-----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, K1AH2fh76qeFqgTpbxvDeTg8UYBI5nOvHIVMFFn3EBXxtO1ZrqdOLfLnf8qRrKwG UsvFoUyCe8lhYuazFsZbdA== 0000914317-99-000556.txt : 19991227 0000914317-99-000556.hdr.sgml : 19991227 ACCESSION NUMBER: 0000914317-99-000556 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: 99718630 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, 1999 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 $9.19 per share closing price of the Registrant's common stock as of September 20, 1999, the aggregate market value of the 1,849,958 shares of the Registrant's common stock deemed to be held by non-affiliates of the Registrant was $17.0 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 20, 1999: 2,521,059 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, 1999 are incorporated into Part II, Items 5 through 8 of this Form 10-K; and (2) portions of the definitive proxy statement for the 1999 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 savings bank. Bank West conducts business from three offices located in Grand Rapids, Michigan. At June 30, 1999, the Company had $206.7 million of total assets, $184.1 million of total liabilities, including $132.4 million of deposits, and $22.6 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, 1999, the Bank's ratio of Tier 1 capital to average total assets was 10.4%, its ratio of Tier 1 capital to risk- weighted assets was 17.6% and its ratio of total capital to risk-weighted assets was 18.0%. See "Regulation - The Bank - Regulatory Capital Requirements." During April 1999, the Board of Directors appointed Ronald A. Van Houten as interim Chief Executive Officer, replacing Paul W. Sydloski. Mr. Van Houten was named President and Chief Executive Officer, removing the interim status in June 1999. 2 During May 1999, the Bank went through a strategic realignment by appointing Louis D. Knooihuizen as Vice President of the newly created Commercial Lending Division. In addition, James A. Koessel, the former Vice President and Chief Lending Officer, was named Senior Vice President of Mortgage Lending. This division includes commercial mortgage lending and residential mortgage lending, while the Commercial Lending Division concentrates primarily on commercial loans not collateralized by mortgages. The strategic realignment reflects the change in the focus of the Bank's business model and strategic plan to concentrate greater efforts on commercial lending activities while consolidating mortgage lending activities. Beginning in fiscal 1995, the Bank expanded its loan products by offering commercial loans and various types of consumer loans. At June 30, 1999, there were $42.5 million in loans receivable outstanding for these loan products compared to $29.4 million and $16.5 million outstanding for such loan products at June 30, 1998 and 1997, respectively. Of the $42.5 million at June 30, 1999, $21.3 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 $1.3 million of non-accruing loans 90 days or more delinquent and $310,000 of net real estate owned, totalled $1.6 million or 1.09% of the net loan portfolio at June 30, 1999. At the end of each of the last five fiscal years, the Company's total nonperforming assets did not exceed fiscal 1999 levels. At June 30, 1999, the Company's allowance for loan losses amounted to $480,000, representing .33% of the total loan portfolio and 38% 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, government legislation and regulation; and changes in other risks detailed in this Form 10-K and in the Company's other Securities and Exchange 3 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, 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, 1999, the Company's total loan portfolio, including loans held for sale but before net items, amounted to $156.7 million. The net loan portfolio, excluding loans held for sale, amounted to $145.2 million at June 30, 1999, representing approximately 70.2% of the Company's $206.7 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, 1999, one- to four-family residential loans amounted to $87.6 million or 55.9% of the total loan portfolio, including loans held for sale. To a lesser extent, the Bank originates residential construction and land development loans, home equity lines of credit, second mortgages, commercial and consumer loans. Construction and land development loans amounted to $26.6 million or 17.0% of the Bank's total loan portfolio, home equity lines of credit amounted to $10.5 million or 6.7% of the total loan portfolio, and second mortgages amounted to $10.8 million or 6.9%, of the total loan portfolio, including loans held for sale. At June 30, 1999, commercial mortgages amounted to $15.5 million or 9.9%, commercial non-mortgages amounted to $3.8 million or 2.4%, and consumer loans amounted to $1.8 million or 1.2%, of the total loan portfolio, including loans held for sale. 4 The following table sets forth the composition of Bank West's loan portfolio by type of loan at the dates indicated.
June 30, ------------------------------------------------------------------------------------------ 1999 1998 1997 1996 ------------------- ------------------ ------------------ ----------------- Amount % Amount % Amount % Amount % ------- ---- ------- ---- ------- ---- ------- ---- (Dollars In Thousands) Real estate loans:(1) One- to four-family residential $87,618 55.9% $80,554 59.5% $83,065 68.6% $85,034 80.2% Construction and land development 26,585 17.0 25,407 18.8 21,560 17.8 14,074 13.3 Commercial mortgages 15,457 9.9 6,485 4.8 2,764 2.3 1,194 1.1 Home equity lines of credit 10,513 6.7 9,877 7.3 6,371 5.2 2,214 2.1 Second mortgages 10,820 6.9 8,148 6.0 4,253 3.5 1,927 1.8 Consumer loans 1,849 1.2 1,666 1.2 1,081 .9 622 0.6 Commercial non-mortgage 3,824 2.4 3,253 2.4 2,032 1.7 1,010 0.9 ------- ---- ------- ---- ------- ---- ------- ---- Total loans 156,666 100.0% 135,390 100.0% 121,126 100.0% 106,075 100.0% ===== ===== ===== ===== Less: Loans held for sale 2,381 8,157 2,231 4,297 Loans in process 9,001 8,248 7,169 5,828 Deferred fees and discounts (402) (211) (30) 47 Allowance for loan losses 480 290 226 166 -------- ------- --------- ------- Net loans $145,206 $118,906 $111,530 $95,737 ======== ======= ======= ======
June 30, ----------------------- 1995 ----------------------- Amount % ------- ---- Real estate loans:(1) One- to four-family residential $92,673 91.7% Construction and land development 6,146 6.1 Commercial mortgages 90 .1 Home equity lines of credit 1,453 1.4 Second mortgages 683 0.7 Consumer loans 30 -- Commercial non-mortgage -- -- ------- ----- Total loans 101,075 100.0% ===== Less: Loans held for sale 2,746 Loans in process 2,290 Deferred fees and discounts 95 Allowance for loan losses 108 ------- Net loans $95,836 =======
- ------------------------- (1) Includes loans held for sale. 5 Contractual Maturities. The following table sets forth the scheduled contractual maturities of Bank West's loans at June 30, 1999. 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, 1999 in: One year or less $ 317 $11,999 $2,282 $ -- $ 257 After one year through two years 9,170 625 5,254 257 29 After two years through three years 2,267 1,260 340 208 49 After three years through five years 847 -- 7,581 2,096 2,993 After five years through ten years 42,073 11,410 -- 7,952 2,137 After ten years through fifteen years 8,970 -- -- -- 4,414 After fifteen years 23,974 1,291 -- -- 941 ------- ------- ------- ------- ------- Total(1) $87,618 $26,585 $15,457 $10,513 $10,820 ======= ======= ======= ======= ======= Commercial Consumer Non-Mortgage Total --------- ------------- --------- Amounts due after June 30, 1999 in: One year or less $ 43 $1,970 $ 16,868 After one year through two years 245 400 15,980 After two years through three years 421 -- 4,545 After three years through five years 1,140 370 15,027 After five years through ten years -- 1,022 64,594 After ten years through fifteen years -- 62 13,446 After fifteen years -- -- 26,206 ------- -------- -------- Total(1) $ 1,849 $ 3,824 $156,666 ======= ======== ========
- ----------------- (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, 1999, 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 $ 68,467 $18,834 $ 87,301 Construction and land development 14,370 216 14,586 Commercial mortgages 7,135 6,040 13,175 Home equity -- 10,513 10,513 Second mortgages 10,563 -- 10,563 Consumer 1,764 42 1,806 Commercial non-mortgage 1,120 734 1,854 -------- ------- -------- Total $103,419 $36,379 $139,798 ======== ======= ========
6 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 actual 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 $500,000. If the loan is to be held in the portfolio and exceeds $500,000 but does not exceed $750,000, it must be approved by the Loan Committee. Loans in excess of $750,000 must be approved by the Board of Directors. The Bank has entered into agreements with Freddie Mac and several private investors. The Bank sells loans with servicing retained to Freddie Mac 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 7 repurchase the affected loans that were sold. As of June 30, 1999, 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 $35.2 million of loans in the year ended June 30, 1999. Of the loans purchased in fiscal 1999, $6.6 million consisted of fixed-rate, one- to four-family residential loans, $350,000 consisted of mortgage loans which provide for periodic interest rate adjustments ("ARMs"), $7.3 million consisted of balloon mortgages, $16.7 million consisted of construction loans, part of which were included in loans in process at June 30, 1999, $3.9 million consisted of fixed-rate second mortgages and $354,000 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 $41.6 million, $45.0 million and $32.9 million of loans in fiscal 1999, 1998 and 1997, respectively, representing 41.9%, 39.1% and 42.5%, respectively, of total residential first mortgage loans originated and purchased in such periods. Loan originations and purchases were at record levels in fiscal 1999, as greater emphasis was placed on originating ten-year balloon, 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 1999 compared to the previous fiscal years increased the dollar amount of refinances. Total loan originations and purchases were $125.8 million in fiscal 1999 compared to $115.0 million and $77.4 million in fiscal 1998 and 1997, respectively. 8 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, ----------------------------------- 1999 1998 1997 -------- --------- ------- (In Thousands) Loan originations: One- to four-family residential: Adjustable-rate $ 91 $ 1,054 $ 9,290 Fixed-rate 29,648 32,669 13,036 Balloon 18,950 11,986 1,854 Construction and land development: Adjustable-rate 9,029 9,565 14,758 Fixed-rate 153 632 937 Balloon 11,481 8,105 533 Commercial mortgages 11,053 5,433 2,002 Consumer loans 1,215 2,078 1,006 Home equity loans 2,644 3,383 5,565 Second mortgages 4,625 5,043 4,194 Commercial non-mortgage 1,711 1,919 2,315 -------- --------- ------- Total loan originations 90,600 81,867 55,490 Loans purchased: Second mortgages 3,850 2,776 -- Home equity loans 354 617 -- One- to four-family residential 30,963 29,717 21,892 -------- --------- ------- Total loans originated and purchased 125,767 114,977 77,382 -------- --------- ------- Sales and loan principal repayments: Carrying value of loans sold 34,463 44,320 32,416 Loan principal repayments 70,028 56,393 29,915 -------- --------- ------- Total loans sold and principal repayments 104,491 100,713 62,331 -------- --------- ------- Increase (decrease) due to other items, net (1) 5,024 (6,888) 742 -------- --------- ------- Net increase (decrease) in loan portfolio, net $ 26,300 $ 7,376 $15,793 ======== ========= =======
- ---------------------- (1) Other items consist of loans in process, deferred fees and discounts, allowance for loan losses and loans held for sale. 9 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. At least 50% of Bank West's total assets are required to consist of one or more of the following: loans that were made to purchase, refinance, construct, improve or repair domestic residential housing; home equity loans; cash and other highly liquid assets; securities backed by or representing an interest in mortgages on domestic residential housing, including single or multi-family dwellings, or manufactured housing; shares of stock issued by any federal home loan bank; 50% of the dollar amount of the domestic residential housing mortgage loans, including single or multi-family dwellings, originated by Bank West and sold within 90 days of origination; 200% of the dollar amount of loans and investments to purchase, construct or develop one- to four-family residences the purchase price of which is, or is guaranteed to be, not greater than 60% of the median value of comparable newly constructed one- to four-family residences within the savings bank's local community; 200% of the dollar amount of loans for the 10 purchase, construction, development or improvement of domestic residential housing, or loans to small businesses, located within a geographic region or neighborhood in which the credit needs of low and moderate income residents are not being adequately met at the time the relevant loan is made; shares of stock issued by Freddie Mac and Fannie Mae; loans for personal, family, household or educational purposes; and certain other miscellaneous assets. At June 30, 1999, Bank West significantly exceeded these asset requirements. 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, 1999, $87.6 million or 55.9% 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, 1999, one- to four-family residential ARMs represented $18.8 million or 12.0% 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 11 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. 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 and a relatively flat U.S. Treasury yield curve, the market demand for adjustable-rate loans has decreased as consumer preference for fixed-rate loans has increased. During fiscal 1999, the Bank experienced a higher dollar amount of ARM prepayments and refinances than anticipated. As a result, ARMs represented only 21.5% of total one- to four-family residential loan originations in fiscal 1999 as compared to 40.5% and 59.9% for fiscal 1998 and 1997, respectively. To offset ARM prepayments and refinances, the Bank originated various types of balloon mortgages for portfolio, primarily ten-year balloons. At June 30, 1999, one- to four-family balloons represented 59.2% of total one- to four-family residential loan originations as compared to 30.3% and 15.0% for fiscal 1998 and 1997, respectively. 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 increased in recent years and represents the second most significant type of loan for the Bank. At the end of fiscal 1999, 1998 and 1997, construction and land development loans amounted to $26.6 million, $25.4 million and $21.6 million, respectively, or 17.0%, 18.8% and 17.8% of the total loan portfolio (including loans held for sale), respectively. The Bank purchased $16.7 million of construction loans in fiscal 1999, a portion of which were included in loans in process at June 30, 1999. The Bank expects additional growth in its construction loan portfolio in fiscal 2000. 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 12 "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 1.0%. 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, 1999, $10.5 million or 6.7% of the Bank's total loan portfolio, including loans held for sale but before net items, consisted of home equity loans. During fiscal 1999, the Bank purchased $354,000 of home equity lines of credit from various correspondent financial institutions. The Bank had unused commitments of $8.9 million of home equity lines of credit at June 30, 1999. Management expects additional growth in its home equity lines of credit in fiscal 2000. Second Mortgages. At June 30, 1999, $10.8 million or 6.9% 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 1999, the Bank purchased $3.9 million of second mortgages from various correspondent financial institutions. The majority of second mortgages purchased during the fiscal year were required to have private mortgage insurance in place. Management expects additional growth in its second mortgage loan portfolio in fiscal 2000. Commercial Lending. Bank West's commercial mortgage and commercial non-mortgage loans amounted to $15.5 million and $3.8 million, respectively, representing 9.9% and 2.4% of the total loan portfolio, including loans held for sale but before net items at June 30, 1999. The origination of commercial mortgages significantly increased to $11.1 million in fiscal 1999 from $5.4 million in fiscal 1998, as the Bank placed greater emphasis on these loans. The expected result of the previously mentioned strategic realignment that took place during fiscal 1999 is to significantly increase both commercial mortgage and non-mortgage loan volume in fiscal 2000. 13 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, 1999, Bank West's consumer loan portfolio amounted to $1.8 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 decreased to $1.2 million in fiscal 1999 from $2.1 million in fiscal 1998, primarily as a result of increased competition for these loans. Management expects to continue to offer these loans but does not expect significant growth in this category during fiscal 2000. 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, 1999, Bank West had approximately $402,000 of net loan costs which had been deferred and are being recognized as income over the lives of the related loans. 14 At June 30, 1999, Bank West was servicing $27.2 million of loans for the Freddie Mac. During fiscal 1999, the Bank experienced a high dollar amount of prepayments or refinances of loans serviced for Freddie Mac due to the decline in overall market interest rates. However, the increase in overall market interest rates since June 30, 1999 has significantly reduced the prepayments of loans serviced for Freddie Mac. Asset Quality Delinquent Loans. The following table sets forth information concerning delinquent loans at June 30, 1999, 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, 1999 ------------------------------------------------------------------------------------- 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 $ 217 .14% $ 7 --% $ 207 .13% Construction and land development -- -- -- -- 930 .59 Home equity and second mortgages 195 .12 51 .03 136 .09 Consumer loans 34 .02 -- -- 6 -- Commercial loans(1) 323 .21 2 -- -- -- --- --- ----- --- ------ ---- Total $ 769 .49% $ 60 .03% $1,279 .81% ======= === ===== === ====== ====
- ------------------ (1) Includes commercial mortgage and commercial non-mortgage loans. 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 15 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, 1999 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, 1999, the Bank had $1,279,000 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, ---------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ---- ----- ------- (Dollars in Thousands) Total nonperforming assets: Non-accruing loans 90 days or more delinquent $1,279 $ 841 $417 $ 43 $ 145 Real estate owned 310 192 20 -- -- ------ ------ ---- ----- ------- Total $1,589 $1,033 $437 $ 43 $ 145 ====== ====== ==== ===== ======= Total nonperforming loans as a percentage of loans, net 1.09% .71% .37% .04% .15% ====== ====== ==== ===== ======= Total nonperforming assets as a percentage of total assets .77% .57% .28% .03% .10% ====== ====== ==== ===== =======
The $1.6 million of nonperforming assets at June 30, 1999 consisted primarily of one- to four-family residential loans and construction spec loans. The increase in nonperforming assets at June 30, 1999 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, 1999. The Bank's total classified assets at June 30, 1999 amounted to $1.6 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. 16 Allowance for Loan Losses. At June 30, 1999, Bank West's allowance for loan losses amounted to $480,000 or .31% 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, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in Thousands) Total loans outstanding(1) $156,666 $135,390 $121,126 $106,075 $101,075 ======== ======== ======== ======== ======== Allowance for loan losses, beginning of period 290 $ 226 $ 166 $ 108 $ 88 Provision for loan losses 220 81 60 60 20 Charge-offs, net of recoveries(2) 30 17 -- 2 -- -------- -------- -------- -------- -------- Allowance for loan losses, end of period $ 480 $ 290 $ 226 $ 166 $ 108 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans outstanding .31% .21% .19% .16% .11% ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total nonperforming loans 37.5% 34.5% 54.2% 386.0% 74.5% ======== ======== ======== ======== ========
(Footnotes on next page) 17 - -------------------- (1) Includes loans held for sale. (2) Of the $30,000 in charge-offs in fiscal 1999, $16,000 related to commercial loans, $12,000 related to home equity loans and $2,000 related to consumer loans. 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 1996 related to residential loans. There were no recoveries in fiscal 1999, 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, ---------------------------------------------- 1999 1998 -------------------- -------------------- Loan Loan Category Category Amount as a % Amount as a % of of Total of of Total Allowance Loans Allowance Loans --------- ----- --------- ----- (Dollars in Thousands) One- to four-family residential $ 52 55.9% $ 38 59.5% Construction and land development 70 17.0 19 18.8 Commercial(1) 176 12.3 110 7.2 Consumer(2) 91 14.8 89 14.5 Unallocated 91 -- 34 -- ---- ----- ---- ----- Total $480 100.0% $290 100.0% ==== ===== ==== =====
- ------------------------ (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 Fannie Mae or the Freddie Mac. Fannie Mae and Freddie Mac are public corporations chartered by 18 the U.S. government. These institutions guarantee the timely payment of interest and the ultimate return of principal. Fannie Mae and Freddie Mac mortgage-backed securities are not backed by the full faith and credit of the United States, but because Fannie Mae and Freddie Mac are U.S. government-sponsored enterprises, these securities are considered high quality investments with minimal credit risks. During fiscal 1999, 1998 and 1997, the Company purchased $19.2 million, $28.3 million and $15.7 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, 1999, the Company's mortgage-backed securities classified as available for sale had a market value of $3.4 million (gross of $94,000 in unrealized losses), while CMOs classified as available for sale had a market value of $21.1 million (gross of $355,000 in net unrealized losses). During April of 1999, CMO's were transferred from the held to maturity portfolio to the available for sale portfolio and trading portfolio in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities to provide the Company with additional flexibility in the management of its security portfolio as more fully discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 1999 Annual Report to Stockholders, filed as Exhibit 13.1 hereto (the "1999 Annual Report"). At the date of transfer, these securities had an amortized cost of $14.1 million. For additional information relating to the Company's mortgage-backed securities and CMO's and the transfer of securities noted above, see Note 2 to the Consolidated Financial Statements in the 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 19 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, ------------------------------- 1999 1998 1997 ------- ------ ------- (In Thousands) Mortgage-backed and related securities: Mortgage-backed securities $ 3,408 $ 807 $ 1,583 Collateralized mortgage obligations 21,131 35,700 23,995 ------- ------- ------- Total mortgage-backed securities $24,539 $36,507 $25,578 ======= ======= =======
During the fourth quarter of fiscal 1999, the Bank sold approximately $15 million of its CMO's that were lower yielding and had longer average lives than the bonds that replaced them, taking advantage of the recent rise in overall market interest rates. Information regarding the contractual maturities and weighted average yield of the Company's mortgage-backed securities portfolio at June 30, 1999 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, 1999 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 $ -- $ -- $ -- $ 3,408 $ 3,408 Collateralized mortgage obligations -- -- 848 20,283 21,131 ------ ------- --- ------ -------- Total $ -- $ -- $ 848 $ 23,691 $24,539 ------ ======= ====== ======== ======== Weighted average yield --% --% 6.55% 5.95% 5.97% ===== ======= ====== ======= ========
20 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, --------------------------------------- 1999 1998 1997 -------- -------- --------- (Dollars In Thousands) Mortgage-backed securities and CMOs at beginning of period $ 36,507 $ 25,578 $ 17, 342 Purchases 21,180 28,348 15,729 Repayment (7,450) (787) (545) Sales and calls (24,813) (16,576) (7,247) Gain (loss) on sales (184) 55 12 Amortization of premiums, net (243) (80) (11) Change in net unrealized gain (loss) on securities available for sale (458) (31) 298 -------- -------- -------- Mortgage-backed securities and CMOs at end of period $ 24,539 $ 36,507 $ 25,578 ======== ======== ======== Weighted average yield at end of period 5.97% 6.68% 7.09% ======== ======== ========
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 $17.7 million or 8.6% of total assets at June 30, 1999. Such securities consist of U.S. government agencies, corporate bonds, taxable municipal bonds and equity securities. At June 30, 1999, 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 downturn in the U.S. equity markets, especially in small cap stocks, had a negative impact on the Company's equity investments. As a result, the Company liquidated the majority of its equity securities during the fiscal year. Remaining equity securities have a carrying value of $60,000 at June 30, 1999. 21 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, ---------------------------------------------------------------- 1999 1998 1997 ------------------- ----------------- ------------------ Book Market Book Market Book Market Value Value Value Value Value Value ------- ------- ------ ------ ------ ------ (In Thousands) U.S. Government agency securities $10,899 $10,774 $3,995 $3,992 $3,999 $3,979 Corporate bonds 3,286 3,278 -- -- -- -- Taxable municipal bonds 3,659 3,622 -- -- -- -- Equity securities 62 60 3,011 3,011 -- -- FHLB stock 2,700 2,700 2,100 2,100 1,550 1,550 ------- ------- ------ ------ ------ ------ Total $20,606 $20,434 $9,106 $9,103 $5,549 $5,529 ======= ======= ====== ====== ====== ======
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, 1999.
Amounts at June 30, 1999 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 ------- ----- ---------- ----- --------- ----- Bonds and other debt securities: U.S. Government agency securities $ -- --% $10,774 6.12% $ -- --% Corporate bonds -- -- 3,278 6.52 -- -- Taxable municipal bonds -- -- 995 6.33 2,627 6.79 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 7.89% in fiscal 1999. Also, the Company's equity securities have no stated maturity. At June 30, 1999, the Company did not have securities in any one issuer which exceeded 10% of the Company's stockholders' equity. 22 Interest-Bearing Deposits At June 30, 1999, the Company had interest-bearing deposits in financial institutions of $7.6 million, as compared to $1.8 million and $2.0 million at June 30, 1998 and 1997, respectively. The increase in interest-bearing deposits from June 30, 1998 to June 30, 1999 is primarily due to excess liquidity generated from loan prepayments. 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 and from FHLB advances. 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 $9.4 million or 7.1% of total deposits at June 30, 1999. 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. 23 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, ---------------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- --------------------- Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- (Dollars in Thousands) Certificate accounts: 2.00% - 3.99% $ 169 .1% $ -- --% $ -- --% 4.00% - 5.99% 84,699 64.0 61,575 51.3 45,409 44.2 6.00% - 7.99% 10,090 7.6 27,601 23.0 32,230 31.3 8.00% - 9.99% 25 -- 23 -- 21 -- -------- ----- -------- ----- -------- ----- Total certificate accounts 94,983 71.7 89,199 74.3 77,660 75.5 -------- ----- -------- ----- -------- ----- Transaction accounts: Passbook and statement savings 19,268 14.6 19,335 16.1 17,388 16.9 Money market accounts 5,313 4.0 572 .5 786 .8 NOW and noninterest-bearing accounts 12,837 9.7 10,873 9.1 7,028 6.8 -------- ----- -------- ----- -------- ----- Total transaction accounts 37,418 28.3 30,780 25.7 25,202 24.5 -------- ----- -------- ----- -------- ----- Total deposits $132,401 100.0% $119,979 100.0% $102,862 100.0% ======== ===== ======== ===== ======== =====
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, --------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ---------------------- --------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------ ---------- (Dollars in Thousands) Passbook and statement $ 19,465 3.14% $ 18,808 3.61% $17,247 3.61% savings accounts Money market accounts 12,418 1.97 7,013 1.65 6,260 1.69 and NOW accounts Certificates of deposit 91,307 5.52 83,032 5.79 73,465 5.71 -------- ---- -------- ---- ------- ---- Total $123,190 4.79% $108,853 5.15% $96,972 5.08% ======== ==== ======== ==== ======= ====
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. 24 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, 1999.
Quarter Ending: Amounts - --------------- ------- (In Thousands) September 30, 1999 $ 6,636 December 31, 1999 5,863 March 31, 2000 3,006 June 30, 2000 949 After June 30, 2000 4,436 ------- Total certificates of deposit with balances of $100,000 or more $20,890 =======
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, 1999, Bank West had $50 million of advances from the FHLB of Indianapolis, $30 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, $20 million of adjustable-rate advances mature during fiscal 2000. See Note 7 to the Consolidated Financial Statements in the 1999 Annual Report for additional information. During fiscal 1999, 1998 and 1997, the Bank utilized additional FHLB advances to fund loans and securities growth as well as mortgage banking activities. 25 The following table sets forth certain information regarding borrowings at or for the dates indicated:
At or for the Year Ended June 30, -------------------------------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in Thousands) FHLB advances: Average balance outstanding $46,686 $35,803 $22,433 Maximum amount outstanding at any month-end during the period $51,925 $38,000 $29,000 Balance outstanding at end of period $50,000 $37,000 $29,000 Average interest rate during the period 5.11% 5.61% 5.46% Weighted average interest rate at end of period 5.22% 5.48% 5.84%
Subsidiaries At June 30, 1999, the Bank had one wholly-owned subsidiary, Sunrise Mortgage Corporation ("Sunrise"), which was formed in December 1997. Sunrise was established to originate and purchase non-conforming mortgage loans, including sub-prime mortgage loans for resale. Recently, management decided to discontinue non-conforming lending through Sunrise due to the lower than expected loan volume originated and purchased during the most recent fiscal year. 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 26 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 59 full-time employees and 12 part-time employees at June 30, 1999. 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 institution 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 27 institution 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 institution 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 institution 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 (1) payment of dividends by the savings institution; (2) transactions between the savings institution and its affiliates; and (3) 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 institution 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, 1999, 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 institution 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 institution 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 institution holding company or subsidiary thereof any business activity, upon prior notice to, and no objection by the OTS, other than: (1) furnishing or performing management services for a subsidiary savings institution; (2) conducting an insurance agency or escrow business; (3) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution; (4) holding or managing properties used or occupied by a subsidiary savings institution; (5) acting as trustee under deeds of trust; (6) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple savings institution holding companies; or (7) unless the Director of the OTS by regulation prohibits or limits such activities for savings institution holding companies, those activities authorized by the FRB as permissible for bank holding companies. Those activities described in (7) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings institution holding company. Pending legislation in the U.S. Congress provides for the modernization of the banking system and would significantly affect the operations and regulatory structure of the financial services industry. The legislation is intended to permit the banking, securities and insurance industries to compete more efficiently and more effectively. The legislation restricts the activities of unitary holding companies that were not in existence as of March 4, 1999 and that had not filed an application to become a unitary holding company by that date. New unitary holding companies would (1) have their activities limited to those that are financial in nature or incidental thereto, and (2) no longer be able to be acquired by 28 commercial companies. The Company currently believes that it will be grandfathered and that it will not be required to discontinue any current activity. 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 (1) 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 (2) 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 (a) 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 (b) 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 (1) 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 (2) 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, 1999, Bank West was in compliance with the above restrictions. 29 Restrictions on Acquisitions. Except under limited circumstances, savings institution holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (1) control of any other savings institution or savings institution holding company or substantially all the assets thereof or (2) 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 institution 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 institution holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings institution holding company which controls savings institutions in more than one state if (1) the multiple savings institution 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; (2) 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 (3) 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 institution 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. 30 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, 1999, each of the Bank's ratios exceeded minimum requirements for the well capitalized category. See Note 13 to the Consolidated Financial Statements in the 1999 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 31 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 $75.6 million at June 30, 1999. At June 30, 1999, the Bank had $50 million of FHLB advances outstanding, and available credit of $2 million under a line of credit with the FHLB, of which no balance was outstanding. See Note 7 to the Consolidated Financial Statements in the 1999 Annual Report. 32 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, 1999, Bank West had $ 2.7 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 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 achieved a fully funded status first, and effective January 1, 1996 the FDIC substantially reduced the average deposit insurance premium paid by BIF-insured banks. The deposit insurance premiums for BIF member institutions were reduced to zero basis points (subject to a $2,000 minimum) for institutions in the lowest risk category, as compared to 23 basis points for SAIF members in the lowest risk category. On September 30, 1996, new 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 provided for elimination of the premium differential between SAIF-insured and BIF-insured institutions and 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 33 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. Beginning January 1, 1997, effective SAIF rates generally range from zero basis points to 27 basis points. From 1997 through 1999, SAIF members will pay 6.4 basis points to fund the Financing Corporation, 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. 34 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 capital and surplus. However, upon approval by two-thirds vote of the Board of Directors, the limit may be increased not to exceed 25% of the capital and surplus. During fiscal 1998, the Board of Directors approved the 25% limit. At June 30, 1999, the 25% limit for the Bank was $2.6 million, and the Bank did not have any loans to one borrower in excess of such amount. 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). 35 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, (1) 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, (2) 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, (3) 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, (4) 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 (5) 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, (a) 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, (b) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, and (c) 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. 36 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 beginning in fiscal 1999. 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 30,1999 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, (1) it is in redemption of shares, (2) it is pursuant to a liquidation of the institution, or (3) 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 (1) adjusted current earnings as defined in the Code, over (2) AMTI (determined without regard to this preference and prior to reduction by net operating losses). 37 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, 1999, 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, 1996 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 was 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. In 1999, the State of Michigan repealed this tax over a 23 year phase-out period beginning in calendar year 2000. Item 2. Properties. At June 30, 1999, 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, 1999. 38
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 $2,269 $ 53,474 910 Bridge Street Grand Rapids, MI 49504 Owned 608 71,771 6740 Cascade Road S.E. Grand Rapids, MI 49546 Leased 124 7,156 ------ --------- Total $3,001 $132,401 ====== ========
Item 3. Legal Proceedings. - --------------------------- Bank West is a defendant under two legal proceedings pending in Kent County Circuit Court: Cowles v. Bank West and Newton v. Bank West. Cowles' original complaint was filed on July 17, 1998 and was premised upon a claim that the Bank was engaged in the unauthorized practice of law because it charged residential mortgagors a $250 document preparation fee and that the Bank also violated the Michigan Consumer Protection Act. The complaint contained additional claims, largely dependent upon the foregoing allegations. Plaintiff later filed amendments, alleging claims under the Federal Truth in Lending Act. Judge Johnston dismissed on August 30, 1999 the claim for unauthorized practice of law and the claim under the Michigan Consumer Protection Act. He earlier had dismissed one of the Truth in Lending Act claims. There currently remain in the case a claim for violation of the Truth in Lending Act, and claims for unjust enrichment and innocent and negligent misrepresentation. On September 9, 1999, plaintiff filed a motion to file yet a third amended complaint, trying to conform the allegations concerning the remaining claims to Judge Johnston's August 30, 1999 opinion. The case of Newton v. Bank West, filed on August 12, 1999 in Kent County Circuit Court by the same attorneys who represent the plaintiff in Cowles, also is based upon Bank West's charging of a document preparation fee and contains claim for the unauthorized practice of law and violation of the Michigan Consumer Protection Act. Newton also is pending before Judge Johnston and if the judge follows his reasoning in Cowles, those claims should be dismissed. Newton also contains claims for unjust enrichment and negligent and innocent misrepresentation and replevin. These latter claims have not yet been sought to be amended to conform to Judge Johnston's August 30, 1999 rulings in Cowles. Management intends to continue to contest these cases vigorously. Based on a review of current facts and circumstances, management is unable to determine the amount of loss, if any, that is possible. 39 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 other 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 1999 Annual Report. Item 6. Selected Financial Data. - --------------------------------- The information required herein is incorporated by reference from page 2 of the 1999 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 16 of the 1999 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 17 to 44 of the 1999 Annual Report. Item 9. Changes in and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure. --------------------- Not applicable. 40 PART III. Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------- The information required herein is incorporated by reference from pages 3 to 5 and 11 of the definitive proxy statement of the Company for the Annual Meeting of Stockholders to be held on October 27, 1999, which will be filed within 120 days of June 30, 1999 ("Definitive Proxy Statement"). Item 11. Executive Compensation. - --------------------------------- The information required herein is incorporated by reference from pages 11 to 17 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 17 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, 1999 and 1998 Consolidated Statements of Income for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 41 (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 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 10.8 Form of Amendment to Employment Security Agreement among Bank West Financial Corporation, Bank West and certain executive officers 10.9 Amended and Restated Agreement and General Release among Bank West Financial Corporation, Bank West and Paul W. Sydloski, dated February 24, 1999 10.10 Employment Agreement with Bank West Financial Corporation, Bank West and Ronald A. Van Houten, effective April 13, 1999 10.11 Employment Security Agreement among Bank West Financial Corporation, Bank West and Louis D. Knooihuizen, dated May 6, 1999 13.1 1999 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. 42 (**) 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, 1999. (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. 43 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 23, 1999 By: /s/ Ronald A. Van Houten ------------------------ Ronald A. Van Houten President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Ronald A. Van Houten September 23, 1999 - ------------------------ Ronald A. Van Houten President and Chief Executive Officer /s/ George A. Jackoboice September 23, 1999 - ------------------------ George A. Jackoboice Chairman of the Board and Director /s/ Richard L. Bishop September 23, 1999 - --------------------- Richard L. Bishop Director /s/ Thomas D. DeYoung September 23, 1999 - --------------------- Thomas D. DeYoung Director /s/ Jacob Haisma September 23, 1999 - ---------------- Jacob Haisma Director /s/ Harry E. Mika September 23, 1999 - ----------------- Harry E. Mika Director /s/ Wallace D. Riley September 23, 1999 - -------------------- Wallace D. Riley Director /s/ Carl A. Rossi September 23, 1999 - ----------------- Carl A. Rossi Director /s/ Robert J. Stephan September 23, 1999 - --------------------- Robert J. Stephan Director /s/ John H. Zwarensteyn September 23, 1999 - ----------------------- John H. Zwarensteyn Director /s/ Kevin A. Twardy September 23, 1999 - ------------------- Kevin A. Twardy Chief Financial Officer (also principal accounting officer) EX-10.8 2 Exhibit 10.8 Amendment to Employment Security Agreement This agreement made February 24, 1999 amends the Employment Security Agreement dated March 31, 1997 (the "Employment Security Agreement"), between Bank West Financial Corporation, a Michigan corporation (the "Corporation"), Bank West, a Michigan savings bank and wholly owned subsidiary of the Corporation (the "Bank") and James A. Koessel, Laurie S. Adams, Kevin A. Twardy (the "Executive"). The Corporation and the Bank are referred to collectively as the "Employers" in this agreement. The Employment Security Agreement is amended as follows: 1. Section 4 of the Employment Security Agreement is amended in its entirety to read as follows: 4. Mitigation of Benefits (a) The Executive shall be required to mitigate the amount of any benefits enumerated in Subsection (a) of Section 2, entitled "Benefits Upon Terminiation", of the Employment Security Agreement, by diligently seeking other employment consistent and comparable with the Executive's current position or earnings from self-employment, provided, however, that Executive shall not be required to accept comparable employment located beyond a fifty (50) mile radius of the City of Grand Rapids, Kent County, Michigan. Those benefits shall be reduced by an amount equal to one hundred percent (100%) of the total base salary earned by the Executive from such other employment or earnings from self-employment during the twenty four (24) months following the first business day of the month following the Date of Termination. In no event, however, shall the Executive be required to pay back to the Employers pursuant to this provision any amount in excess of the amount payable under Section 2(a). (b) The Executive's failure to make good faith efforts to diligently and continuously seek other employment, as reasonably determined in the exercise of utmost good faith by the Boards of Directors of the Employers, shall be a breach of this Employment Security Agreement. In such case the Employers shall notify the Executive in writing and provide the Executive with thirty (30) days to take appropriate corrective action. The notice shall state the basis for the breach and what corrective action must be taken. If the Executive fails to do so, the Employers' obligations under this Employment Security Agreement shall terminate upon the first day following the expiration of the thirty (30) day notice. 3. Section 11 of the Employment Security Agreement is amended in its entirety to read as follows: 11. Term of Agreement. Unless extended as provided in this Section 11, this Employment Security Agreement shall terminate on March 30, 2001. Prior to March 31, 2000 and each March 30 after that (the "anniversary date"), the Boards of Directors of the Employers shall consider, review and, if appropriate, explicitly approve a one-year extension of the remaining term of this Employment Security Agreement. The term of this Employment Security Agreement shall continue to extend each year if the Boards of Directors approve the extension. If the Boards of Directors elect not to extend the term, they shall give written notice of the decision to the Executive not less than thirty (30) days prior to the anniversary date. Except as expressly amended above, all other terms and conditions of the original Employment Security Agreement dated March 30, 1995 shall remain in effect without change. Witness: Bank West Financial Corporation By: /s/ Jason Schnelker By /s/ George A. Jackoboice ------------------- ------------------------ Jason Schnelker George A. Jackoboice Its Chairman Witness: Bank West By: /s/ Jason Schnelker By /s/ George A. Jackoboice ------------------- ------------------------ Jason Schnelker George A. Jackoboice Its Chairman Executive /s/ James A. Koessel -------------------- James A. Koessel /s/ Laurie S. Adams ------------------- Laurie S. Adams /s/ Kevin A. Twardy ------------------- Kevin A. Twardy EX-10.9 3 Exhibit 10.9 AMENDED AND RESTATED AGREEMENT AND GENERAL RELEASE This Amended and Restated Agreement and General Release (the "Agreement") is made between Bank West Financial Corporation, a Michigan corporation, Bank West, a Michigan savings bank, both with offices at 2185 Three Mile Road, NW, Grand Rapids, MI 49544-1451 (collectively called the "Employer") and Paul W. Sydloski, whose address is 6941 Pinehurst Lane NE, Rockford, MI 49341 (the "Employee"). Factual Background Employer and Employee are parties to an Employment Agreement dated March 30, 1995 (the "Employment Agreement"). Since that time, Employee has been and is now in the employ of Employer. Employer currently does not intend to extend the Employment Agreement with Employee beyond March 29, 2000 expiration date. Employer and Employee desire to mutually terminate the Employment Agreement upon the terms and conditions of this Agreement. With the exception of the acceptance and revocation terms set forth in Section 17(e), the terms and conditions of this Agreement amend and replace the terms and conditions of the Agreement and General Release offered by Employer on February 3, 1999. Agreement NOW, THEREFORE, in consideration of the mutual agreements and commitments contained in this Agreement, the parties agree as follows: 1. Termination of Employment. Employee agrees to terminate and resign from his employment with Employer effective as of the close of business on March 4, 1999 (the "Separation Date"). Employee acknowledges and agrees that he has the option to remain employed with Employer until the Employment Agreement expires on March 29, 2000, but is choosing to voluntarily terminate his employment pursuant to this Agreement. As soon as reasonably practicable after the Separation Date, Employer will reimburse Employee for an reimbursable business expenses incurred through the Separation Date, in accordance with Employer's expense reimbursement policies. No expenses incurred beyond the Separation Date shall be reimbursed by the Employer. 2. Effect of Recission or Non-Acceptance. Employer acknowledges and agrees that should Employee choose to rescind this Agreement pursuant to Section 17(e), or choose not to accept this Agreement, Employee may remain employed with Employer in accordance with the terms of the Employment Agreement. 3. Severance Pay. Employer shall pay Employee severance pay of $225,000 in the following manner. Employee shall pay Employee 52 equal installments of $4,326.92 commencing March 19, 1999 and continuing every other Friday of each month after that until March 2, 2001, payment shall be the last payment to Employee by Employer and following that payment the severance pay shall be considered paid in full. 4. Withholding. Employer shall withhold from the payments to Employee under this Agreement any and all applicable withholding, payroll, and other taxes and similar charges as required by law, as well as appropriate Employee deductions or contributions to continuing employee benefit plans. 5. Termination of Employment Agreement. The Employment Agreement shall be terminated as of the Separation Date and shall be superseded in all respects by this Agreement. 6. Termination of Certain Employee Benefits. Except as specifically stated in this Agreement, at the close of business on the Separation Date, Employee shall no longer be a participant in nor receive the benefits of any 1 pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employer. 7. Employee Benefit Continuation. Commencing March 5, 1999, and continuing for 12 months thereafter, Employee shall continue to receive medical and dental coverage under Employer's Comprehensive Health Insurance Plan under the same terms as were provided to Employee by Employer as of the Separation Date. Employee is not waiving his right to continue to be eligible for coverage for an additional six (6) months beyond the term stated above, subject, however, to Employee's continued timely payment of the full COBRA rate to continue coverage during that six month period. 8. News Release. Employer shall issue a news release announcing Employee's resignation. Employer agrees to consult with Employee regarding the content and presentation of the news release. 9. Other Plans. (a) Defined Benefit Pension Plan. Employee's service credit under the Defined Benefit Pension Plan for employees of Employer will cease accruing effective with the Separation Date. (b) Life Insurance. Employee or Employee's spouse owns a life insurance policy on Employee's life in the amount of $300,000. Employer has been paying the premium on this policy. Effective with the Separation Date, Employer will no longer make the premium payments on this policy and the policy shall become the sole responsibility of Employee. Employer agrees to assign all rights in the policy to Employer and/or Employee's spouse. 10. Other Employer Property. On or before the Separation Date, Employee shall return any credit cards, telephone cards and similar items provided by Employer and any other property of the Employer in his possession. 11. Surrender of Confidential Information. Employee shall promptly surrender to the Employer any and all records, files, correspondence, reports and computer disks relating to the Employer's operations, maintenance, products, marketing, research and development, production and general business plans and schedules, production specifications, individual customer specifications, individual customer pricing policies, accounts receivable information, accounting and financial information such as costs and profit margins, as well as the Employer's methods of production, maintenance, distribution, sales, sources of supply, customers, customer lists, customer quotes, customer needs, customer complaints, customer products and potential products or uses of the Employer's products, and confidential price characteristics and policies in his possession. 12. Utmost and Continued Good Faith. The parties agree to utilize the utmost good faith in performing their respective obligations under this Agreement. Neither party shall take any action or make any statement reasonable calculated to adversely affect the other party's financial well-being or to disparage, damage, injure, impugn the integrity or reputation, or call into question the character, of the other party, including in the case of Employer, its affiliates, subsidiaries, officers, directors, agents, employees, successors and assigns. Employee agrees to cooperate in any way possible with Employer during any current or pending transition of management, with Employer and Employer's attorneys as a witness, party or in any other capacity, in any pending litigation (including but not limited to Cowles v. Bank West), and in any pending or future regulatory inquiries or examinations of Employer's operations. Employer shall reimburse Employee for mileage (31 cents/mile), telephone, photocopying and postage expenses reasonably incurred in so doing. The foregoing shall not be deemed to prohibit either party from instituting formal legal proceedings to enforce the obligations of the other party under this Agreement. 13. Proprietary Information. Employee agrees that he shall treat as confidential, and shall not under any circumstances disclose, or use for his own advantage or benefit, any confidential information and confidential documents relating in any way to the business affairs of the Employer of which he may currently have knowledge or 2 of which he had knowledge during the course of his employment. For purposes of this Agreement, the terms "confidential information" and "confidential documents" shall include but not limited to, all employee data including salary information, customer lists, inventions, designs, research and development plans, product and business plans, budget and strategy plans, trade secrets, and other proprietary information. 14. Non-Competition. Employee agrees that for a period of two years following the Separation Date he will not solicit, without Employer's consent, any person who was an employee of the Company at any time during the one-year period immediately preceding the termination of the Employee's employment. 15. No Disclosure of Agreement. Employee agrees not to disclose, either directly or indirectly, any information whatsoever regarding the terms and conditions of this Agreement to any person other than to Employee's attorney, accountant, or spouse. Employee agrees to inform such attorney, accountant, or spouse of the confidentiality of such information. 16. No Re-employment. Employee shall not apply in the future for any employment with the Employer or with a subsidiary, division or affiliated entity of such corporation. 17. Employee's Release. (a) In consideration for the severance payment, benefits and other emoluments specifically itemized in this Agreement, Employee releases and forever discharges Employer, its affiliates, subsidiaries, officers, directors, agents, employees, successors and assigns, from any and all actions, causes of action, suits, claims, charges or complaints which Employee may have or claim to have against any of them as a result of Employee's employment with and/or separation from employment with Employer. Employee further covenants and promises that he will not file or cause to be filed on his behalf any charge, complaint or legal action of any nature before any court or administrative agency to assert any claim against Employer arising out of Employee's employment or separation from employment from Employer. (b) Employee acknowledges that this General Release includes but is not limited to claims arising under federal, state or local laws prohibiting employment discrimination or claims growing out of any legal restrictions on Employer's right to terminate its employees. Employee expressly waives and releases any and all claims or rights to unemployment compensation and any and all claims or rights arising under the Civil Rights Act of 1964 and 1991, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act of 1990, the Rehabilitation Act of 1973, the Age Discrimination in Employment Act, the Michigan Elliott-Larsen Civil Rights Act, and the Michigan Handicappers' Civil Rights Act, and all other relevant state and federal statutes. With the exception of any claims arising under this Agreement, this release also includes any claims for costs, interest or attorneys' fees, past and future wages, severance pay, bonuses, unvested pension, profit-sharing, vacation pay, medical insurance, life and disability insurance, and all other benefits resulting from the action or inaction of either of the parties on or before the Separation Date. (c) Employee understands that he is not waiving any rights or claims that may rise after this Agreement is executed, and further understands that the above described consideration is in addition to anything of value to which Employee is already entitled. (d) Employee acknowledges that Employer has advised Employee to consult with an attorney prior to executing this Agreement. (e) Employee understands and has been advised by Employer that Employee is entitled to a period of twenty-one (21) days to consider this Agreement and further that Employee is entitled to revoke this Agreement within seven (7) days after signing this Agreement and that this Agreement shall not become effective or enforceable until the revocation period is expired. Employee agrees that the operative starting date with respect to his 3 rights under this section shall be February 3, 1999, the date the Agreement and General Release was offered by Employer. (f) Employee hereby resigns as a director, officer and employee, and from all other official positions with Employer as of the Separation Date. 18. Severability. It is agreed that the covenants of this Agreement are severable, and that if any single clause or clauses shall be found unenforceable, the entire Agreement shall not fail but shall be construed and enforced without any severed clauses in accordance with the tenor of this Agreement. 19. Entire Agreement. This agreement contains the sole and entire agreement between the parties with respect to the subject matter contained in it and is intended to supersede, extinguish, override and terminate any prior agreement or agreements between the parties. The parties acknowledge and agree that non of them has made any representation with respect to the subject matter of this Agreement or any representations inducing its execution and delivery, except such representations as are specifically set forth in the Agreement and each of the parties acknowledges that he or it has relied on his or its own judgment in entering into same. The parties further acknowledge that any prior statements or representations that may have been made by any them to the other with respect to the subject matter of this Agreement are void and of no effect and that none of them has relied on such prior statements or representations in connection with his or its dealing with the other with respect to this Agreement. 20. Remedies. The parties agree that if there is a breach of this Agreement, the remedies at law will be inadequate and the non-breaching party shall be entitled to see redress by court proceedings in the form of an injunction restraining the breaching party and/or providing for specific performance without any bond or other security being required. The non-breaching party shall also be entitled to such damages as that party may show by appropriate evidence. Nothing in this Agreement shall be construed as preventing the non-breaching party from pursuing, or seeking any damages at law or in equity which it may have, and Employer may, in any event, be entitled upon any breach to terminate any payments remaining to be paid pursuant to the provisions of this Agreement. 2l. Effective Date. This Agreement shall become effective on the eighth (8th) day following the day on which Employee signs and dates it (the "Effective Date"). At any time prior to the Effective Date, Employee may revoke the Agreement by providing Employer written notice of revocation. 22. No Duty to Mitigate. Employer agrees that Employee shall have no duty to mitigate the amount of any benefits received under this Agreement by seeking other employment or otherwise. The amount of any such benefits shall not be reduced by any compensation earned by Employee as a result of employment by another employer after the Separation Date. 23. Miscellaneous. (a) The parties agree that this Agreement shall be construed in accordance with the laws of the State of Michigan. (b) This Agreement may not be amended except in writing, signed by all parties. (c) This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns, executors, administrators and heirs. (d) Any notices required by this Agreement shall be in writing and delivered by hand or sent by certified mail, return receipt requested: 4 to the Employee at: 6941 Pinehurst Lane, N.E. Rockford, MI 49341 To the Employer at: 2185 Three Mile Road, N.W. Grand Rapids, MI 49544-1451 Attention: Chief Financial Officer or to such other address as a party shall specify by written notice to the other. 24. Acknowledgment. Employee acknowledges that he has carefully read and fully understands all of the provisions of this Agreement and acknowledges that he has knowingly and voluntarily executed this Agreement of his own free will and volition, without any pressure or duress from Employer or any other party, and was not under the influence of any medication which would impair his ability to make a rational, informed decision regarding the execution of this Agreement. Bank West Financial Corporation, a Michigan corporation Dated: February 24, 1999 By: /s/ George A. Jackoboice ------------------------ George A. Jackoboice Its: Chairman Bank West, a Michigan savings bank Dated: February 24, 1999 By: /s/ George A. Jackoboice ------------------------ George A. Jackoboice Its: Chairman Dated: March 4, 1999 /s/ Paul W. Sydloski -------------------- Paul W. Sydloski 5 EX-10.10 4 Exhibit 10.10 VAN HOUTEN EMPLOYMENT AGREEMENT This Agreement is made effective as of April 13, 1999, among Bank West Financial Corporation, a Michigan corporation ("BWFC"), Bank West, a Michigan savings bank, both with offices at 2185 Three Mile Road, NW, Grand Rapids, MI 49544-1451 (collectively referred to as "BW") and Ronald A. Van Houten, whose address is 1841 Lonsdale NE, Grand Rapids, MI 49503 ("Van Houten"). Factual Background Van Houten has been employed in the banking industry for more than 45 years, during which time he has developed considerable skills regarding the marketing of bank products and the management of banking institutions. BW desires to employ Van Houten in the capacity of interim Chief Executive Officer and to receive the benefits of his knowledge and expertise. Van Houten desires to serve BW in that capacity. Because of the nature of BW's business, Van Houten may acquire valuable confidential information concerning BW, BW=s products and programs, or BW's customers. Terms and Conditions 1. Term. BW retains Van Houten for an indefinite term commencing April 13, 1999, (the "Effective Date"). This Agreement shall continue until terminated. Either party may terminate this Agreement for any reason or no reason upon providing 30 days written notice to the other. 2. Duties. Van Houten shall be employed as interim Chief Executive Officer of BW. His duties shall be designated by the Boards of Directors of BW from time to time. Van Houten and BW acknowledge that Van Houten is expected to be a full-time employee but recognize this may not always require his full-time presence at the BW offices. 3. Compensation. As compensation for the services which Van Houten may render to BW, BW shall pay Van Houten a salary, initially at the annual rate of $9,600 per year (the "Compensation"). The Compensation shall be payable in equal biweekly installments of $369.23 commencing April 16, 1999, and continuing every other Friday after that until the end of the Term. The $9,600 is the current limit which Van Houten can earn and still draw his full Social Security retirement benefits. Each time that limit is raised by Social Security regulations while this Agreement remains in effect, the annual salary rate shall be increased to the amount of the new limit, effective with the date of increase in the limit. In no event shall the salary amount exceed that limit. BW shall withhold from the payments to Van Houten under this Agreement any and all applicable withholding, payroll, and other taxes and similar charges as required by law, as well as appropriate employee deductions or contributions to continuing employee benefit plans. 4. Travel & Motor Vehicle Allowance. BW shall provide Van Houten with a monthly motor vehicle allowance of $400 (the "Motor Vehicle Allowance"). The Motor Vehicle Allowance shall be applied toward the lease, purchase, maintenance and operating expenses (including insurance, road service, etc.) of a motor vehicle of sufficient size, appearance and quality consistent with that of Van Houten's professional position with BW. It is expected that the Motor Vehicle Allowance will not be sufficient to completely reimburse Van Houten for all his motor vehicle expenses. Any motor vehicle expenses incurred by Van Houten which are not covered by the Motor Vehicle Allowance shall be paid by Van Houten without reimbursement by BW. 5. Entertainment and Other Travel Expenses. In addition to the Motor Vehicle Allowance, BW shall also reimburse Van Houten for reasonable customary expenditures incurred for travel and entertainment on behalf of BW. These expenses shall be subject to approval of the Chairman of BW. 6. Health Insurance; Retirement Benefits. BW shall attempt to include Van Houten in all benefits of life insurance and retirement plans provided by BW for its other full-time employees. BW shall have the right to change carriers and coverage without incurring an obligation to Van Houten. With the exception of dental coverage, Van Houten waives the right to participate in BW=s medical plan. BW shall attempt to include Van Houten in BW=s dental plan under the same terms as those offered to other full-time employees. 7. Vacation. Van Houten shall be entitled to paid annual vacations in accordance with the policies as established from time to time by the Board of Directors of BW but in any event not less than three weeks per year. 8. Incentive Stock Option. a. Grant and Vesting of Option. On the Effective Date, BWFC granted to Van Houten an incentive stock option for 33,334 shares of BWFC common stock (the "Option"). The Option has been granted pursuant to the BWFC 1995 Key Employee Stock Compensation Program, and all addendums to it (the "Program"). The Option exercise price is $8.656 per share. The Program provides that the stock vests at a rate of 20% per year (the "Plan Vesting Rate"). For purposes of this Agreement, a vesting calculation shall also be computed assuming the stock shall vest monthly based upon a rate of 33.33% per year (the "Termination Vesting Rate") (The monthly vesting calculation shall be made on the 14th day of each month, commencing with the 14th day of May, 1999, and shall vest at the rate of 2.78% per month). b. Payment upon Termination - Before April 14, 2004. In the event Van Houten's employment is terminated prior to April 14, 2004 (which is the date on which all of the 33,334 shares would be vested at the Plan Vesting Rate of 20% per year), BW shall pay Van Houten an amount to be determined as follows: 1. The unrealized gain on the number of shares vested at the Termination Vesting Rate in excess of the number of shares vested at the Plan Vesting Rate. Specifically, the payment shall be calculated as follows: o No. of shares vested per the Termination Vesting Rate, o Less no. of shares vested per the Plan Vesting Rate, o Mutiplied by the difference between: o The Fair Market Value per share, as defined in paragraph 9 below, and o The $8.656 per share Option exercise price. The calculations are to be made as of the effective date of the termination, and the payment shall be made to Van Houten within thirty days of that effective date. Also, Van Houten would retain his right to exercise the Option for all shares which were vested per the Plan Vesting Rate. 2. For example, if Van Houten's employment were terminated on April 14, 2002, all 33,334 Option shares would be vested at the Termination Vesting Rate, and 20,000 of the Option shares would be vested at the Plan Vesting Rate. Assume a Fair Market Value of $16 per share. The Option price is $8.656 per share. In this illustration, BW would be required to pay Van Houten: No. of shares vested per Termination Vesting Rate 33,334 Less no. of shares vested per the Plan Vesting Rate 20,000 -------- Difference 13,334 Fair Market Value per share $16.000 Option exercise price per share 8.656 -------- Unrealized gain per share $ 7.344 Payment amount: 13,334 shares X $7.344 per share = $97,925 2 Van Houten would retain his vested right to exercise the Option for 20,000 shares, which would have an unrealized gain of $146,880. Van Houten's total gain from the Option would be $97,925 + $146,880 = $244,805. c. Payment upon Termination - On or After April 14, 2004. In the event Van Houten's employment is terminated on or after April 14, 2004, Van Houten shall be solely entitled to his right to exercise the option for the 33,334 shares which would be vested at that time. d. Payment upon Termination due to Change in Control. In the event a Change in Control of BW, as defined in section 10, shall occur and Van Houten=s employment is terminated as a result of the Change in Control or after that event, the Option shares shall be deemed to be 100% vested for purposes of the Termination Vesting Rate. 9. Fair Market Value Defined. For purposes of this Agreement, "Fair Market Value" shall be the mean of the high and low sales prices of the shares of common stock of BWFC on the date in question (or, if such day is not a trading day in the U.S. markets, on the nearest preceding trading day), as reported with respect to the principal market (or the composite of the markets, if more than one) or national quotation system in which such shares are then traded, or if no such prices are reported, the mean between the closing high bid and low ask prices of a share of common stock of BWFC on that day on the principal market or national quotation system then in use, or if no such quotations are available, the price furnished by a professional securities dealer making a market in such shares selected by the Board of Directors of BWFC, or if no such prices are available, the book value of a share of common stock of BWFC as determined under generally accepted accounting principles as of the latest practical date. 10. Change in Control Defined. For purposes of this Agreement, a "Change in Control" of BW shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor to it, whether or not BW is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of BW representing 25% or more of the combined voting power of BW's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the BW cease for any reason to constitute at least a majority unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 11. Acknowledgment of Confidential Information. Van Houten acknowledges that during his employment with BW, he may acquire or be given access to or may develop or assist in developing confidential information regarding the products, property, business and affairs of BW, including information concerning BW's customers. This confidential information may consist of concepts, ideas, trade secrets, marketing and sales processes or techniques, pricing arrangements, operating procedures, technical data, customer names, customer contact persons and telephone numbers, loan originator names, broker names, investor names, quotations or other confidential information not generally known or easily ascertainable by the general public concerning BW's business. This information is referred to in this Agreement simply as "Confidential Information". 12. Restriction on Confidential Information. Van Houten shall not, during his employment with BW, use any Confidential Information outside of the scope of his employment by BW. He shall not communicate or disclose orally or in writing any of the Confidential Information to any person or entity, directly or indirectly, under any circumstances outside the scope of his employment by BW. Upon termination 3 of his employment with BW, he shall promptly return to BW all written or other tangible evidence of any Confidential Information and any memoranda with respect to that evidence which is in his possession or under his control. 13. Non-Compete. Van Houten shall not, during his employment with BW, directly or indirectly, for himself or for any other person, firm, corporation, partnership, limited liability company or association, either as a partner, principal, agent, employee, member, officer, director, material beneficial owner, or in any other capacity, conduct or engage in, or become interested in, either wholly or in part, any other financial institution or affiliate of it without the consent of BW. For purposes of this paragraph, Van Houten shall be deemed a material beneficial owner of an enterprise if Van Houten is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the company representing 10% or more of the combined voting power of the company=s then outstanding securities. 14. Indemnification. BW shall indemnify and hold harmless Van Houten from and against any and all liability and loss relating to Van Houten=s actions during the Term of this Agreement, except for any liability or loss resulting from the gross negligence of Van Houten and except as BW's ability to indemnify may otherwise be limited by its articles of incorporation or bylaws or by the Michigan Business Corporation Act, the Michigan Banking Code or the Michigan Savings Bank Act. 15. Notices. All demands, notices and communications required by this Agreement shall, unless otherwise specified by the terms of this Agreement, be in writing and shall be deemed to be given (i) upon personal delivery to the person to whom addressed (by messenger or delivery service), (ii) the day following delivery to a nationally recognized overnight courier service, (iii) three days following deposit in the U.S. mail, first class postage prepaid, or (iv) upon transmission of any notice by telecopy (fax). a. For BW, the notice shall be addressed to the following (which address may be changed by written notice): Bank West Attention: Chief Financial Officer 2185 Three Mile Road, NW Grand Rapids, MI 49544-1451 With a copy to: Jack A. Siebers Siebers Mohney PLC 125 Ottawa Ave. NW, Suite 340 Grand Rapids, Michigan 49503-2830 b. For Van Houten, the notice shall be addressed to the following (which address may be changed by written notice): Ronald A. Van Houten 1841 Lonsdale NE Grand Rapids, Michigan 49503 16. Entire Agreement. This Agreement states the entire understanding between the parties concerning the subject matter and supersedes and replaces all prior agreements written or verbal between the parties concerning the subject matter of the Agreement. 17. Attorneys' Fees And Costs. If any party commences an action against the other party as a 4 result of a breach or alleged breach of this Agreement, the prevailing party shall be entitled to recover from the losing party its actual attorneys' fees and costs of suit. 18. Assignment. In entering into this Agreement, BW is relying upon the business reputation, experience and integrity of Van Houten. The Agreement may not be assigned by Van Houten without BW's prior written consent, which consent may be withheld arbitrarily and for any reason or no reason. 19. Good Faith. Each party shall exercise the utmost good faith in performing the terms of this Agreement. 20. Remedies. The parties agree that if there is a breach of this Agreement, the remedies at law will be inadequate and the non-breaching party shall be entitled to seek redress by court proceedings in the form of an injunction restraining the breaching party and/or providing for specific performance without any bond or other security being required. The non-breaching party shall also be entitled to such damages as that party may show by appropriate evidence. Nothing in this Agreement shall be construed as preventing the non- breaching party from pursuing, or seeking any damages at law or in equity which it may have, and BW may, in any event, be entitled upon any breach to terminate any payments remaining to be paid pursuant to the provisions of this Agreement. 21. Regulatory Prohibition. Notwithstanding any other provision of this Agreement to the contrary, any payments made to Van Houten pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. ss.1828(k)) and the regulations promulgated thereunder, including 12 C.F.R. Part 359, and any successor provisions to such statute or regulations. 22. Miscellaneous. This Agreement shall be construed in accordance with the laws of the State of Michigan. It may not be amended except in writing, signed by all parties. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, assigns, executors, administrators and heirs, including any party that acquires stock or substantially all of the stock or assets of BWFC or BW. Bank West Financial Corporation, a Michigan corporation Dated: May 24, 1999 By: /s/ George A. Jackoboice ------------------------ George A. Jackoboice Its: Chairman Bank West, a Michigan savings bank Dated: May 24,1999 By: /s/ George A. Jackoboice ------------------------ George A. Jackoboice Its: Chairman Dated: May 24, 1999 /s/ Ronald A. Van Houten ------------------------ Ronald A. Van Houten 5 EX-10.11 5 Exhibit 10.11 EMPLOYMENT SECURITY AGREEMENT EMPLOYMENT SECURITY AGREEMENT, dated this 6th day of May 1999, between Bank West Financial Corporation, a Michigan corporation (the "Corporation"), Bank West, a Michigan-chartered savings bank and a wholly owned subsidiary of the Corporation (the "Bank"), and Louis D. Knooihuizen (the "Executive"). Hereinafter, the Corporation and the Bank are referred to collectively as the "Employers." WITNESSETH: WHEREAS, the Executive is a newly hired officer of the Employers; WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive in the event that his employment with the Employers is terminated under specified circumstances; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. Definitions. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) Annual Compensation. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of base salary paid to the Executive by the Employers or any subsidiary thereof during any of the three calendar years preceding the Date of Termination, including the calendar year in which the Date of Termination occurs. (b) Cause. Termination by the Employers of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. For purposes of this paragraph, no act or failure to act on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. (c) Change in Control of the Corporation. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, 2 as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) Code. Code shall mean the Internal Revenue Code of 1986, as amended. (e) Date of Termination. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause, the date on which the Notice of Termination is given, and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination. (f) Disability. Termination by the Employers of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) Good Reason. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on: (i) Without the Executive's express written consent, the assignment by the Employers to the Executive following a Change in Control of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control of the Corporation, or a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) Without the Executive's express written consent, a material reduction by the Employers in the Executive's base salary as in effect on the date of the Change in Control of the Corporation or as the same may be increased from time to time 3 thereafter or a material reduction in the package of fringe benefits provided to the Executive; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iv) The failure by the Employers to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 6 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) Notice of Termination. Any purported termination by the Bank for Cause, Disability or Retirement or by the Executive for Good Reason shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Employers' termination of Executive's employment for Cause, and (iv) is given in the manner specified in Section 7 hereof. (j) Retirement. Termination by the Employers of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. Benefits Upon Termination. If the Executive's employment by the Employers shall be terminated subsequent to a Change in Control of the Corporation by (i) the Employers other than for Cause, Retirement, or as a result of the Executive's death or Disability, or (ii) the Executive for Good Reason, then the Employers shall, subject to the provisions of Section 3 hereof, if applicable: (a) pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash amount equal to two (2) times the Executive's Annual Compensation; and (b) maintain and provide for a period ending at the earlier of (i) two (2) years after the Date of Termination or (ii) the date of the Executive's full-time employment by another employer (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (b)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to 4 participate immediately prior to the Date of Termination (other than retirement plans or stock compensation plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (b) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. 3. Limitation of Benefits under Certain Circumstances. If the payments and benefits pursuant to Section 2 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Employers would constitute a "parachute payment" under Section 280G of the Code, the payments and benefits pursuant to Section 2 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 2 being non-deductible to either of the Employers pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and benefits to be made pursuant to Section 2 shall be based upon the opinion of independent tax counsel selected by the Employers' independent public accountants and paid for by the Employers. Such counsel shall be reasonably acceptable to the Employers and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Employers and/or the Executive do not agree with the opinion of such counsel, (i) the Employers shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 2, as selected by the Executive, which such opinion indicates that there is a high probability do not result in any of such payments and benefits being non-deductible to the Employers and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Employers may request, and Executive shall have the right to demand that the Employers request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 2 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Employers, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Employers and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment other than pursuant to Section 2 hereof, or a reduction in the payments and benefits specified in Section 2 below zero. 4. Mitigation of Benefits. (a) The Executive shall be required to mitigate the amount of any benefits enumerated in Section 2(a) hereof by diligently seeking other employment consistent and comparable with the Executive's current position or earnings from self-employment, provided, however, that the 5 Executive shall not be required to accept comparable employment located beyond a fifty (50) mile radius of the City of Grand Rapids, Kent County, Michigan. The benefits specified in Section 2(a) hereof shall be reduced by an amount equal to one hundred percent (100%) of the total base salary earned by the Executive from such other employment or earnings from self-employment during the twenty-four (24) months following the first business day of the month following the Date of Termination. In no event, however, shall the Executive be required to pay back to the Employers pursuant to this provision any amount in excess of the amount payable under Section 2(a). (b) The Executive's failure to make good faith efforts to diligently and continuously seek other employment, as reasonably determined in the exercise of utmost good faith by the Boards of Directors of the Employers, shall be a breach of this Employment Security Agreement. In such case, the Employers shall notify the Executive in writing and provide the Executive with thirty (30) days to take appropriate corrective action. The notice shall state the basis for the breach and what corrective action must be taken. If the Executive fails to do so, the Employers' obligations under this Employment Security Agreement shall terminate upon the first day following the expiration of the thirty (30) day notice. 5. Withholding. All payments required to be made by the Employers hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Employers may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. Assignability. The Employers may assign this Agreement and their rights hereunder in whole, but not in part, to any corporation, bank or other entity with or into which either of the Employers may hereafter merge or consolidate or to which either of the Employers may transfer all or substantially all of their respective assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Employers hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 7. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Employers: President Bank West Financial Corporation 2185 Three Mile Road N.W. Grand Rapids, Michigan 49544 6 To the Executive: Louis D. Knooihuizen 3530 Navaho S.W. Grandville, Michigan 49418 8. Amendment; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Boards of Directors of the Employers to sign on their behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise the substantive laws of the State of Michigan. 10. Nature of Employment and Obligations. (a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Employers and the Executive, and the Employers may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof. (b) Nothing contained herein shall create or require the Employers to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Employers hereunder, such right shall be no greater than the right of any unsecured general creditor of the Employers. 11. Term of Agreement. Unless extended as provided in this Section 11, this Employment Security Agreement shall terminate on March 30, 2001. Prior to March 31, 2000, and each March 30 after that (the "anniversary date"), the Boards of Directors of the Employers shall consider, review and, if appropriate, explicitly approve a one-year extension of the remaining term of this Employment Security Agreement. The term of this Employment Security Agreement shall continue to extend each year if the Boards of Directors so approve the extension. If the Boards of Directors elect not to extend the term, they shall give written notice of the decision to the Executive not less that thirty (30) days prior to the anniversary date. 12. Interpretation and Headings. This Agreement shall be interpreted in order to achieve the purposes for which it was entered into. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Regulatory Prohibition. Notwithstanding any other provision of this Agreement to the contrary, the obligations of the Employers hereunder shall be suspended in the event that the FDIC prohibits or limits, by regulation or order, any payment hereunder pursuant to Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. ss.1828(k)) and the regulations promulgated thereunder, including 12 C.F.R. Part 359. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: BANK WEST FINANCIAL CORPORATION /s/ Kevin A. Twardy By: /s/ Ronald A. Van Houten - ------------------- ------------------------ Kevin A. Twardy Ronald A. Van Houten Attest: BANK WEST /s/ Kevin A. Twardy By: /s/ Ronald A. Van Houten - ------------------- ------------------------ Kevin A. Twardy Ronald A. Van Houten EXECUTIVE /s/ Janet E. Pellerito By: /s/ Louis D. Knooihuizen - ---------------------- ----------------------- Janet E. Pellerito Louis D. Knooihuizen EX-13.1 6 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 ....................................... 17 Consolidated Financial Statements Consolidated Balance Sheets .......................................... 18 Consolidated Statements of Income .................................... 19 Consolidated Statements of Changes in Shareholders' Equity .......................................... 20 Consolidated Statements of Cash Flows ................................ 22 Notes to Consolidated Financial Statements ........................... 24 Annual Meeting The Annual Meeting of Shareholders is scheduled for Wednesday, October 27, 1999 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard Street, N.W., Grand Rapids, Michigan. Corporate Headquarters 2185 Three Mile Rd., N.W. Grand Rapids, Michgian 49544-1451 To Our Stockholders: First, let me say it is a distinct privilege to join Bank West as its President and Chief Executive Officer. I joined the Bank West team on April 13, 1999, with 45 years of banking experience that includes commercial and mortgage lending and various other areas of responsibility in the banking sector. After reviewing the Bank's strategic plan, I was pleased to find that the principles of the plan of core loan and deposit growth were parallel with my banking philosophy. I recognized, however, that we needed to strengthen our management team by adding experience in other areas of the Bank if we were to grow and diversify our balance sheet, continue to portfolio high quality loans, and significantly improve profitability. Our goal is to establish high caliber, experienced leadership in the key areas of the Bank which subscribes to our vision of responsive, personalized community banking. As we work toward accomplishing this goal, we must continue to differentiate ourselves as a community bank that values relationships and recognizes the role we play in enhancing the prosperity of our customers and the communities we serve. We are excited about the opening of our fourth branch in Jenison, a southwestern suburb of Grand Rapids, in November 1999. This branch will play an important role in our loan and deposit growth plans. We also plan on upgrading our loan origination and processing software that will enable us to improve our efficiency in various areas of the Bank. The investment we have made in people, systems and geographical expansion will provide the foundation for continued growth and profitability. The Bank achieved 22% net loan growth during fiscal 1999, primarily from commercial and residential mortgage loans. Net income for 1999 was $176,000 as compared to $830,000 and $923,000 for 1998 and 1997, respectively. The items impacting 1999 net income are described in detail in the "Management's Discussion and Analysis of Financial Condition and Results of Operations"section. We recognized that such charges were necessary as we continue to position our Company for future earnings based upon our strategy of core loan and deposit growth. Although we are disappointed in fiscal 1999's results, we are optimistic of the Company's success in the years ahead. Bank West has aggressively addressed the upcoming Year 2000 ("Y2K") event during the fiscal year, working within FDIC guidelines. We renovated or upgraded all mission critical computer systems to ensure Y2K compliance. Additionally, we have evaluated our credit customers to determine the risk that they might pose as a result of Y2K so that we can take appropriate steps to mitigate those risks. Policies, plans, and procedures have been developed to guide contingency business resumption efforts in the event of some unforeseen development, such as power or telecommunications failure. Like all companies, we face the uncertainty of external influences on our operations at the turn of the century. However, the substantial investment of time and resources we have made in this area allows us to look forward to the new millennium with confidence. Our directors, management and staff want to thank you, our stockholders, for your investment and belief in our efforts and vision. We will continue our efforts to grow and diversify your company, with the goal of enhancing shareholder value. With this in mind, we look forward to our 113th year of offering superior banking services throughout the Western Michigan area. Sincerely, /s/Ronald A. Van Houten ----------------------- Ronald A. Van Houten President and Chief Executive Officer 1
Selected Consolidated Financial Data (Dollars in thousands except per share data) Year Ended June 30, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Summary of Operations Total interest income $ 13,666 $ 12,549 $ 10,429 10,088 7,848 Net interest income 5,352 4,937 4,279 4,158 3,185 Provision for loan losses 220 81 60 60 21 Other income 621 1,012 1,554 1,202 270 One-time special SAIF assessment -- -- 551 -- -- Other expenses 5,339 4,585 3,821 3,469 2,352 Income taxes 146 453 478 622 366 Income before cumulative effect of accounting change 268 -- -- -- -- Cumulative effect of change in accounting (92) -- -- -- -- Net income 176 830 923 1,208 716 Balance Sheet Data Total assets $206,669 $181,469 $155,675 $137,982 $139,648 Cash and cash equivalents 9,106 4,206 3,673 6,694 4,595 Securities 17,733 6,745 3,978 7,422 11,405 Mortgage collateralized securities 24,539 36,507 25,578 17,341 18,335 Loans, net 145,206 118,906 111,530 95,737 95,836 Loans held for sale 2,381 8,157 2,231 4,297 2,746 Deposits 132,401 119,979 102,862 91,028 85,180 FHLB advances 50,000 37,000 29,000 19,000 24,922 Equity 22,552 23,275 22,592 26,810 28,171 Per Share Data(1) Basic earnings per share(2) $ .07 $ .35 $ .36 $ .39 $ .07 Diluted earnings per share(2) .07 .33 .36 .39 .07 Dividends per share .24 .22 .19 .19 -- Book value per share 8.68 8.87 8.59 8.13 8.11 Ratios Average yield on interest-earning assets 7.23% 7.74% 7.61% 7.52% 6.97% Average rate on interest-bearing liabilities 4.88 5.26 5.15 5.37 4.76 Average interest spread 2.35 2.48 2.46 2.15 2.21 Net interest margin 2.83 3.04 3.12 3.10 2.83 Return on average assets (ROA) .09 .49 .64 .87 .62 Return on average equity (ROE) .76 3.58 3.89 4.38 4.34 Efficiency ratio 72.16 76.34 74.89 68.56 69.56 Dividend pay-out ratio 342.86 64.96 54.94 49.93 -- Average equity to average assets 11.72 13.60 16.42 19.77 14.46 Non-performing loans as a % of loans, net .88 .71 .37 .04 .15
(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. 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 (the "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, government legislation and regulation; and changes in 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, a state 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 originate and purchase residential real estate loans, including residential construction loans. The Company also originates commercial loans, home equity 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 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 sales 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 were required to have a commitment to sell in place to an investor on a servicing released basis. Recently, management decided to discontinue non-conforming lending through Sunrise Mortgage Corporation due to the lower than expected loan volume originated and purchased during the most recent fiscal year. The Company's net income was $176,000, $830,000 and $923,000 for fiscal 1999, 1998 and 1997, respectively. Fiscal 1999 net income, and to some degree, fiscal 1998 and 1997 net income were impacted by a number of items which management feels will no longer significantly impact future earnings. See "Results of Operations for the Year Ended June 30, 1999 Compared to the Year Ended June 30, 1998" and "Results of Operations for the Year EndedJune 30, 1998 Compared to the Year ended June 30, 1997" sections for further clarification of such items. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Changes in Financial Condition Assets. Total assets increased by $25.2 million or 13.9% from June 30, 1998 to June 30, 1999. The increase is primarily due to an increase in net loans of $26.3 million or 22.1% as greater emphasis was placed on originating commercial loans and balloon single-family mortgage loans instead of concentrating primarily on residential mortgage banking activities. The additional emphasis on the origination of these loans during fiscal 1999 was designed to diversify the Bank's loan portfolio from its traditional emphasis on adjustable-rate mortgages ("ARM's"), which have recently been out-of-favor due to the overall lower interest rate environment, 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 18.4% at the end of fiscal 1998 to 23.9% at the end of fiscal 1999. Management expects the next fiscal year and future years to reflect significant growth in commercial loans due to the strategic realignment that occurred during March of 1999. The Bank's newly appointed President/Chief Executive Officer and Vice President of Commercial Lending both have extensive commercial lending and banking experience. The Bank's strategic plan and business model has changed in focus to concentrate greater efforts on commercial lending activities. The growth in commercial lending is expected to contribute significantly toward improving the Bank's net interest income and margins. The Bank's mortgage banking activities consist of selling newly originated and purchased loans into the secondary market. Total loans sold amounted to $41.6 million, $45.0 million and $32.9 million in fiscal 1999, 1998 and 1997, respectively. Loans held for sale amounted to $2.4 million, $8.2 million and $2.2 million at June 30, 1999, 1998 and 1997, respectively. The dollar amount of loans sold and loans held for sale decreased in fiscal 1999 due to management's recent strategy to portfolio ten-year balloon mortgages versus selling them. Adding ten-year balloon loans to portfolio was designed to offset the significant prepayments of ARM's and longer-term fixed-rate mortgages during the fiscal year. In addition, the current strategy will leverage the balance sheet which is expected to provide additional net interest income. The Bank continues to explore different options to increase retail and wholesale mortgage loan volume. Collateralized mortgage obligations ("CMO's) decreased from $35.7 million at June 30, 1998 to $21.1 million at June 30, 1999. During the fourth quarter of fiscal 1999, the Bank sold approximately $15 million of its CMO's that were lower yielding and had longer average lives than the bonds that replaced them, taking advantage of the recent rise in overall market interest rates. This decision will result in higher net interest income and also provide liquidity over the next few years to fund anticipated commercial loan growth. The fourth quarter sale of CMO's resulted in a $129,000 loss, net of income taxes. However, it is anticipated that the higher yielding bonds that were purchased will recover the loss in the form of higher interest income within twelve months. The remaining CMO's, which have floating rates based on either the prime or one month LIBOR rates, are structured with relatively low weighted average note rates of approximately 7.1% as compared to current market rates, which reduces prepayment risk. During April of 1999, securities were transferred from the held to maturity portfolio to the available for sale and trading portfolios in accordance with the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" to provide the Company with additional flexibility in the management of its security portfolio as discussed below. At the date of transfer, these securities had an amortized cost of $14.1 million. Other securities which are classified as available for sale primarily consist of U.S. agency securities, corporate bonds, pass-thru mortgage-backed securities and taxable municipal securities. These types of securities increased from $7.6 million at June 30, 1998 to $21.1 million at June 30, 1999. The increase is primarily due to the purchase of U.S. agency securities and corporate and municipal bonds that are higher yielding and have much shorter average lives than CMO's. The Company also liquidated the majority of its equity securities during the fiscal year. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Remaining equity securities have a carrying value of approximately $60,000 at June 30, 1999. The shift in the mix of the security portfolio represents another step in the Bank's strategy to focus on its principles of long-term loan growth through liquidity, asset/liability and credit risk management by matching debt securities with planned loan growth. At June 30, 1999, the unrealized loss on the Company's entire securities portfolio was approximately $410,000, net of taxes, which is shown as a component of stockholders' equity. The unrealized loss is due to the recent rise in overall market interest rates and wider spreads in the market. Management believes that the recent decline in the market values of these securities is temporary. Liabilities. Deposits increased by $12.4 million or 10.4% from June 30, 1998 to June 30, 1999. The increase in total deposits was primarily attributable to growth in certificates of deposit of $5.8 million or 6.5%, and growth in NOW and money market deposits of $5.3 million or 119.4%. Certificates of deposit accounted for approximately 72% of total deposits at June 30, 1999 and approximately 74% of total deposits at June 30, 1998. At June 30, 1999, $73.6 million or 77.5% of total certificates of deposit mature in one year or less, and $20.9 million or 22.0% 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. The Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. Based on its experience, management believes that its passbook and statement savings, demand deposits and NOW accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be affected by market conditions. Because the growth in deposits has not matched the growth in assets in recent years, the Bank has utilized Federal Home Loan Bank ("FHLB") advances. During fiscal 1999, the Bank increased FHLB advances by $13.0 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. Management expects to continue to utilize additional FHLB advances in the next fiscal year. Shareholders' Equity. Shareholders' equity amounted to $22.6 million or 10.9% of total assets at June 30, 1999 compared to $23.3 million or 12.8% of total assets at June 30, 1998. The Company's trend of profitability continued in fiscal 1999 with the Company earning $176,000. However, net income was impacted by a number of items which management feels will no longer significantly impact future earnings as discussed in the "Results of Operations for the Year Ended June 30, 1999 Compared to the Year Ended June 30, 1998" section. The decrease in total shareholders' equity relates primarily to net income offset by dividends, stock repurchases and an increase in unrealized losses on available for sale securities. The cost of shares issued to the Company's Employee Stock Ownership Plan ("ESOP") but not yet allocated to participants totaling $745,000 at June 30, 1999 is presented in the consolidated balance sheet as a reduction of shareholders' equity. The unearned compensation value of the Company's MRPs totalled $165,000 at June 30, 1999 and is also 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, 1999, the net unrealized loss was $410,000, while at June 30, 1998, the net unrealized gain was $5,000. The $14.1 million of CMO securities transferred from the held to maturity portfolio to the available for sale portfolio during April of 1999 increased the unrealized loss on securities available for sale equity component by $119,000. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Non-performing Assets and the Allowance for Loan Losses The table below sets forth the amounts and categories of non-performing assets at June 30, 1999 and June 30, 1998:
June 30, June 30, 1999 1998 - -------------------------------------------------------------------------------- (Dollars in Thousands) Non-accrual loans One- to four-family $ 207 $ 682 Construction and land development 930 -- Commercial -- 32 Consumer 142 127 ------ ------ Total 1,279 841 Foreclosed assets Construction and land development 310 192 ------ ------ Total non-performing assets $1,589 $1,033 ====== ====== Total non-performing assets as a percentage of total assets .77% .57% ====== ======
Non-performing assets in the construction and land development category consist of seven construction spec loans to five builders in the western and southwestern Michigan area. These loans, which are collateralized by single-family homes, had a maximum loan-to-value ratio of 75%. The majority of these homes are substantially complete. Management believes that these loans are adequately collateralized. Such loans did not require specific reserves against the allowance for loan losses at June 30, 1999. However, due to an increase in delinquencies in these types of loans, general reserve allocation percentages were increased resulting in increased general reserves for those types of loans at June 30, 1999. The allowance for loan losses totalled $480,000 or 38% of total non- performing loans at June 30, 1999, and no portion of the allowance for loan losses was allocated to specific loans. During the year ended June 30, 1999, there were $29,429 in charge-offs. At June 30, 1999, $110.6 million or 71.7% of the Bank's total loan portfolio was collateralized by first liens on one-to four-family residences, and the net loan portfolio amounted to 70.2% of total assets. Results of Operations for the Year Ended June 30, 1999 Compared to the Year Ended June 30, 1998 Net Income. Net income for fiscal 1999 was $176,000 or $.07 per diluted share, compared to $830,000 or $.33 per diluted share for fiscal 1998. The decrease in the Company's net income of $654,000 or 78.8% in fiscal 1999 from fiscal 1998 was due to several events that are not expected to impact future earnings which are described below on an after tax basis. First, the Company realized a $340,000 net of tax loss on investment securities in 1999 compared to a net of tax loss of $1,100 in 1998 primarily resulting from the liquidation of the Company's equity investments and the sale of certain CMO's in order to reposition the securities portfolio as previously mentioned. Second, the Company incurred $253,000, net of tax, in legal costs associated with a class action lawsuit filed on July 17, 1998 by a Bank West borrower. Third, the Company incurred $140,000 net of tax, in a settlement accrual in 1999 related to the former President and Chief Executive Officer. Fourth, the Company incurred a $55,000 net of tax loss on disposal of fixed assets in 1999 related to Year 2000 compliance. These items are discussed in greater detail in the following sections. The above amounts were partially offset by growth in net interest income of $415,000, or 8.4%. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 interest-earning assets and interest-bearing liabilities, market rates of interest, the level of nonperforming assets, demand for loans and other market forces. Net interest income increased by $415,000 for the year ended June 30, 1999 as compared to the year ended June 30, 1998. The increase in net interest income was primarily attributable to a $16.0 million or 13.2% increase in the average loan portfolio (including loans held for sale). The Company's average interest spread decreased from 2.48% to 2.35%, reflecting the relatively flat U.S. Treasury yield curve during the fiscal year. The yield on total interest-earning assets decreased from 7.74% for fiscal 1998 to 7.23% for fiscal 1999. The yield decreased primarily due to refinances of a portion of the Bank's existing loan portfolio to lower rates as well as the downward repricing of the Bank's floating-rate CMO portfolio. During the fiscal year, the Federal Reserve lowered the federal funds rate by 75 basis points, and overall market interest rates declined substantially from the previous year. Since June 30, 1999, single-family mortgage interest rates have risen back to levels experienced in the recent past. Management expects that its strategy shift to place greater emphasis on commercial lending will positively impact the yield on the loan portfolio. The cost of interest-bearing liabilities decreased from 5.26% for fiscal 1998 to 4.88% for fiscal 1999, primarily due to the decline in the overall interest rate environment. In addition, the Bank increased its non-CD core deposits to $37.4 million or 28.3% of total deposits compared to $30.7 million or 25.6% of total deposits. Net interest margin decreased from 3.04% for fiscal 1998 to 2.83% for fiscal 1999. The decrease in net interest margin was primarily due to the relatively flat U.S. Treasury yield curve, which negatively impacted the yield on interest-earning assets as loans repriced downward faster than the repricing of certificates of deposit and FHLB advances. 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 fiscal year resulted in a shift in borrower preference to fixed-rate and balloon 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, and balloon loans which are generally portfolioed. A continued high level of refinances and conversions of adjustable-rate mortgages to fixed-rate and balloon 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. 7 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, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- 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) $136,874 $ 10,598 7.74% $120,844 $ 9,795 8.11% $103,324 $ 8,206 7.94% Securities 46,077 2,677 5.81 36,669 2,446 6.67 28,601 1,907 6.67 Interest-bearing deposits 3,652 191 5.23 2,738 152 5.55 3,633 199 5.48 FHLB stock 2,521 199 7.89 1,958 156 7.97 1,483 116 7.81 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 189,124 13,665 7.23 162,209 12,549 7.74 137,041 10,428 7.61 - -------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 7,547 8,522 7,419 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $196,671 $170,731 $144,460 ================================================================================================================================ Interest-bearing liabilities: Savings, checking and MMDA's $ 31,883 857 2.69 $ 25,821 794 3.08 $23,507 729 3.10 Certificates of deposit 91,307 5,044 5.52 83,032 4,808 5.79 73,465 4,195 5.71 FHLB advances 47,185 2,412 5.11 35,803 2,010 5.61 22,433 1,225 5.46 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 170,375 8,313 4.88 144,656 7,612 5.26 119,405 6,149 5.15 - -------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities 3,247 2,853 1,340 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 173,622 147,509 120,745 Stockholders' equity 23,049 23,222 23,715 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $196,671 $170,731 $144,460 ================================================================================================================================ Net interest income; average interest rate spread $ 5,352 2.35% $ 4,937 2.48% $ 4,279 2.46% ================================================================================================================================ Net interest margin(3) 2.83% 3.04% 3.12% ================================================================================================================================ Average interest-earning assets to average interest-bearing liabilities 1.11x 1.12x 1.15x ================================================================================================================================
(1) At June 30, 1999, the weighted average yields earned and rates paid were as follows: loans receivable, 7.73%; securities, 6.11%; interest-bearing deposits, 5.77%; FHLB stock, 8.00%; total interest-earning assets, 7.31%; savings, checking and MMDA's, 3.11%; certificates of deposits, 5.20%; FHLB advances, 5.22%; total interest-bearing liabilities, 4.86%; and interest spread, 2.45%. (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) Net interest margin equals net interest income divided by average interest-earning assets. 8 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, 1999 June 30, 1998 vs. vs. Year Ended Year Ended June 30, 1998 June 30, 1997 - --------------------------------------------------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Due to Due to - --------------------------------------------------------------------------------------------------------------------------- Total Total Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Interest income: Loans receivable $(460) $1,263 $ 803 $178 $1,411 $1,589 Securities (342) 573 231 15 524 539 Interest-bearing deposits (9) 48 39 3 (50) (47) FHLB stock (2) 45 43 2 38 40 - --------------------------------------------------------------------------------------------------------------------------- Total interest income (813) 1,929 1,116 198 1,923 2,121 - --------------------------------------------------------------------------------------------------------------------------- Interest expense: Savings, checking and MMDA's (109) 172 63 (5) 70 65 Certificates of deposit (230) 466 236 60 553 613 FHLB advances (192) 594 402 35 750 785 - --------------------------------------------------------------------------------------------------------------------------- Total interest expense (531) 1,232 701 90 1,373 1,463 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $(282) $ 697 $ 415 $108 $ 550 $ 658 ===========================================================================================================================
Provision for Loan Losses. 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. The provision for loan losses increased by $139,000 or 171.6% when comparing fiscal 1999 to fiscal 1998. During the fiscal year, management increased the provision for loan losses as a result of increases in general reserve percentage assumptions utilized for construction and land development loans due to a recent increase in delinquencies of builder spec loans. In addition, the increase in commercial loans, both on a dollar basis and as a percentage of total loans, required additional general reserves. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 provision for loan losses to increase in the next fiscal year to keep pace with the growth in the loan portfolio and to reflect 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 .77% as of June 30, 1999 compared to .57% as of June 30, 1998. The allowance for loan losses as a percentage of total loans at June 30, 1999 increased to .33% compared to .24% at June 30, 1998. The allowance for loan losses equalled 37.5% of nonperforming loans at June 30, 1999. The ratio of net charge-offs to average loans outstanding was .02% for fiscal 1999 compared to .01% for fiscal 1998. Total Other Income. Total other income decreased by $392,000 or 38.7% in fiscal 1999 from fiscal 1998, partially due to a $157,000 increase in the loss on sales of securities available for sale. In additon, net gains on trading securites decreased by $217,000. The increase in net loss on securities available for sale was primarily due to a first quarter change totaling $401,000 related to what management believed to be an other-than-temporary decline in the market value of certain equity securities. Management decided to liquidate the majority of the remaining equity securities during fiscal 1999 in order to reposition the securities portfolio as previously mentioned. The carrying value of the remaining equity securities was approximately $60,000 at June 30, 1999. The decrease in net gain on trading securities was due to the Company's decision to eliminate its equity trading account in the prior fiscal year in light of stock market volatility. Total Other Expenses. Total other expenses increased by $754,000 or 16.4% in fiscal 1999 as compared to fiscal 1998. The increase was primarily due to the factors discussed below. Compensation and benefits expense was higher by $149,000 or 5.3%. This expense category included a $225,000 settlement accrual related to the former President and Chief Executive Officer. The former President and Chief Executive Officer was replaced by Ronald A. Van Houten. Absent the settlement accrual, compensation and benefits expense was lower by $76,000, or 2.7% primarily due to lower ESOP expense of $112,000 resulting from a general decline in the market value of the Company's stock in 1999 as compared to 1998. Except for expected personnel additions in the commercial lending area, the Bank has completed the majority of personnel additions necessary to support continued growth in its lending areas and existing 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 2000. Professional fees increased by $404,000, or 153.2%. The Company incurred approximately $384,000 in legal costs during fiscal 1999 associated with defending a class action lawsuit filed on July 17, 1998 by a Bank West borrower. See Note 10 to Consolidated Financial Statements for more information. Management anticipates additional legal defense costs in fiscal 2000, however, management is unable to determine the amount to be incurred. The Company incurred an $83,000 loss on the disposal of fixed assets considered non-complaint with respect to the Year 2000. See "The Year 2000" section for additional information on the status of the Bank's Year 2000 efforts. Data processing expense increased by $64,000 or 32.2% in fiscal 1999 from fiscal 1998 primarily due to $25,000 of Year 2000-related pass-through costs from the service bureau the Bank utilizes. In addition, maintenance agreement costs increased due to utilizing additional software products, and the volume of transactions processed increased resulting in higher data processing expense. Cumulative Effect of a Change in Accounting Principle. During 1999, the Company changed the accounting for certain securities by transferring certain held to maturity securities to the trading portfolio under the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and 10 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Hedging Activities. The transfer resulted in the recognition of a $92,000 net of tax charge in 1999. The transfer allowed the Company to subsequently sell such securities in 1999, consistent with management's strategy to reposition the security portfolio as previously mentioned. Federal Income Tax Expense. Federal income tax expense decreased by $355,000 or 78.4% in fiscal 1999 from fiscal 1998, due to a decrease in pre-tax income. 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 by $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 Interest Income. 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 $8.1 million or 28.2% increase in the average securities portfolio, primarily mortgage collateralized securities. 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 represented 23.1% of total loans at the end of fiscal 1998 compared to 14% of total loans at the end of fiscal 1997. The cost of interest-bearing liabilities increased from 5.15% for fiscal 1997 to 5.26% for fiscal 1998. The higher cost was 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. Provision for Loan Losses. The provision for loan losses increased by $21,000 or 35.0% when comparing fiscal 1998 and 1997. 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 net loans at June 30, 1998 increased to .24% compared to .20% 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. 11 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 $202,000 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 increased stock market volatility in fiscal 1998. The increase in net loss on 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. 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 $75,000 or 39.7%. 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 was 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. 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 pre-tax 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, forwards, 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 12 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 assets (consisting of ARM's, commercial and home equity loans and floating rate CMO's). Significant effort has been made to reduce the duration and average life of the Bank's interest-earning assets. This has been accomplished by management's current strategy to portfolio balloon mortgages versus longer-term fixed-rate mortgages as well as portfolio commercial and home equity loans. During fiscal 1999, the Bank's ratio of interest-sensitive assets to interest-sensitive liabilities remained approximately the same as in the prior year. 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 and balloon mortgage loans for retention in the loan portfolio. In addition, the Bank continues to emphasize commercial and home equity loans which have shorter average lives than the mortgage portfolio. At June 30, 1999, the Bank's adjustable-rate and balloon mortgage loans amounted to $70.7 million or 48.7% of total loans. The Bank experienced a high level of ARM prepayments during fiscal 1999 due to the relatively flat yield curve. Management anticipates that the Bank will retain a sufficient amount of newly originated balloons and other loan types to offset loan prepayments 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 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 anticipated changes in NII and 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, 1999:
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 $ 9,740 (50.04)% $5,380 (11.38)% +300 12,065 (38.11) 5,603 (7.70) +200 14,683 (24.67) 5,830 (3.95) +100 17,121 (12.17) 5,960 (1.82) Static 19,493 -- 6,070 -- (100) 19,946 2.33 5,917 (2.53) (200) 19,446 (0.24) 5,701 (6.08) (300) 18,517 (5.00) 5,415 (10.80) (400) 17,771 (8.84) 5,166 (14.90)
13 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) As illustrated in the table, an increase in interest rates will result in larger net decreases in the Bank's NPV as compared to a decrease in interest rates. This occurs principally because, when rates increase, the Bank's deposits reprice faster than its ARM's and other adjustable-rate loans. An increase in interest rates also will negatively impact the securities available for sale which is shown as a component of stockholders' equity. 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 investments 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, 1999, the Bank has approximately $23.6 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. 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. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Year 2000 General. The Year 2000 issue confronting us, as well as our suppliers, customers' suppliers and competitors, centers on the inability of many computer systems to recognize the Year 2000. Many existing computer programs and systems originally were programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000 unless they are corrected or replaced. Like most financial service providers, we may be significantly affected by the Year 2000 issue due to our dependence on technology and date-sensitive data. Computer software, hardware and other equipment, both within and outside the Bank's direct control and third parties with whom the Bank electronically or operationally interfaces are likely to be affected. If computer systems are not modified in order to be able to identify the Year 2000, many computer applications could fail or create erroneous results. In this event, calculations which rely on date field information, such as interest, payment or due dates and other operating functions, could generate results which are significantly misstated. In accordance with federal regulatory pronouncements, the Bank's Year 2000 plan addressed issues involving awareness, assessment, renovation, validation, implementation and contingency planning. These phases are discussed below. Awareness and Assessment. The Bank has a Year 2000 team, consisting of a committee of the Board of Directors which consists of two outside directors, the Chief Executive Officer, three Vice Presidents, and an Information Systems Coordinator. The Year 2000 Committee meets monthly and the Chairman of the Committee, an outside director, reports to the Board of Directors on a monthly basis. Management has conducted an assessment of all software, hardware, environmental systems and other computer-controlled systems. In addition, management has identified and developed an inventory of all technological components and vendors. All "mission critical" areas have been identified. Renovation Phase. The Bank completed its upgrade of in-house hardware and software considered mission critical prior to June 30, 1999. The Bank's core data processing software is provided by Fiserv Milwaukee, Inc. ("Fiserv"), an outside vendor. Fiserv represents that they are fully compliant. Validation or Testing Phase. Utilizing a test lab environment, the Bank during 1998 tested its loan origination, loan servicing, savings deposits, savings withdrawal, general ledger and other activities for Year 2000 compliance. Extensive testing also took place with applications that interface with Fiserv. Management explored during 1998 the steps involved in switching its data processing to a different service provider in the event its current provider was unable to become Year 2000 compliant in a timely manner. Based on their review, management does not believe that a switch to a new service provider will be necessary. Implementation Phase. Additional testing was conducted during the first half of 1999, and the Bank completed the implementation phase by June 30, 1999. Contingency Planning. The Bank has adopted a contingency plan in the event that one or more of its internal and external computer systems fail to operate on or after January 1, 2000. In a worst case scenario, the Bank would need to post accounts and general ledger entries manually. This system is in the process of being set up. Testing of the Bank's business resumption plan was completed by June 30, 1999. The Bank has in place a $2 million line of credit from the Federal Home Loan Bank of Indianapolis that can be used for liquidity purposes if other sources of funds are not available when needed. The Bank can also obtain short-term FHLB advances if necessary. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Risks. If one or more internal or external computer systems fail to operate properly on or after January 1, 2000, the Bank may be unable to process transactions, prepare statements or engage in similar normal business activities. If all transactions were required to be handled manually due to computer or other failures, the Bank would need to hire additional personnel which could significantly increase expenses. In the event any of our local utility companies were unable to provide electricity or other needed services, our operations would be disrupted. Our electricity provider has represented that they are Year 2000 compliant; however, the Bank is unable to provide any assurances as to the Year 2000 readiness of the electricity provider or other utility companies. We believe we have taken appropriate steps with respect to matters that are within our control in order to become ready for the Year 2000 in a timely manner. Based on the steps taken to date, including testing and other documentation, management believes that issues related to Year 2000 will not have a material adverse effect on the Company's liquidity, capital resources or consolidated results of operations. However, we are unable to provide any assurances that we have foreseen all problems that may develop on or after January 1, 2000 or that we have taken all actions that may be considered necessary in hindsight. In addition, the readiness of all third parties, including customers and suppliers, is inherently uncertain and cannot be guaranteed by us. While our outside service providers have shared with us their testing results, none of the service providers have provided us with enforceable assurances. Costs. The Bank currently estimates the total cost of becoming Year 2000 compliant is approximately $150,000. These costs cover the replacement of depreciable assets, primarily personal computers and consulting costs. The costs associated with Year 2000 readiness are based on management's best estimates. In addition, the Bank incurred a loss of $83,460 on disposal of non-Year 2000 compliant hardware and software. Status of Borrowers and Other Customers. The Bank's customer base consists primarily of individuals who use the Bank's services for personal, household or consumer uses. Management believes these customers are not likely to individually pose material Year 2000 risks directly. It is not possible at this time to gauge the indirect risks which could be faced if the employers of these customers encounter unresolved Year 2000 issues. Most of the Bank's loans are residential or consumer in nature. The Bank had approximately 130 commercial borrowers as of June 30, 1999. Management has performed a review of these commercial borrowers to determine if there are any Year 2000 issues or concerns of the borrower that could affect repayment of the Bank's loan. To-date, no issues or concerns have been identified. Accordingly, no specific Year 2000 related reserves have been assigned to these loans. For new commercial loans, the Bank is requiring the borrower to represent that it expects to become Year 2000 compliant in a timely manner and that it will promptly notify the Bank if the borrower or any of its material vendors or suppliers will not achieve compliance timely, in each case excluding any noncompliance that would not have a material adverse effect on the borrower's financial condition. The Bank believes these representations will assist management in monitoring the status of new commercial borrowers. 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. 16 Report of Independent Auditors [CROWE CHIZEK LETTERHEAD] 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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain securities effective April 1, 1999 to conform with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan August 16, 1999 17
Consolidated Balance Sheets June 30, 1999 and 1998 1999 1998 ------------ ------------ ASSETS Cash and due from financial institutions $ 1,527,481 $ 2,408,476 Interestbearing deposits in financial institutions 7,578,387 1,797,063 ------------ ------------ Total cash and cash equivalents 9,105,868 4,205,539 Securities available for sale 42,272,306 32,167,697 Securities held to maturity (fair value: 1998 - $11,079,178) -- 11,084,361 Loans held for sale 2,380,576 8,156,572 Loans, net 145,205,691 118,905,611 Federal Home Loan Bank (FHLB) stock 2,700,000 2,100,000 Premises and equipment net 3,000,951 3,164,905 Accrued interest receivable 1,019,165 879,082 Mortgage servicing rights 232,561 280,869 Real estate owned 309,826 192,080 Other assets 442,257 332,136 ------------ ------------ $206,669,201 $181,468,852 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits $132,401,205 $119,979,379 FHLB borrowings 50,000,000 37,000,000 Accrued interest payable 292,289 253,037 Advanced payments by borrowers for taxes and insurance 509,218 512,538 Deferred federal income tax 67,362 335,182 Other liabilities 846,996 114,029 ------------ ------------ Total liabilities 184,117,070 158,194,165 Commitments and contingencies Shareholders' equity Preferred stock, 5,000,000 shares authorized, none issued Common stock, $.01 par value; 10,000,000 shares authorized; 2,597,729 and 2,623,629 issued at June 30, 1999 and 1998 25,978 26,237 Additional paid-in capital 11,328,830 11,551,136 Retained earnings, substantially restricted 12,517,215 12,928,028 Accumulated other comprehensive income, net of tax of $211,018 in 1999 and ($2,644) in 1998 (409,623) 5,132 Management Recognition Plan (unearned shares) (165,021) (360,998) Employee Stock Ownership Plan (unallocated shares) (745,248) (874,848) ------------ ------------ 22,552,131 23,274,687 ------------ ------------ $206,669,201 $181,468,852 ============ ============
See accompanying notes to consolidated financial statements. 18
Consolidated Statements of Income Years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ---------- ----------- ------------ Interest and dividend income Loans $10,598,406 $ 9,795,291 $ 8,206,364 Securities 2,677,378 2,446,042 1,907,129 Other interest-earning deposits 190,711 152,152 199,210 Dividends on FHLB stock 199,142 155,825 115,838 ---------- ----------- ------------ 13,665,637 12,549,310 10,428,541 Interest expense Deposits 5,900,947 5,601,870 4,924,144 FHLB borrowings 2,412,433 2,010,465 1,224,959 ---------- ----------- ------------ 8,313,380 7,612,335 6,149,103 ---------- ----------- ------------ Net interest income 5,352,257 4,936,975 4,279,438 Provision for loan losses 220,000 81,000 60,000 ---------- ----------- ------------ Net interest income after provision for loan losses 5,132,257 4,855,975 4,219,438 Other income Net gain on sales of loans 664,568 662,203 498,666 Fees and service charges 319,884 340,967 317,286 Net gain (loss) on trading securities (16,498) 200,148 731,156 Net gain (loss) on securities available for sale (358,784) (201,890) (285) Other income 11,199 10,911 7,050 ---------- ----------- ------------ 620,369 1,012,339 1,553,873 Other expenses Compensation and benefits 2,959,351 2,809,557 2,234,337 Federal deposit insurance expense 70,427 64,306 121,246 FDIC special assessment -- -- 550,556 Professional fees 666,946 263,374 188,561 Data processing expense 261,093 197,487 177,878 Occupancy expense 336,370 301,185 266,457 Furniture, fixtures and equipment expense 183,228 153,899 137,249 Advertising 89,876 111,351 119,993 Loss on disposal of fixed assets 83,460 -- -- Other expense 687,861 683,532 575,481 ---------- ----------- ------------ 5,338,612 4,584,691 4,371,758 ---------- ----------- ------------
Income before federal income tax expense and cumulative effect of accounting change 414,014 1,283,623 1,401,553 Federal income tax expense 145,600 453,255 478,724 ---------- ----------- ------------ Income before cumulative effect of accounting change 268,414 830,368 922,829 Cumulative effect of change in accounting for certain securities, net of tax benefit of $47,600 (92,399) -- -- ---------- ----------- ------------ Net Income $ 176,015 $ 830,368 $ 922,829 ========== =========== ============ Basic earnings per share: Income before cumulative effect of accounting change $ 0.11 $ 0.35 $ 0.36 Cumulative effect of accounting change (0.04) -- -- ---------- ----------- ------------ Net Income $ 0.07 $ 0.35 $ 0.36 ========== =========== ============ Diluted earnings per share: Income before cumulative effect of accounting change $ 0.11 $ 0.33 $ 0.36 Cumulative effect of accounting change (0.04) -- -- ---------- ----------- ------------ Net Income $ 0.07 $ 0.33 $ 0.36 ========== =========== ============
See accompanying notes to consolidated financial statements. 19 Consolidated Statements of Changes in Shareholders' Equity Years Ended June 30, 1999, 1998 and 1997
Accumulated Additional Other Unearned Unallocated Total Common Paid-in Retained Comprehensive MRP ESOP Shareholders' Stock Capital Earnings Income Shares Shares Equity -------- ----------- ----------- --------- --------- ----------- ----------- Balance at July 1, 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 Other comprehensive income, net of tax: Unrealized gains (losses) arising during the year 219,909 219,909 Less reclassification adjustments for net losses included in net income 188 188 --------- ---------- Other comprehensive income 220,097 220,097 ---------- Comprehensive income 1,142,926 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) Shares committed to be released under Employee Stock Ownership Plan 60,244 129,600 189,844 -------- ----------- ----------- --------- --------- ----------- ----------- 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 Other comprehensive income, net of tax: Unrealized losses arising during the year (140,825) (140,825) Less reclassification adjustments for net losses included in net income 133,247 133,247 --------- ---------- Other comprehensive income (loss) (7,578) (7,578) ---------- Comprehensive income 822,790 Shares earned under MRP $152,400 $ 152,400 Cash dividends of $.22 per share $(539,433) (539,433)
See accompanying notes to consolidated financial statements. 20 Consolidated Statements of Changes in Shareholders' Equity (Continued) Years Ended June 30, 1999, 1998 and 1997
Accumulated Additional Other Unearned Unallocated Total Common Paid-in Retained Comprehensive MRP ESOP Shareholders' Stock Capital Earnings Income Shares Shares Equity ------- ----------- ----------- --------- --------- --------- ----------- 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 ------- ----------- ----------- --------- --------- --------- ----------- Balance at June 30, 1998 26,237 11,551,136 12,928,028 $ 5,132 (360,998) (874,848) 23,274,687 Net income for the year ended June 30, 1999 176,015 176,015 Other comprehensive income, net of tax: Unrealized loss on transfer of securities held to maturity to available for sale (26,469) (26,469) Unrealized losses arising during the year (728,371) (728,371) Less reclassification adjustments for net losses included in net income 340,085 340,085 --------- ---------- Other comprehensive income (loss) (414,755) (414,755) ---------- Comprehensive income (loss) (238,740) Shares earned under MRP 107,800 107,800 Shares forfeited under MRP (88,177) 88,177 -- Cash dividends of $.24 per share (586,828) (586,828) Repurchase of 46,000 shares of stock $ (460) $ (415,852) $ (416,312) Shares committed to be released under Employee Stock Ownership Plan 105,047 $ 129,600 234,647 Shares issued upon exercise of stock options 201 139,462 139,663 Tax benefit relating to employee stock compensation plans 37,214 37,214 ------- ----------- ----------- --------- --------- --------- ----------- Balance at June 30, 1999 $25,978 $11,328,830 $12,517,215 $(409,623) $(165,021) $(745,248) $22,552,131 ======= =========== =========== ========= ========= ========= ===========
See accompanying notes to consolidated financial statements. 21
Consolidated Statements of Cash Flows Years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities Net income $ 176,015 $ 830,368 $ 922,829 Adjustments to reconcile net income to net cash from operating activities Purchase of trading securities -- (2,530,635) (5,428,775) Proceeds from sales of trading securities -- 4,486,385 3,947,118 Origination and purchase of mortgage loans for sale (35,127,650) (50,245,577) (30,350,557) Proceeds from sales of mortgage loans 41,568,214 44,982,359 32,915,164 Net (gain) loss on sales of: Loans (664,568) (662,203) (498,666) Securities 515,281 1,742 (730,871) Real estate owned 2,501 (2,241) (210) Depreciation 247,685 213,787 192,495 Amortization of premium, net 242,923 79,741 13,848 Loss on disposal of fixed assets 83,460 -- -- ESOP expense 234,647 346,528 189,844 MRP expense 107,800 152,400 149,918 Provision for loan losses 220,000 81,000 60,000 Change in: Deferred loan fees (191,521) (180,698) (77,301) Other assets and accrued interest receivable (218,843) (541,027) (85,866) Other liabilities and accrued interest payable 768,899 (2,039) (36,442) ----------- ----------- ----------- Net cash from operating activities 7,964,843 (2,990,110) 1,182,528 Cash flows from investing activities Purchase of FHLB stock (600,000) (550,000) (75,000) Net decrease in interest-bearing time deposits -- 99,000 199,000 Loan originations, net of repayments (19,099,197) (4,296,879) (13,664,118) Loans purchased for portfolio (7,539,188) (3,295,025) (2,156,750) Securities available for sale: Purchases (36,282,467) (24,143,884) (14,725,895) Proceeds from sales 27,518,645 15,634,260 10,731,577 Proceeds from maturities, calls and principal repayments 11,450,457 2,786,772 1,545,498 Securities held to maturity: Purchases (3,093,501) (11,102,747) (3,002,813) Proceeds from maturities, calls and principal repayments -- 4,000,625 1,000,000 Property and equipment expenditures (170,143) (250,534) (213,681) Proceeds from disposal of fixed assets 2,952 -- -- Proceeds from sale of real estate owned 189,579 162,918 25,566 ----------- ----------- ----------- Net cash from investing activities (27,622,863) (20,955,494) (20,336,616)
See accompanying notes to consolidated financial statements. 22
Consolidated Statements of Cash Flows (Continued) Years ended June 30, 1999, 1998 and 1997 1999 1998 1997 ------------ ------------ ------------ Cash flows from financing activities Net increase in deposits $ 12,421,826 $ 17,117,227 $ 11,834,080 Repayment of FHLB borrowings (39,000,000) (43,000,000) (11,000,000) Proceeds from FHLB borrowings 52,000,000 51,000,000 21,000,000 Repurchase of common stock (416,312) (105,938) (5,193,866) Issuance of shares upon exercise of stock options 139,663 7,283 -- Dividends paid on common stock (586,828) (540,685) (506,959) ------------ ------------ ------------ Net cash from financing activities 24,558,349 24,477,887 16,133,255 ------------ ------------ ------------ Net change in cash and cash equivalents 4,900,329 532,283 (3,020,833) Cash and cash equivalents at beginning of period 4,205,539 3,673,256 6,694,089 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 9,105,868 $ 4,205,539 $ 3,673,256 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 8,274,128 $ 7,561,515 $ 6,103,832 Income taxes 281,000 768,119 456,050 Supplemental disclosure of noncash investing activities: Transfer of securities from held to maturity to available for sale 6,096,798 -- -- Transfer of securities from held to maturity to trading 8,024,251 -- -- Transfer of securities from trading to available for sale -- 1,165,649 -- Transfer from loans to real estate owned 309,826 316,083 45,268
See accompanying notes to consolidated financial statements. 23 Notes to Consolidated Financial Statements June 30, 1999, 1998 and 1997 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Reporting: 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. Nature of Operations and Line of Business: The Company and the Bank provide a broad range of banking and financial services in the banking industry. Substantially all revenues and services are derived from banking products and services. The Bank's primary services include accepting deposits and making commercial, 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. 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 available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on the sale of securities are based on the amortized cost of the security sold. 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. 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 24 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) outstanding. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due ninety 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: The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. 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 ninety 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 thirty-one to forty 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 less estimated costs to sell 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. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the 25 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. 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. Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Derivatives include interest rate swaps, futures, and similar items. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and the hedged item, even if the fair value of the hedged item is not otherwise recorded. As of April 1, 1999, the Company adopted this statement and, in accordance with its provisions, chose to reclassify certain securities from held to maturity to available for sale and trading, as more fully disclosed in a separate note. TheCompany does not have derivative instruments in its portfolio to account for under the provisions of this statement. 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. 26 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings and Dividends Per Share: 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 1997 earnings and dividends per share amounts have been retroactively adjusted for a three-for-two stock split paid in December, 1997. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as a separate component of shareholders' equity. The accounting standard that requires reporting comprehensive income first applies for fiscal 1999, with prior information restated to be comparable. New Accounting Pronouncements: Mortgage loans originated in mortgage banking are converted into securities on occasion. A new accounting standard for fiscal 2000 will allow classifying these securities as available for sale, trading, or held to maturity, instead of the current requirement to classify as trading. This is not expected to have a material effect but the effect will vary depending on the level and designation of securitizations as well as on market price movements. 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 ----------- -------- ---------- ----------- 1999 U.S. agencies $10,898,521 $ 5,382 $ (130,128) $10,773,775 Mortgage-backed securities 3,501,610 -- (94,083) 3,407,527 Collateralized mortgage obligations 21,485,867 40,689 (395,670) 21,130,886 Corporate bonds 3,285,678 570 (7,723) 3,278,525 Taxable municipal bonds 3,659,131 -- (37,463) 3,621,668 Equity securities 62,140 -- (2,215) 59,925 ----------- -------- ---------- ----------- $42,892,947 $ 46,641 $ (667,282) $42,272,306 =========== ======== ========== =========== 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 =========== ======== ========== =========== Held to Maturity 1998 Collateralized mortgage obligations $11,084,361 $ 42,498 $ (47,681) $11,079,178 =========== ======== ========== ===========
27 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 2 - SECURITIES (Continued) The scheduled maturities of securities available for sale at June 30, 1999 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.
Amortized Fair Cost Value ----------- ----------- Due after one year through five years $15,184,791 $15,047,130 Due after five years through ten years 2,658,539 2,626,838 Mortgagebacked securities and collateralized mortgage obligations 24,987,477 24,538,413 Equity securities 62,140 59,925 ----------- ----------- $42,892,947 $42,272,306 =========== ===========
Proceeds from sales of securities amounted to approximately $27,518,000, $20,121,000 and $14,679,000 for the years ended June 30, 1999, 1998 and 1997, respectively, including approximately $4,486,000 and $3,947,000 relative to trading securities for the years ended June 30, 1998 and 1997. Gains (losses) on securities, reflected in the consolidated statements of income, were as follows for the years ended June 30:
1999 1998 1997 --------- -------- -------- Gross realized gains on: Securities available for sale $ 263,474 $ 59,447 $ 17,075 Trading securities -- 667,238 602,570 --------- -------- -------- 263,474 726,685 619,645 Gross realized losses on: Securities available for sale (622,258) (261,337) (17,360) Trading securities (156,497) -- (1,977) --------- -------- -------- (778,755) (261,337) (19,337) --------- -------- -------- Net realized gains (losses) (515,281) 465,348 600,308 Net unrealized gain (loss) on trading securities -- (467,090) 130,563 --------- -------- -------- $(515,281) $ (1,742) $730,871 ========= ======== ========
During April of 1999, securities were transferred from the held to maturity portfolio to the available for sale portfolio and the trading portfolio in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. At the date of transfer, the securities transferred to the available for sale portfolio had an amortized cost of $6,096,798 and increased the unrealized loss on securities available for sale by $40,104 and decreased shareholders' equity by $26,469 (net of tax of $13,635). The securities transferred to the trading portfolio had an amortized cost of $8,024,251 and a fair 28 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 2 - SECURITIES (Continued) value of $7,884,252, resulting in a loss of $139,999 at the date of transfer. This amount has been shown net of tax of $47,600 as a cumulative effect of an accounting change in the consolidated statements of income. These trading securities were subsequently sold during 1999 at a loss of $16,498, resulting in a gross realized loss on trading securities of $156,497, as shown in the table above. There are no trading securities held at June 30, 1999. 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. 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:
1999 1998 1997 ------------ ----------- ----------- Loans held for sale - beginning of period $ 8,156,572 $ 2,231,151 $ 4,297,092 Activity during the periods: Loans originated and purchased for sale 35,127,650 50,245,577 30,350,557 Proceeds from sales of mortgage loans (41,568,214) (44,982,359) (32,915,164) Gain on sale of loans 664,568 662,203 498,666 ------------ ----------- ----------- Loans held for sale end of period $ 2,380,576 $ 8,156,572 $ 2,231,151 =========== =========== ===========
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:
1999 1998 1997 ----------- ----------- ----------- Mortgage loan portfolios serviced for FHLMC $27,179,312 $33,201,177 $26,980,056 =========== =========== =========== Loan servicing fee income $ 77,241 $ 78,433 $ 70,661 =========== =========== ===========
Custodial escrow balances maintained in connection with the foregoing loan servicing were $173,793 and $192,262 at June 30, 1999 and 1998. Following is the activity for mortgage servicing rights for the years ended June 30:
1999 1998 1997 --------- -------- -------- Balance at July 1 $ 280,869 $148,569 $142,697 Additions 65,692 190,800 16,372 Amortization (114,000) (58,500) (10,500) --------- -------- -------- Balance at June 30 $ 232,561 $280,869 $148,569 ========= ======== ========
29 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 Note 4 - LOANS A valuation allowance for mortgage servicing rights was not considered necessary for 1999, 1998 and 1997. Loans are classified as follows at June 30:
1999 1998 ------------ ------------ Real estate loans: One-to four-family residential - fixed rate $ 14,559,680 $ 15,383,013 One-to four-family residential - balloon 51,842,742 24,413,846 One-to four-family residential - adjustable 18,833,825 32,599,924 Construction 25,395,916 24,730,805 Commercial mortgages 15,457,293 6,485,449 Home equity lines of credit 10,512,823 9,877,359 Second mortgages 10,820,377 8,148,412 Land development 1,189,394 675,498 ------------ ------------ Total mortgage loans 148,612,050 122,314,306 Consumer loans 1,849,363 1,665,606 Commercial non-mortgage 3,823,834 3,253,091 ------------ ------------ Total 154,285,247 127,233,003 Less: Loans in process 9,001,424 8,248,310 Net deferred fees (costs) (402,135) (210,614) Allowance for loan losses 480,267 289,696 ------------ ------------ $145,205,691 $118,905,611 ============ ============
Activity in the allowance for loan losses for the years ended June 30 is as follows:
1999 1998 1997 -------- -------- -------- Beginning balance $289,696 $225,862 $165,862 Provision charged to operations 220,000 81,000 60,000 Charge-offs, net of recoveries (29,429) (17,166) -- -------- -------- -------- Ending balance $480,267 $289,696 $225,862 ======== ======== ========
During the years ended June 30, 1999, 1998 and 1997, 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. Related party loan activity during 1999 and 1998 and balances as of June 30, 1999 and 1998 did not exceed $600,000. 30 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 5 - PREMISES AND EQUIPMENT NET A summary of premises and equipment is as follows at June 30:
1999 1998 ---------- ---------- Land $ 529,300 $ 529,300 Bank building and improvements 2,411,654 2,399,476 Furniture and equipment 1,051,429 1,180,697 ---------- ---------- 3,992,383 4,109,473 Accumulated depreciation (991,432) (944,568) ---------- ---------- $3,000,951 $3,164,905 ========== ==========
NOTE 6 - DEPOSITS Deposits at June 30 are summarized as follows:
1999 1998 ------------------------- ---------------------------- Amount % Amount % ------------ ------ ------------ ------ Noninterest-bearing $ 8,419,022 6.36% $ 7,010,473 5.84% Now accounts and MMDAs 9,731,425 7.35 4,434,858 3.70 Passbook and statement savings 19,267,901 14.55 19,334,577 16.11 Certificates of deposit 94,982,857 71.74 89,199,471 74.35 ------------ ------ ------------ ------ $132,401,205 100.00% $119,979,379 100.00% ============ ====== ============ ======
At June 30, 1999, the scheduled maturities of certificates of deposit are as follows by fiscal year-end:
2000 $73,607,227 2001 15,046,159 2002 2,408,500 2003 2,193,413 2004 1,689,478 Thereafter 38,080 ----------- $94,982,857 ===========
As of June 30, 1999 and 1998, the Bank had time deposit accounts with balances of $100,000 or more of $20,890,000 and $17,183,000. Related party deposits were $1,704,000 and $2,095,000 at June 30, 1999 and 1998. 31 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 6 - DEPOSITS (Continued) 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 consist of the following at June 30:
1999 1998 ----------- ----------- Putable advances with maturities January 2003 through January 2009, with rates ranging from 4.65% to 5.34% at June 30, 1999, averaging 5.22% at June 30, 1999 and 5.23% at June 30, 1998 $30,000,000 $22,000,000 Adjustable-rate advances with maturities October 1999 through December 1999, with rates ranging from 4.90% to 5.38% at June 30, 1999, averaging 5.01% at June 30, 1999 and 5.78% at June 30, 1998 20,000,000 15,000,000 ----------- ----------- $50,000,000 $37,000,000 =========== ===========
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, 1999 are as follows for the next 5 years: 2000 $20,000,000 2001 -- 2002 -- 2003 10,000,000 2004 -- Thereafter 20,000,000 ----------- $50,000,000 =========== 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, 1999 and 1998. In addition to FHLB stock, the advances are collateralized at a minimum of 160% of the advances outstanding by approximately $121,000,000 and $118,000,000 of first mortgage loans and securities under a blanket lien arrangement at June 30, 1999 and 1998. 32 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 8 - FEDERAL INCOME TAXES The provision for federal income taxes for the years ended June 30 consists of the following:
1999 1998 1997 --------- -------- -------- Current income tax expense $ 199,758 $401,804 $530,231 Deferred income tax expense (benefit) (54,158) 51,451 (51,507) --------- -------- -------- Total expense attributable to operations 145,600 453,255 478,724 Tax benefit attributable to cumulative effect of accounting change (47,600) -- -- Deferred expense allocated to other comprehensive income items: Unrealized loss on transfer of securities held to maturity to available for sale (13,635) Unrealized gains (losses) arising during the year (375,222) (72,546) 113,286 Less reclassification adjustments for net losses included in net income 175,195 68,642 97 --------- -------- -------- Other comprehensive income (213,662) (3,904) 113,383 --------- -------- -------- $(115,662) $449,351 $592,107 ========= ======== ========
Deferred tax assets and liabilities at June 30 consist of the following:
1999 1998 -------- --------- Deferred tax assets: Accrued expenses $ 70,963 $ 15,300 Management Recognition Plan 18,744 34,054 Loans marked-to-market (938) 89,422 Unrealized loss on securities available for sale 211,018 -- Other 72,774 31,084 -------- --------- 372,561 169,860 Deferred tax liabilities Loan fees 139,329 81,172 Bad debt allowance 58,019 162,555 FHLB stock dividend 49,116 49,116 Fixed assets 114,389 114,060 Mortgage servicing rights 79,070 95,495 Unrealized gain on securities available for sale -- 2,644 -------- --------- 439,923 505,042 -------- --------- Net deferred tax liability $(67,362) $(335,182) ======== =========
No valuation allowance was provided on deferred tax assets. 33 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 8 - FEDERAL INCOME TAXES (Continued) The provision for federal income taxes attributable to continuing operations differs from that computed at the statutory corporate tax rate as follows:
Years ended ----------------- June 30, ---------------- 1999 1998 1997 -------- -------- -------- Statutory rate 34% 34% 34% Tax expense at statutory rate $140,765 $436,432 $476,528 Stock compensation plans 35,717 16,982 3,150 Other (30,882) (159) (954) -------- -------- -------- $145,600 $453,255 $478,724 ======== ======== ======== Effective rate 35% 35% 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, 1999 and 1998 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 with the year ending June 30, 1999. 34 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 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:
1999 1998 1997 ---------- ---------- ---------- Basic earnings per share Net income available to common shareholders $ 176,015 $ 830,368 $ 922,829 ---------- ---------- ---------- Weighted average common shares outstanding 2,399,997 2,370,243 2,572,335 ---------- ---------- ---------- Basic earnings per share $ .07 $ .35 $ .36 ========== ========== ========== Diluted earnings per share Net income available to common shareholders $ 176,015 $ 830,368 $ 922,829 ---------- ---------- ---------- Weighted average common shares outstanding 2,399,997 2,370,243 2,572,335 Add: dilutive effects of assumed exercise of stock options and unvested MRP's Stock options 49,155 107,670 10,827 MRP shares 5,913 10,413 -- ---------- ---------- ---------- Weighted average common and dilutive potential common shares outstanding 2,455,065 2,488,326 2,583,162 ---------- ---------- ---------- Diluted earnings per share $ .07 $ .33 $ .36 ========== ========== ==========
Stock options for 67,995 and 26,026 shares of common stock were not considered in the computation of diluted earnings per share for the years ended June 30, 1999 and 1997, 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:
1999 1998 ----------- ----------- Commitments to make loans $ 7,092,000 $ 7,035,000 Unused lines of credit 14,392,000 11,172,000 Loans in process 9,001,000 8,248,000 Letters of credit 330,000 278,000
Approximately 80% and 61% of commitments to make loans and to fund loans in process were made at fixed rates as of June 30, 1999 and 1998. Rate ranges for these fixed rate commitments were 6.625% to 9.125% and 7.0% to 9.125% as of June 30, 1999 and 1998. Lines of credit are issued at current market rates. 35 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued) The Company does not anticipate any losses as a result of these commitments. Collateral obtained upon exercise of the commitment is determined using the Bank's credit evaluation of the borrower, and may include real estate, business assets and other items. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. The Bank is a defendant under two legal proceedings alleging the unauthorized practice of law and various violations of law. Management intends to continue to contest these cases vigorously. Based on a review of current facts and circumstances, management is unable to determine the amount of loss, if any, that is possible. 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 or results of operations of the Company. During 1999, a settlement agreement totaling $225,000 was reached with a former management executive. Per the provisions of the agreement, the total settlement is being paid in 52 equal monthly installments, ending in March of 2001. Approximately $190,000 is included in other liabilities at June 30, 1999 and represents the remaining amount to be paid under the agreement. The Company has entered into employment agreements with four executive officers of the Company. Under the terms of those agreements, certain events leading to separation from the Company could result in a cash payment equal to two times the affected emloyee's compensation payable in twenty four equal monthly installments, and continued participation in medical and dental plans the employee was entitled to prior to the date of separation. The Company has also entered into a separate employment agreement with the President/CEO of the Company. Under the terms of this agreement, certain events leading to separation from the Company could result in the immediate vesting of the 33,334 stock options granted inApril of 1999 under the Stock OptionPlan, as more fully disclosed in Note 12. At the date of separation, such immediate vesting could result in a cash payment up to an amount equal to the 33,334 options multiplied by the difference between the market value of the Company's stock at the date of separation and the exercise price of the options. 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, 1999, 1998 and 1997. 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. 36 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 11 - EMPLOYEE BENEFIT PLANS (Continued) 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 contributions for fiscal 1999, 1998 and 1997 were approximately $10,600, $9,600 and $5,200, 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 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 $852,176 at June 30, 1999. 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 1999, 1998 and 1997, 24,300 shares of stock with an average fair value of $9.66 per share in 1999, $14.26 per share in 1998 and $7.81 per share in 1997 were committed to be released. Distributions of 2,244 and 4,802 shares were made to participants during the years ended June 30, 1999 and 1998. ESOP compensation expense for the years ended June 30, 1999, 1998 and 1997 was $234,647, $346,528 and $189,844. Shares held by the ESOP at June 30 are as follows:
1999 1998 ---------- ---------- Allocated to participants 94,934 72,878 Unallocated 139,734 164,034 ---------- ---------- Total ESOP shares 234,668 236,912 ========== ========== Fair value of unallocated shares $1,406,073 $2,316,980 ========== ==========
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 37 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued) 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.
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, 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 11.38 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 Granted 7/30/98 37,495 13.25 Granted 4/14/99 33,334 8.66 Granted 5/6/99 5,000 9.00 Exercised (20,100) 6.95 Forfeited (62,320) 10.02 (13,221) 6.67 ------- ------- ------ ------- Balance outstanding June 30, 1999 104,139 7.03 197,909 9.11 41,657 6.73 59,099 6.67 ======= ======= ====== ====== Options/shares exercisable (vested) 57,278 49,380 24,160 43,164 ======= ======= ====== ====== Options/shares available for future grant 7 24,000 0 38,107 ======= ======= ====== ======
During the years ended June 30, 1999, 1998 and 1997, $107,800, $152,400 and $149,918 was charged to compensation expense for the MRPs. Had compensation cost for stock options been measured using FASB Statement No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted. 38 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
Years ending ---------------- June 30, --------------- 1999 1998 1997 -------- -------- -------- Net income as reported $176,015 $830,368 $922,829 Pro forma net income 113,933 716,649 885,286 Basic earnings per share as reported .07 .35 .36 Pro forma basic earnings per share .05 .30 .33 Diluted earnings per share as reported .07 .33 .36 Pro forma diluted earnings per share .05 .29 .33 Weighted-average fair value of options granted during the year 1.39 2.07 .96
The fair value of options granted during the years ended June 30, 1999, 1998 and 1997, respectively, is estimated using the following weighted-average information: risk-free interest rate of 5.33%, 6.22%, and 6%, expected life of 5 years, expected monthly volatility of stock price of 8.7%, 7.1% and 6.3% and expected dividends of 2.7%, 1.9% and 3% per year. At June 30, 1999, options outstanding were as follows: Number of options 302,048 Range of exercise prices $6.63 - $13.25 Weighted-average exercise price $8.39 Weighted-average remaining option life 7.59 Years For options now exercisable: number 106,810 Weighted-average exercise price $7.36 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 state and 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. 39 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 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
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 ------ ----- ----- ------ ------ ----- 1999 Total capital (to risk weighted assets) $21.1 18.0% $9.4 8.0% $11.7 10.0% Tier 1 capital (to risk weighted assets) 20.6 17.6 4.7 4.0 7.0 6.0 Tier 1 capital (to average total assets) 20.6 10.4 7.9 4.0 9.9 5.0 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
At June 30, 1999 and 1998, 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. 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 40 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) to the current adjusted qualifying balancesfor 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, 1999, approximately $11,300,000 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 1999 and 1998, the Company repurchased 46,000 and 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 $9.05 and $14.125 during fiscal 1999 and 1998 and remain available for general corporate purposes, including issuance in connection with stock-based compensation plans. Subsequent to June 30, 1999, 80,000 shares of the Company's common stock were repurchased at an average price of $9.38. NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of Bank West Financial Corporation is as follows:
CONDENSED BALANCE SHEETS as of: ---------- June 30, ---------- 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents $ 1,409,630 $ 284,085 Securities available for sale 59,925 2,752,325 Federal income tax receivable 13,921 149,171 Loan receivable from Employee Stock Ownership Plan 852,176 968,684 Investment in subsidiary bank 20,204,318 19,857,357 Accrued interest receivable 4,249 894 Other assets 7,208 12,670 ----------- ----------- Total assets $22,551,427 $24,025,186 =========== =========== LIABILITIES Note payable to subsidiary $ -- $ 750,000 Deferred taxes (benefit) (751) 464 Other liabilities 47 35 SHAREHOLDERS' EQUITY 22,552,131 23,274,687 ----------- ----------- Total liabilities and shareholders' equity $22,551,427 $24,025,186 =========== ===========
41 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME, for the years ended: ----------------- June 30, ----------------- 1999 1998 1997 --------- ----------- ----------- Interest and dividend income Securities $ 76,079 $ 150,447 $ 55,455 Loan to Employee Stock Ownership Plan 64,794 72,605 79,892 Other interest-bearing deposits 47,064 18,595 53,732 Dividends from subsidiary bank -- -- 2,500,000 --------- ----------- ----------- 187,937 241,647 2,689,079 Interest expense 3,719 99,850 11,794 --------- ----------- ----------- Net interest income 184,218 141,797 2,677,285 Other income Net gain on trading securities -- 200,148 731,156 Net gain (loss) on securities available for sale (332,714) (259,730) (14,995) --------- ----------- ----------- (332,714) (59,582) 716,161 Operating expenses 95,806 152,108 88,468 --------- ----------- ----------- Income before federal income taxes and equity in undistributed earnings of subsidiary bank (244,302) (69,893) 3,304,978 Federal income tax expense (benefit) (83,000) (23,745) 273,700 --------- ----------- -----------
Income (loss) before equity in undistributed earnings of subsidiary bank (161,302) (46,148) 3,031,278 Equity in undistributed (excess distributed) earnings of subsidiary Bank 337,317 876,516 (2,108,449) --------- ----------- ----------- Net income 176,015 830,368 922,829 Other comprehensive income, net of tax: Change in unrealized gain (loss) on securities, net of reclassification effects (414,755) (7,578) 220,097 --------- ----------- ----------- Comprehensive income $(238,740) $ 822,790 $ 1,142,926 ========= =========== ===========
42 Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS, for the years: ------------------ June 30, ----------------- 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities Net income $ 176,015 $ 830,368 $ 922,829 Adjustments to reconcile net income to cash provided by operations Equity in undistributed (excess distributed) earnings of subsidiary Bank (337,317) (876,516) 2,108,449 Trading securities: Purchases -- (2,530,635) (5,428,775) Proceeds from sales -- 4,486,385 3,947,118 (Gain) loss on sales of securities 332,714 59,582 (716,161) Change in Accrued interest receivable (3,355) 228 18,611 Other assets 140,712 (156,302) 30,089 Other liabilities 12 (34,441) 22,495 ----------- ----------- ----------- Net cash provided by operating activities 308,781 1,778,669 904,655 Cash flows from investing activities Securities available for sale: Purchases (350,000) (1,904,438) Proceeds from sales 2,706,107 59,399 2,481,875 Principal reduction on ESOP note receivable 116,508 108,698 101,410 Contribution to subsidiary Bank (42,374) (38,426) (37,921) Net (increase) decrease in interest-bearing time deposits -- 99,000 99,000 ----------- ----------- ----------- Net cash used in investing activities 2,430,241 (1,675,767) 2,644,364
Cash flows from financing activities Proceeds of loan from subsidiary Bank -- 2,450,000 1,300,000 Repayment of loan to subsidiary Bank (750,000) (1,700,000) (1,300,000) Dividends paid on common stock (586,828) (540,685) (506,959) Repurchase of common stock (416,312) (105,938) (5,193,866) Issuance of shares upon exercise of stock options 139,663 7,283 -- ----------- ----------- ----------- Net cash from financing activities (1,613,477) 110,660 (5,700,825) ----------- ----------- ----------- Net change in cash and cash equivalents 1,125,545 213,562 (2,151,806) Cash and cash equivalents at beginning of period 284,085 70,523 2,222,329 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 1,409,630 $ 284,085 $ 70,523 =========== =========== ===========
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. Notes to Consolidated Financial Statements (Continued) June 30, 1999, 1998 and 1997 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:
1999 1998 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ------- ------- ------- ------- Financial assets Cash and cash equivalents $ 9,106 $ 9,106 $ 4,206 $ 4,206 Securities 42,272 42,272 43,252 43,247 Loans, net 145,206 144,517 118,906 119,380 Loans held for sale 2,381 2,407 8,157 8,298 Mortgage servicing rights 233 233 281 281 Federal Home Loan Bank stock 2,700 2,700 2,100 2,100 Accrued interest receivable 1,019 1,019 879 879 Financial liabilities Deposits 132,401 132,496 119,979 120,229 Federal Home Loan Bank borrowings 50,000 50,019 37,000 36,802 Accrued interest payable 292 292 253 253 Advance payments by borrowers for taxes and insurance 509 509 513 513
44 Your Partners in Bank West Financial Corporation DIRECTORS George A. Jackoboice, Chairman of the Board; President of Monarch Hydraulics, Inc. Carl A. Rossi, Treasurer; Contract Manager and part-owner of Bay Area Interiors 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, Private Investor, Director for 29 years at five different banks in Western Michigan Wallace D. Riley, President and Senior Partner of Riley and Roumell, P.C. SPECIAL COUNSEL Elias, Matz, Tiernan & Herrick L.L.P. Suite 1200 734 15th Street, N.W. Washington, D.C. 20005 GENERAL COUNSEL Siebers Mohney Associates, P.L.C. The Ledyard Building Suite 340 125 Ottawa Avenue N.W. Grand Rapids, Michigan 49503 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 EXECUTIVE OFFICERS Ronald A. Van Houten, President, Chief Executive Officer James A. Koessel, Senior Vice President of Mortgage Lending Laurie S.Adams, Vice President, Director of RetailBanking Louis D. Knooihuizen, Vice President of Commercial Lending Kevin A. Twardy, Vice President, Chief Financial Officer 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, 1999 were 2,597,729. As of September 15, 1999, the Company had approximately 611 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, 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 September 30, 1998 14.250 9.500 .06 December 31, 1998 11.250 8.750 .06 March 31, 1999 10.000 8.250 .06 June 30, 1999 10.938 8.250 .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. 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 7 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 16, 1999, 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, 1999. /s/Crowe, Chizek and Company LLP -------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan September 24, 1999 EX-27 8
9 YEAR JUN-30-1999 JUN-30-1999 1,527,481 7,578,387 0 0 42,272,306 0 0 145,205,691 480,267 206,669,201 132,401,205 20,000,000 1,715,865 30,000,000 0 0 25,978 22,526,153 206,669,201 10,598,406 2,677,378 389,853 13,665,637 5,900,947 8,313,380 5,352,257 220,000 (375,282) 5,338,612 414,014 414,014 0 (92,399) 176,015 .07 .07 7.23 1,279,000 0 0 0 289,696 29,429 0 480,267 480,267 0 91,000
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