-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HoNE4bLAetbx0ivWwGhyQL+XPD63HrL+JjV2cRqOMY0mutdxUfX6B8gWkdRU6ehL q25N8bELcw+EQlaZo4DLoQ== 0000914317-96-000327.txt : 19960927 0000914317-96-000327.hdr.sgml : 19960927 ACCESSION NUMBER: 0000914317-96-000327 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK WEST FINANCIAL CORP CENTRAL INDEX KEY: 0000934598 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 383203447 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25666 FILM NUMBER: 96635193 BUSINESS ADDRESS: STREET 1: 2185 THREE MILE RD N W CITY: GRAND RAPIDS STATE: MI ZIP: 49544-1451 BUSINESS PHONE: 6164597254 MAIL ADDRESS: STREET 1: 2185 THREE MILE RD N W CITY: GRAND RAPIDS STATE: MI ZIP: 49544-1451 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to _______________ Commission File No.: 0-25666 Bank West Financial Corporation (Exact name of registrant as specified in its charter) Michigan 38-3203447 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2185 Three Mile Road N.W. Grand Rapids, Michigan 49544 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (616) 785-3400 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act Common Stock (par value $.01 per share) (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [X] Based upon the $10.75 closing price of the Registrant's common stock as of September 23, 1996, the aggregate market value of the 1,609,858 shares of the Registrant's common stock deemed to be held by non-affiliates of the Registrant was $17.3 million. Although directors and executive officers of the Registrant and certain of its employee benefit plans were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status. Number of shares of Common Stock outstanding as of September 23, 1996: 1,981,475 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. (1) Portions of the Annual Report to Stockholders for the year ended June 30, 1996 are incorporated into Part II, Items 5 through 8 of this Form 10-K. (2) Portions of the definitive proxy statement for the 1996 Annual Meeting of Stockholders are incorporated into Part III, Items 9 through 13 of this Form 10-K. PART I. Item 1. Business. General Bank West Financial Corporation (the "Company") is a Michigan corporation organized in December 1994 by Bank West, F.S.B. ("Bank West" or the "Bank") for the purpose of becoming a unitary holding company of the Bank. The only significant assets of the Company are the capital stock of the Bank, the Company's loan to the Company's Employee Stock Ownership Plan (the "ESOP"), and the portion of the net proceeds retained by the Company in connection with the conversion of the Bank from the mutual to stock form of organization in March 1995 (the "Conversion"). The business and management of the Company consists of the business and management of the Bank. Bank West is a federally chartered stock savings bank that was originally formed in 1887 as a Michigan-chartered mutual savings and loan association known as West Side Building and Loan. In 1938, the Bank converted to a federal savings association known as West Side Federal Savings and Loan Association. The Bank changed its name and became a federally chartered mutual savings bank in 1993. In March 1995, the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank. Bank West conducts business from two offices located in Grand Rapids, Michigan. At June 30, 1996, the Company had $138.0 million of total assets, $111.2 million of total liabilities, including $91.0 million of deposits, and $26.8 million of total stockholders' equity. Bank West is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans secured primarily by one- to four-family residences located in the western Michigan area. Bank West is a community-oriented savings institution which emphasizes customer service. It generally has sought to enhance its net income by, among other things, maintaining strong asset quality. In pursuit of these goals, Bank West has adopted a business strategy that emphasizes lending and deposit products and services traditionally offered by savings institutions. In addition, since April 1993, the Bank has engaged in mortgage banking activities by originating (and since fiscal 1994 purchasing) one- to four-family residential loans for sale into the secondary market. The implementation of such strategy has enabled the Bank to be profitable and to exceed regulatory capital requirements. During the last five fiscal years, the Company's return on average assets has averaged .78% and its return on average equity has averaged 6.33%. Net income increased by $492,000 or 68.7% in fiscal 1996 from fiscal 1995 primarily due to a $1.0 million increase in net interest income, a $480,000 increase in the gain on the sale of loans and a $358,000 increase in the gain on trading securities. These factors were partially offset by a $1.1 million or 47.5% increase in total other expenses. At June 30, 1996, the Bank exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 15.4%, 15.4% and 31.4%, respectively, as compared to the minimum requirements of 1.5%, 3.0% and 8.0%, respectively. See "Regulation - The Bank - Regulatory Capital Requirements." The Company's total nonperforming assets, which consist solely of non-accruing loans 90 days or more delinquent, amounted to $43,000 or .04% of the net loan portfolio at June 30, 1996. At the end of each of the last five fiscal years, the Company's total nonperforming assets never exceeded $259,000 or .33% of the net loan portfolio, and the Company had no real estate owned and no troubled debt restructurings at any of such dates. At June 30, 1996, the Company's allowance for loan losses amounted to $166,000, representing .16% of the total loan portfolio and 386.0% of total nonperforming assets at such date. See "Asset Quality." Beginning in April 1995, the Bank expanded its loan products by offering small business loans and additional consumer loan products. At June 30, 1996, there were $2.8 million in loans receivable outstanding for these new loan products compared to no loans receivable outstanding for such loan products at June 30, 1995. The Bank expects these loan products will improve its net interest margin and make the Bank more competitive in the marketplace. The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority and primary regulator. The Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC"), the administrator of the Savings Association Insurance Fund ("SAIF"). The Bank is also subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis, which is one of the 12 regional banks comprising the FHLB System. The Company's executive office is located at 2185 Three Mile Road N.W., Grand Rapids, Michigan 49544, and its telephone number is (616) 785-3400. Market Area The Company's market area consists of western Michigan, with its primary market area consisting of Grand Rapids, Michigan and the surrounding metropolitan statistical area. Grand Rapids is located in west central Michigan on the Grand River, the state's longest, and is the seat of Kent County, Michigan. With a population of 189,000 as of 1990, the city is the 83rd largest in the United States and the second largest in Michigan after Detroit, the 7th largest in the nation. Grand Rapids is part of the Grand Rapids Metropolitan Statistical Area with a population of 688,000 people as of 1990, a 14.4% increase from the 1980 census. Per capita income has increased 90.2% from 1980 to $18,000 in 1990. Major industries include furniture manufacture, metal fabrication, medical supplies, plastics, footwear, processed foods, agricultural products, mining of gypsum (for which Michigan is the leading supplier in the nation), appliance manufacture, and health care services. Approximately 360,000 persons were employed in Grand Rapids in 1990, and major employers in the area include Meijer, Inc., Steelcase, General Motors Corp., Amway Corporation and Butterworth Hospital. Lending Activities Loan Portfolio Composition. At June 30, 1996, the Company's total loan portfolio, including loans held for sale but before net items, amounted to $106.1 million. The net loan portfolio, excluding loans held for sale, amounted to $95.7 million at June 30, 1996, representing approximately 69.4% of the Company's $138.0 million of total assets at that date. The lending activities are conducted through Bank West, and the principal lending activity of Bank West is the origination of one- to four-family residential loans. The Bank has also purchased such loans to supplement its loan originations. At June 30, 1996, one- to four-family residential loans amounted to $85.0 million or 80.2% of the total loan portfolio, including loans held for sale. To a lesser extent, the Bank originates construction loans, home equity lines of credit, second mortgages and commercial and consumer loans. Construction loans amounted to $14.1 million or 13.3%, home equity lines of credit amounted to $2.2 million or 2.1%, and second mortgages amounted to $1.9 million or 1.8%, of the total loan portfolio, including loans held for sale. At June 30, 1996, commercial mortgages amounted to $1.2 million or 1.1%, commercial non-mortgages amounted to $1.0 million or 0.9%, and consumer loans amounted to $622,000 or 0.6%, of the total loan portfolio, including loans held for sale. Loan Portfolio Composition. The following table sets forth the composition of Bank West's loan portfolio by type of loan at the dates indicated.
June 30, ---------------------------------------------------------------------------- 1996 1995 1994 --------------------- ---------------------- ------------------- Amount % Amount % Amount % -------- ------- --------- ------ ------- ------ (Dollars In Thousands) Real estate loans:(1) One- to four-family residential $85,034 80.2% $92,673 91.7% $87,177 91.1% Construction 14,074 13.3 6,146 6.1 7,412 7.8 Commercial mortgages 1,194 1.1 90 .1 159 .2 Home equity lines of credit 2,214 2.1 1,453 1.4 545 .5 Second mortgages 1,927 1.8 683 .7 363 .4 Consumer loans 622 0.6 30 -- -- -- Commercial non-mortgage 1,010 0.9 -- -- -- -- ------- ----- ----- ---- ------ ----- Total loans 106,075 100.0% 101,075 100.0% 95,656 100.0% ===== ===== ===== Less: Loans held for sale 4,297 2,746 1,282 Loans in process 5,828 2,290 2,888 Deferred fees and discounts 47 95 159 Allowance for loan losses 166 108 88 ------- ------ Net loans $95,737 $95,836 $91,239 ====== ====== ====== - ------------------------- (1) Includes loans held for sale. June 30, September 30, 1993 1992 -------------------- ------------------- Amount % Amount % -------- ------- ------- ------ Real estate loans:(1) $77,056 91.5% $68,897 95.0% One- to four-family residential 6,296 7.5 2,691 3.7 Construction 104 .1 106 .1 Commercial mortgages -- -- -- -- Home equity lines of credit 768 .9 863 1.2 Second mortgages -- -- -- -- Consumer loans -- -- -- -- Commercial non-mortgage ------ ----- ------- ----- 84,224 100.0% 72,557 100.0% Total loans ===== ===== Less: 3,250 -- Loans held for sale 2,173 728 Loans in process 128 105 Deferred fees and discounts 63 50 Allowance for loan losses $78,610 $71,674 Net loans ====== ====== - ------------------------- (1) Includes loans held for sale.
Contractual Maturities. The following table sets forth the scheduled contractual maturities of Bank West's loans at June 30, 1996. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or less. The amounts shown for each period do not take into account loan prepayments but do reflect normal amortization.
One- to Four-Family Commercial Home Second Residential Construction Mortgages Equity Mortgages ----------- ------------- --------- ------ --------- (In Thousands) Amounts due after June 30, 1996 in: One year or less $ 2,895 $14,074 $ 164 $ -- $ 286 After one year through two years 2,963 -- 144 -- 170 After two years through three years 4,159 -- 81 -- 183 After three years through five years 12,616 -- 805 585 374 After five years through ten years 17,739 -- -- 1,629 898 After ten years through fifteen years 12,611 -- -- -- 8 After fifteen years 32,051 -- -- -- 8 ------ ------- ------ ------ ------ Total(1) $85,034 $14,074 $1,194 $2,214 $1,927 ======= ======= ====== ====== ====== - ------------------------------------ (1) Gross of loans in process, deferred fees and discounts, and allowance for loan losses. Commercial Consumer Non-mortgage Total -------- ------------ ----- Amounts due after June 30, 1996 in: One year or less $216 $ 567 $ 18,202 After one year through two years 127 221 3,625 After two years through three years 125 111 4,659 After three years through five years 154 99 14,633 After five years through ten years -- 12 20,278 After ten years through fifteen years -- -- 12,619 After fifteen years -- -- 32,059 --- ---- ------- Total(1) $622 $1,010 $106,075 === ===== ======= - ------------------------------------ (1) Gross of loans in process, deferred fees and discounts, and allowance for loan losses.
The following table sets forth the dollar amount of all loans, before net items, due after one year from June 30, 1996, based on the scheduled contractual maturities shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.
Floating or Fixed-Rate Adjustable-Rate Total ---------- --------------- ----- (In Thousands) One- to four-family residential ...... $34,211 $47,928 $82,139 Commercial mortgages ................. 93 937 1,030 Home equity .......................... -- 2,214 2,214 Second mortgages ..................... 1,641 -- 1,641 Consumer ............................. 406 -- 406 Commercial non-mortgage .............. 161 282 443 ------- ------- ------- Total .............................. $36,512 $51,361 $87,873 ======= ======= =======
Scheduled contractual maturities of loans do not necessarily reflect the actual term of Bank West's portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of loan prepayments and enforcement of due-on-sale clauses, which give Bank West the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans substantially exceed current mortgage loan rates. Origination, Purchase and Sale of Loans. The lending activities of Bank West are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by Bank West's Board of Directors and management. Loan originations are obtained through a variety of sources, including referrals from real estate brokers, developers, builders and existing customers. Written loan applications are taken by lending personnel, and the loan department supervises the procurement of credit reports, appraisals and other documentation involved with a loan. Property valuations are performed by independent outside appraisers. Except for second mortgages and home equity lines of credit, as to which only title searches are performed, Bank West generally requires title insurance with respect to residential and construction loans. Hazard insurance is also required on all secured property, as is flood insurance if the property is located within a designated flood zone. Bank West's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. If the loan is to be sold to one of the investors with which the Bank has an agreement, as discussed below, the Bank's loan underwriter may approve the loan if the investor has delegated such authority to the Bank. If the investor requires that the loan be underwritten by it, the loan is submitted to the investor for its approval. If the loan is to be held in the Bank's portfolio, it must also be approved by any two individuals granted loan approval authority if the loan does not exceed $200,000. If the loan is to be held in the portfolio and exceeds $200,000 but does not exceed $500,000, it must be approved by the Loan Committee. Loans in excess of $500,000 must be approved by the Board of Directors. Until April 1993, Bank West originated substantially all of the loans in its portfolio and held them until maturity. In the fall of 1992, the Bank applied for reactivation of its seller-service agreement with the Federal Home Loan Mortgage Corporation ("FHLMC"), and in April 1993, following reactivation of the agreement, the first sale to the FHLMC occurred. In July 1993, the institution hired a mortgage underwriter who is responsible for performing underwriting on all loans that are to be sold in the secondary market. Pursuant to a written Secondary Market Policy, the Bank sells the majority of its fixed-rate mortgage loans with a maturity greater than 15 years meeting FHLMC investor requirements to private entities and the FHLMC. In October 1994, the policy was amended to provide that the Bank will sell all newly originated fixed-rate mortgage loans meeting investor requirements and retain only those fixed-rate loans which qualify as exceptions. Prior to April 1994, when the Bank originated new loans to be held for sale, the Bank generally did not enter into forward commitments or other agreements with investors regarding the sale of such loans until after the loan had closed. In the low or declining interest rate environment prevailing in calendar 1993, this strategy resulted in higher gains on the sale of loans. However, when interest rates rose in the first quarter of calendar 1994, the market value of the loans held for sale declined, resulting in a $107,000 write-down of the value of such loans in fiscal 1994. Following the rise in interest rates and the $107,000 write-down, the Bank entered into agreements with several investors, each of whom has agreed to purchase loans, together with servicing thereof, from the Bank on a loan-by-loan best efforts basis, provided that it is satisfied after its review of the loan that the loan complies with its established underwriting guidelines and lending requirements. The Bank does not approve a loan to be originated for sale unless either the loan has been satisfactorily reviewed by one of the investors or the loan is to be sold to an investor which has delegated the approval authority to the Bank. The Bank makes certain representations and warranties regarding the loans it sells pursuant to the above agreements, primarily with respect to the origination of the loans, the loan documents and the existence of valid liens and insurance policies. Any violation of these representations and warranties or, with respect to certain of the agreements, the existence of certain deficiencies in the loans during a specified period may result in the Bank being required to repurchase the affected loans that were sold. As of June 30, 1996, the Bank has not been required to repurchase any of the loans it has sold. The above agreements may be terminated by either party at any time with respect to future loan commitments, with varying amounts of termination notice required. To supplement its loan originations, the Bank has entered into third party origination agreements with a number of mortgage banking companies and financial institutions. Pursuant to such agreements, the third party originators sell loans, together with the servicing thereof, to the Bank on a loan-by-loan basis. The Bank is under no obligation to purchase any of such loans, and the Bank agrees to purchase specific loans only after it has determined that the loan meets its underwriting standards and the standards of the secondary market. The third party originator makes certain representations and warranties regarding the loans it sells to the Bank. If there is a violation of the representations and warranties, or if the first principal and interest payment due to the Bank is not made and the loan remains delinquent for three consecutive payment periods, the Bank may require the third party originator to repurchase the affected loans. The above agreements may be terminated by either party at any time with respect to future loan commitments. Pursuant to the third party origination agreements, the Bank purchased $18.9 million of loans in the year ended June 30, 1996. Of the loans purchased in fiscal 1996, $9.1 million consisted of fixed-rate, one- to four-family residential loans, $1.7 million consisted of mortgage loans which provide for periodic interest rate adjustments ("ARMs"), $1.0 million consisted of balloon mortgages and $7.1 million consisted of construction loans, part of which were included in loans in process at June 30, 1996. Other than the construction loans, most of the loans purchased by the Bank were either sold or are held for sale. The Bank sold $45.8 million, $14.4 million and $13.2 million of loans in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, representing 66.2%, 46.2% and 27.3%, respectively, of total loans originated and purchased in such periods. Loan originations and purchases were at record levels in fiscal 1996 due to a favorable interest rate environment prevailing in the first half of such fiscal year, and the expansion of the retail and wholesale mortgage banking operations. In addition, the Bank expanded its consumer and commercial lending business. Total loan originations and purchases were $69.2 million in fiscal 1996 compared to $31.2 million in fiscal 1995. Loan originations in fiscal 1994 were $29.2 million or 60.5% higher than in fiscal 1995 due to the favorable interest rate environment prevailing in the first half of fiscal 1994. The lower loan originations in fiscal 1995 were partially offset by the purchase of $12.1 million of one- to four-family residential loans in fiscal 1995. At June 30, 1996, Bank West was servicing $28.6 million of loans for others. The following table shows total loans originated, purchased, sold and repaid during the periods indicated, including in each case loans held for sale.
Year Ended June 30, --------------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Loan originations: One- to four-family residential: Adjustable-rate ...................... $ 6,201 $ 3,126 $ 12,533 Fixed-rate ........................... 26,524 5,328 23,070 Construction: Adjustable-rate ...................... 7,693 5,470 4,861 Fixed-rate ........................... 4,078 2,981 7,151 Commercial mortgages ................... 1,212 -- -- Consumer loans ......................... 768 30 -- Home equity loans ...................... 1,039 1,466 634 Second mortgages ....................... 1,645 695 9 Commercial non-mortgage ................ 1,139 -- 60 -------- -------- -------- Total loan originations ............ 50,299 19,096 48,318 Loans purchased: One- to four-family residential ........ 18,919 12,069 63 -------- -------- -------- Total loans originated and purchased ...................... 69,218 31,165 48,381 -------- -------- -------- Sales and loan principal repayments: Loans sold ............................. 45,798 14,383 13,221 Loan principal repayments .............. 18,420 11,364 23,728 -------- -------- -------- Total loans sold and principal repayments ............... 64,218 25,747 36,949 -------- -------- -------- Increase (decrease) due to other items, net (1) ......................... (5,099) (821) 1,197 -------- -------- -------- Net increase (decrease) in loan portfolio, net .................... $ (99) $ 4,597 $ 12,629 ======== ======== ======== - ---------------------- (1) Other items consist of loans in process, deferred fees and discounts, allowance for loan losses and loans held for sale.
Real Estate Lending Standards and Underwriting Policies. Effective March 19, 1993, all financial institutions were required to adopt and maintain comprehensive written real estate lending policies that are consistent with safe and sound banking practices. These lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies adopted by the federal banking agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set forth uniform regulations prescribing standards for real estate lending. Real estate lending is defined as extensions of credit secured by liens on interests in real estate or made for the purpose of financing the constructions of a building or other improvements to real estate, regardless of whether a lien has been taken on the property. The policies must address certain lending considerations set forth in the Guidelines, including LTV limits, loan administration procedures, underwriting standards, portfolio diversification standards and requirements for documentation, approval and reporting. These policies must also be appropriate to the size of the institution and the nature and scope of its operations, and must be reviewed and approved by the institution's board of directors at least annually. The LTV ratio framework, with the LTV ratio being the total amount of credit to be extended divided by the appraised value or purchase price of the property at the time the credit is originated, must be established for each category of real estate loans. If not a first lien, the lender must combine all senior liens when calculating this ratio. Certain institutions can make real estate loans that do not conform with the established LTV ratio limits up to 100% of the institution's total capital. Within this aggregate limit, total loans for all commercial, agricultural, multi-family and other non-one-to-four family residential properties should not exceed 30% of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels. Certain loans are exempt from the LTV ratios (e.g., those guaranteed by a government agency, loans to facilitate the sale of real estate owned, loans renewed, refinanced or restructured by the original lender(s) to the same borrower(s) where there is no advancement of new funds, etc.). Bank West is in compliance with the above standards. Although federal laws and regulations permit federal savings institutions, such as Bank West, to originate and purchase loans secured by real estate located throughout the United States, Bank West's present lending is primarily done within western Michigan. Subject to Bank West's loans-to-one borrower limitation, Bank West is permitted to invest without limitation in residential mortgage loans and up to 400% of its capital in loans secured by non-residential or commercial real estate. Bank West may also invest in secured and unsecured consumer loans in an amount not exceeding 35% of Bank West's total assets. This 35% limitation may be exceeded for certain types of consumer loans, such as home equity and property improvement loans secured by residential real property. In addition, Bank West may invest up to 10% of its total assets in secured and unsecured loans for commercial, corporate, business or agricultural purposes. At June 30, 1996, Bank West was well within each of the above lending limits. Bank West requires title insurance insuring the priority of its lien, as well as fire and extended coverage casualty insurance, in order to protect the properties securing its real estate loans. Borrowers must also obtain flood insurance policies when the property is in a flood hazard area as designated by the Federal Emergency Management Agency. Borrowers may be required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage loan account from which Bank West makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums as they become due. Loans on Existing Residential Properties. The primary real estate lending activity of Bank West is the origination of loans secured by first mortgage liens on one- to four-family residences. At June 30, 1996, $85.0 million or 80.2% of Bank West's total loan portfolio, including loans held for sale but before net items, consisted of one- to four-family residential loans. The loan-to-value ratio, maturity and other provisions of the loans made by Bank West generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by Bank West. Bank West's lending policies on one-to four-family residential mortgage loans generally limit the maximum loan-to-value ratio to 95% of the lesser of the appraised value or purchase price of the property, and generally one- to four-family residential loans in excess of an 80% loan-to-value ratio require private mortgage insurance. Prior to November 1992, the Bank had required a minimum 25% down payment with respect to such loans. For 95% loans, the borrower's down payment must come from the borrower's own funds and cannot be in the form of a gift. A borrower's total debt to income ratio generally may not exceed 41%. Bank West offers fixed-rate one- to four-family residential loans with terms up to 30 years. Such loans are amortized on a monthly basis with principal and interest due each month and customarily include "due-on-sale" clauses, which are provisions giving Bank West the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage or the loan is not repaid. Bank West enforces due-on-sale clauses to the extent permitted under applicable laws. Various legislative and regulatory changes have given Bank West the authority to originate and purchase ARMs, subject to certain limitations. Bank West has been actively marketing ARMs in order to decrease the vulnerability of its operations to changes in interest rates. At June 30, 1996, one- to four-family residential ARMs represented $47.5 million or 44.8% of the total loan portfolio, including loans held for sale. Bank West's one- to four-family residential ARMs are fully amortizing loans with contractual maturities of up to 30 years. These loans have interest rates which are scheduled to adjust annually in accordance with a designated index (which, at present, is the one-year Treasury security index, plus a range from 2.75% to 2.875%). Bank West currently offers a one-year adjustable mortgage with a 2% cap on the rate adjustment per period and a 6% cap rate adjustment over the life of the loan. The adjustable-rate loans in Bank West's loan portfolio are not convertible by their terms into fixed-rate loans, may be assumable, do not contain prepayment penalties and do not produce negative amortization. Bank West also offers 3, 5 and 7 year balloon mortgages. The demand for adjustable-rate loans in Bank West's primary market area has been a function of several factors, including the level of interest rates, and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. Due to the generally lower rates of interest prevailing in recent periods, the market demand for adjustable-rate loans has decreased as consumer preference for fixed-rate loans has increased. Nevertheless, ARMs have represented a substantial portion of residential mortgage loan originations for Bank West. For fiscal 1996, ARMs represented 27.6% of total one- to four-family residential loan originations, compared to 45.0% and 36.0% for fiscal 1995 and 1994, respectively. Construction Loans. Construction loans represent loans to individuals who have a contract with a builder for the construction of their residence as well as loans to builders of residential real estate property. This type of lending has significantly increased in recent years and represents the second most significant type of loan for the Bank. At the end of fiscal 1996, 1995 and 1994, construction loans amounted to $14.1 million, $6.1 million and $7.4 million, respectively, or 13.3%, 6.1% and 7.8% of the total loan portfolio (including loans held for sale), respectively. The Bank purchased $7.1 million of construction loans in fiscal 1996, a portion of which were included in loans in process at June 30, 1996. Construction loans extended pursuant to a builder's line of credit are for up to $500,000 at the prime rate plus a specified percentage. A first mortgage on each home constructed is given as collateral. Interest payments only are due for six months, after which the balance extended is due. The Board of Directors has adopted a policy limiting builder's lines of credit to four mortgages outstanding at any one time, for an aggregate balance of not to exceed $500,000. Loans to builders under a line of credit are limited to 75% of appraised value. The maximum term for any loan pursuant to a builder's line of credit is one year. Pursuant to Bank West's Construction Loan Policy, construction loans to individuals are limited to 95% of the appraised value, or purchase price, whichever is less, of the security property. Construction loans are offered with both fixed and adjustable interest rates. Appropriate documentation related to the construction process must be submitted by applicants for construction loans. Bank West has also adopted a policy for "spec loans" to builders for construction of homes not under sales contract. For these loans, the permissible LTV limit is 75%. A maximum of two "spec loans" is permitted to any one builder to be outstanding at one time. Construction lending is generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for properties that are dependent upon sale of the home being constructed. Construction financing also is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser if the property will not be owner-occupied. Bank West generally attempts to mitigate the risks associated with construction lending by, among other things, lending primarily in its market area, using conservative underwriting guidelines, and closely monitoring the construction process. Home Equity Lines of Credit. Bank West established a Home Equity Credit Line Program in November 1993 to further develop its second mortgage lending. The lines of credit are secured by one- to four-family residences and are available for any purpose. Loans are offered at the prime rate plus a range from 1% to 1.5%. The maximum rate of interest is 18%. The minimum credit line is $1,000, and the maximum line of credit is equal to (a) the lesser of the property's appraised value or two times its assessed valuation, minus (b) any existing indebtedness secured by the property. The term of the line of credit is seven years, with a minimum monthly payment of the greater of 1% of the unpaid balance, $100 or the interest due on the line of credit. At June 30, 1996, $2.2 million or 2.1% of the Bank's total loan portfolio, including loans held for sale but before net items, consisted of home equity loans. In addition, the Bank had commitments of $3.2 million of home equity lines of credit at June 30, 1996. Second Mortgages. At June 30, 1996, $1.9 million or 1.8% of the Bank's total loan portfolio, including loans held for sale but before net items, consisted of second mortgages. The second mortgages are secured by one- to four-family residences, are for a fixed amount and a fixed term, and are made to individuals for a variety of purposes. Because the home equity lines of credit offer greater flexibility to the borrower, it is anticipated that the lines of credit will be more popular than the second mortgages. Other Lending. Bank West's commercial mortgage and commercial non-mortgage loans amounted to $1.2 million and $1.0 million, respectively, representing 1.1% and 0.9% of the total loan portfolio, including loans held for sale but before net items at June 30, 1996. At June 30, 1996, Bank West's consumer loan portfolio amounted to $622,000 or 0.6% of the total loan portfolio, including loans held for sale but before net items. The Bank expects additional growth in its commercial and consumer loan portfolio during fiscal 1997. Loan Fees and Servicing Income. In addition to interest earned on loans, Bank West receives income through the servicing of loans and loan fees charged in connection with loan originations and modifications, late payments, prepayments, changes of property ownership and for miscellaneous services related to its loans. Income from these activities varies from period-to-period with the volume and type of loans made. Loan origination fees or "points" are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. Bank West's loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as interest income over the contractual life of the related loans as an adjustment to the yield of such loans. At June 30, 1996, Bank West had approximately $47,000 of net loan fees which had been deferred and are being recognized as income over the lives of the related loans. Asset Quality Delinquent Loans. The following table sets forth information concerning delinquent loans at June 30, 1996, in dollar amounts and as a percentage of the Company's total loan portfolio. All of the loans delinquent at such date consisted of one- to four-family residential real estate loans. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
June 30, 1996 ----------------------------------------------------------------------------------------- 30-59 90 or More Days Days Overdue 60-89 Days Overdue Overdue ------------------------- ------------------------ ---------------------- Percent Percent Percent of Total of Total of Total Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- One- to four-family residential real estate loans $594,000 .56% $172,000 .16% $43,000 .04%
Non-Performing Assets. When a borrower fails to make a required loan payment, Bank West attempts to cause the default to be cured by contacting the borrower. In general, contacts are made after a payment is more than 15 days past due, at which time a late charge is assessed. Defaults are cured promptly in most cases. If the delinquency on a mortgage loan exceeds 90 days and is not cured through Bank West's normal collection procedures, or an acceptable arrangement is not worked out with the borrower, Bank West will institute measures to remedy the default, including commencing a foreclosure action or, in special circumstances, accepting from the borrower a voluntary deed of the secured property in lieu of foreclosure with respect to mortgage loans or title and possession of collateral in the case of consumer loans. If foreclosure is effected, the property is sold at a sheriff's sale. If Bank West is the successful bidder, the acquired real estate property is then included in Bank West's "real estate owned" account until it is sold. Under Michigan law, there is generally a six-month redemption period with respect to one- to four- family residential properties during which the borrower has the right to repurchase the property. Bank West is permitted under federal regulations to finance sales of real estate owned by "loans to facilitate" which may involve more favorable interest rates and terms than generally would be granted under Bank West's underwriting guidelines. At June 30, 1996 and at the end of each of the last five fiscal years, Bank West had no loans to facilitate and no real estate owned. All loans are reviewed on a regular basis under the Bank's asset classification policy. Loans are placed on a non-accrual status when the loan becomes 90 days delinquent, in which case the accrual of interest is discontinued. At June 30, 1996, the Bank had $43,000 of loans on non-accrual status. The following table sets forth the amounts of the Company's nonperforming assets at the dates indicated, all of which consisted of non-accruing, one- to four-family residential loans 90 days or more delinquent. At such dates, there were no real estate owned and no troubled debt restructurings.
June 30, September 30, -------------------------------- ------------- 1996 1995 1994 1993 1992 (Dollars in Thousands) Total nonperforming assets: Non-accruing loans 90 days or more delinquent ......... $43 $ 145 $ 35 $281 $ 139 === ===== ===== ==== ======= Total nonperforming loans as a percentage of loans, net .. .04% .15% .04% .36% .19% === ===== ===== ==== ======= Total nonperforming assets as a percentage of total assets .03% .10% .03% .29% .16% === ===== ===== ==== =======
The $43,000 of nonperforming assets at June 30, 1996 consisted of two one- to four-family residential loans, secured by property in the Grand Rapids metropolitan area. The Bank's total classified assets at June 30, 1996 amounted to $215,000, of which $172,000 was classified as special mention and $43,000 was classified as substandard. At June 30, 1996, management was not aware of any additional loans with possible credit problems which caused it to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which in management's view may result in the future inclusion of such items in the non-performing asset categories. Allowance for Loan Losses. At June 30, 1996, Bank West's allowance for loan losses amounted to $166,000 or .16% of the total loan portfolio, including loans held for sale. Bank West's loan portfolio consists primarily of one- to four-family residential loans and, to a lesser extent, construction loans, home equity lines of credit, second mortgage loans, nonresidential loans and consumer loans. The Bank believes that there are no material elements of risk in its loan portfolio, and total nonperforming assets have remained at very low levels. The classification of assets policy is reviewed quarterly by the Board of Directors. The loan loss allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations, and other factors and estimates which are subject to change over time. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented.
At or For the Nine Months At or For the At or For the Ended Year Ended Year Ended June 30, June 30, September 30, ---------------------------------- -------- ------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (Dollars in Thousands) Total loans outstanding(1) .... $106,075 $101,075 $ 95,656 $ 84,224 $ 72,557 ======== ======== ======== ======== ======== Allowance for loan losses, beginning of period ......... $ 108 $ 88 $ 63 $ 50 $ 45 Provision for loan losses ..... 60 20 25 13 5 Charge-offs ................... 2 -- -- -- -- -------- -------- -------- -------- -------- Allowance for loan losses, end of period ............... $ 166 $ 108 $ 88 $ 63 $ 50 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans outstanding ................. .16% .11% .09% .07% .07% ======== ======== ======== ======== ======== One- to four-family residential loans as a percent of total loans outstanding 80.2% 91.7% 91.1% 91.5% 95.0% ======== ======== ======== ======== ======== - --------------------------- (1) Includes loans held for sale.
Mortgage-Backed Securities The Company has invested in a portfolio of mortgage-backed securities and related securities. Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of one-to four-family or multi-family residential mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally U.S. government agencies and government sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as the Company. The Company's mortgage-backed securities are insured or guaranteed by the Federal National Mortgage Association ("FNMA") or FHLMC. FNMA and FHLMC are public corporations chartered by the U.S. government. These institutions guarantee the timely payment of interest and the ultimate return of principal. FNMA and FHLMC mortgage-backed securities are not backed by the full faith and credit of the United States, but because FNMA and FHLMC are U.S. government sponsored enterprises, these securities are considered high quality investments with minimal credit risks. During fiscal 1996 and 1995, the Company purchased $13.7 million and $1.8 million, respectively, of adjustable-rate collateralized mortgage obligations ("CMOs"). During fiscal 1994, the Company purchased $2.0 million of fixed-rate CMOs. The CMOs are not classified as "high-risk mortgage securities" under OTS Thrift Bulletin 52 ("TB 52"). CMOs are a special type of pass-through debt in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules with each such class possessing different risk characteristics. During fiscal 1996, the Company sold $9.9 million of adjustable-rate mortgage-backed securities and utilized the proceeds to purchase adjustable-rate CMOs. The CMOs reprice monthly based on the London Interbank Offered Rate ("LIBOR") index. During fiscal 1996 and 1995, the Company purchased $1.1 million and $12.7 million, respectively, of adjustable-rate mortgage-backed securities. The Company utilized FHLB borrowings to fund the purchase of these investments. These borrowings reprice on a monthly basis, based on the LIBOR index. At June 30, 1996, the Company's mortgage-backed securities classified as available for sale had a market value of $2.3 million (net of $23,000 in unrealized losses), while CMOs classified as available for sale had a market value of $15.0 million (net of $235,000 in unrealized losses). During fiscal 1996, mortgage-backed securities and CMOs with a carrying value and fair value of $14.5 million were transferred from held to maturity to available for sale to provide the Company with greater flexibility in managing its liquidity and interest rate risk. As a result, there are no CMOs or mortgage-based securities classified as held to maturity at June 30, 1996. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," mortgage-backed and related securities classified as available for sale are reported at fair value and mortgage-backed and related securities classified as held for investment are reported at amortized cost. For additional information relating to the Company's mortgage-backed and related securities held to maturity or available for sale, see Note 3 to the Consolidated Financial Statements in the 1996 Annual Report to Stockholders, filed as Exhibit 13 hereto (the "1996 Annual Report"). Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that result in nominal credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Company. In general, mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, compared to an assigned risk weighting of 50% to 100% for whole residential mortgage loans. As a result, these types of securities allow the Company to optimize regulatory capital to a greater extent than non-securitized whole loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. In contrast to mortgage-backed securities in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or mortgage-backed securities underlying CMOs are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. The following table sets forth the composition of the Company's mortgage-backed securities portfolio at each of the dates indicated.
June 30, ------------------------------- 1996 1995 1994 ------- ------- ------- (In Thousands) Mortgage-backed securities: FHLMC .................................... $ 2,308 $14,100 $ 1,600 Collateralized mortgage obligations ...... 15,034 4,255 1,840 ------- ------- ------- Total mortgage-backed securities ....... $17,342 $18,355 $ 3,440 ======= ======= =======
Information regarding the contractual maturities and weighted average yield of the Company's mortgage-backed securities portfolio at June 30, 1996 is presented below. Due to repayments of the underlying loans, the actual maturities of mortgage-backed securities generally are substantially less than the scheduled maturities.
Amounts at June 30, 1996 Which Mature In ------------------------------------------------------------------------------- After Five One Year After One to to Over 10 or Less Five Years 10 Years Years Total ------- ---------- -------- ----- ----- (Dollars in Thousands) FHLMC securities ........................... $-- $- $ 93 $ 2,215 $ 2,308 Collateralized mortgage obligations .............................. -- -- -- 15,034 15,034 ----- ---- ------- ------- ------- Total ................................. $-- $- $ 93 $17,249 $17,342 ===== ==== ======= ======= ======= Weighted average yield ..................... --% --% 7.75% 6.51% 6.52 ===== ==== ======= ======= =======
The following table sets forth the purchases, sales and principal repayments of the Company mortgage-backed securities during the periods indicated.
At or For the Year Ended June 30, -------------------------------------- 1996 1995 1994 --------- ---------- ---------- (Dollars In Thousands) Mortgage-backed securities and CMOs at beginning of period ..... $ 18,355 $ 3,440 $ 2,378 Purchases ............................ 14,721 15,309 1,963 Repayments ........................... (2,970) (439) (796) Sales ................................ (12,485) -- -- Gain on sales ........................ 17 -- -- Amortization of premiums, net ........ (90) (5) (4) Change in unrealized loss on securities available for sale ...... (206) 50 (101) -------- -------- -------- Mortgage-backed securities and CMOs at end of period .......... $ 17,342 $ 18,355 $ 3,440 ======== ======== ======== Weighted average yield at end of period ...................... 6.52% 7.21% 7.50% ======== ======== ========
Securities The investment policy of the Company, which is established by the Investment Committee and approved by the Board of Directors, is designed primarily to provide a portfolio of high quality, diversified instruments while seeking to optimize net interest income within acceptable limits of interest rate risk, credit risk and liquidity. Bank West is required to maintain certain liquidity ratios and does so by investing in securities that qualify as liquid assets under OTS regulations. See "Regulation - The Bank - Liquidity Requirements" for a description of such regulations. Such securities include obligations issued or fully guaranteed by the United States government, certain federal agency obligations and certificates of deposit. Securities (excluding FHLB stock) totalled $7.4 million or 5.4% of total assets at June 30, 1996. Such securities consist of U.S. government agency securities and corporate bonds. The aggregate market value of such securities was $7.4 million at June 30, 1996. At June 30, 1996, approximately $5.4 million of securities are classified as available for sale, with the remaining $2.0 million classified as held to maturity. The Company began trading equity securities in fiscal 1996. The gain on trading securities is primarily the result of trading equity securities in various financial institutions. Although to date the Company's equity trading strategy has been successful, there is no guarantee that future results will equal the past fiscal year's performance. The unrealized loss recognized on securities classified as trading was $5,813 at June 30, 1996. The market value of the Company's trading securities portfolio was $708,000 at June 30, 1996. All of the Company's marketable equity securities were sold in fiscal 1994. Such securities consisted of mutual funds which invested in ARMs, short and intermediate-term U.S. government securities, and other debt securities. The following table sets forth certain information relating to the Company's securities portfolio (excluding mortgage-backed securities and CMOs) at the dates indicated.
June 30, ----------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- -------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- (In Thousands) U.S. Government agency securities .............. $ 6,949 $ 6,951 $ 8,537 $ 8,525 $ 3,026 $ 2,937 Corporate bonds ................................ 493 493 1,869 1,869 -- -- Municipal bonds ................................ -- -- 1,000 1,003 1,004 1,008 FHLB stock ..................................... 1,475 1,475 1,475 1,475 840 840 ------- ------- ------- ------- ------- ------- Total ........................................ $ 8,917 $ 8,919 $12,881 $12,872 $ 4,870 $ 4,785 ======= ======= ======= ======= ======= =======
The following table sets forth the amount of securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1996.
Amounts at June 30, 1996 Which Mature In ---------------------------------------------------------------------------- Over One Over Five Weighted Year Weighted Years Weighted One Year Average Through Average Through Average or Less Yield Five Years Yield Ten Years Yield ------- ----- ---------- ----- --------- ----- (Dollars in Thousands) Bonds and other debt securities: U.S. Government and federal agencies ........................... $1,002 6.0% $5,947 6.61% $ -- --% Corporate bonds .............................. -- -- 493 5.90 -- -- ------ ---- ------ ---- ----- -- Total ...................................... $1,002 6.0% $6,440 6.55% $ -- --% ====== ==== ====== ==== ===== === Equity securities: FHLB stock(1) ................................ $1,475 7.60% $ -- --% $ -- --% - --------------------------- (1) As a member of the FHLB of Indianapolis, Bank West is required to maintain its investment in FHLB stock, which has no stated maturity.
At June 30, 1996, the Company did not have securities in any one issuer which exceeded more than 10% of the Company's retained earnings. Interest-Bearing Deposits At June 30, 1996, the Company had interest-bearing deposits at financial institutions of $5.1 million, as compared to $4.2 million and $4.0 million at June 30, 1995 and 1994, respectively. The $900,000 increase in interest-bearing deposits from June 30, 1995 to June 30, 1996 is due to improved cash management techniques. Sources of Funds General. Deposits are the primary source of Bank West's funds for lending and other investment purposes. In addition to deposits, Bank West derives funds from principal repayments on loans and mortgage-backed securities. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. FHLB advances may be used to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes. Deposits. Bank West's deposits are attracted principally from within Bank West's primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts, and term certificate accounts. Included among these deposit products are individual retirement account certificates of approximately $7.2 million or 8.0% of total deposits at June 30, 1996. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. The following table sets forth information regarding the types of accounts offered by Bank West at June 30, 1996.
Minimum Interest Type of Account Opening Deposit Rate --------------- --------------- ---- Regular NOW accounts .......................... $ 300 2.75% Gold NOW accounts(1) .......................... 500 2.75 - 4.00 Passbook accounts ............................. 100 2.50 Basic statement savings ....................... 100 3.00 Tiered statement savings(1) ................... 2,500 3.81 - 4.41 Certificates of deposit: 3 to 5 months ............................... 500 4.43 6 to 11 months .............................. 500 5.43 12 to 23 months ............................. 500 5.63 24 to 35 months ............................. 500 5.87 36 to 47 months ............................. 500 6.11 48 to 59 months ............................. 500 6.35 60 months or more ........................... 500 6.59 - ---------------------- (1) Represents a tiered account.
The large variety of deposit accounts offered by Bank West has increased Bank West's ability to retain deposits and allowed it to be more competitive in obtaining new funds, but has not eliminated the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and corporate securities). During periods of high interest rates, deposit accounts that have adjustable interest rates have been more costly than traditional passbook accounts. In addition, Bank West has become increasingly subject to short-term fluctuations in deposit flows. Bank West's ability to attract and maintain deposits is affected by the rate consciousness of its customers and their willingness to move funds into higher-yielding accounts. Bank West's cost of funds has been, and will continue to be, affected by money market conditions. The following table shows the distribution of, and certain other information relating to, Bank West's deposits by type of deposit, as of the dates indicated.
June 30, ------------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ----------------------- -------------------- Amount % Amount % Amount % -------- ------- ------- ------- ------- ------ (Dollars in Thousands) Certificate accounts: 2.00% - 3.99% ............................. $ -- --% $ 188 .2% $19,317 21.5% 4.00% - 5.99% ............................. 51,043 56.1 23,157 27.2 40,136 44.6 6.00% - 7.99% ............................. 17,351 19.1 40,535 47.6 6,287 7.0 8.00% - 9.99% ............................. 21 -- 35 -- 102 .1 ------- ----- ------- ----- ------- ----- Total certificate accounts .............. 68,415 75.2 63,915 75.0 65,842 73.2 ------- ----- ------- ----- ------- ----- Transaction accounts: Passbook and statement savings ............ 16,572 18.2 17,135 20.1 20,427 22.7 Money market accounts ..................... 1,031 1.1 2,118 2.5 2,293 2.5 NOW accounts .............................. 5,010 5.5 2,012 2.4 1,398 1.6 ------- ----- ------- ----- ------- ----- Total transaction accounts .............. 22,613 24.8 21,265 25.0 24,118 26.8 ------- ----- ------- ----- ------- ----- Total deposits .......................... $91,028 100.0% $85,180 100.0% $89,960 100.0% ======= ===== ======= ===== ======= =====
The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
Year Ended June 30, ---------------------------------------------------------------------------- 1996 1995 1994 -------------------- ---------------------- -------------------- Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ------- ---- ------- ---- ------- ---- (Dollars in Thousands) Passbook and statement savings accounts .... $16,930 3.64% $17,700 3.42% $21,799 3.13% Money market accounts and NOW accounts .... 4,711 2.22 4,511 3.59 2,679 3.14 Certificates of deposit 66,532 5.84 64,968 5.07 62,388 4.52 ------- ---- ------- ---- ------- ---- Total ............. $88,173 5.22% $87,179 4.66% $86,866 4.13% ======= ==== ======= ==== ======= ====
The following table sets forth the savings flows of Bank West during the periods indicated.
Year Ended June 30, -------------------------------------- 1996 1995 1994 (In Thousands) Increase (decrease) before interest credited(1) .......... $ 1,234 $(8,778) $ 2,313 Interest credited ................ 4,614 3,998 3,520 ------- ------- ------- Net increase (decrease) in deposits .................. $ 5,848 $(4,780) $ 5,833 ======= ======= ======= - ----------------- (1) Information provided is net because information necessary to present the gross amounts of deposits and withdrawals is not readily available.
Bank West attempts to control the flow of deposits by pricing its accounts to remain generally competitive with other financial institutions in its market area, but does not necessarily seek to match the highest rates paid by competing institutions. Bank West has generally not taken a position of price leadership in its markets unless there has been an opportunity to market longer term deposits. The principal methods used by Bank West to attract deposits include the offering of a wide variety of services and accounts, competitive interest rates, convenient office locations and cards that access deposits at Bank West through automatic teller machines ("ATMs") established by other banking organizations. Bank West uses traditional marketing methods to attract new customers and deposits, including mass media advertising and direct mailings. The following table sets forth the maturities of Bank West's certificates of deposit having principal amounts of $100,000 or more at June 30, 1996.
Quarter Ending: Amounts (In Thousands) September 30, 1996 ......................................... $ 2,415 December 31, 1996 .......................................... 2,138 March 31, 1997 ............................................. 1,404 June 30, 1997 .............................................. 1,209 After June 30, 1997 ........................................ 3,006 ------- Total certificates of deposit with balances of $100,000 or more ........................... $10,172 =======
Borrowings. Bank West may obtain advances from the FHLB of Indianapolis based upon the security of the common stock it owns in that bank and certain of its residential mortgage loans, investment securities and mortgage-backed securities, provided certain standards related to credit worthiness have been met. See "Regulation - The Bank - Federal Home Loan Bank System." Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. At June 30, 1996, Bank West had $6.0 million of short-term advances from the FHLB of Indianapolis, $5.0 million of which mature in the quarter ended September 30, 1996, and $13.0 million of long-term variable rate borrowings which have maturities between 1997 and 2001. See Note 8 to the Consolidated Financial Statements in the 1996 Annual Report for additional information. In fiscal 1995, the Bank utilized $14.5 million of the long-term borrowings to purchase adjustable-rate mortgage-backed securities and collateralized mortgage obligations. This strategy was implemented to earn a positive spread during both an increasing or decreasing interest rate environment and to supplement the decline in adjustable-rate loan volume. In addition, in fiscal 1995 the Bank utilized $3.0 million of long-term variable rate FHLB borrowings to repay short-term FHLB borrowings bearing a higher interest rate. During fiscal 1996, the Bank reduced short-term advances by $1.4 million and long-term advances by $4.5 million with excess liquidity generated from deposit growth. The following table sets forth certain information regarding borrowed funds at or for the dates indicated:
At or for the Year Ended June 30, ------------------------------------ 1996 1995 1994 ------ ---- ---- (Dollars in Thousands) FHLB advances: Average balance outstanding ........ $22,236 $10,759 $ 2,583 Maximum amount outstanding at any month-end during the period ....................... $25,473 $24,922 $ 5,000 Balance outstanding at end of period ........................ $19,000 $24,922 $ 5,000 Average interest rate during the period ................ 5.96% 5.55% 3.87% Weighted average interest rate at end of period ................. 5.60% 6.23% 5.23%
Subsidiaries OTS regulations permit the Bank to invest up to 2% of its assets in the capital stock of, and secured and unsecured loans to, subsidiary service corporations, and an additional 1% of its assets when the additional funds are utilized for community or inner-city purposes. In addition, federally-chartered savings institutions which are in compliance with their minimum regulatory capital requirements also may make conforming loans to service corporations in which the institution owns or holds more than 10% of the capital stock or to joint ventures of such service corporations in an aggregate amount of up to 50% of the institutions' regulatory capital. OTS regulations also limit the aggregate amount of direct investments, including loans, by a SAIF-insured institution in real estate, service corporations, operating subsidiaries and equity securities as defined therein. At June 30, 1996, the Bank had one wholly owned subsidiary which is inactive. Competition Bank West faces significant competition both in attracting deposits and in making loans. Some of the Bank's major competitors include NBD Bank, Comerica Bank, Michigan National Bank, Old Kent Bank and Trust Company, and First of America Bank. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area, including many large financial institutions which have greater financial and marketing resources available to them. In addition, Bank West faces additional significant competition for investors' funds from short-term money market mutual funds and issuers of corporate and government securities. Bank West competes for deposits principally by offering depositors a variety of deposit programs. Bank West does not rely upon any individual group or entity for a material portion of its deposits. The Bank estimates that its market share of total deposits in Kent County, Michigan is approximately 1%. Bank West's competition for real estate loans comes principally from mortgage banking companies, commercial banks and other savings institutions. Bank West competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers and real estate brokers. Factors which affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets. The Bank estimates that its market share of total mortgage loans secured by properties located in Kent County, Michigan is approximately 3%. Employees Bank West and its subsidiaries had 44 full-time employees and nine part-time employees at June 30, 1996. None of these employees is represented by a collective bargaining agent, and Bank West believes that it enjoys good relations with its personnel. REGULATION The Company General. The Company, as a registered savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA"), is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, Bank West is subject to certain restrictions in its dealings with the Company and affiliates thereof. Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company which holds only one subsidiary savings institution. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, as discussed under "- The Bank - Qualified Thrift Lender Test," then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See "- The Bank - Qualified Thrift Lender Test." If the Company were to acquire control of another savings institution, other than through merger or other business combination with Bank West, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, as set forth below, the activities of the Company and any of its subsidiaries (other than Bank West or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof any business activity, upon prior notice to, and no objection by the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the FRB as permissible for bank holding companies. Those activities described in (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company. Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution's loans to one borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution's unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At June 30, 1996, Bank West was in compliance with the above restrictions. Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Under the Bank Holding Company Act of 1956, the FRB is authorized to approve an application by a bank holding company to acquire control of a savings institution. In addition, a bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF") with the approval of the appropriate federal banking agency and the FRB. As a result of these provisions, there have been a number of acquisitions of savings institutions by bank holding companies in recent years. The Bank General. The OTS has extensive authority over the operations of federally chartered savings institutions. As part of this authority, savings institutions are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Those laws and regulations generally are applicable to all federally chartered savings institutions and may also apply to state-chartered savings institutions. Such regulation and supervision is primarily intended for the protection of depositors. The OTS' enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides for, among other things, the recapitalization of the BIF; the authorization of the FDIC to make emergency special assessments under certain circumstances against BIF members and members of the SAIF; the establishment of risk-based deposit insurance premiums; and improved examinations and reporting requirements. The FDICIA also provides for enhanced federal supervision of depository institutions based on, among other things, an institution's capital level. See " Prompt Corrective Action." Insurance of Accounts. The deposits of Bank West are insured to the maximum extent permitted by the SAIF, which is administered by the FDIC, and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action. Under current FDIC regulations, SAIF-insured institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital--"well capitalized," "adequately capitalized," and "undercapitalized"--which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the FDIA, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from .23% for well capitalized, healthy institutions to .31% for undercapitalized institutions with substantial supervisory concerns. The insurance premiums for Bank West for the two semi-annual periods in each of calendar 1994, calendar 1995 and calendar 1996 were .23% (per annum) of insured deposits. Both the SAIF and the BIF are statutorily required to be recapitalized to a ratio of 1.25% of insured reserve deposits. The BIF has achieved the required reserve ratio, and, as discussed below, the FDIC recently substantially reduced the average deposit insurance premium paid by BIF-insured banks to a level substantially below the average paid by savings institutions. On November 14, 1995, the FDIC approved a final rule regarding deposit insurance premiums. The final rule reduced deposit insurance premiums for BIF member institutions to zero basis points (subject to a $2,000 minimum) for institutions in the lowest risk category, while holding deposit insurance premiums for SAIF members at their current levels (23 basis points for institutions in the lowest risk category). The reduction was effective with respect to the semiannual premium assessment beginning January 1, 1996. Accordingly, in the absence of further legislative action, SAIF members such as Bank West will be competitively disadvantaged as compared to commercial banks by the resulting premium differential. The U.S. House of Representatives and Senate have actively considered legislation which would have eliminated the premium differential between SAIF-insured institutions and BIF-insured institutions by recapitalizing the SAIF's reserves to the required ratio. The proposed legislation would have required all SAIF member institutions to pay a special one-time assessment to recapitalize the SAIF, which in the aggregate would have been sufficient to bring the reserve ratio for the SAIF to 1.25% of insured deposits. Based on the current level of reserves maintained by the SAIF, it was anticipated that the amount of the special assessment required to recapitalize the SAIF would have been approximately 85 to 90 basis points of the SAIF-assessable deposits as of March 31, 1995. It was also anticipated that after the recapitalization of the SAIF, premiums paid by SAIF-insured institutions would be reduced to match those currently being assessed BIF-insured institutions. The legislation also provided for the merger of the BIF and the SAIF, with such merger being conditioned upon the prior elimination of the thrift charter. The legislation discussed above had been, for some time, included as part of a fiscal 1996 federal budget bill, but was eliminated prior to the bill being enacted on April 26, 1996. In light of the legislation's elimination and the uncertainty of the legislative process generally, management cannot predict whether legislation reducing SAIF premiums and/or imposing a special one-time assessment will be adopted, or, if adopted, the amount of the assessment, if any, that would be imposed on the Company. If legislation were to be enacted in the future which would assess a one-time special assessment of up to 90 basis points, the Company would (based upon the Company's SAIF deposits as of March 31, 1996) incur an adverse earnings impact of up to approximately $758,000, gross of related tax benefits, if any. In addition, the enactment of such legislation might have the effect of immediately reducing the Company's capital by such an amount. The FDIC may terminate the deposit insurance of any insured depository institution, including Bank West, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank's deposit insurance. Regulatory Capital Requirements. Federally insured savings institutions are required to maintain minimum levels of regulatory capital. The OTS has established capital standards applicable to all savings institutions. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis. Current OTS capital standards require savings institutions to satisfy three different capital requirements. Under these standards, savings institutions must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 3.0% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of the regulation, core capital generally consists of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Tangible capital is given the same definition as core capital but does not include qualifying supervisory goodwill and is reduced by the amount of all the savings institution's intangible assets, with only a limited exception for purchased mortgage servicing rights. Bank West had no goodwill or other intangible assets at June 30, 1996 which are required to be considered in computing regulatory capital. Both core and tangible capital are further reduced by an amount equal to a savings institution's debt and equity investments in subsidiaries engaged in activities not permissible to national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). These adjustments do not affect Bank West's regulatory capital. In determining compliance with the risk-based capital requirement, a savings institution is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings institution's core capital. Supplementary capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as core capital; subordinated debt and intermediate-term preferred stock; and general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for principal categories of assets are (i) 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government; (ii) 20% for securities (other than equity securities) issued by U.S. Government-sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (iii) 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential bridge loans made directly for the construction of one- to four-family residences and qualifying multi-family residential loans; and (iv) 100% for all other loans and investments, including consumer loans, commercial loans, and one- to four-family residential real estate loans more than 90 days delinquent, and for repossessed assets. In August 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate risk component from total capital for purposes of calculating its risk-based capital. As a result, such an institution will be required to maintain additional capital in order to comply with the risk-based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a loss of net portfolio value exceeding 2.0% of the estimated economic value of its assets in the event of a 200 basis point increase or decrease (with certain minor exceptions) in interest rates. The interest rate risk component will be calculated, on a quarterly basis, as one-half of the difference between an institution's measured interest rate risk and 2.0% multiplied by the economic value of its assets. The rule also authorizes the Director of the OTS, or his designee, to waive or defer an institution's interest rate risk component on a case-by-case basis. The final rule was originally effective as of January 1, 1994, subject however to a two quarter "lag" time between the reporting date of the data used to calculate an institution's interest rate risk and the effective date of each quarter's interest rate risk component. However, in October 1994 the Director of the OTS indicated that it would waive the capital deductions for institutions with a greater than "normal" risk until the OTS published an appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which established (i) an appeals process to handle "requests for adjustments" to the interest rate risk component and (ii) a process by which "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to determine their interest rate risk component. The Director of the OTS indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will continue to delay the implementation of the capital deduction for interest rate risk pending the testing of the appeals process set forth in Thrift Bulletin 67. Effective November 28, 1994, the OTS revised its interim policy issued in August 1993 under which savings institutions computed their regulatory capital in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the revised OTS policy, savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of GAAP capital. At June 30, 1996, Bank West exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 15.4%, 15.4% and 31.4%, respectively. The following table sets forth Bank West's compliance with each of the above-described capital requirements as of June 30, 1996.
Tangible Core Risk-Based Capital Capital(1) Capital(2) ------- ---------- ---------- (Dollars in Thousands) Capital under GAAP ........................... $19,978 $19,978 $19,978 Additional capital items: Unrealized loss on securities available securities available for sale, net of taxes 192 192 192 General valuation allowances(3) ............ 166 ------- ------- ------- Regulatory capital ........................... 20,170 20,170 20,336 Minimum required regulatory capital(4) ....... 1,971 3,941 5,189 ------- ------- ------- Excess regulatory capital .................... $18,199 $16,229 $15,147 ======= ======= ======= Regulatory capital as a percentage ........... 15.40% 15.40% 31.40% Minimum capital required as a percentage(4) ............................. 1.50% 3.00% 8.00% ------- ------- ------- Regulatory capital as a percentage in excess of requirements ................... 13.90% 12.40% 23.40% ======= ======= ======= - ----------------------------- (1) Does not reflect the 4.0% requirement to be met in order for an institution to be "adequately capitalized." See "- Prompt Corrective Action." (2) Does not reflect the interest-rate risk component in the risk-based capital requirement, the effective date of which has been postponed as discussed above. (3) General valuation allowances are only used in the calculation of risk-based capital. Such allowances are limited to 1.25% of risk-weighted assets. (4) Tangible and core capital are computed as a percentage of adjusted total assets of $131.4 million. Risk-based capital is computed as a percentage of adjusted risk-weighted assets of $64.9 million.
Any savings institution that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution's operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. Prompt Corrective Action. Under Section 38 of the FDIA, as added by the FDICIA, each federal banking agency was required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies, including the OTS, adopted substantially similar regulations to implement Section 38 of the FDIA, effective as of December 19, 1992. Under the regulations, an institution is deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions. At June 30, 1996, Bank West was deemed a well capitalized institution for purposes of the above regulations and as such is not subject to the above mentioned restrictions. Safety and Soundness. On November 18, 1993, a joint notice of proposed rulemaking was issued by the OTS, the FDIC, the Office of the Comptroller of the Currency and the Federal Reserve Board (collectively, the "agencies") concerning standards for safety and soundness required to be prescribed by regulation pursuant to Section 39 of the FDIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and managerial standards cover (a) internal controls and information systems, (b) internal audit system, (c) loan documentation, (d) credit underwriting, (e) interest rate risk exposure, (f) asset growth, and (g) compensation, fees and benefits. Under the proposed asset quality and earnings standards, Bank West would be required to maintain (1) a maximum ratio of classified assets (assets classified substandard, doubtful and to the extent that related losses have not been recognized, assets classified loss) to total capital of 1.0, and (2) minimum earnings sufficient to absorb losses without impairing capital. The last ratio concerning market value to book value was determined by the agencies not to be feasible. Finally, the proposed compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the individual being compensated. Legislation enacted in 1994: (1) authorizes the agencies to establish safety and soundness standards by regulation or guideline for all insured depository institutions; (2) gives the agencies greater flexibility in prescribing asset quality and earnings standards by eliminating the requirement that agencies establish quantitative standards; and (3) eliminates the requirement that the standards referenced above apply to depository institution holding companies. The agencies have published a final rule and interagency guidelines ("Guidelines"), as well as proposed asset quality and earning standards which will be added to the Guidelines when finalized. The final rule and Guidelines became effective on August 9, 1995. Under the Guidelines and final rule of the OTS, if an insured savings institution fails to meet any of the standards promulgated by the Guidelines, then the OTS may require such institution to submit a plan within 30 days (or such different period specified by the OTS) specifying the steps it will take to correct the deficiency. In the event that an institution fails to submit or fails in any material respect to implement a compliance plan within the time allowed by the OTS, the OTS must order the institution to correct the deficiency and may (1) restrict asset growth; (2) require the institution to increase its ratio of tangible equity to assets; (3) restrict the rates of interest that the institution may pay; or (4) take any other action that would better carry out the purpose of prompt corrective action. Bank West believes that it is in compliance with the Guidelines and final rule as adopted. Liquidity Requirements. All savings institutions are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings institutions. At the present time, the required minimum liquid asset ratio is 5%. At June 30, 1996, Bank West's liquidity ratio was 16.94%. Capital Distributions. OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings institution to make capital distributions. Generally, the regulation creates a safe harbor for specified levels of capital distributions from institutions meeting at least their minimum capital requirements, so long as such institutions notify the OTS and receive no objection to the distribution from the OTS. Savings institutions and distributions that do not qualify for the safe harbor are required to obtain prior OTS approval before making any capital distributions. Generally, a savings institution that before and after the proposed distribution meets or exceeds its fully phased-in capital requirements (Tier 1 institutions) may make capital distributions during any calendar year equal to the higher of (i) 100% of net income for the calendar year-to-date plus 50% of its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of net income over the most recent four-quarter period. The "surplus capital ratio" is defined to mean the percentage by which the institution's ratio of total capital to assets exceeds the ratio of its fully phased-in capital requirement to assets. "Fully phased-in capital requirement" is defined to mean an institution's capital requirement under the statutory and regulatory standards applicable on December 31, 1994, as modified to reflect any applicable individual minimum capital requirement imposed upon the institution. Failure to meet fully phased-in or minimum capital requirements will result in further restrictions on capital distributions, including possible prohibition without explicit OTS approval. See "- Regulatory Capital Requirements." Tier 2 institutions, which are institutions that before and after the proposed distribution meet or exceed their minimum capital requirements, may make capital distributions up to a specified percentage of their net income during the most recent four quarter period, depending on how close the institution is to meeting its fully phased-in capital requirements. Tier 3 institutions, which are institutions that do not meet current minimum capital requirements, or which have been otherwise notified by the OTS that they will be treated as a Tier 3 institution because they are in need of more than normal supervision, cannot make any capital distribution without obtaining OTS approval prior to making such distributions. In order to make distributions under these safe harbors, Tier 1 and Tier 2 institutions must submit 30 days written notice to the OTS prior to making the distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. In addition, a Tier 1 institution deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 institution as a result of such a determination. At June 30, 1996, Bank West was a Tier 1 institution for purposes of this regulation. On December 5, 1994, the OTS published a notice of proposed rulemaking to amend its capital distribution regulation. Under the proposal, institutions would be permitted to only make capital distributions that would not result in their capital being reduced below the level required to remain "adequately capitalized," as defined above under "-Prompt Corrective Action." Because the Bank will be a subsidiary of a holding company, the proposal would require the Bank to provide notice to the OTS of its intent to make a capital distribution. The Bank does not believe that the proposal will adversely affect its ability to make capital distributions if it is adopted substantially as proposed. Loans to One Borrower. The permissible amount of loans-to-one borrower now generally follows the national bank standard for all loans made by savings institutions. The national bank standard generally does not permit loans-to-one borrower to exceed the greater of $500,000 or 15% of unimpaired capital and surplus. At June 30, 1996, the 15% limit for the Bank was $3.0 million, and the Bank did not have any loans to one borrower in excess of such amount. Loans in an amount equal to an additional 10% of unimpaired capital and surplus also may be made to a borrower if the loans are fully secured by readily marketable collateral. Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets, with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated "special mention" also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital up to certain amounts, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution's classifications and amounts reserved. Branching by Federal Savings Institutions. OTS policy permits interstate branching to the full extent permitted by statute (which is essentially unlimited). Generally, federal law prohibits federal savings institutions from establishing, retaining or operating a branch outside the state in which the federal institution has its home office unless the institution meets the IRS' domestic building and loan test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an emergency acquisition of a troubled savings institution (however, if the troubled savings institution is acquired by a bank holding company, does not have its home office in the state of the bank holding company bank subsidiary and does not qualify under the IRS Test, its branching is limited to the branching laws for state-chartered banks in the state where the savings institution is located); (ii) the law of the state where the branch would be located would permit the branch to be established if the federal savings institution were chartered by the state in which its home office is located; or (iii) the branch was operated lawfully as a branch under state law prior to the savings institution's conversion to a federal charter. Furthermore, the OTS will evaluate a branching applicant's record of compliance with the Community Reinvestment Act of 1977 ("CRA"). An unsatisfactory CRA record may be the basis for denial of a branching application. Qualified Thrift Lender Test. All savings institutions are required to meet a QTL test to avoid certain restrictions on their operations. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Currently, the QTL test requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLB of Indianapolis; and direct or indirect obligations of the FDIC. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At June 30, 1996, the qualified thrift investments of Bank West were approximately 88.8% of its portfolio assets. Accounting Requirements. Applicable OTS accounting regulations and reporting requirements apply the following standards: (i) regulatory reports will incorporate GAAP when GAAP is used by federal banking agencies; (ii) savings institution transactions, financial condition and regulatory capital must be reported and disclosed in accordance with OTS regulatory reporting requirements that will be at least as stringent as for national banks; and (iii) the Director of the OTS may prescribe regulatory reporting requirements more stringent than GAAP whenever the Director determines that such requirements are necessary to ensure the safe and sound reporting and operation of savings institutions. Effective February 10, 1992, the OTS adopted a statement of policy ("Statement") set forth in Thrift Bulletin 52 concerning (i) procedures to be used in the selection of a securities dealer, (ii) the need to document and implement prudent policies and strategies for securities, whether held for investment, trading or for sale, and to establish systems and internal controls to ensure that securities activities are consistent with the financial institution's policies and strategies, (iii) securities trading and sales practices that may be unsuitable in connection with securities held in an investment portfolio, (iv) high-risk mortgage securities that are not suitable for investment portfolio holdings for financial institutions, and (v) disproportionately large holdings of long-term, zero-coupon bonds that may constitute an imprudent investment practice. The Statement applies to investment securities, high-yield, corporate debt securities, loans, mortgage-backed securities and derivative securities, and provides guidance concerning the proper classification of and accounting for securities held for investment, sale and trading. Securities held for investment, sale or trading may be differentiated based upon an institution's desire to earn an interest yield (held for investment), to realize a holding gain from assets held for indefinite periods of time (held for sale), or to earn a dealer's spread between the bid and asked prices (held for trading). Depository institution investment portfolios are maintained to provide earnings consistent with the safety factors of quality, maturity, marketability and risk diversification. Securities that are purchased to accomplish these objectives may be reported at their amortized cost only when the depository institution has both the intent and ability to hold the assets for long-term investment purposes. Securities held for investment purposes may be accounted for at amortized cost, securities held for sale are to be accounted for at the lower of cost or market, and securities held for trading are to be accounted for at market. Bank West believes that its investment activities have been and will continue to be conducted in accordance with the requirements of OTS policies and GAAP. The accounting principles for depository institutions are currently undergoing review to determine whether the historical cost model or market-based measure of valuation is the appropriate measure for reporting the assets of such institutions in their financial statements. Such proposal is controversial because any change in applicable accounting principles which requires depository institutions to carry mortgage-backed securities and mortgage loans at fair market value could result in substantial losses to such institutions and increased volatility in their liquidity and operations. Currently, it cannot be predicted whether there may be any changes in the accounting principles for depository institutions in this regard beyond those imposed by SFAS No. 115 or when any such changes might become effective. The Omnibus Reconciliation Act of 1993 added a new Section 475 to the Internal Revenue Code of 1986, as amended (the "Code"), which provides that certain financial institutions must recognize gain or loss annually with regard to any securities held by them as inventory for resale. Gain and loss is not required to be recognized with regard to securities which are intended to be held until their maturity. Because all of the Bank's investment securities and mortgage-backed securities are classified as held to maturity, Section 475 of the Code does not have a material impact on the financial statements of the Bank. Federal Home Loan Bank System. Bank West is a member of the FHLB of Indianapolis, which is one of 12 regional FHLBs that administers the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. The FHLB advances are collateralized by a blanket collateral loan agreement under which the Bank must maintain minimum eligible collateral of 160% of the outstanding advances. Under this agreement, the limit on the Bank's FHLB advances was $66.0 million at June 30, 1996. At June 30, 1996, the Bank had $19.0 million of FHLB advances. See Note 8 to the Consolidated Financial Statements in the 1996 Annual Report. As a member, Bank West is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At June 30, 1996, Bank West had $1,475,000 in FHLB stock, which was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future. The dividend yield on the Bank's FHLB stock has decreased from 9.7% in fiscal 1993 to 8.1% in fiscal 1996. Federal Reserve System. The FRB requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. As of June 30, 1996, no reserves were required to be maintained on the first $4.3 million of transaction accounts, reserves of 3% were required to be maintained against the next $52.0 million of net transaction accounts (with such dollar amounts subject to adjustment by the FRB), and a reserve of 10% (which is subject to adjustment by the FRB to a level between 8% and 14%) against all remaining net transaction accounts. Because required reserves must be maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution's earning assets. TAXATION Federal Taxation General. The Company and Bank West are subject to the generally applicable corporate tax provisions of the Code, and Bank West is subject to certain additional provisions of the Code which apply to thrift and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive discussion of the tax rules applicable to the Company and Bank West. Fiscal Year. The Company and Bank West file a consolidated federal income tax return on the basis of a fiscal year ending June 30. Bad Debt Reserves. Savings institutions, such as Bank West, which meet certain definitional tests primarily relating to their assets and the nature of their businesses, are permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions may, within specified formula limits, be deducted in arriving at the institution's taxable income. For purposes of computing the deductible addition to its bad debt reserve, the institution's loans are separated into "qualifying real property loans" (i.e., generally those loans secured by certain interests in real property) and all other loans ("non-qualifying loans"). The deduction with respect to non-qualifying loans must be computed under the experience method as described below. The following formulas may be used to compute the bad debt deduction with respect to qualifying real property loans: (i) actual loss experience, or (ii) a percentage of taxable income. Reasonable additions to the reserve for losses on non-qualifying loans must be based upon actual loss experience and would reduce the current year's addition to the reserve for losses on qualifying real property loans, unless that addition is also determined under the experience method. The sum of the additions to each reserve for each year is the institution's annual bad debt deduction. Under the experience method, the deductible annual addition to the institution's bad debt reserves is the amount necessary to increase the balance of the reserve at the close of the taxable year to the greater of (a) the amount which bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bear to the sum of the loans outstanding at the close of the six years, or (b) the lower of (i) the balance of the reserve account at the close of the Bank's "base year," which is its tax year ended December 31, 1987, or (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. Under the percentage of taxable income method, the bad debt deduction equals 8% of taxable income determined without regard to that deduction and with certain adjustments. The availability of the percentage of taxable income method permits a qualifying savings institution to be taxed at a lower effective federal income tax rate than that applicable to corporations in general. This resulted generally in an effective federal income tax rate payable by a qualifying savings institution fully able to use the maximum deduction permitted under the percentage of taxable income method, in the absence of other factors affecting taxable income, of 31.3% exclusive of any minimum tax or environmental tax (as compared to 34% for corporations generally). Any savings institution at least 60% of whose assets are qualifying assets, as described in the Code, will generally be eligible for the full deduction of 8% of taxable income. As of June 30, 1996, 88.0% of the assets of Bank West were "qualifying assets" as defined in the Code. In August 1996, legislation was enacted that repeals the above described reserve method of accounting (including the percentage of taxable income method) used by many savings institutions to calculate their bad debt reserve for federal income tax purposes. Savings institutions with $500 million or less in assets may, however, continue to use the experience method. As a result, the Bank must recapture that portion of its reserve which exceeds the amount that could have been taken under the experience method for post-1987 tax years. At June 30, 1996, the Bank's post-1987 excess reserves amounted to approximately $781,000. The recapture will occur over a six-year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the Bank meets certain residential lending requirements. The legislation also requires savings institutions to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. Under the percentage of taxable income method, the bad debt deduction for an addition to the reserve for qualifying real property loans cannot exceed the amount necessary to increase the balance in this reserve to an amount equal to 6% of such loans outstanding at the end of the taxable year. The bad debt deduction is also limited to the amount which, when added to the addition to the reserve for losses on non-qualifying loans, equals the amount by which 12% of deposits at the close of the year exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. Based on experience, it is not expected that these restrictions will be a limiting factor for Bank West in the foreseeable future. In addition, the deduction for qualifying real property loans is reduced by an amount equal to all or part of the deduction for non-qualifying loans. At June 30, 1996, the federal income tax reserves of Bank West included $3.4 million for which no federal income tax has been provided. Because of these federal income tax reserves and the liquidation account established for the benefit of certain depositors of Bank West in connection with the conversion of the Bank to stock form, the retained earnings of Bank West are substantially restricted. Distributions. If Bank West were to distribute cash or property to its sole stockholder, and the distribution was treated as being from its accumulated bad debt reserves, the distribution will cause Bank West to have additional taxable income. A distribution is deemed to have been made from accumulated bad debt reserves to the extent that (a) the reserves exceed the amount that would have been accumulated on the basis of actual loss experience, and (b) the distribution is a "non-qualified distribution." A distribution with respect to stock is a non-qualified distribution to the extent that, for federal income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in the case of a current distribution, together with all other such distributions during the taxable year, it exceeds the institution's current and post-1951 accumulated earnings and profits. The amount of additional taxable income created by a non-qualified distribution is an amount that when reduced by the tax attributable to it is equal to the amount of the distribution. Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI is in excess of an exemption amount. The Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. Other items of tax preference that constitute AMTI include (a) depreciation and (b) 75% of the excess (if any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). Net Operating Loss Carryovers. A financial institution may carry back net operating losses ("NOLs") to the preceding three taxable years and forward to the succeeding 15 taxable years. This provision applies to losses incurred in taxable years beginning after 1986. At June 30, 1996, Bank West had no NOL carryforwards for federal income tax purposes. Capital Gains and Corporate Dividends-Received Deduction. Corporate net capital gains are taxed at a maximum rate of 35%. Corporations which own 20% or more of the stock of a corporation distributing a dividend may deduct 80% of the dividends received. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of the dividends received. However, a corporation that receives dividends from a member of the same affiliated group of corporations may deduct 100% of the dividends received. Other Matters. Federal legislation is introduced from time to time that would limit the ability of individuals to deduct interest paid on mortgage loans. Individuals are currently not permitted to deduct interest on consumer loans. Significant increases in tax rates or further restrictions on the deductibility of mortgage interest could adversely affect Bank West. Bank West's federal income tax returns for the tax years ended June 30, 1993 forward are open under the statute of limitations and are subject to review by the IRS. State Taxation The State of Michigan imposes a tax on intangible personal property in the amount of $0.20 per $1,000 of deposits of a savings bank or a savings and loan institution, less deposits owed to the federal or Michigan state governments, their agencies or certain other financial institutions. The State of Michigan also imposes a "Single Business Tax," which is a value-added type of tax and is for the privilege of doing business in the State of Michigan. The major components of the Single Business Tax base are compensation, depreciation and federal taxable income, increased by NOLs, if any, utilized in arriving at federal taxable income, and decreased by the cost of acquisition of depreciable tangible assets during the year. The tax rate through September 30, 1994 was 2.35% of the Michigan adjusted tax base. Beginning October 1, 1994, the rate decreased to 2.30% of the Michigan adjusted tax base. Item 2. Properties. At June 30, 1996, Bank West conducted its business from its main office in Walker, Michigan and one branch office in Grand Rapids, Michigan. The following table sets forth the net book value (including leasehold improvement, furnishings and equipment) and certain other information with respect to the offices and other properties of Bank West at June 30, 1996.
Net Book Value of Amount of Description/Address Leased/Owned Property Deposits ------------------- ------------ -------- -------- (In Thousands) 2185 Three Mile Road N.W. Owned $2,506 $13,095 Grand Rapids, MI 49544 910 Bridge Street Grand Rapids, MI 49504 Owned 601 77,933 ----- ------ Total $3,107 $91,028 ====== =======
Item 3. Legal Proceedings. The Company is not involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security-Holders. Not applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein, to the extent applicable, is incorporated by reference from page 45 of the Company's 1996 Annual Report. Item 6. Selected Financial Data. The information required herein is incorporated by reference from page 2 of the 1996 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 3 to 15 of the 1996 Annual Report. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 16 to 43 of the 1996 Annual Report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. PART III. Item 10. Directors and Executive Officers of the Registrant. The information required herein is incorporated by reference from pages 3 to 4, 7 and 11 of the definitive proxy statement of the Company for the Annual Meeting of Stockholders to be held on October 23, 1996, which was filed on September 19, 1996 ("Definitive Proxy Statement"). Item 11. Executive Compensation. The information required herein is incorporated by reference from pages 12 to 18 of the Definitive Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required herein is incorporated by reference from pages 8 to 11 of the Definitive Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required herein is incorporated by reference from page 18 of the Definitive Proxy Statement. PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents Filed as Part of this Report (1) The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13): Report of Independent Auditors Consolidated Balance Sheets as of June 30, 1996 and 1995 Consolidated Statements of Income for the Fiscal Periods Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Periods Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Fiscal Periods ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. (3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index. Exhibit Index Page ------------- ---- 2.1 Plan of Conversion * 3.1 Articles of Incorporation of Bank West Financial Corporation * 3.2 Bylaws of Bank West Financial Corporation * 4.1 Stock Certificate of Bank West Financial Corporation ** 10.1 Employee Stock Ownership Plan * 10.2 Employment Agreement among Bank West Financial Corporation, Bank West, F.S.B. and Paul W. Sydloski dated March 30, 1995 ** 10.3 Form of Employment Security Agreement among Bank West Financial Corporation, Bank West, F.S.B. and certain executive officers * 10.4 1995 Key Employee Stock Compensation Program 10.5 1995 Directors' Stock Option Plan 10.6 1995 Management Recognition Plan for Officers 10.7 1995 Management Recognition Plan for Directors 13.0 1996 Annual Report to Stockholders 21.0 Subsidiaries of the Registrant - Reference is made to "Item 2. Business" for the required information 27.0 Financial Data Schedule (*) Incorporated herein by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-87620) filed by the Company with the SEC on December 21, 1994, as subsequently amended. (**) Incorporated herein by reference from the Company's Annual Report on Form 10-K filed by the Company with the SEC on September 28, 1995. (b) The Company did not file any reports on Form 8-K during the quarter ended June 30, 1996. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) There are no financial statements or schedules which were excluded from Item 8 which are required to be reported herein. 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. BANK WEST FINANCIAL CORPORATION By: /s/ Paul W. Sydloski -------------------- Paul W. Sydloski President, Chief Executive Officer and Director 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 dates indicated. /s/ Paul W. Sydloski September 23, 1996 - --------------------------- Paul W. Sydloski President, Chief Executive Officer and Director /s/ George A. Jackoboice September 23, 1996 - --------------------------- George A. Jackoboice Chairman of the Board and Director /s/ Richard L. Bishop September 23, 1996 - --------------------------- Richard L. Bishop Director /s/ Thomas D. DeYoung September 23, 1996 - --------------------------- Thomas D. DeYoung Director /s/ Jacob Haisma September 23, 1996 - --------------------------- Jacob Haisma Director /s/ Carl A. Rossi September 23, 1996 - --------------------------- Carl A. Rossi Director /s/ Robert J. Stephan September 23, 1996 - --------------------------- Robert J. Stephan Director /s/ John H. Zwarensteyn September 23, 1996 - --------------------------- John H. Zwarensteyn Director /s/ Kevin A. Twardy September 23, 1996 - --------------------------- Kevin A. Twardy Chief Financial Officer (also principal accounting officer) EX-10.4 2 Exhibit 10.4 1995 Key Employee Stock Compensation Program BANK WEST FINANCIAL CORPORATION 1995 KEY EMPLOYEE STOCK COMPENSATION PROGRAM 1. Purpose. This Bank West Financial Corporation 1995 Key Employee Stock Compensation Program ("Program") is intended to secure for Bank West Financial Corporation ("Corporation"), and its subsidiaries, including Bank West, F.S.B. (the "Bank"), and its stockholders, the benefits arising from ownership of the Corporation's common stock, par value $.01 per share ("Common Stock"), by those selected officers and other key employees of the Corporation who will be responsible for its future growth. The Program is designed to help attract and retain superior personnel for positions of responsibility with the Corporation and to provide key employees with an additional incentive to contribute to the success of the Corporation. 2. Elements of the Program. In order to maintain flexibility in the award of stock benefits, the Program is comprised of three parts. The first part is the Incentive Stock Option Plan ("Incentive Plan"). The second part is the Compensatory Stock Option Plan ("Compensatory Plan"). The third part is the Stock Appreciation Rights Plan ("S.A.R. Plan"). Copies of the Incentive Plan, Compensatory Plan and S.A.R. Plan are attached hereto as Part I, Part II and Part III, respectively, and are collectively referred to herein as the "Plans." The grant of an option or appreciation right under one of the Plans shall not be construed to prohibit the grant of an option or appreciation right under any of the other Plans. 3. Applicability of General Provisions. Unless any Plan specifically indicates to the contrary, all Plans shall be subject to the General Provision of the Program set forth below. 4. Administration of the Plans. The Plans shall be administered, construed, governed and amended in accordance with their respective terms. GENERAL PROVISIONS OF THE PROGRAM Article 1. Administration. The Program shall be administered by a committee appointed by the Board of Directors of the Corporation and composed of not less than two directors of the Corporation, none of whom is a full-time officer or employee of the Corporation. The committee, when acting to administer the Program, is referred to as the "Program Administrators." Each Program Administrator shall be a "disinterested person" as set forth in Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934. Any action of the Program Administrators shall be taken by majority vote or the unanimous written consent of the Program Administrators. No Program Administrator shall be liable for any action or determination made in good faith with respect to the Program or to any option or stock appreciation right granted thereunder. Article 2. Authority of Program Administrators. Subject to the other provisions of this Program and applicable laws and regulations, and with a view to effecting its purpose, the Program Administrators shall have sole authority in their absolute discretion: (a) to construe and interpret the Program; (b) to define the terms used herein; (c) to prescribe, amend and rescind rules and regulations relating to the Program; (d) to determine the employees to whom options and appreciation rights shall be granted under the Program; (e) to determine the time or times at which options and appreciation rights shall be granted under the Program; (f) to determine the number of shares subject to any option or stock appreciation right under the Program as well as the option price, and the duration of each option and appreciation right, and any other terms and conditions of options and appreciation rights; (g) to terminate the Program; and (h) to make any other determinations necessary or advisable for the administration of the Program and to do everything necessary or appropriate to administer the Program. All decisions, determinations and interpretations made by the Program Administrators shall be binding and conclusive on all participants in the Program and on their legal representatives, heirs and beneficiaries. Article 3. Maximum Number of Shares Subject to the Program. The maximum aggregate number of shares of Common Stock available pursuant to the Plans, subject to adjustment as provided in Article 7 hereof, shall be an amount equal to 7.0% of the Common Stock to be issued and sold by the Corporation in the subscription offering and any community offering (the "Offering") pursuant to the Plan of Conversion of the Bank ("Plan of Conversion"). If any of the options granted under this Program expire or terminate for any reason before they have been exercised in full, the unpurchased shares subject to those expired or terminated options shall again be available for the purposes of the Program. Article 4. Eligibility and Participation. Only regular full-time employees of the Corporation, including officers whether or not directors of the Corporation, or of any subsidiary, shall be eligible for selection by the Program Administrators to participate in the Program. Directors who are not full-time, salaried employees of the Corporation, or of any subsidiary, shall not be eligible to participate in the Program. Article 5. Maximum Number of Shares to Any Individual. During the life of the Program, no employee or officer of the Corporation or of any subsidiary shall be granted stock options or stock appreciation rights pursuant to this Program in an aggregate amount in excess of 2.5% of the shares of Common Stock issued and sold by the Corporation in the Offering, subject to adjustment as provided in Article 7 hereof. Article 6. Effective Date and Term of Program. After its adoption by the Board of Directors of the Corporation, the Program shall become effective upon the subsequent approval of the Program by the stockholders of the Corporation by such vote as may be required by applicable laws and regulations, which vote shall be taken within 12 months of adoption of the Program by the Corporation's Board of Directors, provided, however, that stockholder approval shall not be obtained within the first six months following consummation of the Offering. No stock options or appreciation rights shall be granted under this Program prior to obtaining stockholder approval of the Program. The Program shall continue in effect for a term of ten years following the date it is adopted by the Board of Directors or approved by stockholders, whichever is earlier, unless sooner terminated under Article 2 of the General Provisions. Article 7. Adjustments. If the shares of Common Stock of the Corporation as a whole are increased, decreased, changed into or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which options and appreciation rights may be granted under this Program, including the maximum number of options and appreciation rights that may be granted to any individual. A corresponding adjustment changing the number or kind of shares allocated to unexercised options, appreciation rights or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in outstanding options and appreciation rights shall be made without change in the aggregate purchase price applicable to the unexercised portion of the option or appreciation right but with a corresponding adjustment in the price for each share or other unit of any security covered by the option or appreciation right. In making any adjustment to the number of shares pursuant to this Article 7, any fractional shares shall be disregarded. Article 8. Termination and Amendment of Program. The Program shall terminate no later than ten years from the date such Program is adopted by the Board of Directors or the date such Program is approved by the stockholders, whichever is earlier. No options or appreciation rights shall be granted under the Program after that date. Subject to the limitation contained in Article 9 of the General Provisions, the Program Administrators may at any time amend or revise the terms of the Program, including the form and substance of the option and appreciation right agreements to be used hereunder; provided that no amendment or revision shall (a) increase the maximum aggregate number of shares that may be sold or appreciated pursuant to options or appreciation rights granted under this Program, except as permitted under Article 7 of the General Provisions or as may be approved by the stockholders of the Corporation; (b) change the minimum purchase price for shares under Section 4 of Plan I; (c) increase the maximum term established under the Plans for any option or appreciation right; or (d) permit the granting of an option or appreciation right to anyone other than as provided in Article 4 of the General Provisions. Article 9. Prior Rights and Obligations. No amendment, suspension or termination of the Program shall, without the consent of the employee who has received an option or appreciation right, alter or impair any of that employee's rights or obligations under any option or appreciation right granted under the Program prior to such amendment, suspension or termination. Article 10. Privileges of Stock Ownership. Notwithstanding the exercise of any options granted pursuant to the terms of this Program, no employee shall have any of the rights or privileges of a stockholder of the Corporation in respect of any shares of stock issuable upon the exercise of his or her option until certificates representing the shares have been issued and delivered. No shares shall be required to be issued and delivered upon exercise of any option unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the securities shall have been fully complied with. No adjustment shall be made for dividends or any other distributions for which the record date is prior to the date on which such stock certificate is issued. Article 11. Reservation of Shares of Common Stock. The Corporation, during the term of this Program, will at all times reserve and keep available such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of the Program. In addition, the Corporation will from time to time, as is necessary to accomplish the purposes of this Program, seek to obtain from any regulatory agency having jurisdiction any requisite authority in order to issue and sell shares of Common Stock hereunder. The inability of the Corporation to obtain from any regulatory agency having jurisdiction the authority deemed by the Corporation's counsel to be necessary to the lawful issuance and sale of any shares of its stock hereunder shall relieve the Corporation of any liability in respect of the non-issuance or sale of the stock as to which the requisite authority shall not have been obtained. Article 12. Tax Withholding. The exercise of any option or appreciation right granted under the Program is subject to the condition that if at any time the Corporation shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in any connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in such event, the exercise of the option or appreciation right shall not be effective unless such withholding tax or other withholding liabilities shall have been satisfied in a manner acceptable to the Corporation. Article 13. Employment. Nothing in the Program or in any option or stock appreciation right shall confer upon any eligible employee any right to continued employment by the Corporation, or by any subsidiary corporations, or limit in any way the right of the Corporation or its subsidiary corporations at any time to terminate or alter the terms of that employment. PART I INCENTIVE STOCK OPTION PLAN Section 1. Purpose. The purpose of this Incentive Plan is to promote the growth and general prosperity of the Corporation by permitting the Corporation to grant options to purchase shares of its Common Stock. This Incentive Plan is designed to help attract and retain superior personnel for positions of responsibility with the Corporation, or of any subsidiary, and to provide key employees with an additional incentive to contribute to the success of the Corporation. The Corporation intends that options granted pursuant to the provisions of this Incentive Plan will qualify and will be identified as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). This Incentive Plan is Part I of the Corporation's Program. Unless any provision herein indicates to the contrary, this Incentive Plan shall be subject to the General Provisions of the Program. Section 2. Option Terms and Conditions. The terms and conditions of options granted under this Incentive Plan may differ from one another as the Program Administrators shall, in their discretion, determine, as long as all options granted under this Incentive Plan satisfy the requirements of this Incentive Plan. Section 3. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of this Incentive Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under this Incentive Plan expire later than ten years from the date on which the option is granted, except that any employee who owns more than 10% of the combined voting power of all classes of stock of the Corporation, or of its subsidiaries, must exercise any options within five years from the date of grant. In addition, each option shall be subject to early termination as provided in this Incentive Plan. Section 4. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall not be less than the fair market value of the shares at the time of the grant of the option; except that for any employee who owns more than 10% of the combined voting power of all classes of stock of the Corporation, or of its subsidiaries, the purchase price shall not be less than 110% of fair market value. For purposes of this Part I, fair market value shall be the mean of the high and low sales prices of a share of Common Stock on the date in question (or, if such day is not a trading day in the U.S. markets, on the nearest preceding trading day), as reported with respect to the principal market (or the composite of the markets, if more than one) or national quotation system in which such shares are then traded, or if no such prices are reported, the mean between the closing high bid and low asked prices of a share of Common Stock on that day on the principal market or national quotation system then in use, or if no such quotations are available, the price furnished by a professional securities dealer making a market in such shares selected by the Board of Directors of the Corporation, or if no such prices are available, the book value of a share of Common Stock as determined under generally accepted accounting principles as of the latest practicable date. Section 5. Maximum Amount of Options in Any Calendar Year. The aggregate fair market value (determined as of the time the option is granted) of the Common Stock with respect to which incentive stock options, as defined in Section 422(b) of the Code, are exercisable for the first time by any employee during any calendar year (under the terms of this Plan and all such plans of the Corporation and any subsidiaries) shall not exceed $100,000. Section 6. Exercise of Options. Each option shall become exercisable at the rate of 20% per year on each annual anniversary of the date the option was granted, and the right to exercise may be cumulative as determined by the Program Administrators. No option may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full in cash or by certified or cashier's check payable to the order of the Corporation or by shares of Common Stock (including shares acquired pursuant to the exercise of an option), if permitted by the Program Administrators, or by a combination of cash, check or shares of Common Stock, at the time of exercise of the option, provided that the form(s) of payment allowed the employee shall be established when the option is granted. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then fair market value as determined by the Program Administrators in accordance with Section 4 of this Incentive Plan. Section 7. Acceleration of Right of Exercise of Installments. Notwithstanding the first sentence of Section 6 of this Incentive Plan, in the event an Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code or dies while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), the right to exercise the option shall be accelerated and the option shall be 100% exercisable (to the extent not previously exercised) as of the date of such disability or death. However, no stock option shall be exercisable within the first six months following the date of grant. Section 8. Written Notice Required. Any option granted pursuant to the terms of this Incentive Plan shall be exercised when written notice of that exercise has been given to the Corporation at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Corporation. Section 9. Compliance With Applicable Laws. Shares of Common Stock shall not be issued with respect to any option granted under this Incentive Plan unless the exercise of that option and the issuance and delivery of those shares pursuant to that exercise shall comply with all relevant provisions of state and federal law including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or national quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Corporation with respect to such compliance. The Program Administrators may also require a person to whom an option has been granted under this Incentive Plan ("Optionee") to furnish evidence satisfactory to the Corporation, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition or otherwise, that the shares are being purchased only for investment and without any present intention to sell or distribute the shares in violation of any state or federal law, rule or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option restricting their transferability to the extent required by law or by this Section 9. Section 10. Employment of Optionee. Each Optionee, if requested by the Program Administrators when the option is granted, must agree in writing as a condition of receiving his or her option that he or she will remain in the employ of the Corporation or any subsidiary of the Corporation, as the case may be, following the date of the granting of that option for a period specified by the Program Administrators, which period shall in no event exceed three years. Nothing in this Incentive Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by the Corporation, or its subsidiary corporations, or limit in any way the right of the Corporation or any of its subsidiary corporations at any time to terminate or alter the terms of that employment. Section 11. Option Rights Upon Termination of Employment. If an Optionee ceases to be employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their discretion, allow such option to be exercised (to the extent exercisable on the date of termination of employment) at any time within three months after the date of termination of employment, unless either the option or this Incentive Plan otherwise provides for earlier termination. Section 12. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), the option may be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or this Incentive Plan otherwise provides for earlier termination. Section 13. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators at the time of the grant of an option, if an Optionee dies while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), or within three months after ceasing to be an employee thereof, his or her option shall expire one year after the date of death unless by its terms it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. However, in order for the option to continue to be treated as an incentive stock option under Section 422 of the Code, the option must be exercised no later than three months after the date of termination of employment. Section 14. Options Not Transferable. Options granted pursuant to the terms of this Incentive Plan may not be sold, pledged, assigned or transferred in any manner otherwise than by will or the laws of descent and distribution and may be exercised during the lifetime of an Optionee only by that Optionee or his guardian or legal representative. PART II COMPENSATORY STOCK OPTION PLAN Section 1. Purpose. The purpose of this Compensatory Plan is to permit the Corporation to grant options to purchase shares of its Common Stock to selected officers and full-time, key employees of the Corporation or any subsidiary. This Compensatory Plan is designed to help attract and retain superior personnel for positions of responsibility with the Corporation and its subsidiaries and to provide key employees with an additional incentive to contribute to the success of the Corporation. Any option granted pursuant to this Compensatory Plan shall be clearly and specifically designated as not being an incentive stock option, as defined in Section 422(b) of the Code. This Compensatory Plan is Part II of the Corporation's Program. Unless any provision herein indicates to the contrary, this Compensatory Plan shall be subject to the General Provisions of the Program. Section 2. Option Terms and Conditions. The terms and conditions of options granted under this Compensatory Plan may differ from one another as the Program Administrators shall, in their discretion, determine as long as all options granted under this Compensatory Plan satisfy the requirements of the Compensatory Plan. Section 3. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of this Compensatory Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under this Compensatory Plan expire later than ten years and one month from the date on which the option is granted. In addition, each option shall be subject to early termination as provided in this Compensatory Plan. Section 4. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall be equal to the fair market value of the shares at the time of the grant of the option. For purposes of this Part II, fair market value shall be the closing sales price of a share of Common Stock on the date in question (or, if such day is not a trading day in the U.S. markets, on the nearest preceding trading day), as reported with respect to the principal market (or the composite of the markets, if more than one) or national quotation system in which such shares are then traded, or if no such closing prices are reported, the mean between the closing high bid and low asked prices of a share of Common Stock on that day on the principal market or national quotation system then in use, or if no such quotations are available, the price furnished by a professional securities dealer making a market in such shares selected by the Board of Directors of the Corporation, or if no such prices are available, the book value of a share of a share of Common Stock as determined under generally accepted accounting principles as of the latest practicable date. Section 5. Exercise of Options. Each option shall become exercisable at the rate of 20% per year on each annual anniversary of the date the option was granted, and the right to exercise may be cumulative as determined by the Program Administrators. No option may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full in cash or by certified or cashier's check payable to the order of the Corporation or by shares of Common Stock (including shares acquired pursuant to the exercise of an option), if permitted by the Program Administrators, or by a combination of cash, check or shares of Common Stock, at the time of exercise of the option. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then fair market value as determined by the Program Administrators in accordance with Section 4 of this Compensatory Plan. Section 6. Acceleration of Right of Exercise of Installments. Notwithstanding the first sentence of Section 5 of this Compensatory Plan, if an Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code or dies while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), the right to exercise the option shall be accelerated and the option shall be 100% exercisable (to the extent not previously exercised) as of the date of such disability or death. However, no stock option shall be exercisable within the first six months following the date of grant. Section 7. Written Notice Required. Any option granted pursuant to the terms of this Compensatory Plan shall be exercised when written notice of that exercise has been given to the Corporation at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Corporation. Section 8. Compliance With Applicable Laws. Shares shall not be issued with respect to any option granted under this Compensatory Plan unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of state and federal law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder and the requirements of any stock exchange or national quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Corporation with respect to such compliance. The Program Administrators may also require a person to whom an option has been granted ("Optionee") to furnish evidence satisfactory to the Corporation, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option restricting their transferability to the extent required by law or by this Section 8. Section 9. Employment of Optionee. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of receiving his or her option that he or she will remain in the employment of the Corporation or any subsidiary, following the date of the granting of that option for a period specified by the Program Administrators, which period shall in no event exceed three years. Nothing in this Compensatory Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by the Corporation or any of its subsidiaries, or limit in any way the right of the Corporation or any subsidiary at any time to terminate or alter the terms of that employment. Section 10. Option Rights Upon Termination of Employment. If any Optionee under this Compensatory Plan ceases to be employed by the Corporation or any subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), for any reason other than disability or death, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their discretion, allow such option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment, unless either the option or this Compensatory Plan otherwise provides for earlier termination. Section 11. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Section 22(e)(3) of the Code while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), the Program Administrators, in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or this Compensatory Plan otherwise provides for earlier termination. Section 12. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators at the time of the grant of an option, if an Optionee dies while employed by the Corporation or any subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies), his or her option shall expire one year after the date of death unless by its terms it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. Section 13. Options Not Transferable. Options granted pursuant to the terms of this Compensatory Plan may not be sold, pledged, assigned or transferred in any manner otherwise than by will or the laws of descent and distribution and may be exercised during the lifetime of an Optionee only by that Optionee or his guardian or legal representative. PART III STOCK APPRECIATION RIGHTS PLAN Section 1. Purpose. The purpose of this S.A.R. Plan is to permit the Corporation to grant stock appreciation rights for its Common Stock to its full-time key employees. This S.A.R. Plan is designed to help attract and retain superior personnel for positions of responsibility with the Corporation and any subsidiary and to provide key employees with an additional incentive to contribute to the success of the Corporation. This S.A.R. Plan is Part III of the Corporation's Program. Unless any provision herein indicates to the contrary, this S.A.R. Plan shall be subject to the General Provisions of the Program. Section 2. Terms and Conditions. The Program Administrators may, but shall not be obligated to, authorize, on such terms and conditions as they deem appropriate in each case, the Corporation to accept the surrender by the recipient of a stock option granted under Part I or Part II of the right to exercise that option, or portion thereof, in consideration for the payment by the Corporation of an amount equal to the excess of the fair market value of the shares of Common Stock subject to such surrendered option, or portion thereof, over the option price of such shares. Such payment, at the discretion of the Program Administrators, may be made in shares of Common Stock valued at the then fair market value thereof, determined as provided in Section 4 of Part I, in cash or partly in cash and partly in shares of Common Stock; provided that with respect to rights granted in tandem with incentive stock options, the Program Administrators shall establish the form(s) of payment allowed the Optionee at the date of grant. The Program Administrators shall not be authorized to make payment to any Optionee in shares of the Corporation's Common Stock unless Section 83 of the Code would apply to the Common Stock transferred to the Optionee. Section 3. Time of Grant. With respect to options granted under Part I, stock appreciation rights must be granted concurrently with the stock options to which they relate; with respect to options granted under Part II, stock appreciation rights may be granted concurrently or at any time thereafter prior to the exercise or expiration of such options. Section 4. Exercise of Stock Appreciation Rights; Effect on Stock Options and Vice Versa. Each stock appreciation right shall become exercisable at the rate of 20% per year on each annual anniversary of the date the stock appreciation right was granted, and the right to exercise may be cumulative as determined by the Program Administrators. Upon the exercise of a stock appreciation right, the number of shares available under the stock option to which it relates shall decrease by a number equal to the number of shares for which the right was exercised. Upon the exercise of a stock option, any related stock appreciation right shall terminate as to any number of shares subject to the right that exceeds the total number of shares for which the stock option remains unexercised. Section 5. Time Limitations. Any election by an Optionee to exercise the stock appreciation rights provided in this S.A.R. Plan shall be made during the period beginning on the third business day following the release for publication of quarterly or annual financial information required to be prepared and disseminated by the Corporation pursuant to the requirements of the Exchange Act and ending on the twelfth business day following such date. The required release of information shall be deemed to have been satisfied when the specified financial data appears on or in a wire service, financial news service or newspaper of general circulation or is otherwise first made publicly available. Section 6. Non-Transferable. The holder of a stock appreciation right may not transfer or assign the right otherwise than by will or in accordance with the laws of descent and distribution. Furthermore, in the event of the termination of his or her service with the Corporation as an officer and/or employee, the right may be exercised only within the period, if any, which the option to which it relates may be exercised. Section 7. Tandem Incentive Stock Option - Stock Appreciation Right. Whenever an incentive stock option authorized pursuant to Part I and a stock appreciation right authorized hereunder are granted together and the exercise of one affects the right to exercise the other, the following requirements shall apply: (a) The stock appreciation right will expire no later than the expiration of the underlying incentive stock option; (b) The stock appreciation right may be for no more than the difference between the exercise price of the underlying option and the market price of the stock subject to the underlying option at the time the stock appreciation right is exercised; (c) The stock appreciation right is transferable only when the underlying incentive stock option is transferable and under the same conditions; (d) The stock appreciation right may be exercised only when the underlying incentive stock option is eligible to be exercised; and (e) The stock appreciation right may be exercised only when the market price of the stock subject to the option exceeds the exercise price of the stock subject to the option. Section 8. Request for Reports. A copy of the Corporation's annual report to stockholders shall be delivered to each Optionee. Upon written request, the Corporation shall furnish to each Optionee a copy of its most recent Form 10-K Annual Report and each Form 10-Q Quarterly Report and Form 8-K Current Report filed with the Securities and Exchange Commission since the end of the Corporation's prior fiscal year, or the comparable forms for small business issuers if such forms are utilized by the Corporation. EX-10.5 3 Exhibit 10.5 1995 Directors' Stock Option Plan BANK WEST FINANCIAL CORPORATION 1995 DIRECTORS' STOCK OPTION PLAN ARTICLE I ESTABLISHMENT OF THE PLAN Bank West Financial Corporation (the "Corporation") hereby establishes this 1995 Directors' Stock Option Plan (the "Plan") upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN The purpose of this Plan is to improve the growth and profitability of the Corporation by attracting and retaining qualified non-employee directors and providing such directors with a proprietary interest in the Corporation through non-discretionary grants of non-qualified stock options (an "Option" or "Options") to purchase shares of the Corporation's common stock, par value $.01 per share ("Common Stock"). ARTICLE III ADMINISTRATION OF THE PLAN 3.01 Administration. This Plan shall be administered by the entire Board of Directors of the Corporation (the "Board"). The Board shall have the power, subject to and within the limits of the express provisions of this Plan, to exercise such powers and to perform such acts as are deemed necessary or expedient to promote the best interests of the Corporation with respect to this Plan. 3.02 Compliance with Law and Regulations. All Options granted hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Corporation shall not be required to issue or deliver any certificates for shares of Common Stock prior to the completion of any registration or qualification of or obtaining of consents or approvals with respect to such shares under any federal or state law or any rule or regulation of any government body, which the Corporation shall, in its sole discretion, determine to be necessary or advisable. Moreover, no Option may be exercised if such exercise or issuance would be contrary to applicable laws and regulations. 3.03 Restrictions on Transfer. The Corporation may place a legend upon any certificate representing shares acquired pursuant to an Option granted hereunder noting that the transfer of such shares may be restricted by applicable laws and regulations. ARTICLE IV ELIGIBILITY Options shall be granted pursuant to the terms hereof to each director of the Corporation as of the dates specified in Article VI hereof who is not an employee of the Corporation or any subsidiary of the Corporation ("Non-employee Director"), except as otherwise specified herein. No honorary directors, advisory directors or directors emeritus shall be entitled to receive Options hereunder. ARTICLE V COMMON STOCK COVERED BY THE PLAN 5.01 Option Shares. The aggregate number of shares of Common Stock of the Corporation which may be issued pursuant to this Plan, subject to adjustment as provided in Article VIII, shall be an amount equal to 3.0% of the Common Stock issued and sold by the Corporation in the subscription offering and any community offering (collectively, the "Offering") pursuant to the Plan of Conversion of Bank West, F.S.B. ("Plan of Conversion"). None of such shares shall be the subject of more than one Option at any time, but if an Option as to any shares is surrendered before exercise or expires or terminates for any reason without having been exercised in full, or for any other reason ceases to be exercisable, the number of shares covered thereby shall again become available for grant under the Plan as if no Options had been previously granted with respect to such shares. 5.02 Source of Shares. The shares of Common Stock issued under this Plan may be authorized but previously unissued shares, treasury shares or shares purchased by the Corporation on the open market or from private sources for use under the Plan. ARTICLE VI OPTION GRANTS 6.01 Option Grants. Options to purchase shares of Common Stock shall be granted to Non-employee Directors of the Corporation at the following times and in the following amounts: (a) Initial Grant. An Option shall be allocated to each Non-employee Director on the date this Plan is approved by the stockholders of the Corporation. Specifically, each Non-employee Director shall receive an Option for the number of whole shares of Common Stock (rounded down to the nearest whole share) determined by multiplying the number of Options which may be issued pursuant to this Plan by 75% and dividing such product by the number of Non-employee Directors at such time. (b) Grant on One-Year Anniversary Date. An Option shall be allocated to each Non-employee Director on the one-year anniversary of the date this Plan is approved by stockholders of the Corporation. Specifically, each Non-employee Director shall receive an Option for the number of whole shares of Common Stock (rounded down to the nearest whole share) determined by dividing the remaining number of Options which may be issued pursuant to this Plan by the number of Non-employee Directors at such time. (c) Subsequent Grants. In the event any Options granted to a Non-employee Director expire or terminate for any reason before they have been exercised in full, the unpurchased shares subject to those expired or terminated Options shall be granted to persons who become a Non-employee Director for the first time following the date Options are granted pursuant to Section 6.01(b) above, as follows: (1) on the date such person is first appointed or elected as a Non-employee Director, he shall receive an Option for 1,000 shares or such lesser number of shares as may be available for grants under the Plan; and (2) if such person does not receive an Option for 1,000 shares as of the date he is first appointed or elected as a Non-employee Director because sufficient shares were not available, he shall receive one or more additional grants as of each day, if any, that an Option subsequently expires or terminates until the number of Options granted to him shall aggregate 1,000 shares. 6.02 Allocation of Grants. If, on any date on which Options are to be granted pursuant to this Plan, the number of shares of Common Stock remaining available under this Plan (after taking into account both shares theretofore issued and shares subject to issuance upon exercise of outstanding Options) is insufficient for the grant of Options to purchase the entire number of shares specified above, then Options to purchase a proportionate amount of such available number of shares (rounded down to the greatest number of whole shares) shall be granted to each Non-employee Director entitled to receive an Option on such date. 6.03 Maximum Number of Shares to Any Non-Employee Director. During the life of this Plan, no Non-employee Director of the Corporation or of any subsidiary shall be granted Options pursuant to this Plan in an aggregate amount in excess of .5% of the shares of Common Stock issued and sold by the Corporation in the Offering, subject to adjustment as provided in Article VIII hereof. ARTICLE VII OPTION TERMS Each Option granted hereunder shall be on the following terms and conditions: 7.01 Option Agreement. The proper officers of the Corporation and each optionee shall execute an Option Agreement which shall set forth the total number of shares of Common Stock to which it pertains, the exercise price and such other terms, conditions and provisions as are appropriate, provided that they are not inconsistent with the terms, conditions and provisions of this Plan. Each optionee shall receive a copy of his executed Option Agreement. 7.02 Option Exercise Price. The per share exercise price at which the shares of Common Stock may be purchased upon exercise of an Option granted pursuant to Section 6.01 hereof shall be equal to the fair market value of the shares at the time of the grant of the Option. For purposes of this Plan, fair market value shall be the mean of the high and low sales prices of a share of Common Stock on the date in question (or, if such day is not a trading day in the U.S. markets, on the nearest preceding trading day), as reported with respect to the principal market (or the composite of the markets, if more than one) or national quotation system in which such shares are then traded, or if no such prices are reported, the mean between the closing high bid and low asked prices of a share of Common Stock on that day on the principal market or national quotation system then in use, or if no such quotations are available, the price furnished by a professional securities dealer making a market in such shares selected by the Board of Directors of the Corporation, or if no such prices are available, the book value of a share of Common Stock as determined under generally accepted accounting principles as of the latest practicable date. 7.03 Exercise and Duration of Options. (a) Except as provided below, each Option shall become exercisable at the rate of 20% per year on each annual anniversary of the date the Option was granted, and the right to exercise shall be cumulative. No Option or portion thereof shall be exercisable more than ten (10) years after the date of grant. (b) Exception for Termination Due to Death or Disability. If an optionee dies while serving as a Non-employee Director or if his service as a Non-employee Director is terminated as a result of disability without the optionee having fully exercised his Options, the optionee's right to exercise his Options shall be accelerated and his Options shall be 100% exercisable (to the extent not previously exercised) as of the date of such death or disability. Thereafter, the optionee or the executors, administrators, legatees or distributees of his estate shall have the right to exercise such Options during the twelve-month period following such death or disability, provided that no Option shall be exercisable within six (6) months after the date of grant or more than ten (10) years from the date it was granted. (c) Exception for Termination Due to Retirement, Resignation or Non-Reelection. If the service of a Non-employee Director is terminated as a result of retirement, resignation or non-reelection before the Options granted to such Non-employee Director have become fully exercisable, any portion of the Options which had not yet become exercisable as of the date of such termination shall expire and be terminated, and the Non-employee Director shall forfeit any rights to that portion of his Options which had not yet become exercisable. Following the date his service is terminated as a result of retirement, resignation or non-reelection, the Non-employee Director shall have the right to exercise his Options, to the extent exercisable on the date of such termination of service, during the twelve-month period following such retirement, resignation or non-reelection, provided that no Option shall be exercisable within six (6) months after the date of grant or more than ten (10) years from the date it was granted. (d) Options granted to a Non-employee Director who is removed for cause pursuant to the Corporation's Bylaws shall terminate as of the effective date of such removal. 7.04 Nonassignability. Options shall not be transferable by an optionee except by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by such optionee or the optionee's guardian or legal representative. 7.05 Manner of Exercise. Options may be exercised in part or in whole and at one time or from time to time. The procedures for exercise shall be set forth in the written Option Agreement provided for in Section 7.01. 7.06 Payment for Shares. Payment in full of the purchase price for shares of Common Stock purchased pursuant to the exercise of an Option shall be made to the Corporation upon exercise of the Option. Payment for shares may be made by the optionee in cash, by certified or cashier's check payable to the Corporation, or by delivering shares of Common Stock (including shares acquired pursuant to the exercise of an Option) equal in fair market value to the purchase price of the shares to be acquired pursuant to the Option, or any combination of the foregoing. 7.07 Voting and Dividend Rights. No optionee shall have any voting or dividend rights or other rights of a stockholder in respect of any shares of Common Stock covered by an Option prior to the time that his name is recorded on the Corporation's stockholder ledger as the holder of record of such shares acquired pursuant to an exercise of an Option. ARTICLE VIII ADJUSTMENTS FOR CAPITAL CHANGES The aggregate number of shares of Common Stock available for issuance under this Plan, the number of shares to which any Option relates, the exercise price per share of Common Stock under any Option and the maximum number of Options which may be granted to any Non-employee Director shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the consummation of the transactions contemplated by the Plan of Conversion resulting from a split, subdivision or consolidation of shares or any other capital adjustment, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt or payment of consideration by the Corporation. If, upon a merger, consolidation, reorganization, liquidation, recapitalization or the like of the Corporation, the shares of the Corporation's Common Stock shall be exchanged for other securities of the Corporation or of another corporation, each recipient of an Option shall be entitled, subject to the conditions herein stated, to purchase or acquire such number of shares of Common Stock or amount of other securities of the Corporation or such other corporation as were exchangeable for the number of shares of Common Stock of the Corporation which such optionees would have been entitled to purchase or acquire except for such action, and appropriate adjustments shall be made to the per share exercise price of outstanding Options. ARTICLE IX AMENDMENT AND TERMINATION OF THE PLAN The Board may, by resolution, at any time terminate, amend or revise this Plan with respect to any shares of Common Stock as to which Options have not been granted, provided, however, that no amendment which (a) changes the maximum number of shares that may be sold or issued under the Plan (other than in accordance with the provisions of Article VIII) or (b) changes the class of persons that may be granted Options shall become effective until it receives the approval of the stockholders of the Corporation, and further provided that the Board may determine that stockholder approval for any other amendment to this Plan may be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements. The Board may not, without the consent of the holder of an Option, alter or impair any Option previously granted under this Plan except as specifically authorized herein. Notwithstanding anything contained in this Plan to the contrary, the provisions of Articles IV, VI and VII of this Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated under such statutes. ARTICLE X RIGHTS TO CONTINUE AS A DIRECTOR Neither this Plan nor the grant of any Options hereunder nor any action taken by the Board in connection with this Plan shall create any right on the part of any Non-employee Director of the Corporation to continue as such. ARTICLE XI WITHHOLDING The Corporation may withhold from any cash payment made under this Plan sufficient amounts to cover any applicable withholding and employment taxes, and if the amount of such cash payment is insufficient, the Corporation may require the optionee to pay to the Corporation the amount required to be withheld as a condition to delivering the shares acquired pursuant to an Option. ARTICLE XII EFFECTIVE DATE OF THE PLAN; TERM 12.01 Effective Date of the Plan. This Plan shall become effective on the date this Plan is approved by the stockholders of the Corporation, which shall not be earlier than the sixth month anniversary of the consummation of the transactions contemplated by the Plan of Conversion (the "Effective Date"), and Options may be granted hereunder as of or after the effective Date and prior to the termination of this Plan. 12.02 Term of Plan. Unless sooner terminated, this Plan shall remain in effect for a period of ten (10) years ending on the tenth anniversary of the adoption of this Plan by the Board of Directors of the Corporation. Termination of this Plan shall not affect any Options previously granted, and such Options shall remain valid and in effect until they (a) have been fully exercised, (b) are surrendered, or (c) expire or are forfeited in accordance with their terms. ARTICLE XIII APPROVAL BY STOCKHOLDERS The Corporation shall submit this Plan to its stockholders for approval at a meeting of stockholders of the Corporation held within twelve (12) months following the adoption of this Plan by the Board of Directors of the Corporation in order to meet the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 and, to the extent applicable, the requirements of the National Association of Securities Dealers, Inc. for quotation of the Common Stock on the Nasdaq System. ARTICLE XIV MISCELLANEOUS 13.01 Governing Law. This Plan shall be construed under the laws of the State of Michigan. 13.02 Pronouns. Wherever appropriate, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. EX-10.6 4 Exhibit 10.6 1995 Management Recognition Plan for Officers BANK WEST FINANCIAL CORPORATION 1995 MANAGEMENT RECOGNITION PLAN FOR OFFICERS AND TRUST AGREEMENT ARTICLE I ESTABLISHMENT OF THE PLAN AND TRUST 1.01 Bank West Financial Corporation (the "Corporation") hereby establishes the 1995 Management Recognition Plan (the "Plan") for the Officers of the Corporation and its subsidiary, Bank West, F.S.B. (the "Bank") and a Trust (the "Trust") upon the terms and conditions hereinafter stated in this 1995 Management Recognition Plan for Officers and Trust Agreement (the "Agreement"). 1.02 The Trustees hereby accept this Trust and agree to hold the Trust assets existing on the date of this Agreement and all additions and accretions thereto upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to retain personnel of experience and ability in key positions by providing such key employees of the Corporation and its Subsidiaries with a proprietary interest in the Corporation as compensation for their contributions to the Corporation and its Subsidiaries and as an incentive to make such contributions in the future. ARTICLE III DEFINITIONS The following words and phrases when used in the Agreement, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronouns shall include the feminine pronouns and the singular shall include the plural. 3.01 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or if none, his estate. 3.02 "Board" means the Board of Directors of the Corporation. 3.03 "Code" means the Internal Revenue Code of 1986, as amended. 3.04 "Committee" means the committee appointed by the Board pursuant to Article IV hereof. 3.05 "Common Stock" means shares of common stock, par value $.01 per share, of the Corporation. 3.06 "Disability" means any physical or mental impairment which qualifies an Employee for disability benefits under the applicable long-term disability plan maintained by the Corporation or a Subsidiary or, if no such plan applies, which would qualify such Employee for disability benefits under the Federal Social Security System. 3.07 "Effective Date" means the date on which the stockholders of the Corporation approve this Plan, which shall not be earlier than the sixth month anniversary of the consummation of the Offering. 3.08 "Employee" means any person who is employed by the Corporation or a Subsidiary, including officers or other employees who may be directors of the Corporation. 3.09 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3.10 "Offering" means the offering of Common Stock to the public pursuant to the Plan of Conversion of Bank West, F.S.B. 3.11 "Plan Shares" or "Shares" means shares of Common Stock held in the Trust which may be distributed to a Recipient pursuant to the Plan. 3.12 "Plan Share Award" or "Award" means a right granted under this Plan to receive a distribution of Plan Shares upon completion of the service requirements described in Article VII. 3.13 "Recipient" means an Employee who receives a Plan Share Award under the Plan. 3.14 "Subsidiary" means those subsidiaries of the Corporation, including Bank West, F.S.B., which, with the consent of the Board, agree to participate in this Plan. 3.15 "Trustee" means those persons (normally, members of the Committee) nominated by the Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for the purposes set forth herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall consist of two or more members of the Board, none of whom shall be an officer or employee of the Corporation and each of whom shall be a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act. The Committee shall have all of the powers allocated to it in this and other sections of the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee shall recommend to the Board one or more individuals (normally, from among its members) to act as Trustees in accordance with the provisions of this Plan and Trust and the terms of Article VIII hereof. 4.02 Role of the Board. The members of the Committee and the Trustee or Trustees shall be appointed or approved by, and will serve at the pleasure of, the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee, and may remove, replace or add Trustees, provided that any directors who are selected as members of the Committee shall not be officers or employees of the Corporation and shall be "disinterested persons" within the meaning of Rule 16b-3 promulgated under the Exchange Act. 4.03 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Corporation shall, subject to the requirements of applicable laws and regulations, indemnify such member against all liabilities and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Corporation and its Subsidiaries and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 4.04 Compliance with Laws and Regulations. All awards granted hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency or stockholders as may be required. ARTICLE V CONTRIBUTIONS 5.01 Amount of Timing of Contributions. The Board shall determine the amount (or the method of computing the amount) and timing of any contributions by the Corporation and its Subsidiaries to the Trust established under this Plan. Such amounts may be paid in cash or in shares of Common Stock and shall be paid to the Trust at the designated time of contribution. No contributions by Employees shall be permitted. 5.02 Investment of Trust Assets; Number of Plan Shares. Subject to Section 8.02 hereof, the Trustees shall invest all of the Trust's assets primarily in Common Stock. The aggregate number of Plan Shares available for distribution pursuant to this Plan in the first year following the Offering, subject to adjustment as provided in Section 9.01 hereof, shall not exceed 2.8% of the shares of Common Stock which are issued by the Corporation in the Offering (rounded down to the nearest whole number), which shares shall be acquired by the Trust following receipt of stockholder approval of the Plan with funds contributed by the Corporation or its Subsidiaries. ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Plan Share Awards may be made to such Employees as may be selected by the Committee. In selecting those Employees to whom Plan Share Awards may be granted and the number of Shares covered by such Awards, the Committee shall consider the position and responsibilities of the eligible Employees, the value of their services to the Corporation and its Subsidiaries, and any other factors the Committee may deem relevant. The Committee may but shall not be required to request the written recommendation of the Chief Executive Officer of the Corporation other than with respect to Plan Share Awards to be granted to him. 6.02 Form of Allocation. As promptly as practicable after a determination is made pursuant to Section 6.01 that a Plan Share Award is to be issued, the Committee shall notify the Recipient in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the Award shall be distributed to the Employee. Such terms shall be reflected in a written agreement with the Employee. The date on which the Committee so notifies the Recipient shall be considered the date of grant of the Plan Share Award. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.03 Maximum Number of Plan Shares to Any Individual. During the life of this Plan, no Employee shall be granted Plan Share Awards pursuant to this Plan covering an aggregate number of Plan Shares in excess of 1.0% of the shares of Common Stock issued and sold by the Corporation in the Offering, subject to adjustment as provided in Section 9.01 hereof. 6.04 Allocations Not Required to any Specific Employee. Notwithstanding anything to the contrary in Section 6.01 hereof, no Employee shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee. ARTICLE VII EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Earning Plan Shares; Forfeitures. (a) General Rules. Subject to the terms hereof, Plan Shares subject to an Award shall be earned by a Recipient at the rate of 20% of the aggregate number of Shares covered by the Award as of each annual anniversary of the date of grant of the Award. If the employment of a Recipient is terminated prior to the fifth annual anniversary of the date of grant of a Plan Share Award for any reason (except as specifically provided in subsections (b) and (c) below), the Recipient shall forfeit the right to any Shares subject to the Award which have not theretofore been earned. In determining the number of Plan Shares which are to be earned, fractional Shares shall be rounded down to the nearest whole number, provided that such fractional Shares shall be aggregated and distributed on the fifth annual anniversary of the date of grant. (b) Exception for Terminations Due to Death or Disability. Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares subject to a Plan Share Award held by a Recipient whose employment with the Corporation or any Subsidiary terminates due to death or Disability shall be deemed earned as of the Recipient's last day of employment with the Corporation or Subsidiary and shall be distributed as soon as practicable thereafter; provided, however, that no Awards shall be distributed prior to six months from the date of grant of the Plan Share Award. (c) Revocation for Misconduct. Notwithstanding anything in the Plan to the contrary, the Board may by resolution immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent Plan Shares have not been distributed hereunder to the Recipient, whether or not yet earned, in the case of an Employee who is discharged from the employ of the Corporation or any Subsidiary for cause (as hereinafter defined). Termination of employment for cause shall include termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any employment agreement. For purposes of this paragraph, no act or failure to act on the Employee's part shall be considered "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Corporation and its Subsidiaries. 7.02 Distribution of Dividends. Any cash dividends or stock dividends declared in respect of each Plan Share held by the Trust will be paid by the Trust, as soon as practicable after the Trust's receipt thereof, to the Recipient on whose behalf such Plan Share is then held by the Trust. 7.03 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Except as provided in Section 7.03(b), Plan Shares shall be distributed to a Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned, provided, however, that no Plan Shares shall be distributed to a Recipient or Beneficiary pursuant to a Plan Share Award within six months from the date on which that Plan Share Award was granted to such person. In addition, no Plan Shares shall be distributed unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the Plan Shares shall have been fully complied with, including the receipt of approval of the Plan by the stockholders of the Corporation by such vote, if any, as may be required by applicable laws and regulations. (b) Timing: Exception for 10% Stockholders. Notwithstanding Sections 7.03(a) above, no Plan Shares may be distributed prior to the date which is five years from the date of consummation of the Offering to the extent the Recipient or Beneficiary, as the case may be, would after receipt of such Shares own in excess of 10% of the issued and outstanding shares of Common Stock. Any Plan Shares remaining undistributed solely by reason of the operation of this Section 7.03(b) shall be distributed to the Recipient or his Beneficiary on the date which is five years from the date of consummation of the Offering. (c) Form of Distributions. All Plan Shares, together with any Shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned and distributable. Payments representing cash dividends shall be made in cash. (d) Withholding. The Trustees may withhold from any cash payment or Common Stock distribution made under this Plan sufficient amounts to cover any applicable withholding and employment taxes, and if the amount of a cash payment is insufficient, the Trustees may require the Recipient or Beneficiary to pay to the Trustees the amount required to be withheld as a condition of delivering the Plan Shares. The Trustees shall pay over to the Corporation or any Subsidiary which employs or employed such Recipient any such amount withheld from or paid by the Recipient or Beneficiary. (e) Restrictions on Selling of Plan Shares. Plan Share Awards may not be sold, assigned, pledged or otherwise disposed of prior to the time that they are earned and distributed pursuant to the terms of this Plan. Following distribution, the Committee may require the Recipient or his Beneficiary, as the case may be, to agree not to sell or otherwise dispose of his distributed Plan Shares except in accordance with all then applicable federal and state securities laws, and the Committee may cause a legend to be placed on the stock certificate(s) representing the distributed Plan Shares in order to restrict the transfer of the distributed Plan Shares for such period of time or under such circumstances as the Committee, upon the advice of counsel, may deem appropriate. 7.04 Voting of Plan Shares. After a Plan Share Award has been made, the Recipient shall be entitled to direct the Trustees as to the voting of the Plan Shares which are covered by the Plan Share Award and which have not yet been earned and distributed to him pursuant to Section 7.03, subject to rules and procedures adopted by the Committee for this purpose. If the Recipient does not direct the Trustees as to the voting of Plan Shares which have not yet been earned and distributed pursuant to Section 7.03, such shares shall not be voted by the Trustees. In the event a tender offer is made for Plan Shares, the Trustees shall tender Plan Shares held by the Plan which have not yet been earned and distributed in accordance with instructions from the Recipient. ARTICLE VIII TRUST 8.01 Trust. The Trustees shall receive, hold, administer, invest and make distributions and disbursements from the Trust in accordance with the provisions of the Plan and Trust and the applicable directions, rules, regulations, procedures and policies established by the Committee pursuant to the Plan. 8.02 Management of Trust. It is the intent of this Plan and Trust that the Trustees shall have complete authority and discretion with respect to the arrangement, control and investment of the Trust, and that the Trustees shall invest all assets of the Trust in Common Stock to the fullest extent practicable, except (i) to the extent that the Trustees determine that the holding of monies in cash or cash equivalents is necessary to meet the obligations of the Trust and (ii) contributions to the Trust by the Corporation and Subsidiary may be temporarily invested in such interest-bearing account or accounts as the Trustees shall determine to be appropriate. In performing their duties, the Trustees shall have the power to do all things and execute such instruments as may be deemed necessary or proper, including the following powers: (a) To invest up to 100% of all Trust assets in Common Stock without regard to any law now or hereafter in force limiting investments for trustees or other fiduciaries. The investment authorized herein may constitute the only investment of the Trust, and in making such investment, the Trustees are authorized to purchase Common Stock from the Corporation or from any other source, and such Common Stock so purchased may be outstanding, newly issued or treasury shares. (b) To invest any Trust assets not otherwise invested in accordance with (a) above, in such deposit accounts, certificates of deposit, obligations of the United States Government or its agencies or such other investments as shall be considered the equivalent of cash. (c) To sell, exchange or otherwise dispose of any property at any time held or acquired by the Trust. (d) To cause stocks, bonds or other securities to be registered in the name of a nominee, without the addition of words indicating that such security is an asset of the Trust (but accurate records shall be maintained showing that such security is an asset of the Trust). (e) To hold cash without interest in such amounts as may in the opinion of the Trustees be reasonable for the proper operation of the Plan and Trust. (f) To employ brokers, agents, custodians, consultants and accountants. (g) To hire counsel to render advice with respect to their rights, duties and obligations hereunder, and such other legal services or representation as they may deem desirable. (h) To hold funds and securities representing the amounts to be distributed to a Recipient or his Beneficiary as a consequence of a dispute as to the disposition thereof, whether in a segregated account or held in common with other assets of the Trust. Notwithstanding anything herein contained to the contrary, the Trustees shall not be required to make any inventory, appraisal or settlement or report to any court, or to secure any order of a court for the exercise of any power herein contained, or to give any bond. 8.03 Records and Accounts. The Trustees shall maintain accurate and detailed records and accounts of all transactions of the Trust, which shall be available at all reasonable times for inspection by any legally entitled person or entity to the extent required by applicable law, or any other person determined by the Committee. 8.04 Expense. All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Corporation and its Subsidiaries. 8.05 Indemnification. Subject to the requirements of applicable laws and regulations, the Corporation shall indemnify, defend and hold the Trustees harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Trustees' powers and the discharge of their duties hereunder, unless the same shall be due to their gross negligence or willful misconduct. ARTICLE IX MISCELLANEOUS 9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for distribution pursuant to the Plan Share Awards, the number of Shares to which any Plan Share Award relates and the maximum number of Plan Shares which may be granted to any Employee shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the Offering resulting from any split, subdivision or consolidation of shares or other capital adjustment, or other increase or decrease in such shares effected without receipt or payment of consideration by the Corporation. 9.02 Amendment and Termination of Plan. The Board may, by resolution, at any time amend or terminate the Plan, subject to (i) any required stockholder approval or any stockholder approval which the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements, and (ii) compliance with all applicable federal and state laws, rules and regulations. The Board may not, without the consent of the holder of a Plan Share Award, alter or impair any Plan Share Award previously granted under this Plan as specifically authorized herein. Termination of this Plan shall not affect Plan Share Awards previously granted, and such Plan Share Awards shall remain valid and in effect until they (a) have been fully earned, (b) are surrendered, or (c) expire or are forfeited in accordance with their terms. 9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Recipient, and during the lifetime of the Recipient, Plan Shares may only be earned by and paid to a Recipient who was notified in writing of an Award by the Committee pursuant to Section 6.02. No Recipient or Beneficiary shall have any right in or claim to any assets of the Plan or Trust, nor shall the Corporation or any Subsidiary be subject to any claim for benefits hereunder. 9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustees, the Committee or the Board in connection with the Plan shall create any right on the part of any Employee to continue in the employ of the Corporation or any Subsidiary. 9.05 Voting and Dividend Rights. No Recipient shall have any voting or dividend rights or other rights of a stockholder in respect of any Plan Shares covered by a Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to the time said Plan Shares are actually earned and distributed to him. 9.06 Governing Law. The Plan and Trust shall be governed by the laws of the State of Michigan. 9.07 Effective Date. This Plan shall be effective as of the Effective Date, and Awards may be granted hereunder as of or after the Effective Date and as long as the Plan remains in effect. 9.08 Term of Plan. This Plan shall remain in effect until the earlier of (a) ten (10) years from the Effective Date, (b) termination by the Board, or (c) the distribution to Recipients and Beneficiaries of all assets of the Trust. 9.09 Tax Status of Trust. It is intended that the trust established hereby be treated as a Grantor Trust of the Corporation under the provisions of Section 671 et seq. of the Code, as the same may be amended from time to time. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, and the initial Trustees of the Trust established pursuant hereto have duly and validly executed this Agreement, all on this 14th day of August 1995. ATTEST: BANK WEST FINANCIAL CORPORATION /s/ Joseph F. Kirkwood By: /s/ Paul W. Sydloski ---------------------- ------------------ Joseph F. Kirkwood Paul W. Sydloski Secretary President and Chief Executive Officer TRUSTEES: /s/ Jacob Haisma ------------------ Jacob Haisma /s/ George Jackoboice ------------------ George Jackoboice /s/ Richard Bishop ------------------ Richard Bishop EX-10.7 5 Exhibit 10.7 1995 Management Recognition Plan for Directors BANK WEST FINANCIAL CORPORATION 1995 MANAGEMENT RECOGNITION PLAN FOR DIRECTORS AND TRUST AGREEMENT ARTICLE I ESTABLISHMENT OF THE PLAN AND TRUST 1.01 Bank West Financial Corporation (the "Corporation") hereby establishes the 1995 Management Recognition Plan (the "Plan") for the Directors of the Corporation and its subsidiary, Bank West, F.S.B. (the "Bank"), and a Trust (the "Trust") upon the terms and conditions hereinafter stated in this 1995 Management Recognition Plan for Directors and Trust Agreement (the "Agreement"). 1.02 The Trustees hereby accept this Trust and agrees to hold the Trust assets existing on the date of this Agreement and all additions and accretions thereto upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to improve the growth and profitability of the Corporation by providing non-employee directors of the Corporation with a proprietary interest in the Corporation as compensation for their contributions to the Corporation and its Subsidiaries and as an incentive to make such contributions in the future. ARTICLE III DEFINITIONS The following words and phrases when used in this Agreement, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronouns shall include the feminine pronouns and the singular shall include the plural. 3.01 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or if none, his estate. 3.02 "Board" means the Board of Directors of the Corporation. 3.03 "Code" means the Internal Revenue Code of 1986, as amended. 3.04 "Committee" means the entire Board of Directors of the Corporation which administers the Plan pursuant to Article IV hereof. 3.05 "Common Stock" means shares of common stock, par value $.01 per share, of the Corporation. 3.06 "Disability" means any physical or mental impairment which qualifies an Employee for disability benefits under the applicable long-term disability plan maintained by the Corporation or any Subsidiary or, if no such plan applies, which would qualify such Employee for disability benefits under the Federal Social Security System. 3.07 "Effective Date" means the date on which the stockholders of the Corporation approve this Plan, which shall not be earlier than the sixth month anniversary of the consummation of the Offering. 3.08 "Employee" means any person who is employed by the Corporation or any Subsidiary, including officers or other employees who may be directors of the Corporation. 3.09 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3.10 "Non-employee Director" means a member of the Board who is not an Employee. 3.11 "Offering" means the offering of Common Stock to the public pursuant to the Plan of Conversion of Bank West, F.S.B. 3.12 "Plan Shares" or "Shares" means shares of Common Stock held in the Trust which may be distributed to a Recipient pursuant to the Plan. 3.13 "Plan Share Award" or "Award" means a right granted under this Plan to receive a distribution of Plan Shares upon completion of the service requirements described in Article VII. 3.14 "Recipient" means a Non-employee Director who receives a Plan Share Award under the Plan. 3.15 "Subsidiary" means any subsidiaries of the Corporation, including the Bank, which, with the consent of the Board, agree to participate in this Plan. 3.16 "Trustee" or "Trustees" means those person or persons (which may be members of the Committee), or firm or other entity, nominated by the Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for the purposes set forth herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall consist of the members of the entire Board. The Committee shall have all of the powers allocated to it in this and other sections of the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee shall appoint one or more persons (which may be from among its members), or a firm or other entity, to act as Trustee(s) in accordance with the provisions of this Plan and Trust and the terms of Article VIII hereof. 4.02 Role of the Board. The Trustee or Trustees shall be appointed or approved by, and will serve at the pleasure of, the Committee. The Committee may in its discretion from time to time remove or replace the Trustees. 4.03 Limitation on Liability. No member of the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a member of the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Corporation shall, subject to the requirements of applicable laws and regulations, indemnify such member against all liabilities and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Corporation and any Subsidiaries and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 4.04 Compliance with Laws and Regulations. All awards granted hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency or stockholders as may be required. ARTICLE V CONTRIBUTIONS 5.01 Amount and Timing of Contributions. The Board shall determine the amount (or the method of computing the amount) and timing of any contributions by the Corporation to the Trust established under this Plan. Such amounts may be paid in cash or in shares of Common Stock and shall be paid to the Trust at the designated time of contribution. No contributions by Non-employee Directors shall be permitted. 5.02 Investment of Trust Assets; Number of Plan Shares. Subject to Section 8.02 hereof, the Trustees shall invest all of the Trust's assets primarily in Common Stock. The aggregate number of Plan Shares available for distribution pursuant to this Plan in the first year following the Offering, subject to adjustment as provided in Section 9.01 hereof, shall be equal to 1.2% of the shares of Common Stock which are issued by the Corporation in the Offering (rounded down to the nearest whole number), which shares shall be acquired by the Trust following receipt of stockholder approval of the Plan with funds contributed by the Corporation or its Subsidiaries. ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Plan Share Awards shall be made to each Non-employee Director. (a) Initial Grant. A Plan Share Award shall be granted to each Non-employee Director on the date this Plan is approved by the stockholders of the Corporation. Specifically, each Non-employee Director shall receive a Plan Share Award for the number of whole shares of Common Stock (rounded down to the nearest whole number) determined by multiplying the number of shares of Common Stock which may be acquired pursuant to this Plan in the first year following the Offering by 90% and dividing such product by the number of Non-employee Directors at such time. (b) Grant on One-Year Anniversary Date. A Plan Share Award shall be allocated to each Non-employee Director on the one-year anniversary of the date this Plan is approved by stockholders of the Corporation. Specifically, each Non-employee Director shall receive a Plan Share Award for the number of whole shares of Common Stock (rounded down to the nearest whole number) determined by dividing the remaining number of shares of Common Stock which may be acquired pursuant to this Plan in the first year following the Offering by the number of Non-employee Directors at such time. (c) Subsequent Grants. In the event any Plan Share Awards granted to a Non-employee Director expire or terminate for any reason before they have been earned in full, the unearned shares subject to those expired or terminated Plan Share Awards shall be granted to persons who become a Non-employee Director for the first time following the date Plan Share Awards are granted pursuant to Section 6.01(b) above, as follows: (1) on the date such person is first appointed or elected as a Non-employee Director, he shall receive a Plan Share Award for 500 shares or such lesser number of shares as may be available for grants under the Plan; and (2) if such person does not receive a Plan Share Award for 500 shares as of the date he is first appointed or elected as a Non-employee Director because sufficient shares were not available, he shall receive one or more additional grants as of each day, if any, that a Plan Share Award subsequently expires or terminates until the number of Plan Share Awards granted to him shall aggregate 500 shares. 6.02 Form of Allocation. As promptly as practicable after a Plan Share Award is to be issued, the Committee shall notify the Recipient in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the Award shall be distributed to the Recipient. Such terms shall be reflected in a written agreement with the Recipient. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.03 Maximum Number of Plan Shares to any Non-Employee Director. During the life of this Plan, no Non-employee shall be granted Plan Share Awards pursuant to this Plan covering an aggregate number of Plan Shares in excess of .2% of the shares of Common Stock issued and sold by the Corporation in the Offering, subject to adjustment as provided in Section 9.01 hereof. ARTICLE VII EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Earning Plan Shares; Forfeitures. (a) General Rules. Subject to the terms hereof, Plan Shares covered by an Award shall be earned by the Recipient at the rate of 20% of the aggregate number of Shares covered by the Award as of each annual anniversary of the date of grant of the Award. If service as a director by a Recipient is terminated prior to the fifth anniversary of the date of grant of a Plan Share Award for any reason (except as specifically provided in subsections (b) and (c) below), the Recipient shall forfeit the right to any Shares subject to the Award which have not theretofore been earned. In determining the number of Plan Shares which are to be earned, fractional Shraes shall be rounded down to the nearest whole number, provided that such fractional Shares shall be aggregated and distributed on the fifth annual anniversary of the date of grant. (b) Exception for Terminations Due to Death or Disability. Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares subject to a Plan Share Award held by a Recipient whose service as a director of the Corporation terminates due to death or Disability shall be deemed earned as of the Recipient's last day of service with the Corporation and shall be distributed as soon as practicable thereafter; provided, however, that no Awards shall be distributed prior to six months from the date of grant of the Plan Share Award. (c) Revocation for Misconduct. Notwithstanding anything hereinafter to the contrary, the Board shall immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent Plan Shares have not been distributed hereunder to the Recipient, whether or not yet earned, in the case of any Non-employee Director who is removed from service as a director of the Corporation for cause (as hereinafter defined). Removal from office for cause shall include termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and desist order. For purposes of this paragraph, no act or failure to act on the part of the Non-employee Director shall be considered "willful" unless done, or omitted to be done, by the Non-employee Director not in good faith and without reasonable belief that the action or omission of the Non-employee Director was in the best interest of the Corporation and its Subsidiaries. 7.02 Distribution of Dividends. Any cash dividends or stock dividends declared in respect of each Plan Share held by the Trust will be paid by the Trust, as soon as practicable after the Trust's receipt thereof, to the Recipient on whose behalf such Plan Share is then held by the Trust. 7.03 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Except as provided in Section 7.03(b), Plan Shares shall be distributed to a Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned, provided, however, that no Plan Shares shall be distributed to a Recipient or Beneficiary pursuant to a Plan Share Award within six months from the date on which that Plan Share Award was granted to such person. In addition, no Plan Shares shall be distributed unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the Plan Shares shall have been fully complied with, including the receipt of approval of the Plan by the stockholders of the Corporation by such vote, if any, as may be required by applicable laws and regulations. (b) Timing: Exception for 10% Stockholders. Notwithstanding Section 7.03(a) above, no Plan Shares may be distributed prior to the date which is five years from the date of consummation of the Offering to the extent the Recipient or Beneficiary, as the case may be, would after receipt of such Shares own in excess of 10% of the issued and outstanding shares of Common Stock. Any Plan Shares remaining undistributed solely by reason of the operation of this Section 7.03(b) shall be distributed to the Recipient or his Beneficiary on the date which is five years from the date of consummation of the Offering. (c) Form of Distributions. All Plan Shares, together with any Shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned and distributable. Payments representing cash dividends shall be made in cash. (d) Withholding. The Trustees may withhold from any cash payment or Common Stock distribution made under this Plan sufficient amounts to cover any applicable withholding and employment taxes, and if the amount of a cash payment is insufficient, the Trustees may require the Recipient or Beneficiary to pay to the Trustees the amount required to be withheld as a condition of delivering the Plan Shares. The Trustees shall pay over to the Corporation or any Subsidiary which employs or employed such Recipient any such amount withheld from or paid by the Recipient or Beneficiary. (e) Restrictions on Selling of Plan Shares. Plan Share Awards may not be sold, assigned, pledged or otherwise disposed of prior to the time that they are earned and distributed pursuant to the terms of this Plan. Following distribution, the Committee may require the Recipient or his Beneficiary, as the case may be, to agree not to sell or otherwise dispose of his distributed Plan Shares except in accordance with all then applicable federal and state securities laws, and the Committee may cause a legend to be placed on the stock certificate(s) representing the distributed Plan Shares in order to restrict the transfer of the distributed Plan Shares for such period of time or under such circumstances as the Committee, upon the advice of counsel, may deem appropriate. 7.04 Voting of Plan Shares. After a Plan Share Award has been made, the Recipients shall be entitled to direct the Trustees as to the voting of the Plan Shares which are covered by the Plan Share Award and which have not yet been earned and distributed to them pursuant to Section 7.03, subject to rules and procedures adopted by the Committee for this purpose. If the Recipient does not direct the Trustees as to the voting of Plan Shares which have not yet been earned and distributed pursuant to Section 7.03, such shares shall not be voted by the Trustees. In the event a tender offer is made for Plan Shares, the Trustees shall tender Plan Shares held by the Plan which have not yet been earned and distributed in accordance with instructions from the Recipient. ARTICLE VIII TRUST 8.01 Trust. The Trustees shall receive, hold, administer, invest and make distributions and disbursements from the Trust in accordance with the provisions of the Plan and Trust and the applicable directions, rules, regulations, procedures and policies established by the Committee pursuant to the Plan. 8.02 Management of Trust. It is the intent of this Plan and Trust that the Trustees shall have complete authority and discretion with respect to the arrangement, control and investment of the Trust, and that the Trustees shall invest all assets of the Trust in Common Stock to the fullest extent practicable, except (i) to the extent that the Trustees determine that the holding of monies in cash or cash equivalents is necessary to meet the obligations of the Trust and (ii) contributions to the Trust by the Corporation and Subsidiary may be temporarily invested in such interest-bearing account or accounts as the Trustees shall determine to be appropriate. In performing their duties, the Trustees shall have the power to do all things and execute such instruments as may be deemed necessary or proper, including the following powers: (a) To invest up to 100% of all Trust assets in Common Stock without regard to any law now or hereafter in force limiting investments for trustees or other fiduciaries. The investment authorized herein may constitute the only investment of the Trust, and in making such investment, the Trustees are authorized to purchase Common Stock from the Corporation or from any other source, and such Common Stock so purchased may be outstanding, newly issued or treasury shares. (b) To invest any Trust assets not otherwise invested in accordance with (a) above, in such deposit accounts, certificates of deposit, obligations of the United States Government or its agencies or such other investments as shall be considered the equivalent of cash. (c) To sell, exchange or otherwise dispose of any property at any time held or acquired by the Trust. (d) To cause stocks, bonds or other securities to be registered in the name of a nominee, without the addition of words indicating that such security is an asset of the Trust (but accurate records shall be maintained showing that such security is an asset of the Trust). (e) To hold cash without interest in such amounts as may in the opinion of the Trustees be reasonable for the proper operation of the Plan and Trust. (f) To employ brokers, agents, custodians, consultants and accountants. (g) To hire counsel to render advice with respect to their rights, duties and obligations hereunder, and such other legal services or representation as they may deem desirable. (h) To hold funds and securities representing the amounts to be distributed to a Recipient or his Beneficiary as a consequence of a dispute as to the disposition thereof, whether in a segregated account or held in common with other assets of the Trust. Notwithstanding anything herein contained to the contrary, the Trustees shall not be required to make any inventory, appraisal or settlement or report to any court, or to secure any order of a court for the exercise of any power herein contained, or to give any bond. 8.03 Records and Accounts. The Trustees shall maintain accurate and detailed records and accounts of all transactions of the Trust, which shall be available at all reasonable times for inspection by any legally entitled person or entity to the extent required by applicable law, or any other person determined by the Committee. 8.04 Expenses. All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Corporation and its Subsidiaries. 8.05 Indemnification. Subject to the requirements of applicable laws and regulations, the Corporation shall indemnify, defend and hold the Trustees harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Trustees' powers and the discharge of their duties hereunder, unless the same shall be due to their gross negligence or willful misconduct. ARTICLE IX MISCELLANEOUS 9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for distribution pursuant to the Plan Share Awards, the number of Shares to which any Plan Share Award relates and the maximum number of Plan Shares which may be granted to any Non-employee Director shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the Offering resulting from any split, subdivision or consolidation of shares or other capital adjustment, or other increase or decrease in such shares effected without receipt or payment of consideration by the Corporation. 9.02 Amendment and Termination of Plan. The Board may, by resolution, at any time amend or terminate the Plan, subject to (i) any required stockholder approval or any stockholder approval which the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements, and (ii) compliance with all applicable federal and state laws, rules and regulations. The Board may not, without the consent of the holder of a Plan Share Award, alter or impair any Plan Share Award previously granted under this Plan as specifically authorized herein. Termination of this Plan shall not affect Plan Share Awards previously granted, and such Plan Share Awards shall remain valid and in effect until they (a) have been fully earned, (b) are surrendered, or (c) expire or are forfeited in accordance with their terms. Notwithstanding anything contained in this Plan to the contrary, the provisions of Articles VI and VII of this Plan shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated under such statutes. 9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Recipient, and during the lifetime of the Recipient, Plan Shares may only be earned by and paid to a Recipient who was notified in writing of an Award by the Committee pursuant to Section 6.02. No Recipient or Beneficiary shall have any right in or claim to any assets of the Plan or Trust, nor shall the Corporation or any Subsidiary be subject to any claim for benefits hereunder. 9.04 Service Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustees, the Committee or the Board in connection with the Plan shall create any right on the part of any Non-employee Director to continue as such. 9.05 Voting and Dividend Rights. No Recipient shall have any voting or dividend rights or other rights of a stockholder in respect of any Plan Shares covered by a Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above, prior to the time said Plan Shares are actually earned and distributed to him. 9.06 Governing Law. The Plan and Trust shall be governed by the laws of the State of Michigan. 9.07 Effective Date. This Plan shall be effective as of the Effective Date, and Awards may be granted hereunder as of or after the Effective Date and as long as the Plan remains in effect. 9.08 Term of Plan. This Plan shall remain in effect until the earlier of (a) ten (10) years from the Effective Date, (b) termination by the Board, or (c) the distribution to Recipients and Beneficiaries of all assets of the Trust. 9.09 Tax Status of Trust. It is intended that the trust established hereby be treated as a Grantor Trust of the Corporation under the provisions of Section 671 et seq. of the Code, as the same may be amended from time to time. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, and the initial Trustees of the Trust established pursuant hereto have duly and validly executed this Agreement, all on this 14th day of August 1995. ATTEST: BANK WEST FINANCIAL CORPORATION /s/ Joseph F. Kirkwood By: /s/ Paul W. Sydloski - ---------------------- -------------------- Joseph F. Kirkwood Paul W. Sydloski Secretary President and Chief Executive Officer TRUSTEES: /s/ Jacob Haisma ---------------- Jacob Haisma /s/ George Jackoboice --------------------- George Jackoboice /s/ Richard Bishop ------------------ Richard Bishop EX-13.0 6 Exhibit 13.0 1996 Annual Report to Stockholders Bank West Financial Corporation 1996 Annual Report To Shareholders Section 1 Letter to Shareholders Selected Consolidated Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Section 2 Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Annual Meeting The Annual Meeting of Stockholders is scheduled for Wednesday, October 23, 1996 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard Street, N.W., Grand Rapids, Michigan. Letter to Shareholders: Dear Fellow Shareholders: It is with continuing pride and enthusiasm that I present this, the second annual report of Bank West Financial Corporation, for your review. Last year I described the long range strategy of the corporation and am pleased to report that the strategy is working. The pace of growth, although conservative, reduces the chance of error and therefore loss. With shareholder value being foremost in our minds, we believe that this approach will allow the bank to continue to be healthy, safe, and strong, while contributing to the enhancement of shareholder value. This has been a year of challenge and new beginnings. The new corporate headquarters, which is now one year old, has helped in the growth of our geographic market area. It has also served to change our image to a more proactive financial institution, and to relay the message that Bank West is more than a bank. We are in fact "the bank that makes you feel at home." We also took a new approach to strategic planning. The entire staff of the bank now plays a significant role in the process. Each bank employee has their own mission statement, strategy, tactics and action plans. Each is consistent with the bank's position and in fact, make up the elements of the Strategic Plan for Bank West. This approach allows each employee to realize they have ownership in the bank and play an important role in the bank's success. The initial results of this approach have been positive with our consumer lending, small business and mortgage banking operations. Next year will be the first full year for this new program, and the results are expected to be better throughout the bank. As an added motivation for the staff, an incentive based compensation program has been developed. Part of the program is based on referrals. The most significant rewards are possible only when the goals detailed in the Strategic Plan are exceeded. This combination will reward superior performance and serve as a catalyst for the future growth of the bank. In August, 1996 we announced the addition of a branch in the southeast part of Grand Rapids. The new office further expands our geographical market area, giving us a presence in a very desirable part of the community. The office which represents our second branch is the first to come under a lease program, which is consistent with our strategy of growth, without utilizing brick and mortar. We are very enthusiastic about the prospects of success for this location. In fiscal 1996, Bank West Financial Corporation recorded a substantial increase in earnings. The year's net income of $1.2 million, or $0.57 per fully diluted share, compared favorably with earnings of $716 thousand, in fiscal 1995. One ongoing area of concern is the SAIF/BIF issue. The failure of Washington to resolve the problem leaves all thrifts with an unknown risk. Our industry has presented a solution which would put an end to the disparity of insurance premiums, satisfy the current debt and solidify the insurance fund for the future. I can only hope Washington and our banking brethren put aside their petty differences and allow our solution to be adopted. For the next year we will concentrate on further geographic expansion, refinement and expansion of our products and services, expansion of our marketing efforts, and a bankwide commitment to exceed our customer expectations, thereby increasing our market share and improving our franchise value. Finally, I want to thank all of our customers and shareholders for your confidence, support and investments, making fiscal 1996 a successful year. Sincerely, /s/Paul W. Sydloski ------------------- Paul W. Sydloski President
Selected Consolidated Financial Data (Dollars in thousands except per share data) Nine Months Year Ended Ended Year Ended June 30 June 30 September 30 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SUMMARY OF OPERATIONS Net interest income .................................. $ 4,158 $ 3,185 $ 2,861 $ 2,187 $ 2,520 Provision for loan losses ............................. 60 21 25 13 5 Other income .......................................... 1,202 270 226 260 20 Other expenses ......................................... 3,469 2,352 2,045 1,181 1,246 Income taxes ........................................... 622 366 337 413 410 Cumulative effect of change in accounting for income taxes ......................... -- -- -- (151) -- Net income ............................................. 1,208 716 680 689 879 BALANCE SHEET DATA Total assets ........................................... 137,982 139,648 106,594 96,761 86,273 Cash and cash equivalents .............................. 6,694 6,694 4,923 3,388 2,187 Securities ............................................. 7,442 11,405 4,029 4,042 3,166 Mortgage-backed securities ............................. 2,307 14,100 1,600 2,378 4,279 Collateralized mortgage obligations .................... 15,034 4,255 1,840 -- -- Loans, net ............................................. 95,737 95,836 91,329 78,610 71,674 Loans held for sale .................................... 4,297 2,746 1,282 3,250 -- Deposits ............................................... 91,028 85,180 89,960 84,127 76,674 FHLB advances .......................................... 19,000 24,922 5,000 2,000 -- Equity.................................................. 26,810 28,171 10,844 10,230 9,541 PER SHARE DATA Earnings per share(1) .................................. $ 0.57 $ 0.10 -- -- -- Dividends per share .................................... $ 0.28 -- -- -- -- Book value per share ................................... $ 12.19 $ 12.17 -- -- -- RATIOS Average yield on interest-earning assets .............. 7.52 6.97 6.55 7.24 8.16 Average rate on interest-bearing liabilities ......... 5.37 4.76 4.12 4.48 5.86 Average interest rate spread ......................... 2.15 2.21 2.43 2.76 2.30 Net interest margin ................................... 3.10 2.83 2.86 3.24 2.90 Return on average assets ............................... .87 .62 .67 .76 1.00 Return on average equity ............................... 4.38 4.34 6.38 6.90 9.66 Efficiency ratio ...................................... 68.56 69.56 63.85 50.76 49.44 Dividend payout ratio .................................. 49.12 -- -- -- -- Average equity to average assets ....................... 19.77 14.46 10.57 11.01 10.40 Non-performing loans as a % of loans, net .............. .04 .15 .04 .33 .19 (1) Earnings per share for the year ended June 30, 1995 was computed by dividing net income subsequent to the conversion on March 30, 1995 by the weighted average number of shares outstanding subsequent to March 30, 1995.
Management's Discussion and Analysis of Financial Condition and Results of Operations The following sections are designed to provide a more detailed discussion of Bank West Financial Corporation's (the "Company's") consolidated financial condition and results of operations as well as provide additional information on the Company's asset/liability management strategies, sources of liquidity and capital resources. Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements contained herein. This discussion provides information about the consolidated financial condition and results of operations of the Company and its wholly-owned subsidiary, Bank West, F.S.B. (the "Bank" or "Bank West"). General Bank West Financial Corporation is the holding company for Bank West, F.S.B., a federal savings bank. Substantially all of the Company's assets are currently held in, and its operations are conducted through, its sole subsidiary Bank West. The Company's business consists primarily of attracting deposits from the general public and using such deposits, together with Federal Home Loan Bank (FHLB) advances, to make loans for the purchase and construction of residential properties. To a lesser extent, the Company also makes commercial loans, home equity loans and various types of consumer loans. The Company's operations and profitability are subject to changes in interest rates, applicable regulations and general economic conditions, as well as other factors beyond the Company's control. The profitability of Bank West depends primarily on its net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans, investment securities and mortgage collateralized securities, and interest expense on interest-bearing deposits and FHLB borrowings. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. In each of the last three fiscal years, net interest income after provisions for loan losses exceeded total noninterest expense. The Bank's profitability also is dependent, to a lesser extent, on the level of its other income (including gains on sale of loans in connection with its mortgage banking activities, gains (losses) on the sale of securities, and fees and service charges). During fiscal 1996, 1995 and 1994, the sum of net interest income after provisions for loan losses and total other income amounted to $5.3 million, $3.4 million, and $3.1 million, respectively. The Company's net income was $1,208,000, $716,000 and $680,000 for fiscal 1996, 1995 and 1994, respectively. The increase in fiscal 1996 was primarily due to increases in net interest income of $973,000 and other income of $932,000, which were partially offset by an increase in other expenses of $1.1 million compared to fiscal 1995. Asset and Liability Management Consistent net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. The Bank attempts to manage its interest rate risk by maintaining a high percentage of its assets in adjustable-rate mortgages ("ARMs"), other adjustable-rate residential loans and mortgage-backed securities (including collateralized mortgage obligations). The interest rate on ARMs, however, adjusts no more frequently than once a year, with the amount of the change subject to annual limitations, whereas the interest rates on most deposits can change more frequently and are not subject to annual limitations. In addition, the Bank has increased its percentage of assets in short-term balloon mortgages, consumer loans and commercial loans. Management continually works to achieve a neutral position regarding interest rate risk. During fiscal 1996, the Bank placed greater emphasis on reducing the duration of its interest-earnings assets by originating consumer, commercial and one-to four-family construction loans. In addition, the Bank has placed greater emphasis on increasing the percentage of adjustable-rate assets to total interest-earning assets to better match its interest-bearing liabilities. In order to increase the ratio of interest-sensitive assets to interest-sensitive liabilities, the Bank has sold most of the newly originated, fixed-rate mortgages with terms greater than 15 years, while originating ARMs, consumer and commercial loans for retention in the loan portfolio. At June 30, 1996, the Bank's adjustable-rate assets consisted of ARMs amounting to $47.5 million or 34.5% of total assets, mortgage-backed securities (including collateralized mortgage obligations) amounting to $17.3 million or 12.6% of total assets, mortgages with three to seven year balloons amounting to $12.8 million or 9.3% of total assets and consumer loans (including home equity lines and second mortgages) amounting to $4.8 million or 3.5% of total assets. It is anticipated that the Bank will retain a sufficient amount of newly originated ARMs and fixed-rate mortgages with terms of 15 years or less to offset loan prepayments and repayments and sell the excess originations of one-to four-family loans. The Bank anticipates increasing the loan portfolio with newly originated consumer and commercial loans. On the deposit side, management recently has emphasized noninterest-bearing or low-interest deposit products and maintained competitive pricing on longer-term certificates of deposit. The Bank also uses FHLB advances to lengthen the average maturity of the Bank's funding sources when it is more cost effective than alternative funding sources. Management presently monitors and evaluates the potential impact of interest rate changes upon the market value of the Bank's equity and the level of net interest income on a quarterly basis, in an attempt to ensure that interest rate risk is maintained within limits established by the Board of Directors. The Office of Thrift Supervision ("OTS") adopted a final rule in August 1993 incorporating an interest rate risk component into the risk-based capital rules. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate component from total capital for purposes of calculating the risk-based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated market value of its assets in the event of a 200 basis point increase or decrease in interest rates. NPV is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off-balance sheet contracts. A resulting change in NPV of more than 2% of the estimated market value of an institution's assets will require the institution to deduct from its capital 50% of that excess change when calculating regulatory capital ratios. The rule provides that the OTS will calculate the interest rate risk component quarterly for each institution. The effective date of the rule has been postponed by the OTS until further notice. The following table presents the effects of changes in interest rates on the Bank's NPV as of June 30, 1996, as calculated by the OTS, based on information provided to the OTS by the Bank.
Change in Change in Interest Rates NPV as % of NPV as % of in Basis Points Net Portfolio Value Portfolio Value Portfolio Value (Rate Shock) Amount $ Change %Change of Assets of Assets (1) ------------ ------ -------- ------- --------- ------------- (Dollars in Thousands) 400 $14,738 $(8,046) (35)% 12.1% (6.0)% 300 16,876 (5,907) (26) 13.5 (4.4) 200 18,881 (3,903) (17) 14.8 (2.9) 100 20,584 (2,200) (10) 15.8 (1.6) Static 22,784 -- -- 17.1 -- (100) 23,677 893 4 17.5 .7 (200) 24,115 1,331 6 17.7 1.0 (300) 24,627 1,843 8 17.9 1.4 (400) 25,384 2,600 11 18.2 1.9 (1) Based on the portfolio value of the Bank's assets assuming no change in interest rates. The following table shows the effects of changes in interest rates on the Bank's NPV as of June 30, 1995, as calculated by the OTS: Change in Change in Interest Rates NPV as % of NPV as % of in Basis Points Net Portfolio Value Portfolio Value Portfolio Value (Rate Shock) Amount $ Change %Change of Assets of Assets (1) ------------ ------ -------- ------- --------- ------------- (Dollars in Thousands) 400 $12,932 $(8,289) (39)% 10.5% (6.2)% 300 15,541 (5,680) (27) 12.3 (4.2) 200 17,916 (3,306) (16) 13.8 (2.5) 100 19,858 (1,363) (6) 15.0 (1.0) Static 21,221 -- -- 15.8 -- (100) 22,075 854 4 16.3 .6 (200) 22,596 1,375 6 16.5 1.0 (300) 23,055 1,834 9 16.7 1.4 (400) 23,691 2,470 12 17.0 1.8 (1) Based on the portfolio value of the Bank's assets assuming no change in interest rates.
As shown by the above tables, increases in interest rates will result in net decreases in the Bank's net portfolio value, while decreases in interest rates will result in smaller net increases in the Bank's net portfolio value. The tables reflect the Bank's net portfolio value decreasing by 2.9% and 2.5% as of June 30, 1996 and June 30, 1995, respectively, if interest rates increase by 200 basis points. As a result, the Bank would have been required to make a $600,000 and $308,000 deduction from total capital as of June 30, 1996 and 1995, respectively, for purposes of calculating the Bank's risk-based capital requirement if such capital deduction was currently required. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Changes in Financial Condition Assets. Total assets decreased by $1.7 million or 1.2% from June 30, 1995 to June 30, 1996. This decrease is primarily due to the use of funds to repurchase nine percent of the Company's outstanding common stock during the fiscal year. The Bank's mortgage banking activities consist of selling newly originated and purchased loans into the secondary market. Total loans sold amounted to $45.8 million, $14.4 million and $13.2 million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. Loans held for sale amounted to $4.3 million, $2.7 million and $1.3 million at June 30, 1996, 1995 and 1994, respectively. The amount of loans sold and the amount of loans held for sale increased in fiscal 1996 due to increased wholesale and retail mortgage banking activities. The majority of loans originated and purchased for resale have been 30-year fixed rate loans. During fiscal 1996, the Bank transferred $1.8 million of loans from held for sale to portfolio as a result of a rise in interest rates. A provision of $22,000 was recorded to adjust loans held for sale to the lower of cost or market. The Bank expects mortgage banking volume to increase in fiscal 1997. Mortgage-backed securities and collateralized mortgage obligations decreased from $18.4 million at June 30, 1995 to $17.3 million at June 30, 1996. The Bank's mortgage-backed securities and collateralized mortgage obligations were classified as available for sale as of June 30, 1996. At June 30, 1996, the unrealized losses on such obligations, net of federal income tax, totalled $170,000, and are shown as a reduction in shareholders' equity. During fiscal 1996, mortgage-backed securities and collateralized mortgage obligations with a carrying value and fair value of $14.5 million were transferred from securities classified as held to maturity to a securities available for sale classification to provide greater flexibility in managing liquidity and interest rate risk. Other securities primarily consisting of U.S. agency securities and corporate bonds decreased from $11.4 million at June 30, 1995 to $7.4 million at June 30, 1996. The decrease is primarily due to the use of proceeds from sold or called investment securities to fund newly originated consumer and commercial loans instead of reinvesting the proceeds in other securities. The Bank expects additional growth in its consumer and commercial loan portfolios during fiscal 1997 which may be funded by the sale of additional securities. Cash and cash equivalents increased from $4.6 million at June 30, 1995 to $6.7 million at June 30, 1996. Current OTS regulations require that a savings institution maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The Bank's regulatory liquidity ratio amounted to 16.94% at June 30, 1996. The Bank's nonperforming assets totalled $43,000 or .04% of the total loan portfolio at June 30, 1996. At the end of each of the last five fiscal years, the Bank had no real estate owned and no troubled debt restructurings. During fiscal 1996, the Bank sold real estate owned at a net gain of $4,800 and had net charge-offs totaling $2,138. The Bank's low nonperforming assets are primarily due to the Bank's conservative underwriting criteria. At June 30, 1996, $89.0 million or 92.7% of the Bank's total loan portfolio was collateralized by first liens on one-to four-family residences, and the net loan portfolio (excluding loans held for sale) amounted to 69.4% of total assets. Liabilities. Total deposits increased $5.8 million or 6.9% from June 30, 1995 to June 30, 1996. The increase in total deposits was primarily attributable to growth in certificates of deposit of $4.5 million, or 7.0%, and growth in non-interest bearing deposits of $1.7 million or 292.3%. Certificates of deposit accounted for 75% of total deposits both at June 30, 1996 and 1995. At June 30, 1996, $50.7 million or 74.0% of the total certificates of deposit matured in one year or less, and $11.9 million or 17.4% of the total certificates of deposit had balances of $100,000 or more. The increase in deposits was achieved through the opening of the Bank's new main office/branch and increased efforts to attract non-interest bearing commercial accounts. In addition, the Bank has attracted and retained certificate of deposit accounts by offering competitive interest rates. Because the growth in deposits had not matched the growth in assets in recent years, the Bank began using FHLB advances. However, during fiscal 1996 the Bank reduced short-term advances by $1.4 million and long-term advances by $4.5 million with excess liquidity generated from deposit growth. The advances have generally been used to fund the Bank's mortgage banking activities. During fiscal 1995, long-term variable-rate FHLB advances of $14.5 million were utilized to purchase adjustable-rate mortgage-backed securities and collateralized mortgage obligations. This strategy was implemented to earn a positive spread during both an increasing and decreasing interest rate environment and to supplement loan volume. Shareholders' Equity. Shareholders' equity amounted to $26.8 million or 19.4% of total assets at June 30, 1996 compared to $28.2 million or 20.2% of total assets at June 30, 1995. The Company's trend of profitability continued in fiscal 1996 with the Company earning $1.2 million. During fiscal 1996, the Company repurchased 207,375 shares, or 9% of its common stock at a cost of $2.0 million and paid cash dividends of $603,000. The repurchased shares are accretive both to book value per share and earnings per share. Of the 207,375 shares repurchased, 92,575 shares were used to fund the Company's Management Recognition Plans ("MRPs"). During July 1996, the Board of Directors approved the repurchase of an additional 218,100 shares or 10% or the Company's outstanding common stock. The repurchase was approved by the OTS during August, 1996. The cost of shares issued to the Company's Employee Stock Ownership Plan (ESOP) but not yet allocated to participants totaling $1.1 million is presented in the consolidated balance sheet as a reduction of shareholders' equity. The unamortized unearned compensation value of the Company's MRPs also is shown as a reduction of shareholders' equity. In accordance with SFAS No. 115, which the Bank adopted effective June 30, 1994, the Company's investment securities classified as available for sale are carried at market value, with unrealized gains or losses reported as a separate component of shareholders' equity, net of federal income taxes. At June 30, 1996 and 1995, net unrealized losses were $207,000 and $27,000, respectively. Results of Operations While the Company's net income continues to be primarily dependent upon net interest income, the Company's net income in recent years has been affected by gains on the sales of loans in connection with its mortgage banking activities, gains (losses) on the sale of securities and a write-down of loans held for sale. Other than the mortgage banking activities, the Company does not consider these items to be of a recurring nature or part of the Company's "core" earnings. Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on month end balances.
Year Ended June 30, Year Ended June 30, 1996 1995 ------------------------------------------- ----------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) ------- -------- -------- ------- -------- -------- (Dollars in Thousands) Interest-earning assets: Loans receivable(2) $100,350 $7,902 7.87% $ 97,031 $6,882 7.09% Securities 7,987 509 6.37 6,006 356 5.93 Mortgage-backed securities(3) 18,790 1,231 6.55 4,621 316 6.84 Interest-earning deposits 5,476 326 5.95 3,910 229 5.86 Marketable equity securities -- -- -- -- -- -- FHLB stock 1,475 120 8.14 954 65 6.81 -------- ------ ---- -------- ----- ---- Total interest-earning assets 134,078 10,088 7.52 112,522 7,848 6.97 Noninterest-earning assets 5,410 3,287 -------- -------- Total assets $139,488 $115,809 ======== ======== Interest-bearing liabilities: Deposits $88,173 4,605 5.22 $87,179 4,066 4.66 FHLB advances 22,236 1,325 5.96 10,759 597 5.55 -------- ------ ---- -------- ----- ---- Total interest-bearing liabilities 110,409 5,930 5.37 97,938 4,663 4.76 Noninterest-bearing liabilities 1,504 1,125 -------- -------- Total liabilities 111,913 99,063 Stockholders' equity 27,575 16,746 -------- -------- Total liabilities and $139,488 $115,809 ======== ======== stockholders' equity Net interest income; average interest rate spread $4,158 2.15% $3,185 .21% ====== ==== ====== === Net interest margin(4) 3.10% 2.83% ==== ==== Average interest-earning assets to average interest-bearing liabilities 121.44% 114.89% ====== ====== Year Ended June 30, 1994 ----------------------------------- Average Average Yield/ Balance Interest Rate (1) ------- -------- -------- Interest-earning assets: Loans receivable(2) $85,414 $5,858 6.86% Securities 4,036 230 5.70 Mortgage-backed securities(3) 2,632 172 6.53 Interest-earning deposits 3,759 96 2.55 Marketable equity securities 3,419 148 4.53 FHLB stock 780 45 5.77 -------- ------ ---- Total interest-earning assets 100,040 6,549 6.55 Noninterest-earning assets 830 -------- Total assets $100,870 ======== Interest-bearing liabilities: Deposits $86,865 3,589 4.13 FHLB advances 2,583 100 3.87 -------- ------ ---- Total interest-bearing liabilities 89,448 3,689 4.12 Noninterest-bearing liabilities 760 -------- Total liabilities 90,208 Stockholders' equity 10,662 -------- Total liabilities and $100,870 ======== stockholders' equity Net interest income; average interest rate spread $2,860 2.43% ====== ==== Net interest margin(4) 2.86% ==== Average interest-earning assets to average interest-bearing liabilities 111.84% ====== (1) At June 30, 1996, the weighted average yields earned and rates paid were as follows: loans receivable, 7.83%; securities, 6.48%; interest-earning deposits, 5.62%; mortgage-backed securities, 6.52%; FHLB stock, 7.60%; total interest-earning assets, 7.49%; deposits, 5.05%; FHLB advances, 5.60%; total interest-bearing liabilities, 5.15%; and interest rate spread, 2.34%. (2) Includes nonaccrual loans and loans held for sale during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. (3) Includes collateralized mortgage obligations. (4) Net interest margin is net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (change in rate multiplied by prior year volume), and (ii) changes in volume (change in volume multiplied by prior year rate). The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Year Ended Year Ended June 30, 1996 June 30,1995 vs. vs. Year Ended Year Ended June 30, 1995 June 30, 1994 Increase Increase (Decrease) (Decrease) Due to Due to ----------------------------- ------------------------------- Total Total Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) ---- ------ ---------- ---- ------ ---------- Interest income: Loans receivable ....................... $ 778 $ 242 $ 1,020 $ 203 $ 821 $ 1,024 Securities ............................. 28 125 153 10 116 126 Mortgage-backed securities ............. (14) 929 915 9 135 144 Interest-earning deposits .............. 4 93 97 129 4 133 Marketable equity securities ........... -- -- -- (74) (74) (148) FHLB stock ............................. 13 42 55 9 11 20 ------- ------- ------- ------- ------- ------- Total interest income ................. 809 1,431 2,240 286 1,013 1,299 ------- ------- ------- ------- ------- ------- Interest expense: Deposits ............................... 492 47 539 464 13 477 FHLB advances .......................... 47 681 728 60 437 497 ------- ------- ------- ------- ------- ------- Total interest expense ................. 539 728 1,267 524 450 974 ------- ------- ------- ------- ------- ------- Increase (decrease) in net interest income $ 270 $ 703 $ 973 $ (238) $ 563 $ 325 ======= ======= ======= ======= ======= =======
Comparison of Year Ended June 30, 1996 and Year Ended June 30, 1995 Net Income. The Company's net income increased by $492,000 or 68.7% in fiscal 1996 from fiscal 1995. The increase in fiscal 1996 was primarily due to a $973,000 increase in net interest income, a $480,000 increase in gain on the sale of loans and a $358,000 increase in gain on trading securities. These factors were partially offset by a $1.1 million or 47.5% increase in total other expenses. Net Interest Income. The $973,000 or 30.5% increase in net interest income in fiscal 1996 was primarily due to a $3.3 million or 3.4% increase in the average loan portfolio and a $14.2 million or 306.6% increase in the average mortgage-backed securities (including collateralized mortgage obligations) portfolio. These amounts were partially offset by a $12.5 million or 12.7% increase in average interest-bearing liabilities and a decline in the average interest rate spread from 2.21% in fiscal 1995 to 2.15% in fiscal 1996. The average spread declined as a result of the increases in interest rates during the second half of fiscal 1996 which caused deposits to reprice faster than adjustable-rate assets. The Bank expects a positive impact on its average interest spread as a result of the anticipated growth of its commercial and consumer loan portfolios. In addition, it is anticipated that the expanded commercial relationships will generate growth in noninterest-bearing commercial deposit accounts. Interest Income. Total interest income increased by $2.2 million or 28.5% in fiscal 1996 compared to fiscal 1995. The increase was primarily due to an increase in the average mortgage-backed securities portfolio (including collateralized mortgage obligations) of $14.2 million or 306.6% resulting in a $929,000 or 294.0% increase in interest income (before giving effect to a slight decrease in the average yield). In addition, the average loan portfolio increased $3.3 million or 3.4% resulting in a $242,000 or 3.5% increase in interest on loans (before giving effect to an increase in the average yield). The increase in the average mortgage-backed securities portfolio was due to the purchase of adjustable-rate mortgage-backed securities and collateralized mortgage obligations which were funded by long-term variable-rate FHLB advances. The increase in the average loan portfolio was primarily due to the total loan originations exceeding total loans sold and repaid during fiscal 1996. Loan originations also were supplemented by the purchase of $1.9 million of one- to four-family residential loans. The interest on loans also increased due to the average yield increasing from 7.09% in fiscal 1995 to 7.87% in fiscal 1996 resulting in a $778,000 or 11.3% increase in interest on loans (before giving effect to the increase in the average balance) as adjustable-rate loans repriced higher to reflect the higher prevailing market interest rates during fiscal 1996 as well as from the growth in the commercial and consumer loan portfolios. Interest on securities increased by $153,000 or 43.0% in fiscal 1996 over fiscal 1995 as the average balance increased by $2.0 million due to additional purchases of securities during the fiscal year with part of the proceeds of the common stock offering. The higher interest income also was attributable to an increase in the average yield from 5.93% in fiscal 1995 to 6.37% in fiscal 1996. Dividends on FHLB stock increased by $55,000 or 84.6% due to an increase in the average yield from 6.81% in fiscal 1995 to 8.14% in fiscal 1996 as well as an increase in the average balance of $521,000 or 54.6%. Interest on interest-earning deposits increased by $97,000 or 42.4% in fiscal 1996 primarily due to higher average balances from an increase in loan refinances and deposit growth. Interest Expense. Total interest expense increased by $1.3 million or 27.2% in fiscal 1996 compared to fiscal 1995, primarily due to an increase in average FHLB advances and higher average rates paid on both deposits and FHLB advances. The average rate paid on deposits increased from 4.66% in fiscal 1995 to 5.22% in fiscal 1996. The increase in the average rate paid is due to an increase in the prevailing market interest rates compared to the prior fiscal year. Interest on FHLB advances increased $728,000 in fiscal 1996 from fiscal 1995, as the average balance increased $11.5 million and the average rate paid increased to 5.96% in fiscal 1996 from 5.55% in fiscal 1995. The increases in FHLB advances have primarily been used to fund increased loan originations for the Bank's loan portfolio as well as to purchase adjustable-rate mortgage-backed securities and collateralized mortgage obligations. Provision for Loan Losses. The provision for loan losses increased by $39,500 or 192.7% in fiscal 1996 compared to fiscal 1995. The allowance for loan losses totalled $166,000, which represented .16% of the total loan portfolio at June 30, 1996. However, the allowance for loan losses represented 386.0% of total nonperforming loans at such date. Because of the stability of the loan portfolio's credit quality, management budgets a provision for the entire year, and, on a quarterly basis, reviews this amount to determine if any change in the amount of the provision is necessary. For the second half of fiscal 1996, management determined that an increase in the amount of the quarterly provision was necessary to provide general reserves for the growth in the commercial and consumer loan portfolios. Management of the Company believes that the allowance is adequate to cover losses that are probable and reasonably estimable based on past loss experience, general economic conditions, information about specific borrower situations, and other factors and estimates which are subject to change over time. Management expects the provision for loan losses to increase in the next fiscal year as general reserves continue to be provided with the anticipated growth in commercial and consumer loans. Total Other Income. Total other income increased by $932,000 or 345.2% in fiscal 1996 from fiscal 1995, primarily due to a $480,000 increase in gain on the sale of loans and a $366,000 gain on trading securities achieved in fiscal 1996. The increase in the gain on the sale of loans is due to an increase in sold loans from $14.4 million in fiscal 1995 to $45.8 million in fiscal 1996. The Company expects to continue to expand its mortgage banking activities during fiscal 1997. Total loans serviced for FHLMC totalled $28.6 million, which represents an increase of $4.9 million or 20.6% from fiscal 1995 to fiscal 1996. The Bank sold the majority of its loans held for sale servicing released to private investors. The Company began trading equity securities in fiscal 1996. The gain on trading securities is primarily the result of trading equity securities in various financial institutions. Although to-date, the Company's equity trading strategy has been successful, there is no guarantee that future results will equal the current fiscal year's performance. The unrealized loss recognized on securities classified as trading was $5,813 at June 30, 1996. Total Other Expenses. Total other expenses increased by $1.1 million or 47.5% in fiscal 1996 from fiscal 1995, primarily due to increases of $626,000 or 52.1% in compensation and benefits, $120,000 or 78.9% in professional fees and $190,000 or 135.7% in occupancy and furniture, fixtures and equipment expenses. The higher compensation expense was primarily due to hiring individuals to support the growth in the mortgage banking, consumer and commercial loans departments as well as hiring individuals to staff the new branch location. In addition, the Employee Stock Ownership Plan and Management Recognition Plans expenses were $164,000 and $99,000 for fiscal 1996, respectively, compared to $37,000 and none for fiscal 1995, respectively. The increase in professional fees was primarily due to additional consulting, legal and audit fees and the outsourcing of the internal audit and certain human resources functions. The increase in occupancy and furniture, fixtures and equipment expense is primarily due to the opening of the new main office building/branch during fiscal 1996 and the depreciation expense associated with the renovation of the Bank's branch location. In July 1995, the Chairman of the FDIC announced in testimony before the U.S. Congress related to the condition of the Savings Association Insurance Fund (the "SAIF") and related issues a proposal to recapitalize the SAIF by a one-time charge to SAIF-insured institutions of approximately $6.6 billion, or approximately $.85 to $.90 for every $100 of assessable deposits, and an eventual merger of the SAIF with the Bank Insurance Fund (the "BIF"). The Company currently is unable to predict the likelihood of legislation effecting these changes, although a consensus for the one-time charge to the SAIF among regulators, legislators and bankers appears to be developing in this regard. If the proposed assessment of $.85 to $.90 per $100 of assessable deposits was effected based on deposits as of March 31, 1995, as proposed, Bank West's prorata share would amount to approximately $716,000 to $758,000, respectively. Federal Income Tax Expense. Federal income tax expense increased by $256,000 or 69.9% in fiscal 1996 from fiscal 1995, due to a 69.2% increase in pretax income. Comparison of Year Ended June 30, 1995 and Year Ended June 30, 1994 Net Income. The Company's net income increased by $36,000 or 5.3% in fiscal 1995 from fiscal 1994. The increase in fiscal 1995 was primarily due to a $324,000 increase in net interest income and improved results from the sale of securities of $123,000 resulting from gains of $19,000 recorded on the sales of securities in fiscal 1995 compared to a loss on the sale of securities of $104,000 in fiscal 1994. These factors were partially offset by a $307,000 or 15.4% increase in total other expenses and an $82,000 or 37.4% decrease in the gain on sale of loans. Net Interest Income. The $324,000 or 11.3% increase in net interest income in fiscal 1995 was primarily due to an $11.6 million or 13.6% increase in the average loan portfolio, which was partially offset by an $8.5 million or 9.5% increase in average interest-bearing liabilities and a decline in the average interest rate spread from 2.43% in fiscal 1994 to 2.21% in fiscal 1995. The average spread declined as a result of the increases in interest rates during the first three quarters of fiscal 1995, which caused deposits to reprice faster than adjustable-rate assets. Interest Income. Total interest income increased by $1.3 million or 19.8% in fiscal 1995 compared to fiscal 1994. The increase was primarily due to an increase in the average loan portfolio of $11.6 million resulting in a $1.0 million or 17.5% increase in interest on loans. The increase in the average loan portfolio was primarily due to the total loan originations exceeding total loans sold and repaid during fiscal 1995 by $11.6 million, as the Bank portfolioed the majority of balloon and ARM loans in process. Loan originations also were supplemented by the purchase of $3.0 million of one- to four-family residential loans. The increase in interest on loans was also due to the average yield increasing from 6.86% in fiscal 1994 to 7.09% in fiscal 1995 as adjustable-rate loans repriced higher to reflect the increase in interest rates during the second half of fiscal 1995. Interest on securities increased by $126,000 or 54.8% in fiscal 1995 over fiscal 1994 as the average balance increased by $2.0 million due to purchases of $9.7 million in the fourth quarter of fiscal 1995. The higher interest income also was attributable to an increase in the average yield from 5.70% in fiscal 1994 to 5.93% in fiscal 1995. Dividends on marketable equity securities decreased by $148,000 in fiscal 1995 as all of such securities were sold in fiscal 1994. Interest on mortgage-backed securities increased by $144,000 or 83.7% in fiscal 1995 over fiscal 1994, as the average balance increased by $2.0 million due to purchases of $12.8 million of mortgage-backed securities and $2.5 million of collateralized mortgage obligations during the fourth quarter of fiscal 1995. The higher interest income also was attributable to an increase in the average yield from 6.53% in fiscal 1994 to 6.84% in fiscal 1995. Interest Expense. Total interest expense increased by $974,000 or 26.4% in fiscal 1995 compared to fiscal 1994, primarily due to an increase in average FHLB advances and higher average rates paid on both deposits and FHLB advances. The average rate paid on deposits increased from 4.13% in fiscal 1994 to 4.66% in fiscal 1995. The increase in the average rate paid is due to an increase in the prevailing market interest rates during the first three quarters of the past fiscal year. Interest on FHLB advances increased $497,000 in fiscal 1995 from fiscal 1994, as the average balance increased $8.2 million and the average rate paid increased to 5.55% in fiscal 1995 from 3.87% in fiscal 1994. The increases in FHLB advances were primarily used to fund increased loan originations for the Bank's loan portfolio as well as to purchase adjustable-rate mortgage-backed securities and collateralized mortgage obligations. In addition, during fiscal 1995, the Bank obtained a $3.0 million line of credit from the FHLB of Indianapolis to fund its mortgage banking activities, of which $1.4 million had been drawn upon at June 30, 1995. Provision for Loan Losses. The provision for loan losses decreased by $4,500 or 18.0% in fiscal 1995 compared to fiscal 1994. The allowance for loan losses totalled $108,000, which represented .11% of the total loan portfolio at June 30, 1995. However, the allowance for loan losses represented 74.7% of total nonperforming loans at such date. For the second half of fiscal 1995, management determined that a reduction in the amount of the quarterly provision from $6,250 to $4,000 was necessary based on a consistently low dollar amount of nonperforming loans. Management of the Company believes that the allowance is adequate to cover losses that are probable and reasonably estimable based on past loss experience, general economic conditions, information about specific borrower situations, and other factors and estimates which are subject to change over time. Total Other Income. Total other income increased by $44,000 or 19.3% in fiscal 1995 from fiscal 1994, primarily due to a $123,000 increase in gain on the sale of securities. The Company recognized a gain of $19,000 in fiscal 1995 compared to a loss of $104,000 in fiscal 1994. This increase was partially offset by an $82,000 or 37.4% decline in the gain on sale of loans. The lower gain on sale of loans was due to increased competition for the sale of such loans and an upward trend in interest rates during the fiscal year. Total Other Expenses. Total other expenses increased by $307,000 or 15.0% in fiscal 1995 from fiscal 1994, primarily due to increases of $160,000 or 15.4% in compensation and benefits, $101,000 or 196.6% in professional fees and $57,000 or 119.3% in advertising expenses. The higher compensation expense was primarily due to hiring a new Chief Financial Officer, Secondary Marketing Manager, Small Business Manager, commissioned loan officers and operations personnel to staff the new branch operation. In addition, the Employee Stock Ownership Plan expense was $37,000 for fiscal 1995 compared to none for fiscal 1994. The increase in professional fees was due to consulting expenses attributable to the Bank's mortgage banking business, costs incurred for a full-scope compliance exam, increased marketing and advertising, audit and legal expenses. The increase in marketing and advertising expenses is due to the Company's grand opening of its new main office building during fiscal 1995 as well as additional promotions of loan and deposit products. The Company incurred marketing and advertising expenses to aggressively increase its market share. Federal Income Tax Expense. Federal income tax expense increased by $30,000 or 8.9% in fiscal 1995 from fiscal 1994, due to a 6.4% increase in pretax income and a slight increase in the effective tax rate to 33.9% in fiscal 1995 from 33.1% in fiscal 1994. Liquidity and Capital Resources The Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings institution maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. At June 30, 1996, the Bank's liquidity was 16.9% or $11.4 million in excess of the minimum OTS requirement. Cash was utilized by the Bank's operating activities during fiscal 1996 and 1995, primarily as a result of the amount of new loans originated and purchased for sale exceeding the proceeds from the sale of loans held for sale. These amounts were partially offset by net income in each period. Cash was generated by the Bank's operating activities during fiscal 1994 primarily as a result of net income and the proceeds from the sale of loans held for sale exceeding the amount of new loans originated for sale. The primary investing activities of the Company are the origination of loans and the purchase of mortgage-backed securities, and other securities which are primarily funded with the proceeds from repayments and prepayments on existing loans and mortgage-backed securities and the maturity or sale of mortgage-backed and other securities. Investing activities provided net cash in fiscal 1996 primarily because loan repayments exceeded loan originations, the maturity of interest-bearing time deposits and principal payments on mortgage-backed securities. Investing activities used net cash in fiscal 1995 and fiscal 1994 primarily because loan originations exceeded loan repayments in each period. In addition, in fiscal 1995, the amount of mortgage-backed and other securities purchased exceeded the amount sold by $22.7 million. These purchases were primarily funded by a combination of proceeds from the initial public offering and long-term variable-rate FHLB advances. Also in fiscal 1995, property and equipment expenditures totaled $2.7 million as a result of the construction of the new corporate headquarters and the remodeling of its branch facility. The primary financing activity consists of deposits, which increased in fiscal 1996 and fiscal 1994 and decreased in fiscal 1995. The decrease in fiscal 1995 was primarily due to depositors utilizing their deposits at the Bank to purchase common stock of the Company in the initial public offering. Financing activities also include FHLB advances, which decreased in fiscal 1996 as deposit growth reduced the need for higher costing wholesale funds. FHLB advances increased in fiscal 1995 and 1994 in order to fund increased loan originations and purchase adjustable-rate mortgage-backed securities and collateralized mortgage obligations. Total cash and cash equivalents increased by $2.1 million and $1.5 million in fiscal 1996 and 1994, respectively, and decreased by $328,000 in fiscal 1995. Total cash and cash equivalents amounted to $6.7 million at June 30, 1996. At June 30, 1996, the Company had outstanding commitments to originate or purchase $6.7 million of loans. In addition, the Company had unused lines of credit totaling $4.0 million. At the same date, the total amount of certificates of deposit which were scheduled to mature in the following 12 months was $50.7 million. The Company believes that it has adequate resources to fund all of its commitments and that it can adjust the rate on certificates of deposit to retain deposits to the extent desired. If the Company requires funds beyond its internal funding capabilities, advances from the FHLB of Indianapolis are available as an additional source of funds. The Bank is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of 1.5%, 3.0% and 8.0%, respectively. At June 30, 1996, the Bank exceeded each of its capital requirements, with tangible, core and risk-based capital ratios of 15.4%, 15.4% and 31.4%, respectively (see Note 13 to the Consolidated Financial Statements). Impact of Inflation and Changing Prices The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company's performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Recent Accounting and Regulatory Standards In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. The Statement establishes accounting measurement, recognition and reporting standards for impaired loans. SFAS No. 114 was amended in October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 amended SFAS No. 114 primarily to remove its income recognition requirements and add some disclosure requirements. The adoption of SFAS No. 114, as amended by SFAS No. 118, was not material to the Company's 1996 consolidated financial condition or results of operations. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," will require the Company to periodically consider whether an impairment loss should be recognized on long-lived assets and other certain intangible assets based on an estimate of future cash flows. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995, and earlier adoption is encouraged. Adoption of this Statement is not expected to have a material impact on the Company's consolidated financial condition and results of operations. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which is effective for fiscal years beginning after December 15, 1995. SFAS No. 122 amends certain provisions of SFAS No. 65 to allow the separate capitalization of rights to service mortgage loans that are acquired through loan origination activities. The total cost of the mortgage loans originated is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The Company elected to adopt this accounting standard as of July 1, 1995. The impact of SFAS No. 122 on the Company's consolidated financial position and results of operations for fiscal 1996 was an increase of $96,000 to other assets and gain on the sale of loans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" establishes a fair value based method of accounting for employee stock options and similar equity instruments which the FASB encourages companies to adopt for their employee stock compensation plans. However, SFAS No. 123 allows companies to continue measuring compensation cost for such plans using accounting guidance in place prior to SFAS No.123. Companies that elect to remain with the former method of accounting must make pro-forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. This Statement is effective for the Company at the beginning of its fiscal year ending June 30, 1997. Management has concluded that the Company will not adopt the fair value accounting provisions of SFAS No. 123 and will continue to apply its current method of accounting. Accordingly, adoption of SFAS No. 123 will have no impact on the Company's consolidated financial position or results of operations. The FDIC is authorized to adjust the insurance rates for banks that are insured by the BIF as well as for SAIF members. On November 14, 1995, the FDIC approved a final rule regarding deposit insurance premiums. The final rule reduced deposit insurance premiums for BIF member institutions to zero basis points (subject to a $2,000 minimum) for institutions in the lowest risk category, while holding deposit insurance premiums for SAIF members at their current levels (23 basis points for institutions in the lowest risk category). The reduction was effective with respect to the semiannual premium assessment beginning January 1, 1996. Accordingly, in the absence of further legislative action, SAIF members such as Bank West will be competitively disadvantaged as compared to commercial banks by the resulting premium differential. Report of Independent Auditors Shareholders and Board of Directors Bank West Financial Corporation Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Bank West Financial Corporation (the "Company") as of June 30, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bank West Financial Corporation as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for impaired loans and originated mortgage servicing rights in 1996 and for securities in 1994 to conform to new accounting guidance. Crowe, Chizek and Company LLP Grand Rapids, Michigan August 9, 1996
Consolidated Balance Sheets June 30, 1996 and 1995 1996 1995 ---- ---- ASSETS Cash and due from financial institutions ........................ $ 1,571,662 $ 417,397 Interest-bearing deposits in financial institutions ............. 5,122,427 4,177,834 ------------- ------------- Total cash and cash equivalents ............................. 6,694,089 4,595,231 Interest-bearing time deposits .................................. 298,000 1,287,000 Trading securities .............................................. 708,438 -- Securities available for sale (Note 3) .......................... 22,779,280 9,815,401 Securities held to maturity (market value: 1996 - $2,006,000; 1995 - $19,886,289) (Note 3) ............. 2,004,288 19,945,791 Loans held for sale (Note 4) .................................... 4,297,092 2,746,019 Loans, net (Note 5) ............................................. 95,737,191 95,836,247 Federal Home Loan Bank stock .................................... 1,475,000 1,475,000 Premises and equipment - net (Note 6) ........................... 3,106,972 3,087,171 Accrued interest receivable ..................................... 632,043 726,573 Mortgage servicing rights (Note 4) .............................. 142,697 68,196 Other assets .................................................... 107,216 71,814 ------------- ------------- $ 137,982,306 $ 139,654,443 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits (Note 7) ............................................... $ 91,028,072 $ 85,180,250 Short-term FHLB borrowings (Note 8) ............................. 6,000,000 7,422,256 Long-term FHLB borrowings (Note 8) .............................. 13,000,000 17,500,000 Accrued interest payable ........................................ 156,946 181,737 Advanced payments by borrowers for taxes and insurance .......... 459,391 629,303 Deferred federal income tax (Note 9) ............................ 225,760 192,290 Other liabilities ............................................... 301,691 377,513 ------------- ------------- Total liabilities ........................................... 111,171,860 111,483,349 Commitments and Contingencies (Note 10) Shareholders' equity (Notes 9, 12 and 13) Preferred stock, 5,000,000 shares authorized, none issued Common stock, $.01 par value; 10,000,000 shares authorized; 2,199,575 and 2,314,375 issued at June 30, 1996 and 1995 (Note 2) 21,996 23,144 Additional paid-in capital ...................................... 16,542,107 17,812,757 Retained earnings, substantially restricted (Notes 9 and 13) .... 12,231,242 11,626,136 Net unrealized loss on securities available for sale, net of tax of $106,834 in 1996 and $14,062 in 1995 .............. (207,387) (27,295) Management Recognition Plan (unearned shares) (Note 12) ......... (643,464) -- Employee Stock Ownership Plan (unallocated shares) (Note 12) .... (1,134,048) (1,263,648 ------------- ------------- 26,810,446 28,171,094 ------------- ------------- $ 137,982,306 $ 139,654,443 ============= ============= See accompanying notes to consolidated financial statements. Consolidated Statements of Income Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Interest and dividend income Loans .......................................... $ 7,901,948 $ 6,882,198 $ 5,857,639 Securities ..................................... 509,137 356,140 231,144 Mortgage-backed securities and CMO's ........... 1,230,655 315,588 171,887 Other interest-earning deposits ................ 325,796 229,097 95,591 Marketable equity securities ................... -- -- 147,727 Dividends on Federal Home Loan Bank stock ...... 120,467 65,156 45,340 ---------- ----------- ----------- 10,088,003 7,848,179 6,549,328 Interest expense Deposits (Note 7) .............................. 4,605,347 4,065,586 3,588,696 Short-term FHLB advances (Note 8) .............. 419,757 475,088 100,066 Long-term FHLB borrowings (Note 8) ............. 904,975 122,490 -- ---------- ----------- ----------- 5,930,079 4,663,164 3,688,762 ---------- ----------- ----------- Net interest income ............................... 4,157,924 3,185,015 2,860,566 Provision for loan losses (Note 5) ................ 60,000 20,500 25,000 ---------- ----------- ----------- Net interest income after provision for loan losses 4,097,924 3,164,515 2,835,566 Other income Gain on sale of loans (Note 4) ................. 617,286 136,747 218,539 Fees and service charges ....................... 175,199 104,580 106,827 Gain on trading securities ..................... 366,465 -- -- Gain (loss) on securities available for sale (Note 3) ............................ 10,529 18,999 (104,014) Miscellaneous income ........................... 32,533 9,849 5,071 ---------- ----------- ----------- 1,202,012 270,175 226,423 Other expenses Compensation and benefits (Notes 11 and 12) .... 1,827,177 1,200,931 1,040,762 Federal deposit insurance expense .............. 196,397 205,209 190,225 Professional fees .............................. 272,163 152,098 51,288 Data processing expense ........................ 172,596 113,157 104,649 Occupancy expense .............................. 206,058 76,878 62,356 Furniture, fixtures and equipment expense ...... 124,366 63,317 93,516 Advertising .................................... 87,770 104,497 47,659 Provision to adjust loans held for sale to lower of cost or market .................... 22,039 -- 107,043 State taxes .................................... 56,103 27,433 64,318 Miscellaneous expense .......................... 504,379 408,680 283,195 ---------- ----------- ----------- 3,469,048 2,352,200 2,045,011 ---------- ----------- ----------- See accompanying notes to consolidated financial statements. Consolidated Statements of Income Years ended June 30, 1996, 1995 and 1994 (continued) 1996 1995 1994 ---- ---- ---- Income before federal income tax expense .......... 1,830,888 1,082,490 1,016,978 Federal income tax expense (Note 9) ............... 622,400 366,478 336,869 Net income ........................................ $ 1,208,488 $ 716,012 $ 680,109 =========== =========== =========== Earnings per common and common equivalent share subsequent to conversion (Note 1) ......... $ .57 $ .10 N/A =========== =========== =========== Dividends per common share ........................ $ .28 N/A N/A =========== =========== =========== See accompanying notes to consolidated financial statements. Consolidated Statements of Changes in Shareholders' Equity Years ended June 30, 1996, 1995 and 1994 Unrealized Gain (Loss) Additional on Securities Unearned Common Paid-In Retained Available for MRP Stock Capital Earnings Sale (net of tax) Shares Balance at July 1, 1993 $10,230,015 Net income for the year ended June 30, 1994 680,109 Cumulative effect of adopting SFAS No. 115 as of June 30, 1994, net of tax of $34,272 $ (66,529) ----------- --------- Balance at June 30, 1994 10,910,124 (66,529) Net income for the year ended June 30, 1995 716,012 Sale of 2,314,375 shares of common stock, net of conversion costs (Note 2, 12 and 14) $23,144 $17,807,694 Shares released under Employee Stock Ownership Plan (Note 12) Change in unrealized loss on securities available 5,063 for sale, net of tax of $20,210 39,234 ------- ----------- ---------- -------- Balance at June 30, 1995 23,144 17,812,757 11,626,136 (27,295) Net income for the year ended June 30, 1996 1,208,488 Issuance of 92,575 shares of common stock for Management Recognition Plans (MRPs) (Note 12) 926 741,658 $(742,584) Shares earned under MRPs 99,120 Cash dividends of $.28 per share (603,382) Repurchase of 207,375 shares of stock, at cost (Note 14) (2,074) (2,046,987) Shares committed to be released under Employee Stock Ownership Plan (Note 12) 34,679 Change in net unrealized loss on securities available for sale, net of tax of $92,775 (180,092) ------- ----------- ---------- -------- --------- Balance at June 30, 1996 $21,996 $16,542,107 $12,231,242 $(207,387) $(643,464) ======= =========== =========== ========= ========= See accompanying notes to consolidated financial statements. Unallocated Total ESOP Shareholders' Shares Equity ------ ------ Balance at July 1, 1993 $10,230,015 Net income for the year ended June 30, 1994 680,109 Cumulative effect of adopting SFAS No. 115 as of June 30, 1994, net of tax of $34,272 (66,529) ----------- Balance at June 30, 1994 10,843,595 Net income for the year ended June 30, 1995 716,012 Sale of 2,314,375 shares of common stock, net of conversion costs (Note 2, 12 and 14) $(1,296,048) 16,534,790 Shares released under Employee Stock Ownership Plan (Note 12) 32,400 37,463 Change in unrealized loss on securities available for sale, net of tax of $20,210 39,234 ----------- ----------- Balance at June 30, 1995 (1,263,648) 28,171,094 Net income for the year ended June 30, 1996 1,208,488 Issuance of 92,575 shares of common stock for Management Recognition Plans (MRPs) (Note 12) Shares earned under MRPs 99,120 Cash dividends of $.28 per share (603,382) Repurchase of 207,375 shares of stock, at cost (Note 14) (2,049,061) Shares committed to be released under Employee Stock Ownership Plan (Note 12) 129,600 164,279 Change in net unrealized loss on securities available for sale, net of tax of $92,775 (180,092) ----------- ----------- Balance at June 30, 1996 $(1,134,048) $26,810,446 === ==== =========== =========== Consolidated Statements of Cash Flows Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Net income .................................... $ 1,208,488 $ 716,012 $ 680,109 Adjustments to reconcile net income to net cash from operating activities Purchase of trading securities ................ (2,224,537) -- -- Proceeds from sale of trading securities ...... 1,882,564 -- -- Origination and purchase of mortgage loans for sale .............................. (48,488,782) (16,997,866) (11,141,446) Proceeds from sale of mortgage loans .......... 45,798,332 14,382,754 13,221,311 Net (gain) loss on sales of: Loans .................................... (617,286) (136,747) (218,539) Securities ............................... (376,994) (18,999) -- Marketable equity securities ............. -- -- 104,014 Real estate owned ........................ (4,806) -- Depreciation .................................. 179,742 62,718 70,440 Amortization (accretion) of premium (discounts), net ............................ 103,072 17,154 (2,355) ESOP expense .................................. 164,279 37,463 -- MRP expense ................................... 99,120 -- -- Loss on disposal of fixed assets .............. 2,662 -- -- Provision for loan losses ..................... 60,000 20,500 25,000 Provision to adjust loans held for sale to lower of cost or market .................. 22,039 -- 107,043 Change in: Deferred loan fees .......................... (47,292) (64,652) 30,896 Other assets ................................ (15,373) (532,741) (22,483) Other liabilities ........................... (144,282) 563,259 412,722 ------------ ------------ ------------ Net cash from operating activities ..... (2,399,054) (1,951,145) 3,266,712 Consolidated Statements of Cash Flows Years ended June 30, 1996, 1995 and 1994 (continued) 1996 1995 1994 ---- ---- ---- Cash flows from investing activities Purchase of marketable equity securities ...... -- -- (3,122,845) Purchase of FHLB stock ........................ -- (635,200) (80,000) (Increase) decrease in interest-bearing time deposits ............................... 989,000 (1,287,000) -- Loan originations, net of repayments .......... 3,696,997 (248,962) (12,621,184) Loans purchased for portfolio ................. (1,921,400) (3,016,261) (63,450) Purchase of securities available for sale ..... (21,217,480) (9,728,635) (1,963,448) Proceeds from sale of securities available for sale .......................... 14,077,014 1,671,263 -- Purchase of securities held to maturity ....... -- (14,610,995) -- Proceeds from sale of marketable equity securities .................................. -- -- 6,689,034 Proceeds from maturities or calls of securities available for sale .......................... 7,282,760 -- -- Proceeds from maturities or calls of securities held to maturity ............................ 1,500,000 -- -- Principal payments on mortgage-backed securities .................................. 2,817,407 277,415 796,223 Principal payments on collateralized mortgage obligations ........................ 152,515 160,528 -- Property and equipment expenditures ........... (202,205) (2,721,038) (199,450) Proceeds from sale of real estate owned ....... 50,181 Proceeds from sale of real estate ............. -- 84,510 -- ------------ ------------ ------------ Net cash from investing activities ....... 7,224,789 (30,054,375) (10,565,120) See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Years ended June 30, 1996, 1995 and 1994 (continued) 1996 1995 1994 ---- ---- ---- Cash flows from financing activities Repayment and maturities of FHLB borrowings ... (11,922,256) -- -- Proceeds from FHLB borrowings ................. 6,000,000 $ 19,922,256 $ 3,000,000 Increase (decrease) in deposits ............... 5,847,822 (4,779,731) 5,833,451 Repurchase of common stock .................... (2,049,061) -- -- Dividends paid on common stock ................ (603,382) -- -- Issuance of common stock ...................... -- 16,534,790 -- ------------ ------------ ------------ Net cash from financing activities ....... (2,726,877) 31,677,315 8,833,451 ------------ ------------ ------------ Net change in cash and cash equivalents .......... 2,098,858 (328,205) 1,535,043 Cash and cash equivalents at beginning of period . 4,595,231 4,923,436 3,388,393 ------------ ------------ ------------ Cash and cash equivalents at end of period ....... $ 6,694,089 $ 4,595,231 $ 4,923,436 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for Interest ...................................... $ 5,954,870 $ 4,595,797 $ 3,619,935 Income taxes .................................. 520,000 322,500 355,000 Supplemental disclosure of noncash investing activities: Transfer of loans from held for sale to held to maturity ......................... 1,756,663 1,287,879 -- Transfer from loans to real estate owned ...... 45,375 -- -- Upon the adoption of SFAS No. 115 at June 30, 1994, the Company transferred $1,940,580 from investment securities to securities available for sale and transferred $5,629,700 from investment securities to securities held to maturity. During November of 1995, securities with a carrying value of $15,008,666 and a fair value of $14,964,245 were transferred from securities held to maturity to securities available for sale (Note 3). See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Bank West Financial Corporation (the "Company") was organized as a thrift holding company to be the sole shareholder of Bank West, FSB (the "Bank"), a federally chartered savings bank. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation. The Bank's primary services include accepting deposits and making mortgage and installment loans in Kent County and Eastern Ottawa County, Michigan. The Bank also engages in mortgage banking activities consisting of selling originated and purchased loans into the secondary market. The Bank has formed a wholly-owned service company for the future purpose of involvement with insurance activities permitted by federal and state regulations. At June 30, 1996, the service company was inactive and had no assets or liabilities. During fiscal 1996, the Company began trading equity securities to a limited extent. 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The primary estimates incorporated into the Company's consolidated financial statements which are susceptible to change in the near term include the allowance for loan losses, the determination and carrying value of securities available for sale, trading securities, loans held for sale and impaired loans, and the determination of other-than-temporary reductions in the fair value of securities. Concentrations of Credit Risk: The Bank grants mortgage loans to customers primarily in Kent County, Michigan. No significant number of the Bank's customers are employed at any one specific entity or in any one specific industry. The Bank grants primarily one-to four-family residential real estate loans. Substantially all loans are secured by specific items of collateral, primarily single family residences. Cash Equivalents: For purposes of the consolidated statements of cash flows, the Bank considers all highly liquid debt instruments with original maturities when purchased of three months or less to be cash equivalents. The Bank reports net cash flows for customer loan transactions, deposit transactions, and deposits made with other financial institutions. Trading Securities: Securities that are bought and held principally for resale in the near term (thus held for only a short period of time) are classified as trading securities and recorded at their fair values. Realized and unrealized gains and losses on trading securities are included immediately in other income. Securities Available for Sale or Held to Maturity: Prior to June 30, 1994, investment and mortgage-backed securities held for investment were carried at amortized cost. Management had the intent and the Bank had the ability to hold these securities until maturity. Securities held for sale were carried at the lower of cost or market. Effective June 30, 1994, the Bank adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). This Statement requires that the Bank have positive intent and ability to hold to maturity those securities classified as held to maturity. Any securities not classified as held to maturity or trading, as discussed above, are classified as available for sale. As required NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) by SFAS No. 115, securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss is reported, net of related income tax effects, as a separate component of shareholders' equity, until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Securities held to maturity are carried at amortized cost. Upon adoption of SFAS No. 115, management classified all of its collateralized mortgage obligations as available for sale. The effect of adopting SFAS No. 115 on June 30, 1994 was a decrease in retained earnings of $66,529, net of the income tax effect. Premiums and discounts on investment and mortgage-backed securities are recognized in interest income using the level yield method over the period to maturity. Loans Held for Sale: Mortgage loans originated for sale in the secondary market are carried at the lower of cost or estimated market value on an individual loan basis. Net unrealized losses are recognized in a valuation allowance by charges to income. Gains on the sales of loans are recognized when proceeds from the loan sales are received by the Bank. Loans: Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees. Interest income on loans is accrued over the term of the loans based upon the principal outstanding except where loans are 90 days or more past due, in which case the accrual of interest is discontinued. Under SFAS No. 114 as amended by SFAS No. 118, the carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as adjustments to the provision for loan losses. Loan fees, net of certain direct loan origination costs, are deferred. The net amount deferred is reported in the consolidated balance sheet as part of loans and is recognized as interest income over the term of the loan using the level yield method. Allowance for Loan Losses: Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for possible loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. A loan is charged-off against the allowance by management when deemed uncollectible, although collection efforts continue and future recoveries may occur. In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114) as amended by SFAS No. 118. SFAS No. 114, effective for NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) the Bank beginning July 1, 1995, requires that impaired loans, as defined, be measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. The impact of the adoption of SFAS No. 114 and SFAS No. 118 on the Bank's consolidated financial position and results of operations was not material. Mortgage Loan Servicing Rights: The Company purchases and originates mortgage loans for sale to the secondary market, and sells the loans with servicing retained and released. Effective July 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS No. 122). The Statement requires capitalizing the rights to service originated mortgage loans. Prior to adoption of SFAS No. 122, only purchased mortgage servicing rights were capitalized. Beginning in 1995, the total cost of mortgage loans purchased or originated with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing, based on their relative fair values. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. Mortgage servicing rights are periodically evaluated for impairment by stratifying them based on predominant risk characteristics of the underlying serviced loans, such as loan type, term, and note rate. Impairment represents the excess of cost of an individual mortgage servicing rights stratum over its fair value, and is recognized through a valuation allowance. Fair values for individual stratum are based on quoted market prices. Estimates of fair value include assumptions about prepayment, default and interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of loan servicing rights, and the related valuation allowance, to change significantly in the future. Premises and Equipment: The Company's premises and equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated using the straight-line method with useful lives ranging from 31 to 50 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from five to ten years. Maintenance and repairs are charged to expense and improvements are capitalized. The cost and accumulated depreciation applicable to assets retired, or otherwise disposed of, are eliminated from the accounts and the gain or loss on disposition is credited or charged to operations. Real Estate Owned: Real estate owned is carried at the lower of cost (fair value at date of foreclosure) or fair value minus estimated costs to sell. Adjustments to fair value at the date of acquisition are charged to the allowance for loan losses. Allowances are established for subsequent losses, if any, with corresponding charges to operations. Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Employee Stock Ownership Plan: The Company accounts for its employee stock ownership plan (ESOP) in accordance with AICPA Statement of Position 93-6. The NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated balance sheet as a reduction of shareholders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to paid in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are reflected as a reduction of debt and accrued interest. Management Recognition Plan: MRP awards vest in five equal annual installments from the date of grant, subject to the continuous employment of the recipients as defined under such plans. Compensation expense for the MRPs is recognized on a prorata basis over the vesting period of the awards. The unamortized unearned compensation value of the MRPs is shown as a reduction of shareholders' equity in the accompanying consolidated balance sheets. Preferred Stock: The Company is authorized to issue 5,000,000 shares of preferred stock. Such stock may be issued with such preferences and designations as the Board of Directors may determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the Common Stock and may assist management in impeding an unfriendly takeover or attempted change in control. Earnings Per Share: Earnings per share is based on the weighted average number of outstanding common shares and common stock equivalents. ESOP shares are considered outstanding for earnings per share calculations as they are committed to be released; unallocated shares are not considered outstanding. Common stock equivalents associated with the stock options and MRP shares were not material to the computation of earnings per share for the year ended June 30, 1996. The weighted average number of shares outstanding for the year ended June 30, 1996 was 2,104,921. The weighted average number of shares outstanding for the 1995 period subsequent to conversion was 2,154,394. Issued But Not Yet Adopted Accounting Standards: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 123, Accounting for Stock Based Compensation (SFAS No. 123). The Statement establishes a fair value based method of accounting for employee stock options and similar equity instruments, such as warrants, and encourages all companies to adopt that method of accounting for all of their employee stock compensation plans. However, the Statement allows companies to continue measuring compensation cost for such plans using accounting guidance in place prior to SFAS No. 123. Companies that elect to remain with the former method of accounting must make pro-forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. The accounting requirements of the Statement are required for transactions entered into in fiscal years that begin after December 15, 1995, although early adoption is permitted. Companies which elect to continue measuring compensation costs under current guidance must present pro-forma disclosures for awards granted in the first fiscal year beginning after December 15, 1994; however, that disclosure need not be made until financial statements for that fiscal year are presented for comparative purposes with financial statements for a later fiscal year. Management has concluded that the Company will not adopt the fair value accounting provisions of SFAS No. 123 but will continue to apply its current method of accounting. Accordingly, adoption of the SFAS No. 123 will have no impact on the Company's financial position or results of operations. The NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) disclosure provisions will be adopted as required. Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP On October 24, 1994, the Board of Directors of the Bank, subject to regulatory approval and approval by the members of the Bank, unanimously adopted a Plan of Conversion to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank with the concurrent formation of the Company as the Bank's holding company. The conversion was consummated on March 30, 1995 by amending the Bank's federal charter and the sale of the holding company's common stock in an amount equal to the proforma market value of the Bank after giving effect to the conversion. A subscription offering of the shares of the Company's common stock was offered initially to the Bank's depositors, to tax-qualified employee plans and then to other members and directors, officers and employees of the Bank. Proceeds of $16,533,717 were received from the sale of 2,314,375 common shares, after deduction of conversion costs of $694,235 and the issuance of 162,006 shares for the ESOP in exchange for a note receivable from the ESOP. Upon closing of the stock offering, the Company purchased 100% of the common shares of the Bank. Bank West, F.S.B. is now a wholly-owned subsidiary of the Company. The conversion was an internal reorganization with historical balances carried forward without adjustment. NOTE 3 - SECURITIES Debt and equity securities have been classified in the Consolidated Balance Sheets according to management's intent. The amortized cost and estimated market values of securities at June 30, 1996 and 1995 are as follows:
Available for Sale Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- 1996 U.S. agencies ..................... $ 4,997,678 $ 7,500 $ 60,110 $ 4,945,068 Corporate bonds ................... 496,870 -- 4,271 492,599 ----------- ----------- ----------- ----------- 5,494,548 7,500 64,381 5,437,667 Mortgage-backed securities ........ 2,330,061 3,524 26,089 2,307,496 Collateralized mortgage obligations 15,268,892 302 235,077 15,034,117 ----------- ----------- ----------- ----------- $23,093,501 $ 11,326 $ 325,547 $22,779,280 =========== =========== =========== =========== 1995 U.S. agencies ..................... $ 5,501,973 $ 17,161 $ 383 $ 5,518,751 Corporate bonds ................... 1,876,452 -- 7,038 1,869,414 ----------- ----------- ----------- ----------- 7,378,425 17,161 7,421 7,388,165 Collateralized mortgage obligations 2,478,333 -- 51,097 2,427,236 ----------- ----------- ----------- ----------- $ 9,856,758 $ 17,161 $ 58,518 $ 9,815,401 =========== =========== =========== =========== Held to Maturity Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- 1996 U.S. agencies ..................... $ 2,004,288 $ 3,998 $ 2,286 $ 2,006,000 =========== =========== =========== =========== 1995 U.S. agencies ..................... $ 3,017,824 $ 2,440 $ 14,639 $ 3,005,625 Municipal bonds ................... 999,571 3,829 -- 1,003,400 ----------- ----------- ----------- ----------- 4,017,395 6,269 14,639 4,009,025 Mortgage-backed securities ........ 14,100,219 6,391 53,764 14,052,846 Collateralized mortgage obligations 1,828,177 -- 3,759 1,824,418 ----------- ----------- ----------- ----------- $19,945,791 $ 12,660 $ 72,162 $19,886,289 =========== =========== =========== ===========
NOTE 3 - SECURITIES (Continued) The scheduled maturities of securities available for sale and securities held to maturity at June 30, 1996 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Due within one year ......... -- -- $ 1,002,002 $ 1,006,000 Due after one year through five years ................ $ 4,494,548 $ 4,435,167 1,002,286 1,000,000 Due after five years through ten years ................. 1,000,000 1,002,500 -- -- Mortgage-backed securities and collateralized mortgage obligations ............... 17,598,953 17,341,613 -- -- ----------- ----------- ----------- ----------- $23,093,501 $22,779,280 $ 2,004,288 $ 2,006,000 =========== =========== =========== ===========
Proceeds from the sales of securities amounted to $15,969,000, $1,671,000 and $6,689,000 for the years ended June 30, 1996, 1995 and 1994, respectively, including $1,883,000 relative to trading securities in fiscal 1996. Gross realized gains (losses) on sales of securities were as follows for the years ended June 30: 1996 1995 1994 ---- ---- ---- Gross realized gains $400,243 $18,999 -- Gross realized losses (17,436) -- $(104,014) -------- ------- --------- Net realized gains $382,807 $18,999 $(104,014) ======== ======= ========= The unrealized loss recognized on securities classified as trading was $5,813 for the year ended June 30, 1996. In accordance with the FASB Special Report, A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities, securities held to maturity with a carrying value of $15,008,666, fair value of $14,964,245, unrealized gain of $8,485 and unrealized loss of $52,906 were transferred to the available for sale classification on November 20, 1995. The transfer decreased shareholders' equity by $29,318, which is net of the related deferred tax asset of $15,103. The reclassification was made to provide greater flexibility in managing liquidity and interest rate risk. NOTE 4 - SECONDARY MARKET MORTGAGE ACTIVITIES The following summarizes the Bank's secondary market mortgage activities, which consist solely of one-to four-family real estate loans:
1996 1995 1994 ---- ---- ---- Loans held for sale - beginning of period ... $ 2,746,019 $ 1,282,039 $ 3,250,408 Activity during the periods: Loans originated and purchased for sale 48,488,782 16,997,866 11,141,446 Proceeds from sale of mortgage loans .. (45,798,332) (14,382,754) (13,221,311) Transfer of loans from held for sale to held to maturity .................... (1,756,663) (1,287,879) -- Gain on sale of loans ................. 617,286 136,747 218,539 Allowance to adjust loans held for sale to lower of cost or market ..... -- -- (107,043) ------------ ------------ ------------ Loans held for sale - end of period ......... $ 4,297,092 $ 2,746,019 $ 1,282,039 ============ ============ ============
Mortgage loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of these loans at June 30 are summarized as follows: 1996 1995 1994 ---- ---- ---- Mortgage loan portfolios serviced for FHLMC .......................... $28,590,578 $23,699,436 $15,431,873 =========== =========== =========== Loans servicing fee income ........... $ 66,725 $ 47,451 $ 27,603 =========== =========== =========== Custodial escrow balances maintained in connection with the foregoing loan servicing were $135,011 and $292,374 at June 30, 1996 and 1995, respectively. The carrying value of mortgage servicing rights, which approximates fair value, was $142,697 at June 30, 1996. Following is an analysis of the activity for mortgage servicing rights for 1996: Balance at July 1, 1995 $ 68,196 Additions 124,501 Amortization (50,000) --------- Balance at June 30, 1996 $ 142,697 ========= NOTE 5 - LOANS Loans are classified as follows at June 30: 1996 1995 Real estate loans: One-to four-family residential - fixed rate $ 20,351,715 $ 20,278,403 One-to four-family residential - balloon ... 12,841,337 11,170,168 One-to four-family residential - adjustable 47,544,192 58,568,036 Construction ............................... 14,073,497 6,145,801 Commercial mortgages ....................... 1,193,464 -- Home equity lines of credit ................ 2,214,227 1,453,397 Second mortgages ........................... 1,927,282 682,869 ------------ ------------ Total mortgage loans .................. 100,145,714 98,298,674 Consumer loans ................................... 622,353 29,859 Commercial non-mortgage .......................... 1,010,076 -- ------------ ------------ Total ................................. 101,778,143 98,328,533 Less: Loans in process ........................... 5,827,705 2,289,609 Deferred fees and discounts ................ 47,385 94,677 Allowance for loan losses .................. 165,862 108,000 ------------ ------------ $ 95,737,191 $ 95,836,247 ============ ============ An analysis of the allowance for loan losses for the years ended June 30, 1996, 1995 and 1994, follows: 1996 1995 1994 --------- --------- --------- Beginning balance ......................... $ 108,000 $ 87,500 $ 62,500 Provision charged to operations ..... 60,000 20,500 25,000 Charge-offs ......................... (2,138) -- -- --------- --------- --------- Ending balance ............................ $ 165,862 $ 108,000 $ 87,500 ========= ========= ========= During the year ended June 30, 1996, the Company had no loans which were impaired as defined under the provisions of SFAS No. 114 and No. 118. Loans on which the accrual of interest has been discontinued amounted to $42,983 and $144,644 at June 30, 1996 and 1995, respectively. Interest income that would have been recorded under the original terms of such loans would have been $6,447, $6,187 and $932 for the years ended June 30, 1996, 1995 and 1994, respectively. NOTE 5 - LOANS (Continued) Certain directors and executive officers of the Corporation and the Bank (including family members, affiliates, and companies in which they are principal owners) had loans outstanding with the Bank in the ordinary course of business. A summary of the aggregate loans outstanding which exceeded $60,000 to these individuals follows: Year Ending 1996 1995 --------- --------- Balance at beginning of year ............... $ 935,104 $ 871,607 New loans ............................ 86,537 160,300 Payments ............................. (161,029) (96,803) Officers transferred out ............. (18,761) -- --------- --------- Balance at end of year ..................... $ 841,851 $ 935,104 ========= ========= NOTE 6 - PREMISES AND EQUIPMENT - NET A summary of premises and equipment is as follows at June 30: 1996 1995 ---- ---- Land ....................................... $ 529,300 $ 492,123 Bank building and improvements ............. 2,301,045 2,353,656 Furniture and equipment .................... 814,944 709,710 ---------- ---------- 3,645,289 3,555,489 Accumulated depreciation ................... 538,317 468,318 ---------- ---------- $3,106,972 $3,087,171 ========== ========== NOTE 7 - DEPOSITS Deposits at June 30, 1996 and 1995 are summarized as follows: 1996 1995 ---- ---- Amount % Amount % ------ - ------ - Noninterest-bearing .......... 2,338,248 2.57% $ 595,726 .70% Now accounts and MMDAs ....... 3,703,359 4.07 3,534,556 4.15 Passbook and statement savings 16,571,616 18.20 17,135,154 20.12 Certificates of deposit ...... 68,414,849 75.16 63,914,814 75.03 ----------- ------ ----------- ------ $91,028,072 100.00% $85,180,250 100.00% =========== ====== =========== ====== At June 30, 1996, the scheduled maturities of certificates of deposit are as follows by fiscal year: 1997 $50,651,945 1998 8,839,364 1999 5,818,200 2000 2,326,478 2001 and thereafter 778,862 ----------- $68,414,849 =========== As of June 30, 1996 and 1995, the Bank had deposit accounts with balances of $100,000 or more of $11,914,000 and $9,733,000, respectively. NOTE 8 - FEDERAL HOME LOAN BANK BORROWINGS Advances from the Federal Home Loan Bank of Indianapolis, collateralized by mortgage loans and securities under a blanket collateral agreement, consist of the following at June 30:
Rate at Date Due June 30, 1996 1996 1995 -------- ------------- ---- ---- Line of credit; available limit of $3,000,000 Balance, June 30 ...................... 5.99% -- $ 1,422,256 Single-maturity fixed rate advance July 25, 1995 ......................... -- 2,000,000 August 1, 1995 ........................ -- 4,000,000 September 3, 1996 ..................... 5.77 $ 1,000,000 -- December 16, 1996 ..................... 5.44 1,000,000 -- Adjustable rate advance August 5, 1996 - reprices quarterly ... 5.47 4,000,000 -- October 30, 1997 - reprices monthly ... 5.61 2,000,000 2,000,000 October 30, 1998 - reprices monthly ... 5.61 4,000,000 4,000,000 October 30, 1999 - reprices monthly ... 5.61 5,000,000 5,000,000 August 26, 2001 - reprices monthly .... 5.77 2,000,000 6,500,000 ----------- ----------- $19,000,000 $24,922,256 =========== ===========
Maturities of borrowings outstanding at June 30, 1996 are as follows for the next 5 fiscal years: 1997 $ 6,000,000 1998 2,000,000 1999 4,000,000 2000 5,000,000 2001 and thereafter 2,000,000 ------------ $ 19,000,000 ============ During 1996, the Company prepaid $4,500,000 of the advance due August 26, 2001 without penalty, as permitted under the terms of the FHLB advance agreement. Prepayment of certain remaining advances is permitted only upon the Company's termination of its FHLB membership, while others are subject to prepayment penalties under the provisions and conditions of the credit policy of the FHLB. NOTE 9 - FEDERAL INCOME TAXES The provision for federal income taxes for the years ended June 30, 1996, 1995 and 1994 consists of the following: 1996 1995 1994 ---- ---- ---- Current income tax expense ........ $496,158 $358,085 $332,948 Deferred income tax expense ....... 126,242 8,393 3,921 -------- -------- -------- $622,400 $366,478 $336,869 ======== ======== ======== Deferred tax assets and liabilities consist of the following: 1996 1995 ---- ---- Deferred tax assets: Loan fees ...................................... $ 7,021 $ 24,005 Capital loss ................................... -- 28,931 Unrealized loss on securities available for sale 106,834 14,062 Loans marked-to-market ......................... -- 15,723 Accrued expenses ............................... 17,211 13,703 Management Recognition Plan .................... 33,701 -- Other .......................................... 621 4,588 --------- --------- 165,388 101,012 Deferred tax liabilities Bad debt allowance ............................. 209,164 208,207 FHLB stock dividend ............................ 49,116 49,116 Loans marked-to-market ......................... 12,674 -- Fixed assets ................................... 71,677 35,979 Mortgage servicing rights ...................... 48,517 -- --------- --------- 391,148 293,302 Net deferred tax liability ........................... $(225,760) $(192,290) ========= ========= No valuation allowance was provided on deferred tax assets. NOTE 9 - FEDERAL INCOME TAXES (Continued) The provision for federal income taxes differs from that computed at the statutory corporate tax rate as follows: Years ended June 30, 1996 1995 1994 ---- ---- ---- Statutory rate ................. 34% 34% 34% Tax expense at statutory rate .. $ 622,502 $ 368,047 $ 345,772 Tax exempt interest ............ (639) (2,360) (3,979) Other .......................... 537 791 (4,924) --------- --------- --------- $ 622,400 $ 366,478 $ 336,869 ========= ========= ========= Effective rate ................. 34% 34% 33% Differences in the methods of determining the deduction for bad debts for tax and financial statement purposes after 1988 are included in deferred taxes. For years prior to 1988, the Bank had determined taxable income after deducting a provision for bad debts in excess of such provisions recorded in the financial statements. Accordingly, retained earnings at June 30, 1996 and 1995 includes approximately $3,364,000 on which no provision for federal income taxes has been made. The amount of unrecorded deferred taxes is $1,144,000. If this portion of retained earnings is used for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unused lines of credit and commitments to make loans and fund loans in process. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements. The contract amounts of these financial instruments are as follows at June 30: 1996 1995 ---- ---- Commitments to make loans $6,690,000 $7,368,000 Unused lines of credit 3,987,000 3,909,000 Loans in process 5,828,000 2,290,000 Approximately 77% and 92% of commitments to make loans and to fund loans in process were made at fixed rates as of June 30, 1996 and 1995, respectively. Rate ranges for these fixed rate commitments were 7.0% to 10.75% and 6.75% to 9.5% as of June 30, 1996 and 1995, respectively. Lines of credit are issued at current market rates. The Company does not anticipate any losses as a result of these commitments. Collateral obtained upon exercise of the commitment is determined using the Bank's credit evaluation of the borrower, and may include real estate, business assets and other items. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. The Company and the Bank are subject to certain legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position of the Company. The Company has entered into employment agreements with three of its officers. Under the terms of those agreements, certain events leading to separation from the Company could result in cash payments aggregating approximately $527,000. The deposits of savings associations such as Bank West are presently insured by the Savings Association Insurance Fund (SAIF) which is administered by the FDIC. A recapitalization plan for the SAIF under consideration by Congress provides for a special assessment of up to .90% of deposits to be imposed on all SAIF insured institutions to enable the SAIF to achieve its required level of reserves. If the proposed assessment of .90% was effected based on deposits as of March 31, 1995 (as proposed), the special assessment would decrease net income and shareholders' equity by approximately $500,000, net of taxes. NOTE 11 - EMPLOYEE PENSION PLANS The Company participates in the Financial Institutions Retirement Fund, a multi-employer defined benefit pension plan. Substantially all employees are eligible for participation in the Plan. The benefits are based on each employee's years of service and on the average of the highest five consecutive annual salaries prior to retirement. The benefits are reduced by a specified percentage of the employee's social security benefit. An employee becomes fully vested upon completion of five years of qualifying service. The plan is currently overfunded and did not require contributions or charges to income for the years ended June 30, 1996, 1995 and 1994. Specific plan assets and accumulated benefit information for the Bank's portion of the Fund is not available. Under the Employee Retirement Income Security Act (ERISA), a contributor to a multi-employer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The Company has no present intention to withdraw from the Fund. The Company established a qualified 401(k) plan effective January 1, 1996, covering substantially all employees. Employees who are 18 years and older and who have completed 1,000 hours of service in a 12 consecutive-month period are eligible. Employees may elect to contribute to the plan from 1% to 15% of their salary subject to statutory limitations. The Company will make a matching contribution equal to 25% of the first 3% of employee contributions. Although not required, the Company also has the option to make an additional, nonelective contribution to the plan. Beginning after 2 years of service, employees become vested in the Company's contributions 20% per year, with 100% vesting occurring after 6 years of service. The Company's contribution for 1996 was $3,000. NOTE 12 - STOCK-BASED COMPENSATION PLANS As part of the conversion transaction, the Company established an employee stock ownership plan ("ESOP") for the benefit of substantially all employees. The ESOP borrowed $1,296,048 from the Company and used those funds to acquire 162,006 shares of the Company's stock at $8 per share. Shares issued to the ESOP are committed to be released based on the number of unallocated shares held immediately before release for the current plan year multiplied by a fraction. The numerator of the fraction is the amount of quarterly principal and interest paid. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future periods. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's contributions to the ESOP and earnings on ESOP assets. Principal and interest payments are scheduled to occur in quarterly amounts of $45,326 over a ten-year period. An employee becomes fully vested upon completion of seven years of qualifying services. Upon withdrawal from the plan, participants are entitled to a distribution in cash or Company stock, or both, at the discretion of the Company. However, participants may demand that their entire distribution be in the form of Company stock. During 1996, 16,200 shares of stock with an average fair value of $10.14 per share were committed to be released. ESOP compensation expense for the years ended June 30, 1996 and 1995 were $164,279 and $37,463, respectively. Shares held by the ESOP at June 30 are as follows: NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued) 1996 1995 ---- ---- Allocated to participants 20,250 4,050 Unallocated 141,756 157,956 ---------- ---------- Total ESOP shares 162,006 162,006 ========== ========== Fair value of unallocated shares $1,488,438 $1,461,093 ========== ========== Employee and director Stock Option Plans (SOPs) and officer and director Management Recognition Plans (MRPs) were authorized by the shareholders at the October 25, 1995 annual meeting. The MRPs are restricted stock award plans. The employee stock option plan and the officers' MRP are administered by a committee of directors of the Company, while grants under the directors' stock option plan and the directors' MRP are pursuant to formulas set forth in the plans. Total shares made available under the SOPs and MRPs are 231,437 and 92,575, respectively. The Committee has granted under the employee SOP options to purchase 24,000 shares of common stock at an exercise price of $9.9375 per share, which was the market price of the Company's stock on the date of the grant. At June 30, 1996, there were 138,006 shares reserved for future grants. Options to purchase 52,073 shares were granted to directors under the directors' SOP at an exercise price of $10.4375 per share which was the market price of the Company's stock on the date of the grant. At June 30, 1996, there were 17,358 shares reserved for future grants. During fiscal 1996, no options were exercised or canceled. SOP options vest in five equal annual installments from the date of grant and expire ten years from the date of grant. No compensation expense is being recognized in connection with the issuance of the options. The Committee has awarded 49,250 shares of common stock under the officers' MRP and 24,992 shares of common stock under the directors' MRP. During fiscal 1996, $99,120 was charged to compensation expense for the MRP. NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory or discetionary actions by regulators that, if undertaken, could have an effect on the Bank's financial statements. The Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items under regulatory accounting practices. The Bank's capital is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Regulation requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of core and tangible capital (as defined) to total adjusted assets (as defined). Management believes, as of June 30, 1996, that the Bank meets capital adequacy requirements. The most recent notification from the Office of Thrift Supervision categorizes the Bank as well capitalized under the regulatory framework for prompt corrective action. NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) The Bank's actual capital amounts and ratios are presented below:
Actual Minimum Requirements Excess Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of June 30, 1996 Risk-Based Capital (to Risk Weighted Assets) $20,336,000 31.4% $ 5,189,360 8.0% $15,146,640 23.4% Core Capital (to Total Adjusted Assets) 20,170,000 15.4 3,941,250 3.0 16,228,750 12.4 Tangible Capital (To Total Adjusted Assets) 20,170,000 15.4 1,970,760 1.5 18,199,240 13.9 As of June 30, 1995 Risk-Based Capital (to Risk Weighted Assets) 19,278,506 31.8 4,851,680 8.0 14,426,826 23.8 Core Capital (to Total Adjusted Assets) 19,170,506 14.5 3,959,580 3.0 15,210,926 11.5 Tangible Capital (to Total Adjusted Assets) 19,170,506 14.5 1,979,790 1.5 17,190,716 13.0
FIRREA also includes restrictions on loans to one borrower, on certain types of investments and loans, on loans to officers, directors and principal shareholders, on brokered deposits and on transactions with affiliates. The Qualified Thrift Lender (QTL) test requires 65% of assets to be maintained in housing-related finance and other specified areas. If the QTL test is not met, limits are placed on growth, branching, new investments, FHLB advances, and dividends, or the institution must convert to a commercial bank charter. Management believes that the QTL test has been met. Under OTS regulations, limitations have been imposed on all "capital distributions" by savings institutions, including cash dividends. The regulation establishes a three-tiered system of restrictions, with the greatest flexibility afforded to thrifts which are both well-capitalized and given favorable qualitative examination ratings by the OTS. For example, a thrift which is given one of the two highest examination ratings and has "capital" equal to its fully phased-in regulatory capital requirements (a "tier 1 institution") could, after prior notice but without the prior approval of the OTS, make capital distributions in any year that would reduce by up to one-half the amount of its capital which exceeds its most stringent capital requirement as of the beginning of the calendar year plus net income to date for the six months ended June 30, 1996. Other thrifts would be subject to more stringent procedural and substantive requirements, the most restrictive being prior OTS approval of any capital distribution. The Bank is a tier one institution. The Bank has established a liquidation account with an initial balance of $11,150,000, which is equal to its total net worth as of the date of the latest balance sheet appearing in the final conversion prospectus. The liquidation 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) account is maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion. The liquidation account is reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligi NOTE ble account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Bank may not pay dividends that would reduce shareholders' equity below the required liquidation account balance. Under the most restrictive of the dividend limitations described above, during the fiscal year ending June 30, 1997, the Bank may pay dividends to the holding company equal to $7,573,000 plus fiscal 1997 year-to-date income. NOTE 14 - STOCK REPURCHASE PROGRAMS During fiscal 1996, the Company repurchased 207,375 shares of its common stock after receiving regulatory approval for this amount. The shares were repurchased at an average price of $9.88 and remain available for general corporate purposes, including issuance in connection with stock-based compensation plans. On July 29, 1996, the Board of Directors also approved a repurchase of an additional 218,100 shares, or 10% of its outstanding common stock. The repurchase was approved by the OTS in August of 1996. NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of Bank West Financial Corporation is as follows at June 30:
CONDENSED BALANCE SHEET 1996 1995 ---- ---- ASSETS Cash and cash equivalents ...................... $ 2,222,329 $ 1,021,842 Interest-bearing time deposits ................. 198,000 1,287,000 Trading securities ............................. 708,438 -- Securities available for sale .................. 2,473,199 5,384,102 Loan receivable from Employee Stock Ownership Plan ............................... 1,178,792 1,273,403 Investment in subsidiary bank .................. 19,978,259 19,138,386 Accrued interest receivable .................... 19,733 84,090 Other assets ................................... 35,629 57,513 ----------- ----------- Total assets ............................. $26,814,379 $28,246,336 =========== =========== LIABILITIES Other liabilities .............................. $ 3,933 $ 75,242 SHAREHOLDERS' EQUITY ........................... 26,810,446 28,171,094 ----------- ----------- Total liabilities and shareholders' equity $26,814,379 $28,246,336 =========== ===========
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF INCOME, for the period: March 30, 1995 Year ended through June 30, 1996 June 30, 1995 ------------- ------------- Interest and dividend income Securities .................................. $ 249,350 $ 97,074 Loan to Employee Stock Ownership Plan ....... 86,691 22,681 Other interest-bearing deposits ............. 164,328 42,358 Dividends ................................... 3,772 -- ---------- ---------- Total interest and dividend income .... 504,141 162,113 Other income Gain on sale of investments ................. 358,740 18,922 Operating expenses ................................ 90,521 10,635 ---------- ---------- Income before federal income taxes and equity in undistributed earnings of subsidiary bank ....... 772,360 170,400 Federal income tax expense ........................ 262,500 57,936 ---------- ---------- Income before equity in undistributed earnings of subsidiary bank ..................... 509,860 112,464 Equity in undistributed earnings of subsidiary bank 698,628 96,442 ---------- ---------- Net income ........................................ $1,208,488 $ 208,906 ========== ==========
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF CASH FLOWS, for the period: March 30, 1995 Year ended through June 30, 1996 June 30, 1995 ------------- ------------- Cash flows from operating activities Net income ............................................... $ 1,208,488 $ 208,906 Adjustments to reconcile net income to cash provided by operations Equity in undistributed earnings of subsidiary bank (698,628) (96,442) Purchase of trading securities ..................... (2,224,537) -- Proceeds from sale of trading securities ........... 1,882,564 -- Gain on sales of securities ........................ (358,740) (18,922) Net accretion of securities discounts .............. (1,411) (390) Change in Interest receivable .......................... 64,357 (84,090) Other assets ................................. 21,884 (57,513) Other liabilities ............................ (55,739) 72,757 ------------ ------------ Net cash provided by operating activities (161,762) 24,306 Cash flows from investing activities Purchases of securities available for sale ............... (2,000,000) (6,527,180) Proceeds from sale of securities available for sale ...... 1,091,200 1,169,700 Proceeds from maturity and call of securities available for sale .......................... 3,782,408 -- Principal reduction on ESOP note receivable .............. 94,611 22,645 Contribution to subsidiary bank .......................... (42,527) -- (Increase) decrease in interest-bearing time deposits .... 1,089,000 (1,287,000) Investment in subsidiary bank ............................ -- (8,915,419) ------------ ------------ Net cash used in investing activities .............. 4,014,692 (15,537,254) Cash flows from financing activities Proceeds from issuance of common stock, net of conversion costs ................................ -- 16,534,790 Dividends paid on common stock ........................... (603,382) -- Repurchase of common stock ............................... (2,049,061) -- ------------ ------------ Net cash from financing activities ................. (2,652,443) 16,534,790 ------------ ------------ Net change in cash and cash equivalents ........................ 1,200,487 1,021,842 Cash and cash equivalents at beginning of period ............... 1,021,842 -- ------------ ------------ Cash and cash equivalents at end of period ..................... $ 2,222,329 $ 1,021,842 ============ ============
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Cash and cash equivalents For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Interest-bearing time deposits Fair values for these instruments are estimated by discounting cash flows using rates currently offered for deposits of similar remaining maturities. Securities Fair values for securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans The fair value of fixed and variable rate loans is principally estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, and using prepayment assumptions provided by the Office of Thrift Supervision, which management believes are reasonable. The carrying value of the allowance for loan losses is a reasonable estimate of fair value. Federal Home Loan Bank stock The carrying amount of this stock is a reasonable estimate of fair value. Accrued interest receivable and payable For these items, the carrying amount is a reasonable estimate of fair value. Deposit liabilities The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank borrowings The fair values for these advances are determined by discounting cash flows using rates currently offered for advances of similar remaining maturities. NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Advance payments by borrowers for taxes and insurance For these items, the carrying amount is a reasonable estimate of fair value. Off-balance sheet activities The fair value of commitments is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments was immaterial at the reporting dates presented. The estimated fair values of the Company's financial instruments are as follows:
1996 Carrying Fair Value Value ----- ----- Financial assets Cash and cash equivalents $ 6,694,089 $ 6,694,089 Interest-bearing time deposits 298,000 298,000 Trading securities 708,438 708,438 Securities available for sale 22,779,280 22,779,280 Securities held to maturity 2,004,288 2,006,000 Loans, net 95,737,191 96,186,000 Loans held for sale 4,297,092 4,346,000 Federal Home Loan Bank stock 1,475,000 1,475,000 Accrued interest receivable 632,043 632,043 Financial liabilities Deposits 91,028,072 90,940,900 Federal Home Loan Bank borrowings 19,000,000 19,000,000 Accrued interest payable 156,946 156,946 Advance payments by borrowers for taxes and insurance 459,391 459,391
DIRECTORS EXECUTIVE OFFICERS George A. Jackoboice, Chairman of the Board; Paul W. Sydloski, President, President and 25% owner of Monarch Chief Executive Officer Hydraulics, Inc. Kevin A. Twardy, Vice President, Carl A. Rossi, Treasurer; President of Chief Financial Officer Kentwater Land Co. James A. Koessel, Vice President, Paul W. Sydloski, President, Chief Executive Officer Chief Lending Officer Jacob Haisma, Owner of Jacob Haisma Builders, Inc. Laurie S. Adams, Director of Thomas D. DeYoung, Owner and President Retail Banking of DeYoung and Associates Robert J. Stephan, President, Chief Executive Officer and 91% owner of BeneComp, Inc. Richard L. Bishop, President, Treasurer and 50% TRANSFER AGENT owner of Jurgens & Holtvluwer Men's Store, Inc. Registrar and Transfer Company John H. Zwarensteyn, President, Chief Executive 10 Commerce Drive Officer and owner of Gemini Corporation Cranford, N.J. 07016 LEGAL COUNSEL INDEPENDENT AUDITORS Elias, Matz, Tiernan and Herrick L.L.P. Crowe, Chizek & Company Suite 1200 400 Riverfront Plaza Building 734 15th Street, N.W. 55 Campau, N.W. Washington, D.C. 20005 Grand Rapids, MI 49502
CORPORATE HEADQUARTERS 2185 Three Mile Road, N.W. Grand Rapids, MI 49544 STOCK INFORMATION Bank West Financial Corporation is traded on the Nasdaq National Market under the symbol of "BWFC." Total shares outstanding as of June 30, 1996 were 2,199,575. The high and low bid quotations for the common stock as reported on the Nasdaq, as well as dividends declared per share, were as follows: Quarter Ended High Low Dividends June 30, 1995 $9.750 $8.500 $ -- September 30, 1995 10.250 8.750 .07 December 31, 1995 11.000 9.625 .07 March 31, 1996 10.500 9.625 .07 June 30, 1996 11.125 8.875 .07 The information set forth in the table above was provided by The Nasdaq Stock Market. Such information reflects interdealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of September 4, 1996, the Company had approximately 670 shareholders of record and 1,981,475 shares of common stock outstanding. INVESTOR INFORMATION A copy of Bank West Financial Corporation's Annual Report on Form 10-K and a list of the exhibits thereto, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to Kevin Twardy, Chief Financial Officer, Bank West Financial Corporation, 2185 Three Mile Road, N.W., Grand Rapids, MI 49544, or by calling (616) 785-3400. EX-27 7
9 12-MOS JUN-30-1996 JUN-30-1996 1,571,662 5,122,427 0 708,438 22,779,280 2,004,288 2,006,000 95,737,191 165,862 137,982,306 91,028,072 6,000,000 1,143,788 13,000,000 0 0 21,996 26,788,450 137,982,306 7,901,948 1,739,792 446,263 10,088,003 4,605,347 5,930,079 4,157,924 60,000 376,994 3,469,048 1,830,888 1,208,488 0 0 1,208,488 .57 .57 7.52 42,983 0 0 0 108,000 (2,138) 0 165,862 0 0 165,862
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