-----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, CAczjwPneNSQUbLXtfswnYZfTvgeYqpsYEvsLJ45LobjUhHtQcxZ95h1TThjM83i UdGz7bz5SgoWqAvF4eZNRg== 0000914317-98-000594.txt : 19980928 0000914317-98-000594.hdr.sgml : 19980928 ACCESSION NUMBER: 0000914317-98-000594 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 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: SEC FILE NUMBER: 000-25666 FILM NUMBER: 98715281 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ NO FEE REQUIRED] For the fiscal year ended June 30, 1998 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: 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 $11.00 per share closing price of the Registrant's common stock as of September 21, 1998, the aggregate market value of the 1,919,804 shares of the Registrant's common stock deemed to be held by non-affiliates of the Registrant was $21.1 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 21, 1998: 2,623,629 DOCUMENTS INCORPORATED BY REFERENCE Listed below are the 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, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K; and (2) portions of the definitive proxy statement for the 1998 Annual Meeting of Stockholders are incorporated into Part III, Items 10 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 ("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 Michigan-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, and in December 1997 the Bank converted to a Michigan-chartered bank. Bank West conducts business from three offices located in Grand Rapids, Michigan. At June 30, 1998, the Company had $181.5 million of total assets, $158.2 million of total liabilities, including $120.0 million of deposits, and $23.3 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. At June 30, 1998, the Bank's ratio of Tier 1 capital to average total assets was 11.3%, its ratio of Tier 1 capital to risk-weighted assets was 20.6% and its ratio of total capital to risk-weighted assets was 20.9%. See "Regulation - The Bank - Regulatory Capital Requirements." Beginning in fiscal 1995, the Bank expanded its loan products by offering commercial loans and various types of consumer loans. At June 30, 1998, there were $29.4 million in loans receivable outstanding for these loan products compared to $16.5 million and $7.0 million outstanding for such loan products at June 30, 1997 and 1996, respectively. Of the $29.4 million at June 30, 1998, $18.0 million consisted of home equity lines of credit and second mortgages. The Bank expects its commercial and consumer loan products will improve its net interest margin and make the Bank more competitive in the marketplace. The Company's total nonperforming assets, which consist of $841,000 of non-accruing loans 90 days or more delinquent and $192,000 of net real estate owned, totalled $1,033,000 or .87% of the net loan portfolio at June 30, 1998. At the end of each of the last five fiscal years, the Company's total nonperforming assets did not exceed fiscal 1998 levels. At June 30, 1998, the Company's allowance for loan losses amounted to $290,000, representing .21% of the total loan portfolio and .34% of total nonperforming loans at such date. See "Asset Quality." The Bank is subject to examination and comprehensive regulation by the Commissioner of the Financial Institutions Bureau of the State of Michigan ("Commissioner" or "Financial Institutions Bureau"), 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 also is subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "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. This Form 10-K includes statements that may constitute forward-looking statements, usually containing the words "believe," "estimate," "project," "expect," "intend" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which Bank West operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which Bank West has no control); and other risks detailed in this Form 10-K and in the Company's other Securities and Exchange Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. 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 river. 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. Grand Rapids is part of the Grand Rapids Metropolitan Statistical Area with a population of 1,024,000 people as of 1997, a 48.8% increase from the 1990 census. Per capita income has increased 10.3% from $18,000 in 1990 to $19,851 in 1997. 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. Major employers in the area include Meijer, Inc., Steelcase, General Motors Corp., Amway Corporation and Spectrum Health. Lending Activities Loan Portfolio Composition. At June 30, 1998, the Company's total loan portfolio, including loans held for sale but before net items, amounted to $135.4 million. The net loan portfolio, excluding loans held for sale, amounted to $118.9 million at June 30, 1998, representing approximately 65.5% of the Company's $181.5 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, 1998, one- to four-family residential loans amounted to $80.6 million or 59.5% of the total loan portfolio, including loans held for sale. To a lesser extent, the Bank originates construction and land development loans, home equity lines of credit, second mortgages, commercial and consumer loans. Construction and land development loans amounted to $25.4 million or 18.8% of the Bank's total loan portfolio, home equity lines of credit amounted to $9.9 million or 7.3% of the total loan portfolio, and second mortgages amounted to $8.1 million or 6.0%, of the total loan portfolio, including loans held for sale. At June 30, 1998, commercial mortgages amounted to $6.5 million or 4.8%, commercial non-mortgages amounted to $3.3 million or 2.4%, and consumer loans amounted to $1.7 million or 1.2%, of the total loan portfolio, including loans held for sale. The following table sets forth the composition of Bank West's loan portfolio by type of loan at the dates indicated.
June 30, ---------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % Amount % -------- ----- -------- ----- ------- ----- ------- ----- ------ ----- (Dollars In Thousands) Real estate loans:(1) One- to four-family residential $80,554 59.5% $83,065 68.6% $85,034 80.2% $92,673 91.7% $87,177 91.1% Construction and land development 25,407 18.8 21,560 17.8 14,074 13.3 6,146 6.1 7,412 7.8 Commercial mortgages 6,485 4.8 2,764 2.3 1,194 1.1 90 .1 159 .2 Home equity lines of credit 9,877 7.3 6,371 5.2 2,214 2.1 1453 1.4 545 .5 Second mortgages 8,148 6.0 4,253 3.5 1,927 1.8 683 0.7 363 .4 Consumer loans 1,666 1.2 1,081 .9 622 0.6 30 -- -- -- Commercial non-mortgage 3,253 2.4 2,032 1.7 1,010 0.9 -- -- -- -- -------- ----- -------- ----- ------- ----- ------- ----- ------ ----- Total loans 135,390 100.0% 121,126 100.0% 106,075 100.0% 101,075 100.0% 95,656 100.0% ===== ===== ===== ===== ===== Less: Loans held for sale 8,157 2,231 4,297 2,746 1,282 Loans in process 8,248 7,169 5,828 2,290 2,888 Deferred fees and discounts (211) (30) 47 95 159 Allowance for loan losses 290 226 166 108 88 -------- -------- ------- -------- Net loans $118,906 $111,530 $95,737 $95,836 $91,239 ======= ======= ====== ======== ======
- ------------------------- (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, 1998. 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 Construction Four-Family and Land Commercial Home Second Residential Development Mortgages Equity Mortgages ----------- ----------- --------- ------ --------- (In Thousands) Amounts due after June 30, 1998 in: One year or less $ 675 $ 14,346 $ 2,226 $ 12 $ 422 After one year through two years 374 99 433 -- 8 After two years through three years 12,027 3,902 707 375 57 After three years through five years 2,789 410 3,119 960 1,341 After five years through ten years 12,366 4,422 -- 8,530 2,825 After ten years through fifteen years 10,616 -- -- -- 2,771 After fifteen years 41,707 2,228 -- -- 724 -------- -------- -------- -------- -------- Total(1) $ 80,554 $ 25,407 $ 6,485 $ 9,877 $ 8,148 ======== ======== ======== ======== ======== Commercial Consumer Non-Mortgage Total -------- ------------ ----- Amounts due after June 30, 1998 in: One year or less $ 59 $ 2,076 $ 19,816 After one year through two years 112 127 1,153 After two years through three years 380 368 17,816 After three years through five years 1,110 682 10,411 After five years through ten years 5 -- 28,148 After ten years through fifteen years -- -- 13,387 After fifteen years -- -- 44,659 -------- -------- -------- Total(1) $ 1,666 $ 3,253 $135,390 ======== ======== ========
- ------------------------------------ (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, 1998, 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 $47,310 $32,569 $ 79,879 Construction and land development 10,135 926 11,061 Commercial mortgages 2,294 1,965 4,259 Home equity -- 9,865 9,865 Second mortgages 7,726 -- 7,726 Consumer 1,607 -- 1,607 Commercial non-mortgage 522 655 1,177 ------- ------- -------- Total $69,594 $45,980 $115,574 ======= ======= ========
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 individuals granted loan approval authority if the loan does not exceed $275,000. If the loan is to be held in the portfolio and exceeds $275,000 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. The Bank has entered into agreements with the Federal Home Loan Mortgage Corporation ("FHLMC") and several private investors. The Bank sells loans with servicing retained to FHLMC on a mandatory commitment basis. Each private investor has agreed to purchase loans, together with servicing thereof, from the Bank on a loan-by-loan best efforts basis, provided that the investor 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 that 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, 1998, 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 first and second mortgage 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 such loan meets its underwriting standards and, for first mortgages, 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, then 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 $33.1 million of loans in the year ended June 30, 1998. Of the loans purchased in fiscal 1998, $14.8 million consisted of fixed-rate, one- to four-family residential loans, $448,000 consisted of mortgage loans which provide for periodic interest rate adjustments ("ARMs"), $5.5 million consisted of balloon mortgages, $8.9 million consisted of construction loans, part of which were included in loans in process at June 30, 1998, $2.8 million consisted of fixed-rate second mortgages and $617,000 consisted of variable-rate home equity loans. Most of the one- to four-family loans purchased by the Bank were for resale, whereas the purchased construction, home equity and second mortgage loans were for portfolio. The Bank sold $45.0 million, $32.9 million and $45.8 million of loans in fiscal 1998, 1997 and 1996, respectively, representing 39.1%, 42.5% and 66.2%, respectively, of total loans originated and purchased in such periods. Loan originations and purchases were at record levels in fiscal 1998, as greater emphasis was placed on originating residential construction, commercial and various types of consumer loans for portfolio instead of concentrating primarily on residential mortgage banking activities. In addition, lower prevailing market interest rates during fiscal 1998 compared to the prior fiscal year increased the dollar amount of refinances. Total loan originations and purchases were $115.0 million in fiscal 1998 compared to $77.4 million and $69.2 million in fiscal 1997 and 1996, respectively. At June 30, 1998, Bank West was servicing $33.2 million of loans for the FHLMC. 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, ------------------------------------ 1998 1997 1996 --------- ------- -------- (In Thousands) Loan originations: One- to four-family residential: Adjustable-rate $ 1,054 $ 9,290 $ 6,201 Fixed-rate 44,655 14,890 26,524 Construction: Adjustable-rate 9,565 14,758 7,693 Fixed-rate 8,737 1,470 4,078 Commercial mortgages 5,433 2,002 1,212 Consumer loans 2,078 1,006 768 Home equity loans 3,383 5,565 1,039 Second mortgages 5,043 4,194 1,645 Commercial non-mortgage 1,919 2,315 1,139 --------- ------- -------- Total loan originations 81,867 55,490 50,299 Loans purchased: Second mortgages 2,776 -- -- Home equity loans 617 -- -- One- to four-family residential 29,717 21,892 18,919 --------- ------- -------- Total loans originated and purchased 114,977 77,382 69,218 --------- ------- -------- Sales and loan principal repayments: Carrying value of loans sold 44,320 32,416 45,181 Loan principal repayments 56,393 29,915 19,037 --------- ------- -------- Total loans sold and principal repayments 100,713 62,331 64,218 --------- ------- -------- Increase (decrease) due to other items, net (1) (6,888) 742 (5,099) --------- ------- -------- Net increase (decrease) in loan portfolio, net $ 7,376 $15,793 $ (99) ========= ======= ========
- ---------------------- (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 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 loan-to-value ("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 Michigan-chartered savings institutions, such as Bank West, are permitted 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, 1998, 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, 1998, $80.6 million or 59.5% 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 LTV 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 LTV ratio to 97% 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% LTV 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. At June 30, 1998, one- to four-family residential ARMs represented $32.6 million or 24.1% 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-rate 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 and do not produce negative amortization. Bank West also offers 3, 5, 7 and 10 year balloon mortgages. During the past fiscal year, the Bank experienced a higher dollar amount of ARM prepayments and refinancings than anticipated. As a result, in fiscal 1998 the Bank instituted a 1% prepayment penalty on newly originated or purchased ARMs for portfolio. ARM loans originated or purchased for sale do not contain such prepayment penalties. 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 interest rates prevailing in recent periods, the market demand for adjustable-rate loans has decreased as consumer preference for fixed-rate loans has increased. As a result, for fiscal 1998, ARMs represented only 2.3% of total one- to four-family residential loan originations as compared to 38.4% and 18.9% for fiscal 1997 and 1996, respectively. To offset ARM prepayments, the Bank originated various types of balloon mortgages for portfolio. Construction and Land Development Loans. The Bank originates and purchases loans to finance the construction of one- to four-family dwellings. It also originates loans for acquisition and development of unimproved property to be used for residential purposes. 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 1998, 1997 and 1996, construction and land development loans amounted to $25.4 million, $21.6 million and $14.1 million, respectively, or 18.8%, 17.8% and 13.3% of the total loan portfolio (including loans held for sale), respectively. The Bank purchased $8.9 million of construction loans in fiscal 1998, a portion of which were included in loans in process at June 30, 1998. The Bank expects additional growth in its construction loan portfolio in fiscal 1999. Construction loans extended pursuant to a builder's line of credit are for up to the Bank's regulatory lending limit 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 not to exceed the Bank's regulatory lending limit. 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, unless an exception is made based upon the financial stability of the builder. 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 up to prime plus 1.5%. The minimum credit line is $1,000, and the maximum line of credit is equal to (a) either 95% 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, 1998, $9.9 million or 7.3% of the Bank's total loan portfolio, including loans held for sale but before net items, consisted of home equity loans. During fiscal 1998, the Bank purchased $617,000 of home equity lines of credit from various correspondent financial institutions. The Bank had unused commitments of $7.1million of home equity lines of credit at June 30, 1998. Management expects additional growth in its home equity lines of credit in fiscal 1999. Second Mortgages. At June 30, 1998, $8.1 million or 6.0% 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. During fiscal 1998, the Bank purchased $2.8 million of second mortgages from various correspondent financial institutions. Management expects additional growth in its second mortgage loan portfolio in fiscal 1999. Commercial Lending. Bank West's commercial mortgage and commercial non-mortgage loans amounted to $6.5 million and $3.3 million, respectively, representing 4.8% and 2.4% of the total loan portfolio, including loans held for sale but before net items at June 30, 1998. The origination of commercial mortgages significantly increased to $5.4 million in fiscal 1998 from $2.0 million in fiscal 1997, as the Bank placed greater emphasis on these loans. Management expects additional growth both in commercial mortgage and non-mortgage loans in fiscal 1999. Commercial real estate lending and commercial non-mortgage lending are 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 rental or business properties or for the operation of businesses. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Bank generally attempts to mitigate the risks associated with commercial lending by, among other things, lending primarily in its market area and using low LTV ratios in the underwriting process. Consumer Lending. At June 30, 1998, Bank West's consumer loan portfolio amounted to $1.6 million or 1.2% of the total loan portfolio, including loans held for sale but before net items. The consumer loan portfolio consists of automobile, boat, home improvement and unsecured loans. The origination of consumer loans increased to $2.1 million in fiscal 1998 from $1.0 million in fiscal 1997, as the Bank placed greater emphasis on these loans. Management expects additional growth in its consumer loan portfolio during fiscal 1999. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In many cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of its depreciated value or improper repair and maintenance of the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans and that consumer loans are important to its efforts to increase rate sensitivity, shorten the average maturity of its loan portfolio and provide a full range of services to its customers. Loan Fees and Servicing Income. In addition to interest earned on loans, Bank West receives income through the servicing of loans sold 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 against interest income over the contractual life of the related loans as an adjustment to the yield of such loans. At June 30, 1998, Bank West had approximately $211,000 of net loan costs 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, 1998, in dollar amounts and as a percentage of the Company's total loan portfolio. 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, 1998 ----------------------------------------------------------------------------------- 30-59 60-89 90 or More Days Days Overdue Days Overdue Overdue ----------------------- ------------------------- ---------------------- Percent Percent Percent of Total of Total of Total Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- (Dollars in Thousands) One- to four-family residential real estate loans $1,135 .84% $ -- --% $ 682 .50% Second mortgages 88 .06 -- -- 127 .09 Consumer loans 34 .03 -- -- -- -- Commercial loans 245 .18 -- -- 32 .03
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. In most cases defaults are cured promptly. 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, 1998 and at the end of each of the prior four fiscal years, Bank West had no loans to facilitate 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, 1998, the Bank had $841,000 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 and real estate owned. At such dates, there were no troubled debt restructurings.
June 30, ------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Total nonperforming assets: Non-accruing loans 90 days or more delinquent $ 841 $417 $ 43 $ 145 $ 35 Real estate owned 192 20 -- -- -- ------ ---- ----- ----- ------ Total $1,033 $437 $ 43 $ 145 $ 35 ====== ==== ===== ===== ====== Total nonperforming loans as a percentage of loans, net .71% .37% .04% .15% .04% ====== ==== ===== ===== ====== Total nonperforming assets as a percentage of total assets .57% .28% .03% .10% .03% ====== ==== ===== ===== ======
The $1.0 million nonperforming assets at June 30, 1998 consisted of primarily one- to four-family residential loans and construction mortgage loans. The increase in nonperforming assets at June 30, 1998 was attributable to spec construction mortgage loans. However, due to the Bank's low LTV ratio required for each of these loans, no portion of the allowance for loan losses was allocated to any specific loans at June 30, 1998. The Bank's total classified assets at June 30, 1998 amounted to $1.0 million, which was classified as substandard. At June 30, 1998, 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, 1998, Bank West's allowance for loan losses amounted to $290,000 or .21% 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 and land development loans, home equity lines of credit, second mortgage loans, commercial mortgage and non-mortgage 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 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 Year Ended June 30, --------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------- (Dollars in Thousands) Total loans outstanding(1) $135,390 $121,126 $106,075 $101,075 $95,656 ======== ======== ======== ======== ======= Allowance for loan losses, beginning of period $ 226 $ 166 $ 108 $ 88 $ 63 Provision for loan losses 81 60 60 20 25 Charge-offs, net of recoveries(2) 17 2 -- -- -- -------- -------- -------- -------- ------- Allowance for loan losses, end of period $ 290 $ 226 $ 166 $ 108 $ 88 ======== ======== ======== ======== ======= Allowance for loan losses as a percent of total loans outstanding .21 % .19% .16% .11% .09% ======== ======== ======== ======== ======= One- to four-family residential loans as a percent of total loans outstanding 59.5% 68.6% 80.2% 91.7% 91.1% ======== ======== ======== ======== =======
- --------------------------- (1) Includes loans held for sale. (2) Of the $17,000 in charge-offs in fiscal 1998, $13,000 related to construction loans and $4,000 related to consumer loans. The $2,000 in charge-offs in fiscal 1997 related to residential loans. There were no recoveries in fiscal 1998 and 1997. The following table presents the allocation of the allowance for loan losses by type of loan at each of the dates indicated.
June 30, ---------------------------------------------- 1998 1997 ---------------------------------------------- Loan Loan Category Category Amount as a % Amount as a % of of Total of of Total Allowance Loans Allowance Loans --------- ----- --------- ----- (Dollars in Thousands) Single-family residential $ 38 59.5% $ 43 80.2% Construction and land development 19 18.8 16 13.3 Commercial(1) 110 7.2 48 2.0 Consumer(2) 89 14.5 44 4.5 Unallocated 34 -- 75 -- ---- ----- ---- ----- Total $290 100.0% $226 100.0% ==== ===== ==== =====
(1) Includes commercial mortgages and commercial non-mortgage loans. (2) Includes home equity lines of credit, second mortgages and other consumer loans. 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 the 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 1998, 1997 and 1996, the Company purchased $ 28.3 million, $15.7 million and $13.7 million, respectively, of adjustable-rate collateralized mortgage obligations ("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. The CMOs reprice monthly based on either the prime rate index or the London Interbank Offered Rate ("LIBOR") index. At June 30, 1998, the Company's mortgage-backed securities classified as available for sale had a market value of $807,000 (gross of $10,000 in unrealized losses), while CMOs classified as available for sale had a market value of $24.6 million (gross of $20,000 in net unrealized gains). The book value and market value of CMOs classified as held to maturity at June 30, 1998 totalled $11.1 million. 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 2 to the Consolidated Financial Statements in the 1998 Annual Report to Stockholders, filed as Exhibit 13.1 hereto (the "1998 Annual Report"). Mortgage-backed securities and CMOs 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 and CMO securities portfolio at each of the dates indicated.
June 30, ------------------------------- 1998 1997 1996 ------- ------- ------- (In Thousands) Mortgage-backed and related securities: Mortgage-backed securities $ 807 $ 1,583 $ 2,308 Collateralized mortgage obligations 35,700 23,995 15,034 ------- ------- ------- Total mortgage-backed securities $36,507 $25,578 $17,342 ======= ======= =======
Information regarding the contractual maturities and weighted average yield of the Company's mortgage-backed securities portfolio at June 30, 1998 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, 1998 Which Mature In ------------------------------------------------------------------------- After Five One Year After One to to Over 10 or Less Five Years 10 Years Years Total ------- ---------- -------- ----- ----- (Dollars in Thousands) Mortgage-backed securities $ -- $ -- $ -- $ 807 $ 807 Collateralized mortgage obligations -- -- -- 35,700 35,700 ----- ----- ----- ------- ------- Total $ -- $ -- $ -- $36,507 $36,507 ===== ===== ===== ======= ======= Weighted average yield --% --% --% 6.68% 6.68%
The following table sets forth the purchases, sales and principal repayments of the Company's mortgage-backed securities and CMOs during the periods indicated.
At or For the Year Ended June 30, --------------------------------------- 1998 1997 1996 -------- -------- -------- (Dollars In Thousands) Mortgage-backed securities and CMOs at beginning of period $ 25,578 $ 17, 342 $ 18,355 Purchases 28,348 15,729 14,721 Repayment (787) (545) (2,970) Sales and calls (16,576) (7,247) (12,485) Gain on sales 55 12 17 Amortization of premiums, net (80) (11) (90) Change in net unrealized gain (loss) on securities available for sale (31) 298 (206) -------- -------- -------- Mortgage-backed securities and CMOs at end of period $ 36,507 $ 25,578 $ 17,342 ======== ======== ======== Weighted average yield at end of period 6.68% 7.09% 6.52% ======== ======== ========
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. Securities (excluding FHLB stock, mortgage-backed securities and CMO's) totalled $6.7 million or 3.7% of total assets at June 30, 1998. Such securities consist of U.S. government agency and equity securities. At June 30, 1998, all of the securities are classified as available for sale. On May 31, 1998, the Company reclassified equity securities with a carrying and fair value of $1.2 million from the trading classification to the available for sale classification to reflect management's intent to realize the long-term potential underlying such securities rather than to benefit from short-term changes in market values. The recent downturn in the U.S. equity markets, especially in small cap stocks, has had a negative impact on the Company's remaining equity investments. As a result, management determined that an other-than-temporary market decline in the market value of certain equity securities occurred totaling $260,000 as of June 30, 1998 based on market prices at that date. Over time, management believes the market price of the Company's remaining equity investments will reach estimated values based on underlying fundamentals. At June 30, 1998, the Company had no remaining trading 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, --------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------- --------------------- ----------------------- Book Market Book Market Book Market Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- (In Thousands) U.S. Government agency securities $ 3,995 $3,992 $3,999 $3,979 $6,949 $6,951 Corporate bonds -- -- - -- 493 493 Equity securities 3,011 3,011 - -- -- -- FHLB stock 2,100 2,100 1,550 1,550 1,475 1,475 ------ ------- ------ ----- ------ ------ Total $ 9,106 $ 9,103 $5,549 $5,529 $8,917 $8,919 ======== ====== ===== ===== ===== =====
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, 1998.
Amounts at June 30, 1998 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 agency $ -- -- % $3,992 6.28% $ -- -- % securities Equity securities(1) FHLB stock(1)
- --------------------------- (1) As a member of the FHLB of Indianapolis, the Company is required to maintain its investment in FHLB stock which has no stated maturity. The average yield on the FHLB stock was 8.0% in fiscal 1998. Also, the Company's equity securities have no stated maturity. At June 30, 1998, the Company did not have securities in any one issuer which exceeded 10% of the Company's stockholders' equity. Interest-Bearing Deposits At June 30, 1998, the Company had interest-bearing deposits in financial institutions of $1.8 million, as compared to $2.0 million at June 30, 1997 and 1996, respectively. The $200,000 decrease in interest-bearing deposits from June 30, 1998 to June 30, 1998 is due to excess liquidity being utilized to fund loan originations. 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 $9.1 million or 7.6% of total deposits at June 30, 1998. 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 large variety of deposit accounts offered by Bank West has increased Bank West's ability to retain deposits and has 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, ----------------------------------------------------------------------- 1998 1997 1996 ------------------- -------------------- ------------------- Amount % Amount % Amount % -------- ----- -------- ----- ------- ----- (Dollars in Thousands) Certificate accounts: 2.00% - 3.99% $ -- --% $ -- --% $ -- --% 4.00% - 5.99% 61,575 51.3 45,409 44.2 51,043 56.1 6.00% - 7.99% 27,601 23.0 32,230 31.3 17,351 19.1 8.00% - 9.99% 23 -- 21 -- 21 -- -------- ----- -------- ----- ------- ----- Total certificate accounts 89,199 74.3 77,660 75.5 68,415 75.2 -------- ----- -------- ----- ------- ----- Transaction accounts: Passbook and statement savings 19,335 16.1 17,388 16.9 16,572 18.2 Money market accounts 572 .5 786 .8 1,031 1.1 NOW and noninterest-bearing accounts 10,873 9.1 7,028 6.8 5,010 5.5 -------- ----- -------- ----- ------- ----- Total transaction accounts 30,780 25.7 25,202 24.5 22,613 24.8 -------- ----- -------- ----- ------- ----- Total deposits $119,979 100.0% $102,862 100.0% $91,028 100.0% ======== ===== ======== ===== ======= =====
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, ----------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- ----------------------- --------------------- Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ------- ---- ------- ---- ------- ---- (Dollars in Thousands) Passbook and statement savings accounts $ 18,808 3.61% $17,247 3.61% $16,930 3.64% Money market accounts and NOW accounts 7,013 1.65 6,260 1.69 4,711 2.21 Certificates of deposit 83,032 5.79 73,465 5.71 66,532 5.84 -------- ----- ------- ----- ------ ---- Total $108,853 5.15% $96,972 5.08% $88,173 5.22% ======== ===== ======= ===== ======= ====
The following table sets forth the savings flows of Bank West during the periods indicated.
Year Ended June 30, ------------------------------------- 1998 1997 1996 ------------------------------------- (In Thousands) Increase before interest credited(1) $11,546 $ 6,945 $1,234 Interest credited 5,571 4,889 4,614 ------- ------- ------ Net increase in deposits $17,117 $11,834 $5,848 ======= ======= ======
- ----------------- (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, 1998. Quarter Ending: Amounts - --------------- ------- (In Thousands) September 30, 1998 $ 5,683 December 31, 1998 2,330 March 31, 1999 2,095 June 30, 1999 2,248 After June 30, 1999 4,827 ------- Total certificates of deposit with balances of $100,000 or more $17,183 ======= 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, 1998, Bank West had $37 million of advances from the FHLB of Indianapolis, $22 million of which represent putable advances which gives the FHLB the option to convert the advance to an adjustable-rate beginning one, two or five years after the purchase date, depending on the advance, and quarterly thereafter. In addition, $10 million of adjustable-rate advances mature during fiscal 1999 and $5 million of adjustable-rate advances mature in fiscal 2000. See Note 7 to the Consolidated Financial Statements in the 1998 Annual Report for additional information. During fiscal 1998 and 1997, the Bank utilized additional FHLB advances to fund loans and securities growth as well as mortgage banking activities. During fiscal 1996, the Bank reduced advances by $5.9 million with excess liquidity generated from deposit growth. The following table sets forth certain information regarding borrowings at or for the dates indicated:
At or for the Year Ended June 30, ------------------------------------- 1998 1997 1996 ------- ------- ------- (Dollars in Thousands) FHLB advances: Average balance outstanding $35,803 $22,433 $22,236 Maximum amount outstanding at any month-end during the period $38,000 $29,000 $22,500 Balance outstanding at end of period $37,000 $29,000 $19,000 Average interest rate during the period 5.61% 5.46% 5.96% Weighted average interest rate at end of period 5.48% 5.84% 5.52%
Subsidiaries At June 30, 1998, the Bank had one wholly-owned subsidiary, Sunrise Mortgage Corporation, which was formed in December 1997. Sunrise Mortgage Corporation originates and purchases non-conforming mortgage loans, including sub-prime mortgage loans for resale. All of the loans originated and purchased have a commitment to sell in place to an investor other than Bank West on a servicing released basis. Competition Bank West faces significant competition both in attracting deposits and in making loans. Some of the Bank's major competitors include Bank One, Comerica Bank, Michigan National Bank, Old Kent Bank, Huntington Bank, and National City. Its most direct competition for deposits historically has come 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 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 61 full-time employees and 10 part-time employees at June 30, 1998. 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 following is a summary of certain statutes and regulations affecting the Company and the Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on the Company, the Bank and the business of the Company and the Bank. General Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Federal Reserve Board, the FDIC, the Commissioner, the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds, the depositors of the Bank and the public, rather than shareholders of the Bank or the Company. Federal law and regulations establish supervisory standards applicable to the lending activities of the Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property. 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 Office of Thrift Supervision ("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 qualified thrift lender ("QTL") test set forth in HOLA, 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. At June 30, 1998, the Bank satisfied the QTL 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, 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. Legislation has been recently introduced into the U.S. Congress which would subject all unitary holding companies to the same restrictions on activities as are currently applied to multiple holding companies. If such legislation is enacted in its current form, the ability of the Company to engage in certain activities that are currently permitted to the Company may be restricted. The Company, however, does not believe that it will be required to discontinue any current activity. In addition, such legislation would preclude companies that are engaged in activities not permitted to multiple savings and loan holding companies from acquiring control of the Company. No prediction can be made at this time as to whether such legislation will be enacted or whether it will be enacted in its current form. Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act and OTS regulations. 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, such provisions (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 such provisions, 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. Savings institutions also are subject to the restrictions of 12 U.S.C. ss.1972, which prohibits (i) a depository institution from extending credit, or offering any other services or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not to obtain services of a competitor of the institution, subject to certain exceptions, and (ii) extensions of credit to executive officers, directors and greater than 10% stockholders of a depository institution by any other institution that has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. At June 30, 1998, 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. As a Michigan-chartered state savings bank with deposits insured by the SAIF, Bank West is subject to extensive regulation by the Financial Institutions Bureau and the FDIC. The lending activities and other investments of the Bank must comply with various federal and state regulatory requirements. The Financial Institutions Bureau periodically examines the Bank for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations of SAIF members. The Bank must file reports with the Financial Institutions Bureau and the FDIC describing its activities and financial condition. Bank West also is subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). This supervision and regulation is intended primarily for the protection of depositors. Regulatory Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC-insured non-member banks, such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, FDIC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Federal regulations define these capital categories as follows:
Total Tier 1 Risk-Based Risk-Based Capital Ratio Capital Ratio Leverage Ratio ------------- ------------- -------------- Well capitalized 10% or above 6% or above 5% or above Adequately capitalized 8% or above 4% or above 4% or above Undercapitalized Less than 8% Less than 4% Less than 4% Significantly undercapitalized Less than 6% Less than 3% Less than 3% Critically undercapitalized -- -- A ratio of tangible equity to total assets of 2% or less
As of June 30, 1998, each of the Bank's ratios exceeded minimum requirements for the well capitalized category. See Note 13 to the Consolidated Financial Statements in the 1998 Annual Report. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency. Dividends. Under Michigan law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock. The Bank may not pay dividends except out of net profits after deducting its losses and bad debts. A Michigan-chartered state savings bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend. If the Bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net profits for the preceding one-half year (in the case of quarterly or semi-annual dividends) or full-year (in the case of annual dividends) has been transferred to surplus. A Michigan state bank may, with the approval of the Commissioner, by vote of shareholders owning two-thirds of the stock eligible to vote, increase its capital stock by a declaration of a stock dividend, provided that after the increase the bank's surplus equals at least 20% of its capital stock, as increased. The Bank may not declare or pay any dividend until the cumulative dividends on preferred stock (should any such stock be issued and outstanding) have been paid in full. Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by the Bank, if such payment is determined, by reason of the financial condition of the Bank, to be an unsafe and unsound banking practice. Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution will be responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. Failure to submit an acceptable compliance plan, or failure to adhere to a compliance plan that has been accepted by the appropriate regulator, would constitute grounds for further enforcement action. 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 borrowings 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 borrowings was $74 million at June 30, 1998. At June 30, 1998, the Bank had $ 37.0 million of FHLB advances and a $2.0 million line of credit. See Note 7 to the Consolidated Financial Statements in the 1998 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, 1998, Bank West had $ 2.1 million 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. Deposit Insurance. 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 Commissioner 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 as discussed above under "- Regulatory Capital Requirements." 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 prior to September 30, 1996 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. The deposits of the Bank are currently insured by the SAIF. Both the SAIF and the BIF are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved a fully funded status, and therefore as discussed below, in fiscal 1996 the FDIC substantially reduced the average deposit insurance premium paid by BIF-insured banks to a level approximately 75% below the average premium then 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 then 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. On September 30, 1996, President Clinton signed into law legislation which eliminated the premium differential between SAIF-insured institutions and BIF-insured institutions by recapitalizing the SAIF's reserves to the required ratio. The legislation required all SAIF member institutions to pay a one-time special assessment to recapitalize the SAIF, with the aggregate amount to be sufficient to bring the reserve ratio to 1.25% of insured deposits. The legislation also provides for the merger of the BIF and the SAIF, with such merger being conditioned upon the prior elimination of the thrift charter. Implementing FDIC regulations imposed a one-time special assessment equal to 65.7 basis points for all SAIF-assessable deposits as of March 31, 1995, which was accrued as an expense on September 30, 1996. The Bank's one-time special assessment amounted to $551,000. Net of related tax benefits, the one-time special assessment amounted to $364,000 or $0.14 per share. The payment of the special assessment had the effect of immediately reducing the Bank's capital by such amount. However, management does not believe that this one-time special assessment had a material adverse effect on the Company's consolidated financial condition. In the fourth quarter of 1996, the FDIC lowered the assessment rates for SAIF members to reduce the disparity in the assessment rates paid by BIF and SAIF members. Beginning October 1, 1996, effective SAIF rates generally range from zero basis points to 27 basis points, except that during the fourth quarter of 1996, the rates for SAIF members ranged from 18 to 27 basis points in order to include assessments paid to the Financing Corporation ("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to fund the FICO, while BIF member institutions will pay approximately 1.3 basis points. The Bank's insurance premiums, which had amounted to 23 basis points, were thus reduced to 6.4 basis points effective January 1, 1997. 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. Restrictions on Certain Activities. Under FDICIA, state-chartered banks with deposits insured by the FDIC are generally prohibited from acquiring or retaining any equity investment of a type or in an amount that is not permissible for a national bank. The foregoing limitation, however, does not prohibit FDIC-insured state banks from acquiring or retaining an equity investment in a subsidiary in which the bank is a majority owner. State-chartered banks are also prohibited from engaging as principal in any type of activity that is not permissible for a national bank and subsidiaries of state-chartered, FDIC-insured state banks may not engage as principal in any type of activity that is not permissible for a subsidiary of a national bank unless in either case the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and the bank is, and continues to be, in compliance with applicable capital standard. The FDIC has adopted regulations to clarify the foregoing restrictions on activities of FDIC-insured, state-chartered banks and their subsidiaries. Under the regulations, the term activity refers to the authorized conduct of business by an insured state bank and includes acquiring or retaining any investment other than an equity investment. A bank or subsidiary is considered acting as principal when conducted other than as an agent for a customer, as trustee, or in a brokerage, custodial, advisory or administrative capacity. An activity permissible for a national bank includes an activity expressly authorized for national banks by statute or recognized as permissible in regulations, official circulars or bulletins or in any order or written interpretation issued by the Office of the Comptroller of the Currency ("OCC"). In its regulations, the FDIC indicated that it will not permit state banks to directly engage in commercial ventures or directly or indirectly engage in any insurance underwriting activity other than to the extent such activities are permissible for a national bank or a national bank subsidiary or except for certain other limited forms of insurance underwriting permitted under the regulations. Under the regulations, the FDIC permits state banks that meet applicable minimum capital requirements to engage as principal in certain activities that are not permissible to national banks including guaranteeing obligations of others, activities which the Federal Reserve Board has found by regulation or order to be closely related to banking and certain securities activities conducted through subsidiaries. Uniform Lending Standards. Federal regulations require banks to adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits, that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. A bank's real estate lending policy must reflect consideration of the guidelines that have been adopted by the banking agencies. The Bank does not believe that such guidelines materially affect its lending activities. Limits on 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 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, 1998, the 15% limit for the Bank was $1.5 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. Consumer Protection Laws. The Bank's business includes making a variety of types of loans to individuals. In making these loans, the Bank is subject to state usury and regulatory laws and to various federal statutes, such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Bank is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers. Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank's total assets, as reported to the Commissioner. Branching Authority. Michigan banks, such as the Bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals (including the approval of the Commissioner and the FDIC). Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by IBBEA only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of interstate branching authority by enacting appropriate legislation prior to June 1, 1997. Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner, (i) the acquisition of all or substantially all of the assets of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and loan association located in another state, (ii) the acquisition by a Michigan-chartered bank of all or substantially all of the assets of an FDIC-insured bank, savings bank or savings and loan association located in another state, (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, with the resulting organization chartered by Michigan, (iv) the establishment by a foreign bank, which has not previously designated any other state as its home state under the International Banking Act of 1978, of branches located in Michigan, and (v) the establishment or acquisition of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting Michigan-chartered banks to establish branches in such jurisdiction. Further, the Michigan Banking Code permits, upon written notice to the Commissioner, (i) the acquisition by a Michigan-chartered bank of one or more branches (not comprising all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state, the District of Columbia, or a U.S. territory or protectorate, (ii) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, and (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states, with the resulting organization chartered by one of such other states. 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. In August 1996, legislation was enacted that repeals the reserve method of accounting (including the percentage of taxable income method) previously 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 begin in fiscal 1999, provided the Bank meets certain residential lending requirements. No recapture took place in fiscal 1998 because the Bank met its residential loan requirement under the Code. 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. At June 30, 1998, 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, 1998, Bank West had no NOL carryforwards for federal income tax purposes. Capital Gains and Corporate Dividends-Received Deduction. Corporate net capital gains are currently 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, 1995 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. In 1996, the State of Michigan repealed this tax over a phase-out period beginning in calendar 1995 and ending in calendar 1998. For calendar years 1997, 1996 and 1995, the amount of the tax calculated pursuant to the above formula is reduced by 75%, 50% and 25%, respectively. 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, 1998, Bank West conducted its business from its main office in Walker, Michigan and two branch offices 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, 1998. Net Book Value of Amount of Description/Address Leased/Owned Property Deposits ------------------- ------------ -------- -------- (In Thousands) 2185 Three Mile Road N.W. Grand Rapids, MI 49544 Owned $ 2,364 $39,223 910 Bridge Street Grand Rapids, MI 49504 Owned 661 74,761 6740 Cascade Road S.E. Grand Rapids, MI 49546 Leased 140 5,995 ------- ------- Total $ 3,165 $ 119,979 ======= ========= Item 3. Legal Proceedings. On July 1, 1998, Kristine Cowles filed a complaint against the Bank in the Circuit Court for the County of Kent, State of Michigan. The complaint alleges that the Bank has been engaged in the unauthorized practice of law as the result of charging a fee for preparing loan documents. The complaint seeks class action certification, restitution of all fees paid for the last six years, interest, attorney fees and other costs. Management believes after consultation with legal counsel that the complaint is wholly without merit, and intends to vigorously defend against this suit and has filed a motion for summary judgement and dismissal. A hearing has been scheduled for mid-October 1998. The Company and the Bank are also subject to certain other 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. 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 the inside back cover page of the Company's 1998 Annual Report. Item 6. Selected Financial Data. The information required herein is incorporated by reference from page 2 of the 1998 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 14 of the 1998 Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable since the Company qualifies as a small business issuer. See Item 305(e) of Regulation S-K. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 15 to 43 of the 1998 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, 4, 7 and 11 of the definitive proxy statement of the Company for the Annual Meeting of Stockholders to be held on October 28, 1998, which will be filed within 120 days of June 30, 1998 ("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, 1998 and 1997 Consolidated Statements of Income for the Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years ended June 30, 1998, 1997 and 1996 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 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 13.1 1998 Annual Report to Stockholders 21.1 Subsidiaries of the Registrant - Reference is made to "Item 2. Business" for the required information 23.1 Consent of Crowe, Chizek and Company LLP 27.1 Financial Data Schedule (*) Incorporated herein by reference from the Company's Registration Statement on Form S-1 (Registration No. 33-87620) filed with the SEC on December 21, 1994, as subsequently amended. (**) Incorporated herein by reference from the Company's Form 10-Q filed with the SEC on November 14, 1997. (***) Incorporated herein by reference from the Company's Annual Report on Form 10-K filed with the SEC on September 28, 1995. (****) Incorporated herein by reference from the Company's Annual Report on Form 10-K filed with the SEC on September 26, 1996. (b) The Company did not file any reports on Form 8-K during the quarter ended June 30, 1998. (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 Date: September 22, 1998 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 22, 1998 - -------------------------- Paul W. Sydloski President, Chief Executive Officer and Director /s/ George A. Jackoboice September 22, 1998 - -------------------------- George A. Jackoboice Chairman of the Board and Director /s/ Richard L. Bishop September 22, 1998 - -------------------------- Richard L. Bishop Director /s/ Thomas D. DeYoung September 22, 1998 - -------------------------- Thomas D. DeYoung Director /s/ Jacob Haisma September 22, 1998 Jacob Haisma Director /s/ Harry E. Mika September 22, 1998 - -------------------------- Harry E. Mika Director /s/ Carl A. Rossi September 22, 1998 - -------------------------- Carl A. Rossi Director /s/ Robert J. Stephan September 22, 1998 - -------------------------- Robert J. Stephan Director /s/ John H. Zwarensteyn September 22, 1998 - -------------------------- John H. Zwarensteyn Director /s/ Kevin A. Twardy September 22, 1998 - -------------------------- Kevin A. Twardy Chief Financial Officer (also principal accounting officer) EX-13 2 Table of Contents - -------------------------------------------------------------------------------- Section 1 Letter to Shareholders ......................................... 1 Selected Consolidated Financial Data ........................... 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 3 Section 2 Report of Independent Auditors ................................. 15 Consolidated Financial Statements .............................. Consolidated Balance Sheets .................................... 16 Consolidated Statements of Income .............................. 17 Consolidated Statements of Changes in Shareholders' Equity .................................... 18 Consolidated Statements of Cash Flows .......................... 20 Notes to Consolidated Financial Statements ..................... 22 Annual Meeting The Annual Meeting of Shareholders is scheduled for Wednesday, October 28, 1998 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard Street, N.W., Grand Rapids, Michigan. [GRAPHIC-LOGO FOR BANK WEST FINANCIAL CORPORATION] Letter to Shareholders - -------------------------------------------------------------------------------- In this report to our shareholders I will attempt to clarify where we have been, where we are and where we are going. Since March of 1995 we have been attempting to change this organization from a traditional savings and loan to a full service community bank which would offer new products and services for our customers and provide for the greatest possible return to our shareholders. Our plan calls for a highly skilled and dedicated staff with a strong emphasis on customer service. To accomplish this, we formed a five-year strategic plan utilizing a building block strategy which has been implemented. The strategy calls for a shift from total dependence on single-family loans to one of diversification which is reflected by consumer and commercial loan growth, with balances of approximately $19.7 million and $9.7 million, respectively, at June 30, 1998. Our current strategy also produced a 30% increase in total assets since 1995, which currently stand at approximately $181 million. The confidence exhibited by our customers and our stockholders is reflected in our growth in assets and our improving franchise value. That confidence is much appreciated and the appreciation is manifested in the fact that at every level of the company we are committed to generating and maintaining long-term relationships. We are also committed to providing profitability by offering premier services and programs and at the same time managing our resources in the most efficient manner possible. On the deposit side, our concentration has shifted from dependence on certificates of deposits to more reasonably priced funds. Since 1995, checking account balances have increased from $4.1 million to $11.4 million, and total deposits increased from $85.2 million to $120 million. In the past year total assets increased nearly 17%, loan volume increased 49% and our deposit base increased 17%. The profitability generated from the record loan production volume has been offset by the fact that nearly 50% of the loans we produced in the last fiscal year were refinances. Pre-payment penalties are now part of the adjustable loan instrument (ARM) and should help us control future refinancing of these loans. In the next year our primary goal will be to improve the value of our franchise through market expansion and full utilization of the products we now offer, relying on our building block strategy. We intend to concentrate on cost control and improve our significant ratios by attaining the goals we have set. We have completed the majority of human resource additions which were necessary to support the continued growth of the franchise. One significant event which will have an impact on all businesses is the coming of the new millennium. Making sure that the Bank is Year 2000 (Y2K) compliant is an assignment no financial institution can ignore. Adherence to regulatory requirements, internal training and testing, external testing and a customer information program are all elements of Bank West's Y2K program. Our directors, management and staff want to thank you for your continuing confidence. We will always remain mindful of our mission to enhance shareholder value and to provide quality service that will meet your expectations. With this in mind, we look forward to fiscal year 1999. Sincerely, /s/Paul W. Sydloski ------------------- Paul W. Sydloski President/CEO 1
Selected Consolidated Financial Data - -------------------------------------------------------------------------------- (Dollars in thousands except per share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Summary of Operations Net interest income $ 4,937 $ 4,279 $ 4,158 $ 3,185 $ 2,861 Provision for loan losses 81 60 60 21 25 Other income 1,012 1,554 1,202 270 226 One-time special SAIF assessment -- 551 -- -- -- Other expenses 4,585 3,821 3,469 2,352 2,045 Income taxes 453 478 622 366 337 Net income 830 923 1,208 716 680 Balance Sheet Data Total assets $181,469 $155,675 $137,982 $139,648 $106,594 Cash and cash equivalents 4,206 3,673 6,694 4,595 4,923 Securities 6,745 3,978 7,422 11,405 4,029 Mortgage collateralized securities 36,507 25,578 17,341 18,335 3,440 Loans, net 118,906 111,530 95,737 95,836 91,329 Loans held for sale 8,157 2,231 4,297 2,746 1,282 Deposits 119,979 102,862 91,028 85,180 89,960 FHLB advances 37,000 29,000 19,000 24,922 5,000 Equity 23,275 22,592 26,810 28,171 10,844 Per Share Data(1) Basic earnings per share(2) $ .35 $ .36 $ .39 $ .07 -- Diluted earnings per share(2) .33 .36 .39 .07 -- Dividends per share .22 .19 .19 -- -- Book value per share 8.87 8.59 8.13 8.11 -- Ratios Average yield on interest-earning assets 7.74% 7.61% 7.52% 6.97% 6.55% Average rate on interest-bearing liabilities 5.26 5.15 5.37 4.76 4.12 Average interest spread 2.48 2.46 2.15 2.21 2.43 Net interest margin 3.04 3.12 3.10 2.83 2.86 Return on average assets(3) .49 .64 .87 .62 .67 Return on average equity(3) 3.58 3.89 4.38 4.34 6.38 Efficiency ratio 76.34 74.89 68.56 69.56 63.85 Dividend pay-out ratio 64.96 54.94 49.93 -- -- Average equity to average assets 13.60 16.42 19.77 14.46 10.57 Non-performing loans as a % of loans, net .71 .37 .04 .15 .04
(1) All per share data has been adjusted for stock splits. (2) 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. (3) When excluding the impact of the government mandated one-time Savings Association Insurance Fund assessment of $364,000,net of tax, or $0.14 per share, Return on Average Assets (ROA) equalled .89% and Return on Average Equity (ROE) equalled 5.43% for fiscal 1997. 2 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 ("Bank"). This Annual Report includes statements that may constitute forward-looking statements, usually containing the words "believe," "estimate," "project," "expect," "intend" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which Bank West operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which Bank West has no control); and other risks detailed in this Annual Report and in the Company's other Securities and Exchange Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. General Bank West Financial Corporation is the holding company for Bank West. Effective December 29, 1997, Bank West completed its conversion to a Michigan chartered 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 and 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 and 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. The Company's profitability also is dependent on the level of its other income, including gains on sale of loans in connection with its mortgage banking activities and fees and service charges. During December 1997, the Bank formed Sunrise Mortgage Corporation, a wholly-owned subsidiary engaged to originate and purchase non-conforming mortgage loans including sub-prime mortgage loans for resale. All of the loans originated and purchased have a commitment to sell in place to an investor on a servicing released basis. Sunrise Mortgage Corporation is expected to break-even in twelve to eighteen months. The Company's net income was $830,000, $923,000 and $1,208,000 for fiscal 1998, 1997 and 1996, respectively. Fiscal 1998 net income was positively impacted by an increase in net interest income through continued capital leveraging efforts. This increase was offset by a decrease in gains on securities and higher general and administrative expenses. See "Results of Operations for the Year Ended June 30, 1998 Compared to the Year Ended June 30, 1997" section for additional information. Fiscal 1997 net income was negatively impacted by a $364,000, net of tax, or $0.14 per share government mandated special assessment to recapitalize the Savings Association 3 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). See Note 6 to consolidated financial statements for additional information. Changes in Financial Condition Assets. Total assets increased by $25.8 million or 16.6% from June 30, 1997 to June 30, 1998. The increase is primarily due to a $10.8 million or 33.2% increase in securities as additional adjustable-rate collateralized mortgage obligations were purchased to partially offset the decline in one-to four-family adjustable-rate loans. In addition, loans increased by $7.4 million or 6.6% as greater emphasis was placed on originating commercial and consumer loans for portfolio instead of concentrating primarily on residential mortgage banking activities. The additional emphasis on adding the aforementioned loan types to portfolio during fiscal 1998 was in an effort to diversify the Bank's loan portfolio from its traditional first residential mortgage business and to react to increased competitiveness in the residential mortgage banking business. Total commercial and consumer loans increased as a percent of total loans from 14.0% at the end of fiscal 1997 to 23.1% at the end of fiscal 1998. Management expects continued growth in the commercial and consumer loan portfolios during fiscal 1999. The Bank's mortgage banking activities consist of selling newly originated and purchased loans into the secondary market. Total loans sold amounted to $45.0 million, $32.9 million and $45.8 million in fiscal 1998, 1997 and 1996, respectively. Loans held for sale amounted to $8.2 million, $2.2 million and $4.3 million at June 30, 1998, 1997 and 1996, respectively. The dollar amount of loans sold and loans held for sale increased in fiscal 1998 due to higher refinancing volume as a result of lower prevailing market interest rates compared to the prior fiscal year as well as increased loan origination personnel. The majority of loans originated and purchased for resale have been 30-year fixed-rate loans. Mortgage-backed securities and collateralized mortgage obligations increased from $25.6 million at June 30, 1997 to $36.5 million at June 30, 1998. During fiscal 1998, the Bank purchased additional adjustable-rate collateralized mortgage obligations which is consistent with the Bank's strategy of increasing the ratio of interest-sensitive assets to interest-sensitive liabilities. Collateralized mortgage obligations also were purchased to partially offset the decline in one-to four-family adjustable-rate mortgage loans. The collateralized mortgage obligations earn interest based on either the prime or the London Interbank Offered Rate ("LIBOR") indexes and reprice monthly. These securities were generally purchased with relatively low weighted average collateral rates as compared to current market rates in an effort to minimize prepayment risk. Other securities classified as available for sale or held to maturity, primarily consisting of U.S. agency securities and equity securities, increased from $4.0 million at June 30, 1997 to $6.7 million at June 30, 1998. The increase is primarily due to the purchase of equity securities. In addition, on May 31, 1998, the Company reclassified securities with a carrying and fair value of $1.2 million from the trading classification to the available for sale classification, to reflect management's intent to realize the long-term potential underlying such securities rather than to benefit from short-term changes in market values. The recent downturn in the U.S. equity markets, especially in small cap stocks, has had a negative impact on the Company's remaining equity investments. As a result, management determined than an other-than-temporary decline in the market value of certain equity securities occurred totaling $260,000 as of June 30, 1998. Over time, management believes the market price of the Company's remaining equity investments will reach estimated values based on underlying fundamentals. At June 30, 1998, the Company had no remaining trading securities. Liabilities. Deposits increased $17.1 million or 16.6% from June 30, 1997 to June 30, 1998. The increase in total deposits was primarily attributable to growth in certificates of deposit of $11.5 million, or 14.9%, and growth in non-interest bearing deposits of $3.0 million or 76.8%. Certificates of deposit accounted for approxi- 4 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- mately 74% of total deposits at June 30, 1998 and approximately 76% of total deposits at June 30, 1997. At June 30, 1998, $65.4 million or 73.4% of total certificates of deposit mature in one year or less, and $17.2 million or 19.3% of the total certificates of deposit had balances of $100,000 or more. The increase in deposits was achieved primarily through continued development of new and existing commercial and retail account relationships. In addition, the Bank has attracted and retained certificates of deposit including out-of-state jumbo accounts by offering competitive interest rates. Because the growth in deposits has not matched the growth in assets in recent years, the Bank began utilizing FHLB advances. During fiscal 1998, the Bank increased FHLB advances by $8.0 million. The proceeds of these advances, as well as deposit growth discussed above, were primarily used to fund loan and securities growth as well as mortgage banking activities. Shareholders' Equity. Shareholders' equity amounted to $23.3 million or 12.8% of total assets at June 30, 1998 compared to $22.6 million or 14.5% of total assets at June 30, 1997. The Company's trend of profitability continued in fiscal 1998 with the Company earning $830,000. The primary change in total shareholders' equity relates to net income offset by dividends and stock repurchases. The cost of shares issued to the Company's Employee Stock Ownership Plan ("ESOP") but not yet allocated to participants totaling $875,000 at June 30, 1998 is presented in the consolidated balance sheet as a reduction of shareholders' equity. The unearned compensation value of the Company's MRPs at June 30, 1998 totaling $361,000 also is shown as a reduction of shareholders' equity. The Company's 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, 1998, the net unrealized gain was $5,000, while at June 30, 1997, the net unrealized gain was $13,000. Results of Operations for the Year Ended June 30, 1998, Compared to the Year Ended June 30, 1997 Net Income. Net income for fiscal 1998 was $830,000 or $.35 per basic share, compared to $923,000 or $.36 per basic share for fiscal 1997. The Company's net income decreased by $93,000 or 10.1% in fiscal 1998 from fiscal 1997. The results of operations for fiscal 1997 include a one-time assessment of $364,000, net of taxes, or $.14 per share relating to legislation signed into law on September 30, 1996 to recapitalize the SAIF. Net income for fiscal 1997 without the SAIF assessment would have been $1.3 million or $.50 per share. On a SAIF adjusted basis, net income decreased $457,000 or 35.5% for the year ended June 30, 1998 compared to June 30, 1997. The decrease was primarily due to a reduction of other income of $542,000 as a result of less successful equity securities trading activities by $531,000 a write-down of available for sale equity securities of $260,000 relating to an other-than-temporary market decline and an increase in other expenses (excluding the one-time SAIF assessment) of $764,000, primarily due to an increase in compensation and benefits. These decreases were partially offset by growth in net interest income and in gain on sale of loans of $658,000 and $163,000, respectively. Net income for fiscal 1998 represents a return on average equity ("ROE") of 3.58%, a decrease from 3.89% for fiscal 1997, and a return on average assets ("ROA") of .49%, a decrease from .64% for fiscal 1997. Net Interest Income. The Company's net income is largely dependent upon net interest income. Net interest income is the difference between the average yield earned on loans, securities and other earning assets, and the average rate paid on deposits and FHLB advances. Net interest income is affected by changes in volume and composition of earning assets and interest-bearing liabilities, market rates of interest, the level of nonperforming assets, demand for loans and other market forces. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Net interest income increased $658,000 for the year ended June 30, 1998 as compared to the year ended June 30, 1997. The increase in net interest income was primarily attributable to a $17.5 million or 17.0% increase in the average loan portfolio (including loans held for sale) and a $9.1 million or 39.7% increase in the average mortgage collateralized securities portfolio. The Company's average interest spread improved slightly from 2.46% to 2.48%, with improvements in yield on total interest-earning assets substantially offset by an increase in the cost of interest-bearing liabilities. The yield on total interest-earning assets improved from 7.61% for fiscal 1997 to 7.74% for fiscal 1998. The yield improved primarily due to the growth in the commercial and consumer loan portfolios, which in total represent 23.1% of total loans at the end of fiscal 1998 compared to 14% of total loans at the end of fiscal 1997. Management expects the continued growth in the commercial and consumer loan portfolios during fiscal 1999 will positively impact the yield on loans. The cost of interest-bearing liabilities increased from 5.15% for fiscal 1997 to 5.26% for fiscal 1998. The cost of interest-bearing liabilities increased primarily due to an increase in FHLB advances as a percent of total interest-bearing liabilities and, to a lesser extent, a shift in mix from lower costing demand deposit and savings accounts to higher costing money market and certificate accounts. Net interest margin decreased from 3.12% for fiscal 1997 to 3.04% for fiscal 1998. The reduction in net interest margin was primarily attributable to the Company becoming more leveraged through internal growth. This increase in leverage is reflected in the ratio of average interest-earning assets to average interest-bearing liabilities, which declined to 1.12x for the year ended June 30,1998 compared to 1.15x for the same period in 1997. The future trend of the Company's net interest income and net interest margin may be impacted by the level of loan originations, purchases, repayments, refinances, and sales, and a resulting change in the Company's composition of interest-earning assets. The relatively flat yield curve during the second half of the fiscal year resulted in a shift in borrower preference to fixed-rate mortgage loans. This resulted in borrowers converting adjustable-rate mortgage loans to 30-year fixed-rate loans, which are generally sold in the secondary market. A continued high level of refinances and conversions of adjustable-rate mortgages to fixed-rate mortgages could have a negative impact on future net interest income. Additional factors that may affect the Company's net interest income are changes in interest rates, slope of the yield curve, asset growth, maturity and repricing activity and competition. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Average Balances, Interest Rates and Yields. The following table presents for the periods indicated the total dollar amount of interest income 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. All average balances are based on month end balances.
Year Ended June 30, Year Ended June 30, Year Ended June 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Interest-earning assets: Loans receivable(2) $120,844 $9,795 8.11% $103,324 $8,206 7.94% $100,350 $7,902 7.87% Securities 4,461 326 7.31 5,540 387 6.99 7,987 509 6.37 Mortgage-backed securities(3) 32,208 2,120 6.58 23,061 1,520 6.59 18,790 1,231 6.55 Interest-bearing deposits 2,738 152 5.55 3,633 199 5.48 5,476 326 5.95 FHLB stock 1,958 156 7.97 1,483 116 7.81 1,475 120 8.14 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 162,209 12,549 7.74 137,041 10,428 7.61 134,078 10,088 7.52 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-earning assets 8,522 7,419 5,410 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $170,731 $144,460 $139,488 ==================================================================================================================================== Interest-bearing liabilities: Savings, checking and MMDA's $25,821 794 3.08 $23,507 729 3.10 $21,641 721 3.33 Certificates of deposit 83,032 4,808 5.79 73,465 4,195 5.71 66,532 3,884 5.84 FHLB advances 35,803 2,010 5.61 22,433 1,225 5.46 22,236 1,325 5.96 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 144,656 7,612 5.26 119,405 6,149 5.15 110,409 5,930 5.37 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing liabilities 2,853 1,340 1,504 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 147,509 120,745 111,913 Stockholders' equity 23,222 23,715 27,575 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $170,731 $144,460 $139,488 ==================================================================================================================================== Net interest income; average interest rate spread $ 4,937 2.48% $4,279 2.46% $4,158 2.15% ==================================================================================================================================== Net interest margin(4) 3.04% 3.12% 3.10% ==================================================================================================================================== Average interest-earning assets to average interest-bearing liabilities 1.12x 1.15x 1.21x ====================================================================================================================================
(1) At June 30, 1998, the weighted average yields earned and rates paid were as follows: loans receivable, 7.92%; securities, 6.28%; mortgage-backed securities, 6.68%; interest-bearing deposits, 5.50%; FHLB stock, 8.00%; total interest-earning assets, 7.60%; savings, checking and MMDA's, 3.26%; certificates of deposits, 5.74%; FHLB advances, 5.48%; total interest-bearing liabilities, 5.24%; and interest spread, 2.36%. (2) Includes nonaccrual loans and loans held for sale during the respective periods. Calculated net of deferred fees and discounts and loans in process. (3) Includes collateralized mortgage obligations. (4) Net interest margin equals net interest income divided by average interest-earning assets. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- 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, 1998 June 30, 1997 vs. vs. Year Ended Year Ended June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------------------------------------ Increase Increase (Decrease) (Decrease) Due to Due to - ------------------------------------------------------------------------------------------------------------ Total Total Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) - ------------------------------------------------------------------------------------------------------------ (In Thousands) Interest income: Loans receivable $178 $1,411 $1,589 $ 70 $ 234 $ 304 Securities 17 (78) (61) 46 (168) (122) Mortgage-backed securities (2) 602 600 8 281 289 Interest-bearing deposits 3 (50) (47) (24) (103) (127) FHLB stock 2 38 40 (5) 1 (4) - ------------------------------------------------------------------------------------------------------------ Total interest income 198 1,923 2,121 95 245 340 - ------------------------------------------------------------------------------------------------------------ Interest expense: Savings, checking and MMDA's (5) 70 65 (52) 60 8 Certificates of deposit 60 553 613 (87) 398 311 FHLB advances 35 750 785 (112) 12 (100) - ------------------------------------------------------------------------------------------------------------ Total interest expense 90 1,373 1,463 (251) 470 219 - ------------------------------------------------------------------------------------------------------------ Increase (decrease) in net interest income $108 $ 550 $ 658 $ 346 $(225) $ 121 ============================================================================================================
Provision for Loan Losses. The provision for loan losses increased by $21,000 or 35% when comparing fiscal 1998 and 1997. The provision for loan losses is a result of management's periodic analysis of the allowance for loan losses. 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, and other factors and estimates which are subject to change over time. Management believes that the allowance is adequate to provide for potential losses; however, there can be no assurance the related allowance may not have to be increased in the future. Management expects the 8 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- provision for loan losses to increase in the next fiscal year to keep pace with the growth in the loan portfolio and to prepare for the higher risk of loss associated with management's intention to increase the commercial and consumer loan portfolios. The Company's ratio of nonperforming assets, consisting of loans 90 days or more delinquent and foreclosed assets, to total assets was .57% as of June 30, 1998 compared to .28% as of June 30, 1997. The allowance for loan losses as a percentage of total loans at June 30, 1998 increased to .21% compared to .19% at June 30, 1997. The allowance for loan losses equalled 34.5% of nonperforming loans at June 30, 1998. Nonperforming loans consisted primarily of one- to four-family properties. The ratio of net charge-offs to average loans outstanding was .01% for fiscal 1998 compared to none for fiscal 1997. Total Other Income. Total other income decreased by $542,000 or 34.9% in fiscal 1998 from fiscal 1997, primarily due to a $531,000 or 72.6% decrease in the net gains on trading equity securities and a $201,000 increase in net loss on securities available for sale. This amount was partially offset by a $163,000 or 32.7% increase in gain on sale of loans. The decrease in net gain on trading equity securities was primarily due to the Company's decision to stop trading equity securities in light of recent stock market volatility. The increase in net loss in securities available for sale was due to an other-than-temporary decline in certain equity securities resulting in a write-down of $260,000. The increase in gain on sale of loans is a result of higher refinancing volume from lower prevailing market interest rates compared to the prior fiscal year. The Company expects that the formation of Sunrise Mortgage Corporation and continued expansion of its retail and wholesale mortgage banking business will increase core mortgage banking volume in fiscal 1999 compared to fiscal 1998. Total Other Expenses. Total other expenses increased by $213,000 or 4.9% in fiscal 1998 from fiscal 1997. The increase was primarily due to higher compensation and benefits expense of $576,000 or 25.8%, and higher professional fees of $74,000 or 39.2%. In addition, fiscal 1997 total other expenses include a one-time assessment of $551,000 relating to legislation signed into law on September 30, 1996 to recapitalize the SAIF. On a SAIF adjusted basis, total other expenses increased $764,000 or 20.0% for the year ended June 30, 1998 compared to June 30, 1997. The increase in compensation and benefits is due in part to a greater number of full-time equivalent employees to support the growth in the mortgage banking, consumer and commercial loan departments, and a $157,000 increase in ESOP expense attributable to the higher market price of the Company's stock in fiscal 1998 compared to fiscal 1997. The Bank has completed the majority of personnel additions necessary to support continued growth in its lending areas and branches. Management expects that additional loan and deposit growth given the current staffing level should result in an improvement to the Bank's efficiency ratio for fiscal 1999. Professional fees increased due to higher consulting fees and out-sourcing the human resources function. Federal Income Tax Expense. Federal income tax expense decreased by $26,000 or 5.4% in fiscal 1998 from fiscal 1997, due to a decrease in pretax income. Results of Operations for the Year Ended June 30, 1997, Compared to the Year Ended June 30, 1996 Net Income. The Company's net income decreased by $285,000 or 23.6% in fiscal 1997 from fiscal 1996. The decrease in fiscal 1997 was primarily due to a $364,000 or $0.14 per share government mandated special assessment to recapitalize the SAIF, which is administered by the FDIC. In addition, other expenses (excluding the SAIFassessment) increased by $351,000. These amounts were partially offset by increases in net interest income and other income of $121,000 and $352,000, respectively. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Net Interest Income. The $121,000 or 2.9% increase in net interest income in fiscal 1997 was primarily due to a $3.0 million or 3.0% increase in the average loan portfolio and a $4.3 million or 22.7% increase in the average mortgage collaterized securities portfolio. In addition, the Company's average interest spread increased from 2.15% to 2.46%. The average interest spread increased as a result of an increase in the average yield on interest-earning assets, primarily loans, as well as a decline in the average cost of interest-bearing liabilities both in deposits and FHLB advances. These amounts were partially offset by a $9.0 million or 8.1% increase in average interest-bearing liabilities. Interest Income. Total interest income increased by $340,000 or 3.4% in fiscal 1997 compared to fiscal 1996. The increase was primarily due to a $3.0 million or 3.0% increase in the average loan portfolio and a $4.3 million or 22.7% increase in the average mortgage collateralized securities portfolio. The interest on loans also increased due to the average yield increasing from 7.87% in fiscal 1996 to 7.94% in fiscal 1997 resulting in a $70,000 or .9% 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 1997 as well as the growth in the commercial and consumer loan portfolios. These amounts were partially offset by a decline in interest on securities and other interest-earning deposits of $122,000 and $127,000, respectively, as the proceeds from sold or called securities and other available liquidity were utilized to fund loans instead of being invested in securities. Interest Expense. Total interest expense increased by $219,000 or 3.7% in fiscal 1997 compared to fiscal 1996, primarily due to an increase in the average deposit balance of $8.8 million. This amount was partially offset by a decrease in the average cost of deposits from 5.22% in fiscal 1996 to 5.08% in fiscal 1997. Interest on FHLB advances decreased $100,000 in fiscal 1997 from fiscal 1996, as the average rate paid decreased to 5.46% in fiscal 1997 from 5.96% in fiscal 1996. FHLB advances have primarily been used in addition to deposits to fund loan originations for the Bank's loan portfolio as well as to purchase adjustable-rate collateralized mortgage obligations. Provision for Loan Losses. The provision for loan losses did not change when comparing fiscal 1996 to fiscal 1997. The allowance for loan losses totalled $226,000, which represented .19% of the total loan portfolio and 54.2% of nonperforming loans at June 30, 1997. The nonperforming loans at June 30, 1997 were comprised of one- to four-family mortgage loans. Total Other Income. Total other income increased by $352,000 or 29.3% in fiscal 1997 from fiscal 1996, primarily due to a $365,000 improvement in the results of trading equity securities and a $117,000 increase in fees and service charges. These amounts were partially offset by a $118,000 decrease in gain on sale of loans. The equity securities trading portfolio was comprised of equity investments in financial institutions. The unrealized gain recognized on securities classified as trading was $131,000 at June 30, 1997. Gain on the sale of loans decreased by $118,000 or 19.1% due to a decline in loans sold of $12.9 million as a result of lower refinancing volume from higher prevailing market interest rates compared to the prior fiscal year as well as increased market competition. However, the decline in gain on the sale of loans was offset by an increase in fee and service charge income of $117,000 or 58.4% which was primarily related to new loan programs both at the retail level and with correspondent financial institutions. In an effort to offset the financial statement impact of lower mortgage banking volume, management placed greater emphasis on originating commercial and consumer loans for portfolio. Total Other Expenses. Total other expenses increased by $903,000 or 26.0% in fiscal 1997 from fiscal 1996, primarily due to a government mandated special assessment to recapitalize the SAIF, which is administered by the FDIC. The FDIC notified the Bank that the Bank's special assessment was $551,000 on a pretax basis. 10 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Compensation and benefits increased by $407,000 or 22.3%, which was primarily due to hiring individuals to support the growth in the mortgage banking, consumer and commercial loan departments. In addition, the Employee Stock Ownership Plan and Management Recognition Plans expenses were higher by $26,000 and $51,000 for fiscal 1997, respectively, compared to fiscal 1996. Also, occupancy expense was $60,000 higher during fiscal 1997 compared to fiscal 1996 due to the opening of the Bank's third branch location. These amounts were partially offset by a decrease in professional fees of $83,000 or 30.5% due to a reduction in consulting fees related to one-time projects. Federal Income Tax Expense. Federal income tax expense decreased by $143,000 or 23.0% in fiscal 1997 from fiscal 1996, due to a decline in pretax income. Market Risk Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. The Company currently does not enter into futures, swaps or options. However, the Company is 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 commitments to extend credit and standby letters of credit. These instruments involve to varying degrees elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Bank until the instrument is exercised. The Bank's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. See "Asset and Liability Management" section for additional information. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. Management realizes that certain risks are inherent and the goal is to identify and minimize the risks. The Bank has no market risk sensitivity instruments held for trading purposes. 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 mortgage loans ("ARMs"), other adjustable-rate loans and mortgage collateralized securities. The interest rate on its 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. Significant effort has been made to reduce the duration and average life of the Bank's interest-earning assets. During fiscal 1998, the Bank's ratio of interest-sensitive assets to interest-sensitive liabilities increased primarily due to purchasing additional adjustable-rate collateralized mortgage obligations. These efforts were partially offset by a decline in the ARM portfolio by $17.1 million or 34.5% resulting from borrowers refinancing primarily to fixed-rate loans in the current low interest rate environment. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Another way the Bank has managed interest rate risk is by selling most of the newly originated or purchased, fixed-rate mortgages with terms of fifteen years or greater, while originating adjustable-rate loans and balloon mortgage loans for retention in the loan portfolio. In addition, the Bank continues to emphasize consumer, home equity and commercial loans which are shorter term in nature than the mortgage portfolio. At June 30, 1998, the Bank's adjustable-rate and balloon mortgage loans amounted to $57.0 million or 31.4% of total assets. Although the Bank experienced a high level of ARM prepayments during fiscal 1998, it is anticipated that the Bank will retain a sufficient amount of newly originated balloons and other loan types to offset loan prepayments and repayments in the next fiscal year. With its funding sources, management has attempted to reduce the impact of interest rate changes by emphasizing non-interest bearing products, and term advances from the FHLB. Management presently measures the Bank's interest rate risk by computing estimated changes in net interest income ("NII") and the net portfolio value ("NPV") of equity in the event of a range of assumed changes in market interest rates. The Bank's exposure to interest rates is reviewed quarterly by senior management and the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in NPV in the event of hypothetical changes in interest rates. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust the Bank's asset and liability mix to bring interest rate risk within Board approved limits. Net Portfolio Value is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market sensitive instruments in the event of sudden and sustained 1% to 4% increases and decreases in market interest rates. The following table presents the Bank's projected change in NPV and NII for the various rate shock levels at June 30, 1998:
Net Portfolio Value Net Interest Income - ------------------------------------------------------------------------------------------------ Change in Interest $ Amount % Change $ Amount % Change Rate (Basis Points) of NPV in NPV of NII in NII - ------------------------------------------------------------------------------------------------ (Dollars in Thousands) +400 $17,428 (14.98)% $6,488 24.38% +300 18,356 (10.46) 6,291 20.61 +200 19,129 (6.68) 5,992 14.88 +100 19,771 (3.55) 5,625 7.84 Static 20,499 -- 5,216 -- (100) 19,546 (4.65) 4,703 (9.84) (200) 17,857 (12.89) 4,110 (21.21) (300) 16,506 (19.48) 3,539 (32.16) (400) 15,211 (25.80) 2,996 (42.57)
As illustrated in the table, a decrease in interest rates will result in larger net decreases in the Bank's NPV as compared to an increase in interest rates. This occurs principally because, when rates decline, the Bank does not experience a significant rise in market value for its loans because borrowers prepay at relatively high rates. Also when rates decline, the yield on the Bank's adjustable-rate loans and collateralized mortgage obligations would reprice downward faster than the average cost of funds on its deposits and FHLB advances. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. 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. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, expected rates of prepayments on loans, decay rates of deposits and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Liquidity and Capital Resources The Bank has no regulatory mandated minimum liquidity requirements. The Bank maintains a level of liquidity consistent with management's assessment of expected loan demand, proceeds from loan sales, deposit flows and yields available on interest-earning deposits and investment securities. When overnight deposits fall below management's targeted level, management generally borrows FHLB advances instead of selling securities. The Bank's principal sources of liquidity are deposits, principal and interest payments on loans, proceeds from loan sales, maturities of securities, sales of securities available for sale and FHLB advances. While scheduled loan repayments and maturing securities are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions and competition. The Bank routinely borrows FHLB advances when overnight deposits are drawn to low levels. These borrowings are made pursuant to the blanket collateral agreement with the FHLB. At June 30, 1998, the Bank has approximately $35 million of excess borrowing capacity under the blanket collateral agreement with the FHLB. The Company (excluding the Bank) also has a need for, and sources of, liquidity. Dividends from the Bank and interest income and gains on investments are its primary sources. The Company also has modest operating costs and has paid a regular quarterly cash dividend. The Bank is subject to three capital to asset requirements in accordance with banking regulations. Bank West's capital ratios are well in excess of minimum capital requirements specified by federal banking regulations. See Note 13 to consolidated financial statements for more information on the Bank's capital requirements. Year 2000 Management and a committee of the Board of Directors have developed a formal action plan which outlines the Bank's process for preparing itself for Year 2000 issues. The Bank's core data processing software is provided by an outside vendor. The outside vendor projects the software they provide will be Year 2000 compliant, including testing, during the fourth quarter of 1998. The Bank anticipates testing the software and integration with other third party software during the fourth quarter of 1998. Management also anticipates testing its remaining systems for Year 2000 compliance during the fourth quarter of 1998 and first quarter of 1999. Management presently anticipates that the costs of addressing the Year 2000 will approximate $200,000 to $250,000. These costs will be primarily for the replacement of depreciable assets. The costs associated with Year 2000 readiness are based on management's best estimates. There can be no guarantee that these estimates will be achieved and actual results that might cause differences include, but are not limited to, the ability of other 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- companies on which the Company's systems rely to modify or convert their systems to be Year 2000 compliant, the ability to locate and correct all relevant computer codes, and similar uncertainties. As testing continues and more progress is made, management will continuously be assessing the estimated Year 2000 costs. As of June 30, 1998, the Bank has not incurred any direct costs relating to Year 2000 readiness, except for staff personnel time. 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. Impact of New Accounting Standards Information pertaining to this topic appears at the conclusion of Note 1 to the consolidated financial statements, which are included as part of this report. 14 Report of Independent Auditors - -------------------------------------------------------------------------------- [GRAPHIC-LOGO FOR CROWE CHIZEK] 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, 1998 and 1997 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan August 21, 1998, except for Note 2, for which the date is September 18, 1998 15
Consolidated Balance Sheets June 30, 1998 and 1997 - -------------------------------------------------------------------------------------------------- 1998 1997 ASSETS Cash and due from financial institutions $ 2,408,476 $ 1,722,734 Interestbearing deposits in financial institutions 1,797,063 1,950,522 ------------- ------------- Total cash and cash equivalents 4,205,539 3,673,256 Interest-bearing time deposits -- 99,000 Trading securities -- 2,921,251 Securities available for sale 32,167,697 25,550,974 Securities held to maturity (fair value: 1998 - $11,079,178; 1997 - $4,001,875) 11,084,361 4,003,575 Loans held for sale 8,156,572 2,231,151 Loans, net 118,905,611 111,530,092 Federal Home Loan Bank (FHLB) stock 2,100,000 1,550,000 Premises and equipment - net 3,164,905 3,128,158 Accrued interest receivable 879,082 762,990 Mortgage servicing rights 280,869 148,569 Real estate owned 192,080 19,912 Other assets 332,136 56,263 ------------- ------------- $ 181,468,852 $ 155,675,191 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits $ 119,979,379 $ 102,862,152 FHLB borrowings 37,000,000 29,000,000 Accrued interest payable 253,037 202,217 Advanced payments by borrowers for taxes and insurance 512,538 491,710 Deferred federal income tax 335,182 287,635 Other liabilities 114,029 239,168 ------------- ------------- Total liabilities 158,194,165 133,082,882 Commitments and contingencies Shareholders' equity Preferred stock, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 10,000,000 shares authorized; 2,623,629 and 1,753,475 issued at June 30, 1998 and 1997 26,237 17,535 Additional paid-in capital 11,551,136 11,432,798 Retained earnings, substantially restricted 12,928,028 12,647,112 Net unrealized gain on securities available for sale, net of tax of ($2,644) in 1998 and ($6,548) in 1997 5,132 12,710 Management Recognition Plan (unearned shares) (360,998) (513,398) Employee Stock Ownership Plan (unallocated shares) (874,848) (1,004,448) ------------- ------------- 23,274,687 22,592,309 ------------- ------------- $ 181,468,852 $ 155,675,191 ============= =============
See accompanying notes to consolidated financial statements. 16
Consolidated Statements of Income Years ended June 30, 1998, 1997 and 1996 - ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 Interest and dividend income Loans $ 9,795,291 $ 8,206,364 $ 7,901,948 Securities 2,446,042 1,907,129 1,739,792 Other interest-earning deposits 152,152 199,210 325,796 Dividends on FHLB stock 155,825 115,838 120,467 - ------------------------------------------------------------------------------------------------------------- 12,549,310 10,428,541 10,088,003 Interest expense Deposits 5,601,870 4,924,144 4,605,347 FHLB borrowings 2,010,465 1,224,959 1,324,732 - ------------------------------------------------------------------------------------------------------------- 7,612,335 6,149,103 5,930,079 - ------------------------------------------------------------------------------------------------------------- Net interest income 4,936,975 4,279,438 4,157,924 Provision for loan losses 81,000 60,000 60,000 - ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,855,975 4,219,438 4,097,924 Other income Net gain on sales of loans 662,203 498,666 617,286 Fees and service charges 340,967 317,286 200,330 Net gain on trading securities 200,148 731,156 366,465 Net gain (loss) on securities available for sale (201,890) (285) 10,529 Other income 10,911 7,050 7,402 - ------------------------------------------------------------------------------------------------------------- 1,012,339 1,553,873 1,202,012 Other expenses Compensation and benefits 2,809,557 2,234,337 1,827,177 Federal deposit insurance expense 64,306 121,246 196,397 FDIC special assessment -- 550,556 -- Professional fees 263,374 188,561 272,163 Data processing expense 197,487 177,878 172,596 Occupancy expense 301,185 266,457 206,058 Furniture, fixtures and equipment expense 153,899 137,249 124,366 Advertising 111,351 119,993 87,770 Provision to adjust loans held for sale to lower of cost or market -- -- 22,039 Other expense 683,532 575,481 560,482 - ------------------------------------------------------------------------------------------------------------- 4,584,691 4,371,758 3,469,048 - -------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 1,283,623 1,401,553 1,830,888 Federal income tax expense 453,255 478,724 622,400 - ------------------------------------------------------------------------------------------------------------- Net income $ 830,368 $ 922,829 $ 1,208,488 ============================================================================================================= Basic earnings per share $ .35 $ .36 $ .39 ============================================================================================================= Diluted earnings per share $ .33 $ .36 $ .39 ============================================================================================================= Dividends per share $ .22 $ .19 $ .19 =============================================================================================================
See accompanying notes to consolidated financial statements. 17
Consolidated Statements of Changes in Shareholders' Equity Years ended June 30, 1998, 1997 and 1996 - ----------------------------------------------------------------------------------------------------------------------- Net Unrealized Gain (Loss) Additional on Securities Unearned Unallocated Total Common Paid-in Retained Available for MRP ESOP Shareholders' Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity - ----------------------------------------------------------------------------------------------------------------------- Balance at July 1, 1995 $23,144 $17,812,757 $11,626,136 $(27,295) $(1,263,648) $28,171,094 Net income for the year ended June 30, 1996 1,208,488 1,208,488 Issuance of 92,575 shares of common stock for Management Recognition Plan (MRP) 926 741,658 $(742,584) Shares earned under MRP 99,120 99,120 Cash dividends of $.19 per share (603,382) (603,382) Repurchase of 207,375 shares of stock (2,074) (2,046,987) (2,049,061) Shares committed to be released under Employee Stock Ownership Plan 34,679 129,600 164,279 Change in net unrealized gain (loss) on securities available for sale, net of tax of $92,775 (180,092) (180,092) - ---------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 21,996 16,542,107 12,231,242 (207,387) (643,464) (1,134,048) 26,810,446 Net income for the year ended June 30, 1997 922,829 922,829 Net grant of 1,742 shares of common stock for MRP 19,852 (19,852) Shares earned under MRP 149,918 149,918 Cash dividends of $.19 per share (506,959) (506,959) Repurchase of 446,100 shares of stock (4,461) (5,189,405) (5,193,866)
See accompanying notes to consolidated financial statements. 18
Consolidated Statements of Changes in Shareholders' Equity (Continued) Years ended June 30, 1998, 1997 and 1996 - ----------------------------------------------------------------------------------------------------------------------- Net Unrealized Gain (Loss) Additional on Securities Unearned Unallocated Total Common Paid-in Retained Available for MRP ESOP Shareholders' Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity - ----------------------------------------------------------------------------------------------------------------------- Shares committed to be released under Employee Stock Ownership Plan $ 60,244 $ 129,600 $ 189,844 Change in net unrealized gain (loss) on securities available for sale, net of tax of $113,383 $220,097 220,097 - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1997 $17,535 11,432,798 $12,647,112 12,710 $(513,398) (1,004,448) 22,592,309 Net income for the year ended June 30, 1998 830,368 830,368 Shares earned under MRP 152,400 152,400 Cash dividends of $.22 per share (539,433) (539,433) Issuance of 876,654 shares of common stock for three-for-two stock split, net of cash paid on fractional shares 8,767 (10,019) (1,252) Repurchase of 7,500 shares of stock (75) (105,863) (105,938) Shares committed to be released under Employee Stock Ownership Plan 216,928 129,600 346,528 Shares issued upon exercise of stock options 10 7,273 7,283 Change in net unrealized gain (loss) on securities available for sale, net of tax benefit of $3,904 (7,578) (7,578) - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1998 $26,237 $11,551,136 $12,928,028 $ 5,132 $(360,998) $(874,848) $23,274,687 ========================================================================================================================
See accompanying notes to consolidated financial statements. 19
Consolidated Statements of Cash Flows Years ended June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 830,368 $ 922,829 $ 1,208,488 Adjustments to reconcile net income to net cash from operating activities Purchase of trading securities (2,530,635) (5,428,775) (2,224,537) Proceeds from sales of trading securities 4,486,385 3,947,118 1,882,564 Origination and purchase of mortgage loans for sale (50,245,577) (30,350,557) (48,488,782) Proceeds from sales of mortgage loans 44,982,359 32,915,164 45,798,332 Net (gain) loss on sales of: Loans (662,203) (498,666) (617,286) Securities 1,742 (730,871) (376,994) Real estate owned (2,241) (210) (4,806) Depreciation 213,787 192,495 179,742 Amortization of premium, net 79,741 13,848 103,072 ESOP expense 346,528 189,844 164,279 MRP expense 152,400 149,918 99,120 Loss on disposal of fixed assets -- -- 2,662 Provision for loan losses 81,000 60,000 60,000 Provision to adjust loans held for sale to lower of cost or market -- -- 22,039 Change in: Deferred loan fees (180,698) (77,301) (47,292) Other assets and accrued interest receivable (541,027) (85,866) (15,373) Other liabilities and accrued interest payable (2,039) (36,442) (144,282) - -------------------------------------------------------------------------------------------------------------- Net cash from operating activities (2,990,110) 1,182,528 (2,399,054) Cash flows from investing activities Purchase of FHLB stock (550,000) (75,000) -- Net decrease in interest-bearing time deposits 99,000 199,000 989,000 Loan originations, net of repayments (4,296,879) (13,664,118) 3,696,997 Loans purchased for portfolio (3,295,025) (2,156,750) (1,921,400) Purchase of securities available for sale (24,143,884) (14,725,895) (21,217,480) Proceeds from sales of securities available for sale 15,634,260 10,731,577 14,077,014 Purchase of securities held to maturity (11,102,747) (3,002,813) -- Proceeds from maturities, calls and principal payments of securities available for sale 2,786,772 1,545,498 8,874,974 Proceeds from maturities, calls and principal payments of securities held to maturity 4,000,625 1,000,000 2,877,708 Property and equipment expenditures (250,534) (213,681) (202,205) Proceeds from sale of real estate owned 162,918 25,566 50,181 - -------------------------------------------------------------------------------------------------------------- Net cash from investing activities (20,955,494) (20,336,616) 7,224,789
See accompanying notes to consolidated financial statements. 20
Consolidated Statements of Cash Flows (Continued) Years ended June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net increase in deposits $ 17,117,227 $ 11,834,080 $ 5,847,822 Repayment of FHLB borrowings (43,000,000) (11,000,000) (11,922,256) Proceeds from FHLB borrowings 51,000,000 21,000,000 6,000,000 Repurchase of common stock (105,938) (5,193,866) (2,049,061) Issuance of shares upon exercise of stock options 7,283 -- -- Dividends paid on common stock (540,685) (506,959) (603,382) - -------------------------------------------------------------------------------------------------------------- Net cash from financing activities 24,477,887 16,133,255 (2,726,877) - -------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 532,283 (3,020,833) 2,098,858 Cash and cash equivalents at beginning of period 3,673,256 6,694,089 4,595,231 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 4,205,539 $ 3,673,256 $ 6,694,089 ============================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the period for Interest $ 7,561,515 $ 6,103,832 $ 5,954,870 Income taxes 768,119 456,050 520,000 Supplemental disclosure of noncash investing activities: Transfer of loans from held for sale to held to maturity -- -- 1,756,663 Transfer from loans to real estate owned 316,083 45,268 45,375
During May of 1998, securities with a carrying value and fair value of $1,165,649 were transferred from trading securities to securities available for sale. 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. See accompanying notes to consolidated financial statements. 21 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Bank West Financial Corporation (the "Company") was organized as a thrift holding company for Bank West (the "Bank"), a state-chartered stock 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 mortgage company for the purpose of selling non-conforming originated and purchased loans into the secondary market. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. 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 classification and carrying value of securities, mortgage servicing rights, and loans held for sale and the fair value of stock options and other financial instruments. Concentrations of Credit Risk: The Bank grants mortgage loans to customers primarily in Kent County and Eastern Ottawa 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 Flow Reporting: Cash and cash equivalents are defined as cash and due from banks and other investments with original maturities of three months or less. Net cash flows are reported 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: Securities which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Securities, other than trading securities, that might be sold prior to maturity are classified as available for sale. 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. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Premiums and discounts on securities are recognized in interest income using the level yield method over the period to maturity. Loans Held for Sale: Mortgage loans originated and purchased 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 sales of loans are recognized when proceeds from the loan sales are received by the Bank. 22 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans: Loans are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan fees and costs, and charge-offs. Interest income on loans is accrued over the term of the loans based upon the principal outstanding. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due 90 days or more. Payments received on such loans are reported as principal reductions. Loan fees, net of certain direct loan origination costs, are deferred. The net amount deferred is reported 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 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. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan. Mortgage Loan Servicing Rights: Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Premises and Equipment: 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 40 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from three to ten years. Maintenance and repairs are charged to expense and improvements are capitalized. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of acquisition, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. After acquisition, the property is carried at the lower of cost or fair value, less estimated costs to sell. A valuation allowance is recorded through a charge to income for the amount of selling costs. Valuations are periodically performed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Costs relating to improvement of property are capitalized, whereas costs and revenues relating to the holding of property are expensed. 23 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: Income tax expense is based on the amount of taxes due on the Company's tax return plus changes in the 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 (ESOP): The cost of shares issued to the ESOP but not yet allocated to participants is presented 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 additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings while dividends on unallocated ESOP shares are reflected as a reduction of debt and accrued interest. Management Recognition Plan (MRP): The MRP is a stock award plan for which the measurement of total compensation cost is based upon the fair value of the shares on the date of grant. 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 unearned compensation value of the MRPs is shown as a reduction of shareholders' equity. Stock Option Plan (SOP): Expense for employee compensation under SOPs is recognized only if options are granted below the market price at the grant date. As shown in a separate note, pro forma disclosures of net income and earnings per share are provided as if the fair value method were used for stock-based compensation. 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 have the effect of impeding an unfriendly takeover or attempted change in control. Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance-sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. Earnings and Dividends Per Share: The accounting standard for computing earnings per share was revised for fiscal 1998, and all earnings per share data previously reported have been restated to follow the new standard. Basic earnings per share is based on weighted average common shares outstanding. ESOP shares are considered outstanding as they are committed to be released; unearned shares are not considered outstanding. MRP shares are considered outstanding as they vest. Diluted earnings per share further assumes issuance of dilutive potential common shares relating to outstanding stock options and unvested MRP shares. All earnings and dividends per share amounts have been retroactively adjusted for a three-for-two stock split paid in December, 1997. Issued But Not Yet Adopted Accounting Standards: Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued by the FASB in 1996. It revised the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It was effective for some transactions in fiscal 1997 and will be effective for others in fiscal 1998. The effect on the consolidated financial statements was not material. 24 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, has been issued which will require future reporting of comprehensive income beginning with the quarter ended September 30, 1998. Comprehensive income is net income plus changes in the unrealized gain (loss) on securities available for sale, net of tax. A new accounting standard, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, will require future reporting of additional information related to material business segments beginning with the year ended June 30, 1999. The Company is in the process of determining whether the new standard would result in the identification of additional reportable business segments. A new accounting standard, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will require all derivatives to be recognized at fair value as either assets or liabilities in the Consolidated Balance Sheets beginning with the quarter ended September 30, 1999. Changes in the fair value of derivatives not designated as hedging instruments are to be recognized currently in earnings. Gains or losses on derivatives designated as hedging instruments are either to be recognized currently in earnings or are to be recognized as a component of other comprehensive income, depending on the intended use of the derivatives and the resulting designations. The Company does not believe adoption of this new standard will have a material impact on its consolidated financial position or results of operations. Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - SECURITIES The amortized cost and estimated market values of securities at June 30, are as follows:
Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- 1998 U.S. agencies $ 3,995,488 -- $ (3,613) $ 3,991,875 Mortgage-backed securities 817,236 -- (9,916) 807,320 Collateralized mortgage obligations 24,596,237 $230,029 (210,089) 24,616,177 Equity securities 2,750,960 61,250 (59,885) 2,752,325 - -------------------------------------------------------------------------------------------------------------- $32,159,921 $291,279 $ (283,503) $32,167,697 ============================================================================================================== 1997 U.S. agencies $ 2,998,182 -- $ (21,544) $2,976,638 Mortgage-backed securities 1,579,891 $ 4,016 (1,212) 1,582,695 Collateralized mortgage obligations 20,953,643 88,217 (50,219) 20,991,641 - -------------------------------------------------------------------------------------------------------------- $25,531,716 $ 92,233 $ (72,975) $25,550,974 ==============================================================================================================
25 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued)
Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------- 1998 Collateralized mortgage obligations $11,084,361 $42,498 $(47,681) $11,079,178 ============================================================================================================= 1997 U.S. agencies $ 1,000,762 $ 1,113 -- $ 1,001,875 Collateralized mortgage obligations 3,002,813 -- $ (2,813) 3,000,000 - ------------------------------------------------------------------------------------------------------------- $ 4,003,575 $ 1,113 $ (2,813) $ 4,001,875 =============================================================================================================
The scheduled maturities of securities available for sale and securities held to maturity at June 30, 1998 are shown below. Securities not due at a single maturity date are shown separately. 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 after one year through five years $ 3,995,488 $ 3,991,875 -- -- Mortgage-backed securities and collateralized mortgage obligations 25,413,473 25,423,497 $11,084,361 $11,079,178 Equity securities 2,750,960 2,752,325 - -------------------------------------------------------------------------------------------------------------- $32,159,921 $32,167,967 $11,084,361 $11,079,178 ==============================================================================================================
Proceeds from sales of securities amounted to approximately $20,121,000, $14,679,000 and $15,969,000 for the years ended June 30, 1998, 1997 and 1996, respectively, including approximately $4,486,000, $3,947,000, and $1,883,000 relative to trading securities for the years ended June 30, 1998, 1997 and 1996. Gains (losses) on securities, reflected in the consolidated statements of income, were as follows for the years ended June 30: 26 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued)
1998 1997 1996 - --------------------------------------------------------------------------------------------- Gross realized gains on sales of: Securities available for sale $ 59,447 $ 17,075 $ 27,965 Trading securities 667,238 602,570 372,278 - --------------------------------------------------------------------------------------------- 726,685 619,645 400,243 Gross realized losses on sales of: Securities available for sale (1,059) (17,360) (17,436) Trading securities -- (1,977) -- - --------------------------------------------------------------------------------------------- (1,059) (19,337) (17,436) - --------------------------------------------------------------------------------------------- Net realized gains 725,626 600,308 382,807 Net unrealized gain (loss) on trading securities (467,070) 130,563 (5,813) Other-than-temporary market decline of available for sale securities (260,278) -- -- - --------------------------------------------------------------------------------------------- $ (1,742) $730,871 $376,994 =============================================================================================
During May of 1998, securities with a carrying value and fair value of $1,165,649 were transferred from trading securities to securities available for sale to reflect management's intent to realize the long-term potential underlying such securities rather than to benefit from short-term changes in market values. As of September 18, 1998, the fair value of certain equity securities included in the available for sale classification have declined by $269,000 from June 30, 1998. NOTE 3 - 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:
1998 1997 1996 - --------------------------------------------------------------------------------------------- Loans held for sale - beginning of period $ 2,231,151 $ 4,297,092 $ 2,746,019 Activity during the periods: Loans originated and purchased for sale 50,245,577 30,350,557 48,488,782 Proceeds from sale of mortgage loans (44,982,359) (32,915,164) (45,798,332) Transfer of loans from held for sale to held to maturity -- -- (1,756,663) Gain on sale of loans 662,203 498,666 617,286 - --------------------------------------------------------------------------------------------- Loans held for sale - end of period $ 8,156,572 $ 2,231,151 $ 4,297,092 =============================================================================================
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at June 30 are summarized as follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------- Mortgage loan portfolios serviced for FHLMC $33,201,177 $26,980,056 $28,590,578 ============================================================================================= Loan servicing fee income $ 78,433 $ 70,661 $ 66,725 =============================================================================================
27 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES (Continued) Custodial escrow balances maintained in connection with the foregoing loan servicing were $192,262 and $116,813 at June 30, 1998 and 1997. Following is the activity for mortgage servicing rights for the years ended June 30:
1998 1997 1996 - --------------------------------------------------------------------------------------------- Balance at July 1 $148,569 $142,697 $ 68,196 Additions 190,800 16,372 124,501 Amortization (58,500) (10,500) (50,000) - --------------------------------------------------------------------------------------------- Balance at June 30 $280,869 $148,569 $142,697 =============================================================================================
NOTE 4 - LOANS Loans are classified as follows at June 30:
1998 1997 - --------------------------------------------------------------------------------------------- Real estate loans: One-to four-family residential - fixed rate $ 15,383,013 $ 18,595,586 One-to four-family residential - balloon 24,413,846 12,493,524 One-to four-family residential - adjustable 32,599,924 49,743,799 Construction 24,730,805 21,500,849 Commercial mortgages 6,485,449 2,764,314 Home equity lines of credit 9,877,359 6,370,698 Second mortgages 8,148,412 4,252,996 Land development 675,498 59,764 - --------------------------------------------------------------------------------------------- Total mortgage loans 122,314,306 115,781,530 Consumer loans 1,665,606 1,081,391 Commercial non-mortgage 3,253,091 2,032,190 - --------------------------------------------------------------------------------------------- Total 127,233,003 118,895,111 Less: Loans in process 8,248,310 7,169,073 Net deferred fees (costs) (210,614) (29,916) Allowance for loan losses 289,696 225,862 - --------------------------------------------------------------------------------------------- $118,905,611 $111,530,092 =============================================================================================
An analysis of the allowance for loan losses for the years ended June 30 is follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------- Beginning balance $225,862 $165,862 $108,000 Provision charged to operations 81,000 60,000 60,000 Charge-offs, net of recoveries (17,166) -- (2,138) - ---------------------------------------------------------------------------------------------- Ending balance $289,696 $225,862 $165,862 ==============================================================================================
28 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 4 - LOANS (Continued) During the years ended June 30, 1998, 1997 and 1996, the Company had no loans which were considered impaired. Certain directors and executive officers of the Company 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. The amounts were not material for the years ended June 30, 1998 and 1997. NOTE 5 - PREMISES AND EQUIPMENT - NET A summary of premises and equipment is as follows at June 30:
1998 1997 - -------------------------------------------------------------------------------------------- Land $ 529,300 $ 529,300 Bank building and improvements 2,399,476 2,361,987 Furniture and equipment 1,180,697 967,652 - -------------------------------------------------------------------------------------------- 4,109,473 3,858,939 Accumulated depreciation (944,568) (730,781) - -------------------------------------------------------------------------------------------- $3,164,905 $3,128,158 ============================================================================================
NOTE 6 - DEPOSITS Deposits at June 30 are summarized as follows:
1998 1997 - ------------------------------------------------------------------------------------------------------------ Amount % Amount % - ------------------------------------------------------------------------------------------------------------ Noninterest-bearing $ 7,010,473 5.84% $ 3,965,790 3.86% Now accounts and MMDAs 4,434,858 3.70 3,848,395 3.74 Passbook and statement savings 19,334,577 16.11 17,387,602 16.90 Certificates of deposit 89,199,471 74.35 77,660,365 75.50 - ----------------------------------------------------------------------------------------------------------- $119,979,379 100.00% $102,862,152 100.00% ===========================================================================================================
At June 30, 1998, the scheduled maturities of all certificates of deposit are as follows by fiscal year-end:
1999 $65,436,775 2000 17,718,016 2001 1,944,699 2002 1,953,959 2003 2,096,984 Thereafter 49,038 - -------------------------------------------------------------------------------- $89,199,471 ================================================================================
29 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 6 - DEPOSITS (Continued) As of June 30, 1998 and 1997, the Bank had time deposit accounts with balances of $100,000 or more of $17,183,000 and $14,120,000. Related party deposits were $2,095,000 and $974,000 at June 30, 1998 and 1997. On September 30, 1996, as part of the omnibus appropriations package signed by President Clinton, the government mandated a special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The one-time, special SAIF assessment amounted to $.657 for every $100 of SAIF-insured deposits as of March 31, 1995. The FDIC notified the Bank that the Bank's special assessment was $551,000 which, after taxes, reduced the Company's net income by $364,000 or $.14 per share for the year ended June 30, 1997. The Bank's deposit premiums, which were $.23 for every $100 of assessable deposits in 1996, were reduced to $.064 for every $100 of assessable deposits beginning January 1, 1997. NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS Advances from the Federal Home Loan Bank (FHLB) 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, 1998 1998 1997 - ------------------------------------------------------------------------------------------------------------- Putable advances: January 29, 2003 5.23% $10,000,000 -- January 16, 2008 5.33 10,000,000 -- April 30, 2008 5.23 2,000,000 -- Adjustable rate advances: August 4, 1997 - reprices quarterly -- $ 3,000,000 September 22, 1997 - reprices quarterly -- 1,000,000 October 27, 1997 - reprices daily -- 1,000,000 October 30, 1997 - reprices monthly -- 2,000,000 November 3, 1997 - reprices daily -- 1,000,000 December 15, 1997 - reprices quarterly -- 1,000,000 December 18, 1997 - reprices quarterly -- 1,000,000 December 22, 1997 - reprices daily -- 3,000,000 December 24, 1997 - reprices quarterly -- 2,000,000 March 27, 1998 - reprices quarterly -- 2,000,000 April 30, 1998 - reprices quarterly -- 1,000,000 September 14, 1998 - reprices daily 5.75 1,000,000 -- September 16, 1998 - reprices daily 5.75 1,000,000 -- October 13, 1998 - reprices daily 5.75 1,000,000 -- October 30, 1998 - reprices monthly 5.81 4,000,000 4,000,000 November 16, 1998 - reprices daily 5.75 1,000,000 -- December 28, 1998 - reprices daily 5.75 1,000,000 -- April 30, 1999 - reprices quarterly 5.69 1,000,000 -- October 30, 1999 - reprices monthly 5.81 5,000,000 5,000,000 August 26, 2001 - reprices monthly -- 2,000,000 - ------------------------------------------------------------------------------------------------------------- $37,000,000 $29,000,000 =============================================================================================================
30 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued) For the putable advances, the FHLB has the option to convert the advance to an adjustable rate beginning one, two or five years after the purchase date, depending on the advance, and quarterly thereafter. Maturities of borrowings outstanding at June 30, 1998 are as follows for the next 5 years: 1999 $10,000,000 2000 5,000,000 2001 -- 2002 -- 2003 10,000,000 Thereafter 12,000,000 - -------------------------------------------------------------------------------- $37,000,000 ================================================================================ Prepayment of certain remaining advances is permitted only upon the Bank'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. The Bank did not incur prepayment penalties for the years ended June 30, 1998 and 1997. NOTE 8 - FEDERAL INCOME TAXES The provision for federal income taxes for the years ended June 30 consists of the following:
1998 1997 1996 - --------------------------------------------------------------------------------------------- Current income tax expense $401,804 $530,231 $496,158 Deferred income tax expense (benefit) 51,451 (51,507) 126,242 - --------------------------------------------------------------------------------------------- $453,255 $478,724 $622,400 =============================================================================================
Deferred tax assets and liabilities at June 30 consist of the following:
1998 1997 - --------------------------------------------------------------------------------------------- Deferred tax assets: Loan fees -- $ 20,120 Accrued expenses $ 15,300 16,116 Management Recognition Plan 34,054 34,200 Loans marked-to-market 89,422 27,736 Other 31,084 3,067 - --------------------------------------------------------------------------------------------- 169,860 101,239 Deferred tax liabilities Loan fees 81,172 -- Bad debt allowance 162,555 188,779 FHLB stock dividend 49,116 49,116 Fixed assets 114,060 93,917 Mortgage servicing rights 95,495 50,514 Unrealized gain on securities available for sale 2,644 6,548 - --------------------------------------------------------------------------------------------- 505,042 388,874 - --------------------------------------------------------------------------------------------- Net deferred tax liability $(335,182) $(287,635) =============================================================================================
31 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 8 - FEDERAL INCOME TAXES (Continued) No valuation allowance was provided on deferred tax assets. The provision for federal income taxes differs from that computed at the statutory corporate tax rate as follows:
Years ended ---------------- June 30, ------------------ 1998 1997 1996 - --------------------------------------------------------------------------------------------- Statutory rate 34% 34% 34% Tax expense at statutory rate $436,432 $476,528 $622,502 Tax exempt interest -- -- (639) Stock compensation plans 16,982 3,150 2,669 Other (159) (954) (2,132) - --------------------------------------------------------------------------------------------- $453,255 $478,724 $622,400 ============================================================================================= Effective rate 35% 34% 34%
Differences in 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, 1998 and 1997 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. The Company files consolidated federal income tax returns on a fiscal year basis. Prior to July 1, 1997, if certain conditions were met in determining taxable income, the Bank was allowed a special bad debt deduction based on a percentage of taxable income. Tax legislation passed in August 1996 now requires the Bank to deduct a provision for bad debts for tax purposes based on actual loss experience and recapture the excess bad debt reserve accumulated in tax years after 1987. The related amount of deferred tax liability which must be recaptured is approximately $265,572 and is payable over a six-year period beginning no later than the year ending June 30, 1999. NOTE 9 - EARNINGS PER SHARE A reconciliation of the numerators and denominators of basic and diluted earnings per share for the years ended June 30 are as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Basic earnings per share Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488 - ------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934 - ------------------------------------------------------------------------------------------------------------- Basic earnings per share $ .35 $ .36 $ .39 =============================================================================================================
32 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 9 - EARNINGS PER SHARE (Continued)
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Diluted earnings per share Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488 - -------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934 Add: dilutive effects of assumed exercise of stock options and unvested MRP's Stock options 107,670 10,827 269 MRP shares 10,413 -- -- - -------------------------------------------------------------------------------------------------------------- Weighted average common and dilutive potential common shares outstanding 2,488,326 2,583,162 3,097,203 - -------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ .33 $ .36 $ .39 ==============================================================================================================
Stock options for 26,026 and 78,113 shares of common stock were not considered in the computation of diluted earnings per share for the years ended June 30, 1997 and 1996, respectively, as they were antidilutive. All share and per share amounts have been retroactively adjusted for stock splits. 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 commitments to make loans, unused lines of credit, loans in process and letters of credit. 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:
1998 1997 - -------------------------------------------------------------------------------- Commitments to make loans $7,035,000 $3,201,000 Unused lines of credit 11,172,000 6,208,000 Loans in process 8,248,000 7,169,000 Letters of credit 278,000 --
Approximately 61% and 33% of commitments to make loans and to fund loans in process were made at fixed rates as of June 30, 1998 and 1997. Rate ranges for these fixed rate commitments were 7.0% to 9.125% and 7.625% to 12.25% as of June 30, 1998 and 1997. 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. 33 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued) The Company is a defendant in a lawsuit. The complaint alleges that the Company has been engaged in the unauthorized practice of law as the result of charging a fee for preparing loan documents. The complaint seeks class action certification, restitution of all fees paid for the last six years, interest, attorney fees and other costs. Management believes after consultation with legal counsel, that the complaint is wholly without merit, and intends to vigorously defend against this suit and has filed a motion for summary judgment and dismissal. The Company and the Bank are also subject to certain other 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 four of its officers. Under the terms of those agreements, certain events leading to separation from the Company could result in cash payments aggregating up to approximately $728,000 if termination occurred in calendar 1999. NOTE 11 - EMPLOYEE BENEFIT 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 a percentage of the participant's career average salary for each year of service. 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 against income for the years ended June 30, 1998, 1997 and 1996. Specific plan assets and accumulated benefit information for the Company'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. Since the plan is overfunded, no liability for contributions is necessary. The Company maintains a qualified 401(k) plan 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 makes matching contributions 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 at the rate of 20% per year, with 100% vesting occurring after 6 years of service. The Company's contribution for fiscal 1998, 1997 and 1996 was approximately $9,600, $5,200 and $3,000, respectively. NOTE 12 - STOCK-BASED COMPENSATION PLANS Employee Stock Ownership Plan (ESOP) An ESOP was established for the benefit of substantially all employees. The ESOP borrowed $1,296,048 from the Company and used those funds to acquire 243,009 shares of the Company's stock at $5.33 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 34 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued) 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. The balance of the loan was $968,684 at June 30, 1998. An employee becomes fully vested upon completion of seven years of qualifying service. Upon withdrawal from the plan, participants are entitled to a distribution in cash or Company stock, or both. During 1998, 1997 and 1996, 24,300 shares of stock with an average fair value of $14.26 per share in 1998, $7.81 per share in 1997 and $6.76 per share in 1996 were committed to be released. Distributions of 4,802 and 1,295 shares were made to participants during the years ended June 30, 1998 and 1997. ESOP compensation expense for the years ended June 30, 1998, 1997 and 1996 was $346,528, $189,844, and $164,279. Shares held by the ESOP at June 30 are as follows:
1998 1997 - ------------------------------------------------------------------------------ Allocated to participants 72,878 53,380 Unallocated 164,034 188,334 - ------------------------------------------------------------------------------ Total ESOP shares 236,912 241,714 - ------------------------------------------------------------------------------ Fair value of unallocated shares $2,316,980 $1,695,006 ==============================================================================
All share and per share amounts have been retroactively adjusted for stock splits. Stock Option Plan (SOP) and Management Recognition Plan (MRP) 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 SOP and the officers' MRP are administered by a committee of directors of the Company, while grants under the directors' SOP and the directors' MRP are pursuant to formulas set forth in the plans. MRP shares are granted at the closing market price of the Company's stock on the date of grant and vest in five equal annual installments from the date of grant. SOP options are granted at the average of the high and low market prices of the Company's stock on the date of grant and vest in five equal annual installments and expire ten years from the date of grant. 35 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
Directors' SOP Employees' SOP Directors' MRP Employees' MRP Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Grant Date Grant Date Options Price Options Price Shares Fair Value Shares Fair Value - -------------------------------------------------------------------------------------------------------------- Total options/shares available 104,146 243,009 41,657 97,206 Balance outstanding July 1, 1995 Grant 10/25/95 78,113 $ 6.96 37,488 $6.67 Grant 10/26/95 73,875 $6.67 Grant 11/1/95 36,000 $6.63 - -------------------------------------------------------------------------------------------------------------- Balance outstanding June 30, 1996 78,113 6.96 36,000 6.63 37,488 6.67 73,875 6.67 Granted 7/8/96 21,450 7.33 Granted 10/25/96 26,026 7.25 4,169 7.25 Granted 12/20/96 88,350 7.17 Forfeited (6,150) 7.08 (1,555) 6.67 - -------------------------------------------------------------------------------------------------------------- Balance outstanding June 30, 1997 104,139 7.03 139,650 7.06 41,657 6.73 72,320 6.67 Granted 9/2/97 69,000 11.375 Exercised (1,000) 7.28 Forfeited (3,150) 7.36 - -------------------------------------------------------------------------------------------------------------- Balance outstanding June 30, 1998 104,139 7.03 204,500 8.51 41,657 6.73 72,320 6.67 ============================================================================================================== Options/shares exercisable (vested) 36,450 34,450 15,827 28,928 ============================================================================================================== Options/shares available for future grant 7 37,509 0 24,886 ==============================================================================================================
During the years ended June 30, 1998, 1997 and 1996, $152,400, $149,918, and $99,120 was charged to compensation expense for the MRPs. The following pro forma information presents net income and earnings per share had the fair value method of Statement of Financial Accounting Standards No. 123 (SFAS No. 123) been used to measure compensation cost for stock options granted during fiscal 1998, 1997 and 1996. No compensation cost was actually recognized for stock options for the years ended June 30, 1998, 1997 and 1996. 36 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
Years ending ---------------- June 30, ---------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Net income as reported $ 830,368 $922,829 $1,208,488 Pro forma net income 716,649 885,286 1,175,228 Basic earnings per share as reported .35 .36 .39 Pro forma basic earnings per share .30 .33 .38 Diluted earnings per share as reported .33 .36 .39 Pro forma diluted earnings per share .29 .33 .38 Weighted-average grant-date fair value per option 2.07 .96 .92
In future years, the pro forma effect of not applying SFAS No. 123 is expected to increase as additional options are granted. The fair value of options granted during the years ended June 30, 1998, 1997 and 1996, respectively, is estimated using the following weighted-average information: risk-free interest rate of 6.22%, 6%, and 5.75%, expected life of 5 years, expected monthly volatility of stock price of 7.1%, 6.3% and 6.3%, and expected dividends of 1.90%, 3% and 2.49% per year. At June 30, 1998, options outstanding were as follows: Number of options 308,639 Range of exercise price $6.63 - $11.375 Weighted-average exercise price $8.00 Weighted-average remaining option life 8.13 years For options now exercisable: number 70,900 Weighted-average exercise price $6.98 All share and per share amounts have been retroactively adjusted for stock splits. NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS Effective December 29, 1997, Bank West, the Company's wholly-owned subsidiary, completed its conversion to a Michigan chartered savings bank. As a state chartered savings bank, Bank West's primary regulatory agencies are the Financial Institutions Bureau of the State of Michigan and the Federal Deposit Insurance Corporation. The Bank is subject to regulatory capital requirements administered by these federal regulatory agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 37 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk- Weighted Assets Tier 1 Capital - -------------------------------------------------------------------------------- Total Tier 1 to Adjusted Assets - -------------------------------------------------------------------------------- Well capitalized 10% 6% 5% Adequately capitalized 8 4 4 Undercapitalized 6 3 3
As a result of the Bank's charter change, the June 30, 1998 and 1997 regulatory capital levels are based upon the Federal Deposit Insurance Corporation and Office of Thrift Supervision guidelines, respectively. At year end, actual capital levels (dollars in millions) and minimum required levels were:
Minimum Required to be Well Minimum Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Regulations - --------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- 1998 Total capital (to risk weighted assets) $20.1 20.9% $7.7 8.0% $ 9.6 10.0% Tier 1 capital (to risk weighted assets) 19.8 20.6 3.9 4.0 5.8 6.0 Tier 1 capital (to average total assets) 19.8 11.3 7.0 4.0 8.8 5.0 1997 Total capital (to risk weighted assets) $18.7 23.4% $6.4 8.0% $ 8.0 10.0% Tier 1 (core) capital (to risk weighted assets) 18.4 23.1 3.2 4.0 4.8 6.0 Tier 1 (core) capital (to adjusted total assets) 18.4 12.2 4.5 3.0 7.6 5.0 Tangible capital (to adjusted total assets) 18.4 12.2 2.3 1.5 N/A
At June 30, 1998 and 1997, the Bank was categorized as well capitalized. During fiscal 1997, the Bank made a capital distribution to the Company in the amount of $2,500,000. This distribution was made primarily to allow the Company to make stock repurchase transactions discussed in Note 14. 38 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) At the time of conversion to a stock association, the Bank 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 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 eligible 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. Federal and state banking laws and regulations place certain restrictions on the amount of dividends a bank can pay to its holding company. Under the most restrictive of these dividend limitations, at June 30, 1998, approximately $10,963,000 was available to the Bank for the payment of dividends to the holding company without prior regulatory approval. NOTE 14 - STOCK REPURCHASE PROGRAMS During fiscal 1998, the Company repurchased 7,500 shares of its common stock after receiving approval from its federal regulator to repurchase up to 5%, or 133,500 shares of the Company's common stock. The shares were repurchased at an average price of $14.125 and remain available for general corporate purposes, including issuance in connection with stock-based compensation plans. 39 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 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 SHEETS 1998 1997 - --------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 284,085 $ 70,523 Interest-bearing time deposits -- 99,000 Trading securities -- 2,921,251 Securities available for sale 2,752,325 -- Federal income tax receivable 149,171 -- Loan receivable from Employee Stock Ownership Plan 968,684 1,077,382 Investment in subsidiary bank 19,857,357 18,451,967 Accrued interest receivable 894 1,122 Other assets 12,670 5,540 - --------------------------------------------------------------------------------------------- Total assets $24,025,186 $22,626,785 ============================================================================================= LIABILITIES Note payable to subsidiary $ 750,000 -- Deferred taxes 464 -- Other liabilities 35 $ 34,476 SHAREHOLDERS' EQUITY 23,274,687 22,592,309 - --------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $24,025,186 $22,626,785 =============================================================================================
40 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME, for the years: ------------------ June 30, -------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Interest and dividend income Securities $ 150,447 $ 55,455 $ 253,122 Loan to Employee Stock Ownership Plan 72,605 79,892 86,691 Other interest-bearing deposits 18,595 53,732 164,328 Dividends from subsidiary bank -- 2,500,000 -- - -------------------------------------------------------------------------------------------------------- 241,647 2,689,079 504,141 Interest expense 99,850 11,794 -- - -------------------------------------------------------------------------------------------------------- Net interest income 141,797 2,677,285 504,141 Other income Net gain on trading securities 200,148 731,156 366,465 Net gain (loss) on securities available for sale (259,730) (14,995) (7,725) - -------------------------------------------------------------------------------------------------------- (59,582) 716,161 358,740 Operating expenses 152,108 88,468 90,521 - -------------------------------------------------------------------------------------------------------- Income before federal income taxes and equity in undistributed earnings of subsidiary bank (69,893) 3,304,978 772,360 Federal income tax expense (benefit) (23,745) 273,700 262,500 - -------------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiary bank (46,148) 3,031,278 509,860 Equity in undistributed (excess distributed) earnings of subsidiary Bank 876,516 (2,108,449) 698,628 - -------------------------------------------------------------------------------------------------------- Net income $ 830,368 $ 922,829 $1,208,488 ========================================================================================================
41 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASHFLOWS, for the years: -------------------- June 30, -------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 830,368 $ 922,829 $ 1,208,488 Adjustments to reconcile net income to cash provided by operations Equity in undistributed (excess distributed) earnings of subsidiary Bank (876,516) 2,108,449 (698,628) Purchase of trading securities (2,530,635) (5,428,775) (2,224,537) Proceeds from sale of trading securities 4,486,385 3,947,118 1,882,564 (Gain) loss on securities 59,582 (716,161) (358,740) Net accretion of securities -- -- (1,411) Change in Accrued interest receivable 228 18,611 64,357 Other assets (156,302) 30,089 21,884 Other liabilities (34,441) 22,495 (55,739) - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,778,669 904,655 (161,762) Cash flows from investing activities Purchases of securities available for sale (1,904,438) -- (2,000,000) Proceeds from sales of securities available for sale 59,399 2,481,875 1,091,200 Proceeds from maturities and calls of securities available for sale -- -- 3,782,408 Principal reduction on ESOP note receivable 108,698 101,410 94,611 Contribution to subsidiary Bank (38,426) (37,921) (42,527) Net (increase) decrease in interest-bearing time deposits 99,000 99,000 1,089,000 - ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,675,767) 2,644,364 4,014,692 Cash flows from financing activities Proceeds of loan from subsidiary Bank 2,450,000 1,300,000 -- Repayment of loan to subsidiary Bank (1,700,000) (1,300,000) -- Dividends paid on common stock (540,685) (506,959) (603,382) Repurchase of common stock (105,938) (5,193,866) (2,049,061) Issuance of shares upon exercise of stock options 7,283 -- -- - ----------------------------------------------------------------------------------------------------------
Net cash from financing activities 110,660 (5,700,825) (2,652,443) - ---------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 213,562 (2,151,806) 1,200,487 Cash and cash equivalents at beginning of period 70,523 2,222,329 1,021,842 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 284,085 $ 70,523 $ 2,222,329 ==========================================================================================================
42 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Supplemental disclosure of cash flow information: During May of 1998, securities with a carrying value and fair value of $1,165,649 were transferred from trading securities to securities available for sale. NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and cash equivalents, Federal Home Loan Bank stock, demand, savings and money market deposits, accrued interest, the allowance for loan losses, and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. Fair value of loans held for sale is based on market estimates. The fair value of Federal Home Loan Bank borrowings is based on currently available rates for similar financing. The fair value of off-balance-sheet items is based on the fees or costs that would currently be charged to enter into or terminate such arrangements. The fair value of off-balance-sheet items was not material for this presentation. The estimated fair values of the Company's financial instruments (in thousands) are as follows at June 30:
1998 1997 - -------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------------------------------------- Financial assets Cash and cash equivalents $4,206 $4,206 $3,673 $3,673 Interest-bearing time deposits -- -- 99 99 Securities 43,252 43,247 32,476 32,474 Loans, net 118,906 119,380 111,530 113,366 Loans held for sale 8,157 8,298 2,231 2,265 Mortgage servicing rights 281 281 149 149 Federal Home Loan Bank stock 2,100 2,100 1,550 1,550 Accrued interest receivable 879 879 763 763 Financial liabilities Deposits 119,979 120,229 102,862 102,733 Federal Home Loan Bank borrowings 37,000 36,802 29,000 29,000 Accrued interest payable 253 253 202 202 Advance payments by borrowers for taxes and insurance 513 513 492 492
43 Your Partners in Bank West Financial Corporation - -------------------------------------------------------------------------------- DIRECTORS George A. Jackoboice, Chairman of the Board; President of Monarch Hydraulics, Inc. Hydraulics, Inc. Carl A. Rossi, Treasurer; President of Kentwater Land Co. Paul W. Sydloski, President, Chief Executive Officer Jacob Haisma, Owner of Jacob Haisma Builders, Inc. Thomas D. DeYoung, Owner and President of DeYoung &Associates Robert J. Stephan, Vice Chairman of the Board; President, Chief Executive Officer of SecureOne Benefit Administrators, Inc. Richard L. Bishop, President of Jurgens & Holtvluwer Men's Store, Inc. John H. Zwarensteyn, President, Chief Executive Officer and owner of Gemini Corporation Harry E. Mika, Retired, formerly Director and Senior Vice President of Ameribank in Muskegon, Michigan from 1989 to 1996. LEGAL COUNSEL Elias, Matz, Tiernan & Herrick L.L.P. Suite 1200 734 15th Street, N.W. Washington, D.C. 20005 EXECUTIVE OFFICERS Paul W. Sydloski, President, Chief Executive Officer Kevin A. Twardy, Vice President, Chief Financial Officer James A. Koessel, Vice President, Chief Lending Officer Laurie S.Adams, Vice President, Director of RetailBanking TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, N.J. 07016 INDEPENDENT AUDITORS Crowe, Chizek and Company LLP 400 Riverfront Plaza Building 55 Campau, N.W. Grand Rapids, Michigan 49502 44 CORPORATE HEADQUARTERS 2185 Three Mile Rd., N.W. Grand Rapids, Michgian 49544-1451 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, 1998 were 2,623,629. As of September 26, 1998, the Company had approximately 631 shareholders of record. 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 - -------------------------------------------------------------------------------- September 30, 1996 $ 8.500 $ 7.000 $.04 December 31, 1996 7.667 6.833 .05 March 31, 1997 8.083 7.000 .05 June 30, 1997 9.500 7.417 .05 September 30, 1997 12.667 9.000 .05 December 31, 1997 17.625 12.583 .05 March 31, 1998 16.250 12.750 .06 June 30, 1998 14.750 13.500 .06 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. All per share amounts have been adjusted for stock splits. 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 A. 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-23.1 3 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1995 Key Employee Stock Compensation Program and the 1995 Directors' Stock Option Plan of Bank West Financial Corporation of our report dated August 21, 1998, except for Note 2 for which the date is September 18, 1998, with respect to the consolidated financial statements of Bank West Financial Corporation incorporated by reference in the Annual Report on Form 10-K for the year ended June 30, 1998. /s/CROWE CHIZEK AND COMPANY LLP ------------------------------- CROWE CHIZEK AND COMPANY LLP Grand Rapids, Michigan September 28, 1998 EX-27 4
9 YEAR JUN-30-1998 JUN-30-1998 2,408,476 1,797,063 0 0 32,167,697 11,084,361 11,079,178 118,905,611 289,696 181,468,852 119,979,379 10,000,000 1,214,786 27,000,000 0 0 26,237 23,248,450 181,468,852 9,795,291 2,446,042 307,977 12,549,310 5,601,870 7,612,335 4,936,975 81,000 (1,742) 4,584,691 1,283,623 1,283,623 0 0 830,368 .35 .33 7.74 841,000 0 0 0 225,862 17,166 0 289,696 255,696 0 34,000
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