UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-25666
BANK WEST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-3203447
- ---------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2185 Three Mile Road, N.W., Grand Rapids, Michigan 49544
--------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (616) 785-3400
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
Shares of common stock, par value $.01 per share, outstanding as of May 12,
2000: 2,521,059.
BANK WEST FINANCIAL CORPORATION
FORM 10-Q
Quarter Ended March 31, 2000
PART I - FINANCIAL INFORMATION
Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below:
ITEM 1 - Financial Statements Page
----
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and June 30, 1999 . . . . . . . . . . . . . 3
Consolidated Statements of Income (unaudited) -
For The Three and Nine Months Ended March 31, 2000 and 1999 . . .. . . 4
Consolidated Statements of Comprehensive Income (unaudited) -
For The Nine Months Ended March 31, 2000 and 1999 . . . . . . . . . . 5
Consolidated Statements of Cash Flows (unaudited) -
For The Nine Months Ended March 31, 2000 and 1999. . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Not applicable since the registrant is a small business issuer.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2 - Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . 21
ITEM 3 - Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 22
ITEM 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2000 1999
------------------ ------------------
(Unaudited)
ASSETS
Cash and due from banks $3,721,199 $1,527,481
Interest-bearing deposits 206,572 7,578,387
------------------ ------------------
Total cash and cash equivalents 3,927,771 9,105,868
Securities available for sale (Note 5) 44,342,586 42,272,306
Loans held for sale (Note 6) 758,099 2,380,576
Loans, net (Note 7) 196,214,906 145,205,691
Federal Home Loan Bank stock 4,500,000 2,700,000
Premises and equipment 3,723,142 3,000,951
Accrued interest receivable 1,430,488 1,019,165
Mortgage servicing rights 234,161 232,561
Real estate owned 462,587 309,826
Other assets 531,775 442,257
------------------ ------------------
Total assets $256,125,515 $206,669,201
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $144,424,119 $132,401,205
Federal Home Loan Bank borrowings 88,373,785 50,000,000
Federal Funds Purchased 500,000 -
Accrued interest payable 402,319 292,289
Advance payments by borrowers
for taxes and insurance 369,904 509,218
Other liabilities 313,029 914,358
------------------ ------------------
Total liabilities 234,383,156 184,117,070
------------------ ------------------
Stockholders' Equity:
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,521,059 issued at March 31, 2000
and 2,597,729 at June 30, 1999 25,211 25,978
Additional paid-in-capital 10,641,574 11,328,830
Retained earnings, substantially restricted 12,829,177 12,517,215
Accumulated other comprehensive income
net of tax benefit of $537,256 at March 31,
2000 and tax benefit of $211,018 at June 30, 1999 (1,042,908) (409,623)
Unallocated ESOP shares (Note 3) (648,048) (745,248)
Unearned Management Recognition Plan shares (Note 4) (62,647) (165,021)
------------------ ------------------
Total stockholders' equity 21,742,359 22,552,131
------------------ ------------------
Total liabilities and stockholders' equity $256,125,515 $206,669,201
================== ==================
See accompanying notes to consoldiated financial statements.
3
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
--------------- ------------- --------------- --------------
Interest and dividend income
Loans $3,702,601 $2,648,963 $9,975,577 $7,903,935
Securities 772,296 716,217 2,232,971 2,017,718
Other interest-bearing deposits 18,713 51,772 93,876 141,356
Dividends on FHLB stock 83,345 53,019 220,046 145,290
--------------- ------------- --------------- --------------
4,576,955 3,469,971 12,522,470 10,208,299
--------------- ------------- --------------- --------------
Interest expense
Deposits 1,665,537 1,453,406 4,642,240 4,443,233
FHLB borrowings 1,174,347 647,546 2,956,701 1,805,187
Federal Funds 18,433 - 32,671 -
--------------- ------------- --------------- --------------
2,858,317 2,100,952 7,631,612 6,248,420
--------------- ------------- --------------- --------------
Net interest income 1,718,638 1,369,019 4,890,858 3,959,879
Provision for loan losses 120,000 80,000 280,000 137,000
--------------- ------------- --------------- --------------
Net interest income after provision
for loan losses 1,598,638 1,289,019 4,610,858 3,822,879
--------------- ------------- --------------- --------------
Other income
Loss on sale of securities (22,140) (16,075) (22,140) (298,647)
Gain on sale of loans 19,902 173,202 93,312 568,594
Fees and service charges 101,881 101,858 264,645 236,200
--------------- ------------- --------------- --------------
99,643 258,985 335,817 506,147
--------------- ------------- --------------- --------------
Other expenses
Compensation and benefits 719,111 879,620 2,212,531 2,319,282
Professional fees 60,168 270,893 325,096 551,162
Federal Deposit Insurance 6,903 17,779 44,021 52,296
Occupancy 95,540 77,853 257,281 253,548
Furniture, fixtures and equipment 59,793 47,947 170,398 139,153
Loss on disposal of fixed assets - 77,293 - 77,293
Data processing 70,005 66,886 193,460 194,773
Advertising 53,713 15,781 99,064 69,518
State taxes 5,000 12,954 25,000 52,954
Miscellaneous 160,127 149,533 464,365 457,974
--------------- ------------- --------------- --------------
1,230,360 1,616,539 3,791,216 4,167,953
--------------- ------------- --------------- --------------
Income (loss) before federal income tax expense 467,921 (68,535) 1,155,459 161,073
Federal income tax expense (benefit) 166,200 (30,210) 411,500 58,000
--------------- ------------- --------------- --------------
Net income (loss) $301,721 ($38,325) $743,959 $103,073
=============== ============= =============== ==============
Earnings (loss) per share (Note 2) $.13 $(.02) $.32 $.04
=============== ============= =============== ==============
Earnings (loss) per share assuming dilution (Note 2) $.13 $(.02) $.31 $.04
=============== ============= =============== ==============
Dividends per share $.06 $.06 $.18 $.18
=============== ============= =============== ==============
See accompanying notes to consolidated financial statements.
4
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Nine Months Ended
March 31,
2000 1999
--------------- -------------
Net Income $743,959 $103,073
Other comprehensive income, net of tax:
Unrealized losses on securities available
for sale arising during the year (633,285) (239,822)
--------------- -------------
Comprehensive income (loss) $110,674 ($136,749)
=============== =============
See accompanying notes to consolidated financial statements.
5
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
2000 1999
--------------- ---------------
Cash flows from operating activities
Net income $743,959 $103,073
Adjustments to reconcile net income to
net cash from operating activities
Origination and purchase of loans for sale (5,815,371) (30,258,727)
Proceeds from sale of mortgage loans 7,531,160 35,360,475
Net (gain) loss on sales of:
Loans (93,312) (568,594)
Securities 22,140 298,646
Real estate owned 4,260 2,501
Depreciation 216,440 188,096
Loss on disposal of fixed assets - 77,229
Amortization of premiums, net 25,852 194,603
ESOP expense 147,318 173,518
MRP expense 92,000 80,800
Provision for loan losses 280,000 137,000
Change in:
Deferred loan fees (142,304) (127,860)
Other assets (266,967) (104,245)
Other liabilities (563,251) 316,292
--------------- ---------------
Net cash from operating activities 2,181,924 5,872,807
--------------- ---------------
Cash flows from investing activities
Purchases of securities available for sale (4,667,769) (24,088,802)
Purchases of securities held to maturity - (3,093,501)
Proceeds from sale of securities 40,000 11,707,642
Proceeds from maturities, calls and principal
payments of securities available for sale 1,550,171 10,490,054
Loan originations, net of repayments (35,332,073) (11,031,938)
Loans purchased for portfolio (16,317,406) (5,306,408)
Purchase of FHLB stock (1,800,000) (600,000)
Proceeds from sale of real estate owned 368,946 189,579
Property and equipment expenditures (938,825) (110,725)
--------------- ---------------
Net cash from (used in) investing activities (57,096,956) (21,844,099)
--------------- ---------------
Cash flows from financing activities
Proceeds from FHLB borrowings 84,373,785 29,160,378
Repayment of FHLB borrowings (46,000,000) (18,000,000)
Proceeds from Federal Funds borrowings 500,000 -
Increase in deposits 12,022,914 8,662,944
Repurchase of common stock (751,937) (197,313)
Exercise of stock options 24,170 13,250
Dividends paid on common stock (431,997) (439,719)
--------------- ---------------
Net cash from financing activities 49,736,935 19,199,540
--------------- ---------------
See accompanying notes to consolidated financial statements.
6
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended
March 31,
2000 1999
--------------- ---------------
Net change in cash and cash equivalents (5,178,097) 3,228,248
Cash and cash equivalents at beginning of period 9,105,868 4,205,539
--------------- ---------------
Cash and cash equivalents at end of period $3,927,771 $7,433,787
=============== ===============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $7,521,582 $6,159,976
Income taxes 427,000 196,000
See accompanying notes to consolidated financial statements.
7
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements consist of the accounts of
Bank West Financial Corporation (the Company) and its wholly owned subsidiary,
Bank West (the Bank). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have been
included.
The results of operations for the three and nine months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the year ending
June 30, 2000. The unaudited consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto, for the fiscal year ended June 30, 1999, included in the
Company's 1999 Annual Report.
NOTE 2 - EARNINGS PER SHARE
Earnings Per Share is calculated by dividing net income by the weighted average
number of shares outstanding during the period, including shares that have been
released or committed to be released by the Employee Stock Ownership Plan (ESOP)
and fully vested Management Recognition Plan (MRP) shares. Earnings Per Share
Assuming Dilution further assumes the issuance of dilutive potential common
shares relating to outstanding stock options and unvested MRP shares.
8
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 2 - EARNINGS PER SHARE (Continued)
A reconciliation of the numerators and denominators of Earnings Per Share and
Earnings Per Share Assuming Dilution for the three and nine months ended March
31, 2000 and 1999 is as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Earnings Per Share
Net income (loss) $ 301,721 $ (38,325) $ 743,959 $ 103,073
============= ========== ========== ==========
Weighted average common shares
outstanding 2,346,752 2,403,691 2,360,802 2,397,779
============= ========== ========== ==========
Earnings Per Share $ .13 $ (.02) $ .32 $ .04
============= ========== ========== ==========
Earnings Per Share Assuming Dilution
Net income (loss) $301,721 $(38,325) $ 743,959 $ 103,073
========== ========== ========== ==========
Weighted average common shares
outstanding 2,346,752 2,403,691 2,360,802 2,397,779
Add: dilutive effects of assumed
exercise of stock options
and unvested MRP's
Stock options 18,287 -- 34,452 60,541
MRP shares 573 -- 716 4,259
------------- ---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 2,365,612 2,403,691 2,395,970 2,462,579
============= ========== ========== ==========
Earnings Per Share Assuming Dilution $ .13 $ (.02) $ .31 $ .04
============= ========== ========== ==========
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan (ESOP) for the
benefit of employees who have completed at least twelve consecutive months of
service and have been credited with at least 500 hours of service with the Bank.
The Company has received a favorable determination letter from the Internal
Revenue Service that the ESOP is a tax-qualified plan.
9
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
To fund the ESOP, $1,296,048 was borrowed from the Company for the purpose of
purchasing 243,009 shares of common stock at $5.33 per share. Principal and
interest payments on the loan are due in quarterly installments, with the final
payment of principal and accrued interest being due and payable at maturity,
which is June 30, 2005. Interest is payable during the term of the loan at a
fixed rate of 7.0%. The loan is collateralized by the shares of the Company's
common stock that were purchased with the proceeds. As the Bank periodically
makes contributions to the ESOP to repay the loan, shares are allocated among
participants on the basis of total compensation, as defined. The unallocated
ESOP shares are shown as a reduction to stockholders' equity in the accompanying
consolidated balance sheets. ESOP expense of $45,000 and $147,000 was recorded
for the three and nine months ended March 31, 2000.
NOTE 4 - STOCK BASED COMPENSATION PLANS
The Company has established an employee and a directors' stock option plan
(SOPs) and an officers' and a directors' management recognition plan (MRPs). The
employee stock option plan and the officers' MRP are administered by a committee
of non-employee directors of the Company, while grants under the directors'
stock option plan and the directors' MRP are pursuant to formulas set forth in
the plans. Total shares made available under the SOPs and MRPs were 347,155 and
138,862, respectively. The Committee has awarded under the SOPs options to
purchase 317,503 shares of common stock at exercise prices between $6.625 and
$13.25 per share, which represent the average of the high and low sales prices
of the Company's stock on the dates of the awards. Both the option shares and
grant prices have been adjusted for the three-for-two stock split in December
1997. At March 31, 2000, there were 29,652 option shares reserved for future
grants. As of March 31, 2000, 24,430 options have been exercised. No
compensation expense was recognized in connection with the issuance of the
options. Management has concluded that the Company will not adopt the accounting
provisions of SFAS No. 123 and will continue to apply its current method of
accounting. Accordingly, SFAS No. 123 will have no impact on the Company's
consolidated financial position or results of operations.
The Committee has awarded 59,099 shares of common stock under the officers' MRP
and 41,657 shares of common stock under the directors' MRP, net of forfeitures.
MRP awards vest in five equal annual installments, with the first award vesting
on October 25, 1996. Compensation expense for the MRPs is recognized on a
pro-rata basis over the vesting period of the awards. During the three and nine
months ended March 31, 2000, $27,000 and $92,000 was charged to compensation
expense for the MRPs. The unearned compensation value of the MRPs is shown as a
reduction to stockholders' equity in the accompanying consolidated balance
sheets.
10
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 5 - SECURITIES
The amortized cost and estimated fair values of securities at March 31, 2000 and
June 30, 1999 are as follows:
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
March 31, 2000 (unaudited)
U.S. agencies $10,914,396 $ -- $ 351,584 $10,562,812
Corporate bonds 6,764,837 -- 246,400 6,518,437
Municipal bonds 4,331,805 1,825 103,149 4,230,481
Mortgage-backed securities 3,358,457 132 184,301 3,174,288
Collateralized mortgage obligations 20,553,252 -- 696,684 19,856,568
----------- ----------- ----------- -----------
$45,922,747 $ 1,957 $ 1,582,118 $44,342,586
=========== =========== =========== ===========
June 30, 1999
U.S. agencies $10,898,521 $ 5,382 $ 130,128 $10,773,775
Equity securities 62,140 -- 2,215 59,925
Corporate bonds 3,285,678 570 7,723 3,278,525
Municipal bonds 3,659,131 -- 37,463 3,621,668
Mortgage-backed securities 3,501,610 -- 94,083 3,407,527
Collateralized mortgage obligations 21,485,867 40,689 395,670 21,130,886
----------- ----------- ----------- -----------
$42,892,947 $ 46,641 $ 667,282 $42,272,306
=========== =========== =========== ===========
During fiscal 1999, equity securities were written-down by $401,000 relating to
what management perceived to be an other-than-temporary decline in the market
value of these investments resulting from the downturn in the U.S. stock market,
especially in small cap stocks.
11
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 6 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Company's secondary market mortgage activities,
which consist solely of one- to four-family real estate loans:
Nine Months Ended
March 31,
2000 1999
---- ----
Loans held for sale - beginning of period $ 2,380,576 $ 8,156,572
Activity during the periods:
Loans originated and purchased for resale 5,815,371 30,258,727
Proceeds from sale of loans originated
and purchased for resale (7,531,160) (35,360,475)
Gain on sale of loans 93,312 568,594
------------ ------------
Loans held for sale - end of period $ 758,099 $ 3,623,418
============ ============
The unpaid principal balance of mortgage loans serviced for others amounted to
$25.8 million and $27.2 million at March 31, 2000 and June 30, 1999,
respectively. Custodial escrow balances maintained in connection with the
foregoing loans serviced for others were approximately $117,000 and $174,000 at
March 31, 2000 and June 30, 1999, respectively.
12
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Nine Months Ended March 31, 2000
(Unaudited)
NOTE 7 - LOANS
Loans are classified as follows: March 31, June 30,
2000 1999
---- ----
Real estate loans:
One-to four-family residential - fixed rate $ 15,573,358 $ 14,559,680
One-to four-family residential - balloon 70,187,489 51,842,742
One-to four-family residential - adjustable 18,057,100 18,833,825
Construction and land development 28,290,940 26,585,310
Commercial mortgages 29,548,365 15,457,293
Home equity lines of credit 11,693,846 10,512,823
Second mortgages 15,224,225 10,820,377
------------- -------------
Total mortgage loans 188,575,323 148,612,050
Consumer loans 2,224,307 1,849,363
Commercial non-mortgage 13,500,538 3,823,834
------------- -------------
Total 204,300,168 154,285,247
Less:
Loans in process 7,874,105 9,001,424
Deferred fees and costs (544,439) (402,135)
Allowance for loan losses 755,596 480,267
------------- -------------
$ 196,214,906 $ 145,205,691
Provisions for losses on loans are charged to operations based on management's
evaluation of probable losses in the portfolio. In addition to providing
reserves on specific loans where a decline in value has been identified, general
provisions for losses are established based upon the overall portfolio
composition and general market conditions. In establishing both specific and
general valuation allowances, management reviews individual loans, recent loss
experience, current economic conditions, the overall balance and composition of
the portfolio, and such other factors which, in management's judgment, deserve
recognition in estimating possible losses. Management believes the allowance for
loan losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions and borrower circumstances.
13
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the consolidated financial condition of Bank
West Financial Corporation and its wholly owned subsidiary, Bank West, at March
31, 2000 and June 30, 1999 and the consolidated results of operations for the
three and nine months ended March 31, 2000 with the same periods in 1999. This
discussion should be read in conjunction with the interim consolidated financial
statements and footnotes included herein.
This quarterly report on Form 10-Q 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 other risks detailed in
this quarterly report on Form 10-Q 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.
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 make loans for the purchase and construction of residential
properties. The Company also originates commercial loans, home equity loans and
various types of consumer loans.
FINANCIAL CONDITION
Total assets increased by $49.4 million or 23.9% from $206.7 million at June 30,
1999 to $256.1 million at March 31, 2000. The increase in total assets was
primarily attributable to an increase in total loans by $51 million or 35.1%.
Total loans increased as greater emphasis was placed on originating one- to
four-family balloon mortgages and second mortgages as well as commercial loans.
Management expects continued growth in these types of portfolio lending
activities which is expected to significantly improve the Bank's net interest
income. The strategic realignment that occurred during March of 1999 with the
appointment of the Bank's President and Chief Executive Officer and the
establishment of a Commercial Lending Division brought to Bank West experienced
commercial lenders. The Bank's loan growth during the past few quarters is
indicative of the loan mix and growth expected over the next several quarters.
14
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Bank's mortgage banking activities consist of selling newly originated and
purchased one- to four -family loans into the secondary market. The dollar
amount of loans originated and purchased for resale in the nine months ended
March 31, 2000 decreased by $24.5 million or 80.9% to $5.8 million from $30.3
million in the nine months ended March 31, 1999. The decrease in loan
originations and purchases for resale is primarily due to the recent increase in
overall market interest rates. The Bank has taken steps to reduce overhead
expenses in the mortgage banking area by consolidating functions and by
re-assigning certain personnel to other departments within the Bank. Mortgage
loans originated and purchased for resale in the current quarter consisted
primarily of 30-year fixed-rate loans. The Bank's recent strategy in the one- to
four -family area has been to sell 30-year fixed-rate loans and to portfolio
residential balloon loans.
The Bank has increased its emphasis in adding residential balloon loans to its
portfolio. Typically, residential balloon loans have terms from five to ten
years. Residential balloon loans increased by $18.4 million or 35.5% since June
30, 1999 in an effort to grow the Bank's residential loan portfolio without
taking on the potential additional interest rate risk associated with 15 or
30-year fixed-rate loans.
The Bank has increased both its commercial mortgage and commercial non-mortgage
loans by $14.0 million and $9.7 million, respectively since June 30, 1999.
Management expects to continue its emphasis on commercial lending in an effort
to improve the Bank's earnings and diversify its loan portfolio.
Securities available for sale increased by approximately $2.0 million since June
30, 1999 primarily due to the purchase of high quality corporate bonds.
Collateralized mortgage obligations ("CMO's") have decreased from $21.1 million
at June 30, 1999 to $19.9 million at March 31, 2000. The majority of the Bank's
CMO's have floating interest rates (prime rate or LIBOR index) and are
collateralized by residential mortgages with a weighted average note rate of
approximately 7.1%. The recent increase in overall market interest rates and the
corresponding decrease in prepayment speeds has increased the yield on the CMO
portfolio and has extended their average lives. The unrealized loss on
collateralized mortgage obligations was $460,000, net of taxes which is included
in the net unrealized loss on available for sale securities of $1,042,000 shown
as a component of stockholders' equity. The recent increase in overall market
interest rates caused the total unrealized loss in securities to increase from
June 30, 1999.
Cash and cash equivalents decreased by $5.2 million or 57.1% from June 30, 1999
to March 31, 2000, primarily due to utilizing excess liquidity to fund loan
growth. See "Liquidity and Capital Resources" section for additional information
on the Bank's liquidity.
Total deposits increased by $12.0 million or 9.1% from June 30, 1999 to March
31, 2000, primarily due to an increase in commercial NOW, money market deposit
and certificate of deposit accounts. The variety of deposit accounts offered by
the Bank has allowed it to be competitive in obtaining funds and to respond with
flexibility to changes in consumer demand. 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, the Bank believes that its
savings, NOW and demand accounts are relatively stable sources of deposits.
However, the Bank's ability to attract and maintain certificates of deposit, and
the
15
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
rates paid on these deposits, has been and will continue to be affected by
market conditions.
When deposit growth does not match the growth of assets, other funding sources
such as FHLB advances and Federal Funds are utilized. During the nine months
ended March 31, 2000, the Bank increased FHLB advances by $38.4 million and
purchased Federal Funds of $500,000 to fund the Bank's loan growth. At March 31,
2000, the Bank had approximately $1.4 million of excess borrowing capacity with
the FHLB and $3.5 million of excess borrowing capacity of Federal Funds with a
correspondent bank. The Bank's continued strong loan growth will require a
greater dependence on using broker-arranged certificates of deposit if retail
deposit growth does not match loan growth. At March 31, 2000, the Bank had
broker-arranged certificates of deposit totaling $24.9 million.
Stockholders' equity decreased from $22.6 million at June 30, 1999 to $21.7
million at March 31, 2000. The decrease was primarily due to utilizing $752,000
to repurchase 80,000 shares of the Company's common stock, dividends paid of
$432,000 and a change in the net unrealized loss on securities available for
sale by $633,000 due to the recent rise in overall market interest rates. These
amounts were partially offset by net income of $744,000 during the nine months
ended March 31, 2000.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The table below sets forth the amounts and categories of non-performing assets
at March 31, 2000 and June 30, 1999:
March 31, June 30,
2000 1999
---- ----
(Dollars in Thousands)
Non-accrual loans
One- to four-family $ 75 $ 207
Construction and land development 569 930
Commercial mortgage 253 --
Commercial non-mortgage 26 --
Consumer -- 142
------ ------
Total 923 1,279
Foreclosed assets
One- to four-family 463 310
------ ------
Total non-performing assets $1,386 $1,589
====== ======
Total as a percentage of total assets .54% .77%
====== ======
16
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Non-performing loans in the construction and land development category at March
31, 2000 consist of four construction spec loans to five builders in the western
and southwestern Michigan area. These loans, which are collateralized by
single-family homes, require a loan-to-value ratio of 75% when underwritten. The
majority of these homes are substantially complete. Management believes that
these loans are adequately collateralized. Therefore, only general reserves
versus specific reserves have been assigned to these loans at March 31, 2000.
Non-performing loans in the commercial mortgage category at March 31, 2000
consist of one loan. During April, management received a commitment letter from
another financial institution to pay-off this loan. Accordingly, management
expects this loan to be fully paid-off during May of 2000.
The allowance for loan losses totaled $756,000 or 81.9% of total non-performing
loans at March 31, 2000. A specific reserve totaling $31,000 has been allocated
to one home equity loan. During the nine months ended March 31, 2000,
charge-offs totaled $4,671. The increase in one- to four- family foreclosed
assets relates to taking the deed to the underlying properties that
collateralize builder spec loans. At March 31, 2000, $132.1 million or 64.7% 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 76.6% of total
assets.
RESULTS OF OPERATIONS
Net Income. Net income increased by $340,000 in the quarter ended March 31, 2000
and increased by $641,000 in the nine months ended March 31, 2000. The increases
were primarily due to growth in net interest income, lower professional fees and
the absence of non-recurring charges incurred during the previous fiscal year.
See the following sections for additional information.
Net Interest Income. Net interest income increased by $350,000 or 25.6% in the
quarter ended March 31, 2000 over the comparable 1999 period. Net interest
income increased due to higher average loans outstanding by $55.2 million or
41.2% resulting from strong growth in residential balloon mortgages and
commercial loans. In addition, the Bank's interest spread increased from 2.34%
for the quarter ended March 31, 1999 to 2.59% for the quarter ended March 31,
2000. The increase in interest spread was primarily due the strong loan
portfolio growth, especially in higher yielding commercial loans. For the
quarter ended March 31, 2000, the overall yield on interest-earning assets was
7.63% compared to 7.19% in the comparable prior period. The increased yield was
partially offset by an increase in the Bank's average cost of funds from 4.85%
in the quarter ended March 31, 1999 to 5.04% in the quarter ended March 31, 2000
reflecting the higher overall interest rate environment and the inverted U.S.
Treasury yield curve. The increase in the Bank's cost of funds was also due to
the greater use of FHLB borrowings and brokered certificates of deposit.
Management expects the Bank's interest spread to decrease somewhat in the
upcoming months due to the upward repricing of deposits and FHLB advances as
well as the anticipated need for additional wholesale borrowings to fund
anticipated loan growth.
17
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net interest income increased by $931,000 or 23.5% in the nine months ended
March 31, 2000 over the comparable 1999 period. Net interest income increased
primarily due to a higher average balance of loans outstanding by $42.7 million
or 33.0%. In addition, the Bank's interest spread increased from 2.32% for the
nine months ended March 31, 1999 to 2.62% for the nine months ended March 31,
2000. The increase in interest spread was primarily due the strong loan
portfolio growth, especially in higher yielding commercial loans. For the nine
months ended March 31, 2000, the overall yield on interest-earning assets was
7.50% compared to 7.30% in the comparable prior period. Also, the Bank's average
cost of funds decreased from 4.98% in the nine months ended March 31, 1999 to
4.88% in the nine months ended March 31, 2000 reflecting a lower overall
interest rate environment in the early part of fiscal 2000.
Provision for Loan Losses. The provision for loan losses increased by $40,000 or
50.0% and by $143,000 or 104.4% in the three and nine months ended March 31,
2000, respectively, over the comparable 1999 periods. Management has increased
the provision for loan losses due primarily to the increase in commercial loans,
both on a dollar basis and as a percentage of total loans requiring additional
general reserves. The allowance for loan losses totaled approximately $756,000
or .37% of the total loan portfolio and 81.9% of non-performing loans at March
31, 2000.
The Bank's management establishes allowances for loan losses. On a quarterly
basis, management evaluates the loan portfolio and determines the amount that
must be added. These allowances are charged against income in the year they are
established. When establishing the appropriate levels for the provision and the
allowance for loan losses, management considers a variety of factors, in
addition to the fact that an inherent risk of loss always exists in the lending
process. Consideration is also given to current economic conditions, the
diversification of the loan portfolio, loan growth, historical loss experience,
delinquency rates, the review of loans by loan review personnel, the individual
borrower's financial and managerial strengths, and the adequacy of underlying
collateral.
Other Income. Total other income decreased by $159,000 or 61.4% in the three
months ended March 31, 2000 from the comparable prior period. The decrease was
primarily due to lower mortgage banking related gain on sale of loans by
$153,000 or 88.4%. The decrease is due to significantly lower mortgage loan
sales volume resulting from the rise in mortgage interest rates and the Bank's
shift in emphasis to portfolio residential balloon loans.
For the nine months ended March 31, 2000, other income decreased by $170,000 or
33.6% due to lower mortgage banking related gain on sale of loans by $475,000 or
83.6% resulting from the rise in mortgage interest rates and the Bank's shift in
emphasis to portfolio residential balloon loans. This amount was largely offset
by the absence of losses on sale of securities by $277,000 relating to a
write-down of equity securities during the 1999 period.
18
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Expenses. Total other expenses decreased by $387,000 or 23.9% in the
quarter ended March 31, 2000 over the comparable 1999 period. Professional fees
were lower by $211,000 or 77.9%, primarily due to lower legal costs associated
with defending a class action lawsuit filed on July 17, 1998 by a Bank West
borrower. This lawsuit was dismissed in March of 2000 during summary judgment
hearings. See Part II, Item 1 for additional information. Compensation and
benefits expense decreased by $161,000 or 18.3% due to a $225,000 contract
settlement accrual related to the former President and Chief Executive Officer
incurred during the March 31, 1999 quarter. This amount was partially offset by
higher compensation and benefits expense incurred during the current quarter
related to higher overall staff levels, which include personnel hired for the
Bank's newly purchased Jenison branch and Caledonia loan production office. Also
during the quarter ended March 31, 1999, the Bank incurred a $77,000 loss on
disposal of non-Year 2000 compliant equipment and software that did not recur
during the current quarter. Occupancy expense increased by $18,000 during the
March 31, 2000 quarter when compared to the prior year's quarter due to the
opening of the Jenison and Caledonia offices. Advertising expense was higher by
$38,000 during the quarter due to advertising campaigns directed at commercial
loan and deposit customers.
For the nine months ended March 31, 2000, total other expenses decreased by
$377,000 or 9.0%. Professional fees were lower by $226,000 primarily due to
lower legal costs associated with defending a class action lawsuit filed on July
17, 1998 by a Bank West borrower. This lawsuit was dismissed in March of 2000
during summary judgment hearings. See Part II, Item 1 for additional
information. Compensation and benefits expense decreased by $107,000 or 4.6% due
to a $225,000 contract settlement accrual related to the former President and
Chief Executive Officer incurred during the March 31, 1999 quarter. This amount
was partially offset by higher compensation and benefits expense incurred during
the current quarter reflecting higher overall staff levels, which include
personnel hired for the Bank's newly purchased Jenison branch and Caledonia loan
production office. Also during the nine months ended March 31, 1999, the Bank
incurred a $77,000 loss on disposal of non-Year 2000 compliant equipment and
software that did not reoccur during the current nine month period. Advertising
expense was higher by $29,000 during the nine months ended March 31, 2000 versus
the comparable prior period due to advertising campaigns directed at commercial
loan and deposit customers. State taxes were lower by $28,000 due to implemented
state tax planning initiatives.
The other categories of miscellaneous and other expenses did not materially
change in the three and nine months ended March 31, 2000 when compared to the
March 31, 1999 periods.
Federal Income Tax Expense. Federal income tax expense increased by $196,000 and
$354,000 in the three and nine months ended March 31, 2000 over the comparable
1999 periods primarily due to higher pre-tax income levels.
19
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
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 a hybrid blanket collateral
agreement with the FHLB. At March 31, 2000, the Bank has approximately $1.4
million of excess borrowing capacity based on eligible collateral under the
hybrid blanket collateral agreement with the FHLB. At March 31, 2000, the Bank
had $3.5 million of excess borrowing capacity of Federal Funds with a
correspondent bank. The Bank's continued strong loan growth will require a
greater usage of broker-arranged certificates of deposit if retail deposit
growth does not match loan growth. At March 31, 2000, the Bank had
broker-arranged certificates of deposit totaling $24.9 million.
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.
Bank West is subject to three capital to asset requirements in accordance with
banking regulations. At March 31, 2000, Bank West was categorized as well
capitalized.
20
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended March 31, 2000
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
Bank West is a defendant in two class-action cases pending
before Judge Johnston in Kent County Circuit Court: Cowles v.
Bank West and Newton v. Bank West. Cowles' original complaint,
filed on July 17, 1998, alleged claims under state common law
and the Michigan Consumer Protection Act, all based on the
theory that the Bank engaged in the unauthorized practice of
law when it charged residential mortgage borrowers a $250 fee
for the preparation of documents. Plaintiff later filed
amendments, alleging claims under the federal Truth in Lending
Act. The case was certified for class action in April of 1999.
Shortly thereafter, Cowles' Truth in Lending Act claims were
dismissed on statute of limitations grounds and Karen Paxon
intervened in the suit as a named plaintiff and class
representative for those claims. On August 30, 1999, the Court
ruled that the Bank had not engaged in the unauthorized
practice of law and that the Michigan Consumer Protection Act
did not apply to plaintiffs' claims. An order dismissing all
claims except the one remaining Truth in Lending Act claim was
entered on January 10, 2000. On January 24, 2000, the Court
ruled that the final claim should be dismissed on statute of
limitations (i.e. one-year time frame). Plaintiffs
subsequently moved to add new named plaintiffs whose Truth in
Lending Act claims were not barred by the statute of
limitations. On March 24, 2000, the court denied the motion to
add new named plaintiffs and entered a final judgment in favor
of Bank West on all claims. An appeal by plaintiffs is
possible.
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 the Cowles case, assert the same state law
claims on behalf of borrowers who were excluded from the class
in Cowles. The Bank has filed a motion for summary
disposition, and the parties stipulated to submit the motion
to the Court on the basis of the briefs filed in Cowles. On
February 27, 2000, the Court entered an order granting summary
disposition to Bank West. No appeal has been filed.
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 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
21
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended March 31, 2000
PART II - OTHER INFORMATION (Continued)
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security-Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits: The following exhibit is filed herewith:
Exhibit No. Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarter ended March 31, 2000.
22
SIGNATURES
Pursuant to the requirements 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
Registrant
Date: May 12, 2000 /s/ Ronald A. Van Houten
---------------------------- -------------------------
Ronald A. Van Houten,
President and Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 2000 /s/ Kevin A. Twardy
--------------------------- -------------------
Kevin A. Twardy, Vice President and
Chief Financial Officer
(Principal Financial Officer)
23