 |
Earnings per common share: |
|
|
|
|
Basic | $ 0.40 | $ 0.47 | $ 0.56 | $ 0.64 |
Diluted | $ 0.39 | $ 0.47 | $ 0.55 | $ 0.63 |
Weighted-average Basic Shares | 4,228,838 | 4,197,791 | 4,170,176 | 4,133,837 |
Weighted-average Diluted Shares |
|
|
|
|
Equivalents Related to Options | 55,308 | 57,970 | 61,030 | 68,309 |
Weighted-average Diluted Shares | 4,284,146 | 4,255,761 | 4,231,206 | 4,202,146 |
|
|
|
|
|
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 |
62
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, 2005 and 2004, 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, 2005. 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. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
MOSS ADAMS LLP
Stockton, California
March 30, 2006
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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, 2005, 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.
There were no events in the fourth quarter which were required to be reported on Form 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 aN $0.08 per share Cash Dividend.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Because the Corporation is the parent corporation of Bank of Walnut Creek (the "Bank"), certain information is being provided with respect to the Bank's Board of Directors and its standing committees during 2005. The Bank's Board of Directors is composed of the same individuals as the Corporation's Board of Directors.
DIRECTORS |
| PRINCIPAL | YEAR FIRST |
|
| OCCUPATION - | ELECTED |
| AGE | PAST FIVE YEARS | A DIRECTOR |
|
|
|
|
Richard G. Hill | 69 | Owner – R.G. Hill & Company, | 1980 |
|
| a Real estate property management and brokerage firm in Central Contra Costa County |
|
|
|
|
|
Reynold C. Johnson III | 55 | Chairman and CFO – Pacific Land | 1981 |
|
| Enterprises Inc., a real estate development and investment corporation |
|
|
|
|
|
Craig A. Lazzareschi | 59 | President – Greater Bay | 1980 |
|
| Development Corp., a real estate development and investment company |
|
|
|
|
|
Tom J. Mantor | 51 | President and COO – Bank of | 1994 |
|
| Walnut Creek |
|
|
|
|
|
John F. Nohr | 65 | President – Woodminster | 1981 |
|
| Company Realtors - Developers |
|
|
|
|
|
James L. Ryan | 72 | Chairman and CEO – Bank of | 1980 |
|
| Walnut Creek and BWC Financial Corp. |
|
|
|
|
|
John L. Winther | 66 | President – Delta Wetlands, Inc. | 1981 |
The Board of Directors of the Corporation held twelve regular meetings and one special meeting during 2005. the Corporation's Board of Directors had no standing committees during 2005. All of the directors attended at least 75% of the meetings of the Board.
EXECUTIVE OFFICERS |
| POSITION WITH THE CORPORATION OR BANK |
|
| AND PRINCIPAL OCCUPATION DURING |
| AGE | THE PAST FIVE YEARS |
|
|
|
James L. Ryan | 72 | Chief Executive Officer and Chairman. |
|
| Has been CEO of the Bank since its inception in 1979. |
|
|
|
Tom J. Mantor | 51 | President of the Bank and Chief Operating |
|
| Officer since December 1993. Has been with the Bank since 1991. |
|
|
|
Leland E. Wines | 61 | Executive Vice President and Chief |
|
| Financial Officer. Has been with the Bank since 1983. |
|
|
|
John R. Sheets | 64 | Executive Vice President, Chief Credit |
|
| Officer. Has been with the Bank since August 2000. |
|
|
|
Andrea L. Head | 48 | Executive Vice President, Real Estate |
|
| Division. Has been with the Bank since 1983. |
65
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.
66
ITEM 11. EXECUTIVE COMPENSATION
The following table shows for the three fiscal years ended December 31, 2005, 2004 and 2004, |
|
| ||||||
the compensation paid to the Bank's executive officers. |
|
|
|
|
| |||
|
|
|
|
| Long-Term |
|
|
|
|
|
|
|
| Compensation |
|
|
|
Annual Compensation |
|
|
|
| Awards |
| Payouts |
|
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) |
|
|
|
|
|
| Securities |
|
|
|
|
|
| Other Annual | Restricted | Underlying | LTIP | All other |
Name and |
|
| Bonus | Compensation | Stock | Options/ | Payouts | Compensation |
Principal Position | Year | Salary | (A) | (B) | Award(s) | SAR (#) |
| ( c) |
James L. Ryan | 2005 | $ 325,278 | $ - | $ 29,250 | - | - | - | - |
Chief Executive Officer/ | 2004 | $ 315,803 | $ - | $ 27,000 | - | - | - | - |
Chairman of the Board | 2004 | $ 306,605 | $ - | $ 31,500 | - | - | - | - |
|
|
|
|
|
|
|
|
|
Tom J. Mantor | 2005 | $ 189,636 | $ - | $ 22,750 | - | - | - | - |
President/ | 2004 | $ 184,113 | $ - | $ 21,600 | - | - | - | - |
Chief Operating Officer | 2004 | $ 178,750 | $ - | $ 24,500 | - | - | - | - |
|
|
|
|
|
|
|
|
|
Leland E. Wines | 2005 | $ 153,937 | $ - | $ - | - | - | - | - |
Executive Vice President/ | 2004 | $ 149,453 | $ - | $ - | - | - | - | - |
Cashier/Chief Financial Officer | 2004 | $ 145,100 | $ - | $ - | - | - | - | - |
|
|
|
|
|
|
|
|
|
John Sheets | 2005 | $ 168,838 | $ 30,325 | $ - | - | - | - | - |
Executive Vice President/ | 2004 | $ 163,920 | $ 16,995 | $ - | - | - | - | - |
Chief Credit Officer | 2004 | $ 159,135 | $ 30,125 | $ - | - | - | - | - |
|
|
|
|
|
|
|
|
|
Andrea L. Head | 2005 | $ 143,222 | $ 103,958 | $ - | - | - | - | - |
Executive Vice President/ | 2004 | $ 139,050 | $ 104,622 | $ - | - | - | - | - |
Real Estate Division | 2004 | $ 135,000 | $ 105,145 | $ - | - | - | - | - |
|
|
|
|
|
|
|
|
|
(A) The Bank maintains an incentive bonus plan for executive officers. Under such plan, an incentive pool is created based | ||||||||
upon the criterion of return on the Bank's average assets. The incentive pool is allocated based on salary and performance. | ||||||||
The amounts set forth above reflect bonuses paid in the current calendar year based on the prior year's performance. | ||||||||
The Bank paid bonuses to the named executive officers for the fiscal year ended December 31, 2005 during 2006. |
| |||||||
(B) Amounts reflect Board of Director fees paid to such persons. |
|
|
|
| ||||
(C) Other compensation is paid, including profit sharing and matching contributions to the Bank's ESOP and Profit Sharing Plan. | ||||||||
In addition, employees may receive benefit from the use of a company automobile and the cost of membership in a country club. | ||||||||
The aggregate amount of such other compensation is not separately listed because it does not exceed the lesser of |
| |||||||
$25,000 or 10% of the annual compensation reported for such persons. |
|
|
|
|
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The Corporation has only one class of stock issued and outstanding, that being its common stock. Information concerning the beneficial ownership of The Corporation’s common stock as of March 31, 2006, by each director, executive officer, and by the directors and officers of the Corporation and the Bank as a group, and by each person holding 5% or more of the Corporation’s stock, is set forth in the following table.
| Number |
|
|
|
|
| of Shares |
|
| Total | Percent |
Name of | Beneficially | Options | ESOP | Shares | of |
Beneficial Owner | Owned(A) | Vested(B) | Shares(C) | (A)+(B)+(C) | Total(D) |
Andrea L. Head | 44,076 | 5,150 | 41,186 | 90,412 | 2.15% |
Richard G. Hill | 273,039 | 2,190 | - | 275,229 | 6.54% |
Reynold C. Johnson III | 218,912 | 2,190 | - | 221,102 | 5.26% |
Craig A. Lazzareschi | 45,757 | 2,190 | - | 47,947 | 1.14% |
Tom J. Mantor | 160,874 | 4,277 | 26,385 | 191,536 | 4.55% |
John F. Nohr | 123,598 | 2,190 | - | 125,788 | 2.99% |
James L. Ryan | 554,682 | 6,864 | 2,340 | 563,886 | 13.41% |
John R. Sheets | - | 2,562 | 3,154 | 5,716 | 0.14% |
Leland E. Wines | 100,029 | 4,167 | 51,134 | 155,330 | 3.69% |
John L. Winther | 113,973 | 2,190 | - | 116,163 | 2.76% |
|
|
|
|
|
|
Officers and Directors |
|
|
|
|
|
as a group (10 in number) | 1,634,940 | 33,970 | 124,199 | 1,793,109 | 42.64% |
|
|
|
|
|
|
BWC ESOP Plan (C) | 269,160 | - | - | 269,160 | 6.40% |
|
|
|
|
|
|
Total Shares and |
|
|
|
|
|
Vested Options (D) | 4,205,439 |
|
|
|
|
| (A) | Unless otherwise indicated, each person listed has sole investment and voting power with respect to the shares listed. Includes all shares beneficially owned, whether directly or indirectly, individually or together with associates. Includes shares allocated through the BWC Employee Stock Ownership Plan and Trust. |
| (B) | Includes any shares of which beneficial ownership may be acquired within 60 days of March 31, 2006, by the exercise of stock options. |
| (C) | Substantially all eligible, salaried employees of the Corporation are covered by an Employee Stock Ownership and Savings 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 $485,000 in 2005. 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. This plan is administered by senior management members in accordance with the terms of the plan. |
Includes all shares issued and outstanding plus vested options which may be exercised within 60 days of March 31, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank's current policy is one of not granting loans to its executive officers or directors, or the executive officers or directors of the Corporation or Bank, except that all directors are eligible to have a line of credit available to them with a maximum of $2,000 outstanding at any one time. Such line of credit is made available to the directors on the same terms and at the same interest rate as is available to all other qualified customers of the Bank. The Bank has had and expects to have banking transactions in the ordinary course of business with many of the principal shareholders of BWC and the Bank (and their associates), on substantially the same terms (including interest rates and collateral) as those prevailing for comparable transactions with others. No loan to any director, executive officer, or shareholder of the Corporation or the Bank (or their associates) has involved more than normal risk of
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collectibility or presented other unfavorable features. If loans were to be made to directors, executive officers, or principal shareholders of the Corporation or the Bank, then all such loans would be subject to the limitations prescribed by California Financial Code section 3370, et seq. and by the Financial Institutions Regulatory and Interest Rate Control Act of 1978, the principal effect of which is to require that any loan to a director, executive officer or principal shareholder be on non-preferential terms and, should all loans to that individual exceed $500,000 in the aggregate, be approved in advance by the Bank's Board of Directors. With respect to transactions other than loans, the Corporation and the Bank have had and expect to have such transactions in the ordinary course of business with many of its directors, executive officers, and principal shareholders (and their associates), but all such transactions have been and will be on substantially the same terms as those prevailing for comparable transactions with others.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fiscal 2005 Audit Firm Fee Summary
The Corporation retained as its principal auditor, Moss Adams LLP, to provide services in the following categories and paid to Moss Adams LLP the following amounts for the years indicated:
a) Audit Fees | 2005 | 2004 |
| $ 88,000 | $ 75,000 |
The Audit Committee has considered whether the provision of non-audit services by the Corporation’s principal auditor is compatible with maintaining auditor independence and, after such consideration, the Audit Committee has determined that auditor independence was being maintained.
b) Audit-Related-Fees | 2005 | 2004 |
| $ 10,250 | $ 10,250 |
An annual audit of the financial statements of the Bank’s Employee Stock Ownership and Savings Plan, is required by law.
c) Tax Fees | 2005 | 2004 |
| $ 8,500 | $ 9,000 |
Moss Adams LLP reviews the Corporation’s quarterly tax estimates and prepares the annual tax filings to the IRS and Franchise Tax Board.
d) All Other Fees | 2005 | 2004 |
| None | None |
| PART IV |
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. |
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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.
__________________________
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 28, 2006 | |
James L. Ryan | and Director |
| |
___________________ | Executive Vice President and | March 28, 2006 | |
Leland E. Wines | Chief Financial Officer |
| |
___________________ | Director | March 28, 2006 |
Tom Mantor
___________________ | Director | March 28, 2006 |
Richard G. Hill
___________________ | Director | March 28, 2006 |
Reynold C. Johnson III
___________________ | Director | March 28, 2006 |
Craig Lazzareschi
___________________ | Director | March 28, 2006 |
John F. Nohr
___________________ | Director | March 28, 2006 |
John L. Winther
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| EXHIBIT | EXHIBIT NUMBER |
Articles of Incorporation and Amendments | Refer to 10-K filing | |
| of March 1995. |
|
By-Laws | Refer to 10-K filing | |
| of March 1995. |
|
Consents of Independent Public Accountants:
| Moss Adams LLP Consent dated March 30, 2006 | 23.1 |
Certification of Chief Executive Officer and Chief Financial Officer
| Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31.1-31.2 |
Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | 32.1-32.2 |
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CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation of our report dated March 30, 2006 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. 33-35735) and 2000 Stock Option Plan (Registration Statement File No. 333-42830).
Moss Adams LLP
Stockton, California,
March 30, 2006
Exhibit 23.1
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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 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, 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 28, 2006
James L. Ryan
Chairman and CEO
Exhibit 31.1
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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 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:
| e) | 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; |
| f) | 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; |
| g) | 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 |
| h) | 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, to the registrant's auditors and the Audit Committee of registrant's board of directors (or persons performing the equivalent function):
| c) | 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 |
| d) | 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 28, 2006
Leland E. Wines
EVP/CFO
Exhibit 31.2
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18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
In connection with the Quarterly Report of BWC Financial Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2006 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 2003, 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 28, 2006
________________________
JAMES L. RYAN
Chairman and CEO
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
In connection with the Quarterly Report of BWC Financial Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2006 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 2003, 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 28, 2006
________________________
LELAND E. WINES
EVP/CFO & Corp. Secretary
Exhibit 32.2
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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.
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