To Our Stockholders:
This past year we have made great strides in changing the Bank's image from a
113 year old savings and loan institution to a community bank. It has been a
year of dramatic asset growth, improved profitability and improved efficiency
for your Bank as described in more detail below:
Asset Growth - Assets increased 30% from $206.7 million to $268.4
million, primarily as a result of growth both in the commercial and
residential lending areas.
Improved Profitability - Net income was $1.1 million, or $.46 per share
for the fiscal year ended June 30, 2000, an increase of 520.5% compared
to net income of $176,000 or $.07 per share for the same period of
1999.
[graphic-photo of Robert J. Stephan]
Improved Efficiency - Senior management has managed to better balance
operational overhead expense in the loan and deposit areas through
consolidation and realignment of duties throughout the organization,
thus contributing to the improved earnings for the year. We continue to
focus on improving the efficiency ratio without impacting customer
service.
The Y2K event turned out to be a non-event at Bank West. We expected and
accomplished a smooth transition due to the substantial investment of time and
resources to ensure that no interruption would occur to our system.
The strategic plan we put in place this past year is showing significant
improvement to the financial results. Next year, our major focus will be on
deposit growth and commercial lending. We expect these efforts will further
improve our interest margin and overall profitability. Over the past year, our
dramatic growth in assets has set the stage for more consistent quarterly
earnings growth. We are hopeful that the progress we have shown quarter after
quarter eventually will be recognized by the marketplace, which should translate
into a higher stock price.
[graphic-photo of Ronald A. Van HOuten]
The rising overall interest rate environment as well as a dramatic shift of
investments to the technology sector has resulted in lack of interest by
investors relating to bank stocks. This has caused a downward spiral in the
market value of bank stocks throughout the entire financial services sector. As
you can see from the financial highlights under Selected Consolidated Financial
Data, the book value of your Bank at June 30, 2000 is $8.81 per share. Bank West
stock is presently trading at a low percentage of book value and a low multiple
of earnings as compared to historical averages for the banking sector.
Our goal is to continue to serve our customers as well as expanding our
customer base throughout the Western Michigan community by delivering banking
services that meet or exceed their expectations. We invite you as a stockholder
to refer your friends, family and associates to utilize the products and
services offered at Bank West. Your support definitely makes a difference.
Your company is blessed with talented and committed team members. During this
past year, they have worked through many changes and challenges in achieving
current year results. We thank them for their efforts.
On November 26, 1999 our friend, colleague and Chairman of the Board, George
A. Jackoboice, suddenly passed away while vacationing in Salzburg, Austria. His
years of wisdom and guidance were very much appreciated. A copy of the Board's
"In Memoriam" resolution is printed on the following page.
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 114th year of
offering superior banking services throughout the Western Michigan area.
Sincerely, Sincerely,
/s/Ronald A. Van Houten /s/Robert J. Stephan
- ----------------------- --------------------
Ronald A. Van Houten Robert J. Stephan
President and Chief Executive Officer Chairman of the Board
IN MEMORIAM RESOLUTION
[GRAPHIC-photo of George A. Jackoboice]
George A. Jackoboice
--------------------
WHEREAS, George A. Jackoboice was first elected as a Director of Bank West
(formerly West Side Federal Savings and Loan) in 1978, and served continuously
in that office before being unanimously elected Chairman of the Board in 1991;
and
WHEREAS, Director and Chairman Jackoboice served the Board and the Bank and
all of its members and shareholders with singular dedication and distinction,
thereby contributing immeasurably to the growth, stability and reputation of the
Bank; and,
WHEREAS, his unfortunate and unexpected sudden demise on November 26, 1999 at
the age of 57 years, leaves an unwanted void of leadership on the Board and a
great sense of loss of companionship among his fellow directors and officers;
NOW THEREFORE, BE IT RESOLVED, that the untimely death of our Chairman George
Alan Jackoboice on November 26, 1999 be and hereby is officially noted in these
minutes of the Board of Directors meeting of December 20, 1999, and that the
Secretary of the Board be, and hereby is, directed to send a copy of this
resolution to the Jackoboice family together with our condolences.
The above resolution was unanimously adopted.
Selected Consolidated Financial Data
Year Ended June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- ----------
Summary of Operations
Total interest income $ 17,605 $ 13,666 $ 12,549 $ 10,429 $ 10,088
Net interest income 6,693 5,352 4,937 4,279 4,158
Provision for loan losses 400 220 81 60 60
Other income 428 621 1,012 1,554 1,202
One-time special SAIF assessment -- -- -- 551 --
Other expenses 5,025 5,339 4,585 3,821 3,469
Income taxes 604 146 453 478 622
Income before cumulative effect of
accounting change 1,092 268 830 923 1,209
Cumulative effect of change in accounting -- (92) -- -- --
Net income 1,092 176 830 923 1,209
Balance Sheet Data
Total assets $ 268,370 $206,669 $181,469 $155,675 $137,982
Cash and cash equivalents 3,734 9,106 4,206 3,673 6,694
Securities 20,735 17,733 6,745 3,978 7,422
Mortgage collateralized securities 21,867 24,539 36,507 25,578 17,341
Loans, net 210,717 145,206 118,906 111,530 95,737
Loans held for sale 573 2,381 8,157 2,231 4,297
Deposits 155,840 132,401 119,979 102,862 91,028
FHLB advances 88,803 50,000 37,000 29,000 19,000
Equity 22,223 22,552 23,275 22,592 26,810
Per Share Data(1)
Basic earnings per share $ .46 $ .07 $ .35 $ .36 $ .39
Diluted earnings per share .46 .07 .33 .36 .39
Dividends per share .24 .24 .22 .19 .19
Book value per share 8.81 8.68 8.87 8.59 8.13
Ratios
Average yield on interest-earning assets 7.62% 7.23% 7.74% 7.61% 7.52%
Average rate on interest-bearing liabilities 5.02 4.88 5.26 5.15 5.37
Average interest spread 2.60 2.35 2.48 2.46 2.15
Net interest margin 2.90 2.83 3.04 3.12 3.10
Return on average assets .45 .09 .49 .64 .87
Return on average equity 4.97 .76 3.58 3.89 4.38
Efficiency ratio 67.21 72.16 76.34 74.89 68.56
Dividend pay-out ratio 52.17 342.86 64.96 54.94 49.93
Average equity to average assets 9.15 11.72 13.60 16.42 19.77
Non-performing loans as a % of loans, net .19 .88 .71 .37 .04
(1) All per share data has been adjusted for stock splits.
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, commercial loans, home equity loans
and, to a lesser extent, 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.
The Company's net income was $1,092,000, $176,000 and $830,000 for fiscal
2000, 1999 and 1998, respectively. Net income for fiscal 2000,1999 and 1998 was
impacted by a number of items which management believes will no longer
significantly impact future earnings. See "Results of Operations for the Year
Ended June 30, 2000 Compared to the Year Ended June 30, 1999" and "Results of
Operations for the Year Ended June 30, 1999 Compared to the Year Ended June 30,
1998" sections for further clarification of such items.
Changes in Financial Condition
Assets. Total assets increased by $61.7 million or 29.9% from June 30, 1999 to
June 30, 2000. The increase is largely due to an increase in net loans of $65.5
million or 45.1% as greater emphasis was placed on originating and retaining
commercial loans and balloon single-family mortgage loans instead of
concentrating primarily on residential mortgage banking activities. The increase
in net loans was partially offset by a decrease in cash and cash equivalents by
$5.4 million or 59.3% as excess cash was utilized to fund loan growth. The
additional emphasis on the origination of commercial and balloon single-family
mortgage loans during fiscal 2000 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 interest rate
environment that reflects an inverted U.S. Treasury yield curve, and to react to
increased competitiveness in the residential mortgage banking business. Total
commercial loans increased as a percent of total loans from 12.5% at the end of
fiscal 1999 to 22.2% at the end of fiscal 2000. Management's strategy for fiscal
2001 and beyond is to place greater emphasis on commercial lending and reduce
the emphasis in the residential lending area due to the increasing disparity
between yields on commercial loans versus residential loans. Accordingly, the
anticipated growth in commercial loans is expected to favorably impact the
Bank's net interest income and net interest margin.
The Bank's mortgage banking activities consist of selling newly originated
and purchased loans into the secondary market. Total loans sold amounted to $9.4
million, $41.6 million and $45.0 million in fiscal 2000, 1999 and 1998,
respectively. Loans held for sale amounted to $573,000, $2.4 million and $8.2
million at June 30, 2000, 1999 and 1998, respectively. The dollar amount of
loans sold and loans held for sale decreased significantly in fiscal 2000 due to
both the rise in overall market interest rates and management's strategy during
fiscal 2000 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 portfolio lending strategy has reduced the Bank's excess
capital position and provided significant growth in net interest income.
Collateralized mortgage obligations ("CMO's") decreased from $21.1 million at
June 30, 1999 to $19.2 million at June 30, 2000. The decrease in CMO's is
consistent with management's current strategy to orderly liquidate the majority
of the CMO portfolio to provide liquidity over the next few years to fund higher
yielding commercial loan growth. The remaining CMO's have floating rates based
on either the prime or one month LIBOR rates, and are structured with relatively
low weighted average note rates as compared to current market rates, which
reduces prepayment risk.
Other securities classified as available for sale primarily consist of U.S.
agency securities, corporate bonds, pass-through mortgage-backed securities and
municipal securities. These types of securities increased from $21.2 million at
June 30, 1999 to $23.4 million at June 30, 2000. The increase is primarily due
to the purchase of corporate bonds early in the fiscal year. Management plans to
orderly liquidate the securities portfolio over the next few years to fund
higher yielding commercial loan growth.
At June 30, 2000, the unrealized loss on the Company's entire securities
portfolio was approximately $831,000, net of taxes, which is shown as a
component of stockholders' equity. The increase in the net unrealized loss from
$410,000 at June 30, 1999 is due to the recent rise in overall market interest
rates. Management believes that the recent decline in the market values of these
securities is temporary.
Liabilities. Deposits increased by $23.4 million or 17.7% from June 30, 1999
to June 30, 2000. The increase in total deposits was primarily attributable to
growth in certificates of deposit of $25.5 million, or 26.8%. Certificates of
deposit accounted for approximately 77% of total deposits at June 30, 2000 and
approximately 72% of total deposits at June 30, 1999. At June 30, 2000, $93.0
million or 77.2% of total certificates of deposit mature in one year or less,
and $51.5 million or 42.7% 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 increased its reliance on brokered
certificates of deposit to fund part of the loan growth during fiscal 2000.
Brokered certificates of deposits increased from $19.2 million at June 30, 1999
to $37.6 million at June 30, 2000. The interest rates offered on these deposits
approximate the interest rates in the local market area.
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") borrowings. During
fiscal 2000, the Bank increased FHLB borrowings by $38.8 million. The proceeds
of these borrowings, as well as deposit growth discussed above, were primarily
used to fund loan growth. Management expects to continue to utilize additional
FHLB borrowings, Federal Funds and brokered certificates of deposit in the next
fiscal year to fund additional loan growth.
Shareholders' Equity. Shareholders' equity amounted to $22.2 million or 8.3% of
total assets at June 30, 2000 compared to $22.6 million or 10.9% of total assets
at June 30, 1999. The Company had increased earnings over the prior year and
reported net income of $1,092,000. Net income was impacted by approximately
$106,000, net of tax, during fiscal 2000 due to professional fees related to
defending the Bank in a lawsuit that was dismissed during the fiscal year.
Management believes that this expense will no longer significantly impact future
earnings. For additional discussion, see "Results of Operations for the Year
Ended June 30, 2000 Compared to the Year Ended June 30, 1999" section. The
decrease in total shareholders' equity relates primarily to net income offset by
dividends, stock repurchases and an increase in unrealized losses on securities
available for sale.
The cost of shares issued to the Company's Employee Stock Ownership Plan
("ESOP") but not yet allocated to participants totaling $616,000 at June 30,
2000 is presented in the consolidated balance sheet as a reduction of
shareholders' equity. The unearned compensation value of the Company's
Management Recognition Plans ("MRP's") totaled $36,000 at June 30, 2000 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, 2000, the net
unrealized loss was $831,000, while at June 30, 1999, the net unrealized loss
was $410,000. The increase in overall market interest rates had a negative
impact on the market value of the securities portfolio.
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, 2000 and June 30, 1999:
June 30, June 30,
2000 1999
------ ------
(Dollars in Thousands)
Non-accrual loans
One- to four-family $ 14 $ 207
Construction and land development 275 930
Commercial -- --
Consumer (including second mortgages) 115 142
------ ------
Total 404 1,279
Real estate owned
Construction and land development 380 310
------ ------
Total non-performing assets $ 784 $1,589
====== ======
Total non-performing assets as
a percentage of total assets .29% .77%
====== ======
Non-performing assets in the construction and land development category
consist of six single-family homes. The majority of these homes are
substantially complete. Management believes that these non-performing assets are
adequately collateralized. The two loans on non-accrual did not require specific
reserves against the allowance for loan losses at June 30, 2000. The real estate
owned properties required a write-down of approximately $33,000 during fiscal
2000. The allowance for loan losses totaled $844,000 or 208.9% of total
non-performing loans at June 30, 2000. During the year ended June 30, 2000,
there were $36,339 in net charge-offs. At June 30, 2000, $139.5 million or 62.9%
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 78.5% of total
assets.
Results of Operations for the Year Ended June 30, 2000
Compared to the Year Ended June 30, 1999
Net Income. Net income for fiscal 2000 was $1,092,000 or $.46 per diluted
share, compared to $176,000 or $.07 per diluted share for fiscal 1999. The
increase in the Company's net income of $916,000 or 520.5% in fiscal 2000 from
fiscal 1999 was primarily due to an increase in net interest income of $1.3
million, resulting from net loan growth of $65.5 million. In addition, several
non-recurring items, which management believes are not expected to impact future
earnings, had a significant impact on fiscal 1999 earnings but only a nominal
impact on fiscal 2000 earnings. These items are described below on an after tax
basis. First, the Company realized a $340,000, net of tax, loss on securities in
fiscal 1999 compared to a net of tax loss of $19,000 in fiscal 2000 primarily
resulting from the liquidation of the Company's equity investments and the sale
of certain CMO's during fiscal 1999 in order to reposition the securities
portfolio for future liquidity needs. Second, the Company incurred approximately
$253,000, net of tax, in legal costs during fiscal 1999 associated with a class
action lawsuit filed on July 17, 1998 by a Bank West borrower, compared to net
of tax expense of $106,000 during fiscal
2000 associated with the lawsuit. Third, during fiscal 1999, the Company
incurred a $140,000, net of tax, settlement accrual 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 fiscal 1999 related to Year 2000
compliance. These items are discussed in greater detail in the following
sections.
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 other borrowings. Net interest income is affected by changes in
volume and the 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 $1.3 million or 25.1% for the year ended
June 30, 2000 as compared to the year ended June 30, 1999. The increase in net
interest income was primarily attributable to a $44.2 million or 32.3% increase
in the average loan portfolio (including loans held for sale). The Company's
average interest spread increased from 2.35% to 2.60%, reflecting higher
yielding commercial and second mortgage loan growth during fiscal 2000.
The yield on interest-earning assets increased from 7.23% for fiscal 1999 to
7.62% for fiscal 2000. The yield increased primarily due to the growth in
commercial loans which typically have a higher yield than residential mortgage
loans. In addition, during the fiscal year, the Federal Reserve Bank increased
the federal funds rate by 175 basis points and the overall market interest rates
increased significantly from the previous year, resulting in an upward repricing
of floating rate loans and securities. Management expects that its strategy to
increase the emphasis on commercial lending for fiscal 2001 will favorably
impact the average yield on interest-earning assets.
The cost of interest-bearing liabilities increased from 4.88% for fiscal 1999
to 5.02% for fiscal 2000, primarily due to the increase in the overall interest
rate environment and the change in mix of interest-bearing liabilities.
Certificates of deposit as a percentage of total deposits increased from 71.7%
at June 30, 1999 to 77.3% at June 30, 2000. In addition, FHLB advances as a
percentage of total interest-bearing liabilities increased from 28.7% at June
30, 1999 to 37.4% at June 30, 2000. Management expects that the higher overall
interest rate environment will result in an increase in the average cost of
interest-bearing liabilities during fiscal 2001.
Net interest margin increased from 2.83% for fiscal 1999 to 2.90% for fiscal
2000. The increase in net interest margin was primarily due to a change in mix
of interest-earning assets resulting from the significant growth in commercial
loans, which typically have a higher yield than residential loans.
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 recent rapid rise in overall market interest rates
is expected to have a negative impact on the Company's net interest income.
However, the anticipated growth in commercial loans is expected to partially
offset any negative impact. Additional factors that may affect the Company's net
interest income are the slope of the yield curve, asset growth, maturity and
repricing activity and competition.
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,
2000 1999 1998
------------------------------ ----------------------------- -------------------------
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) $181,035 $14,185 7.84% $136,874 $10,598 7.74% $120,844 $ 9,795 8.11%
Securities 44,337 3,001 6.77 46,077 2,677 5.81 36,669 2,446 6.67
Interest-bearing deposits 1,940 109 5.62 3,652 191 5.23 2,738 152 5.55
FHLB stock 3,875 310 8.00 2,521 199 7.89 1,958 156 7.97
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 231,187 17,605 7.62 189,124 13,665 7.23 162,209 12,549 7.74
------- ---- ------- ---- ------- ----
Noninterest-earning assets 9,491 7,547 8,522
-------- -------- --------
Total assets $240,678 $196,671 $170,731
======== ======== ========
Interest-bearing liabilities:
Savings, checking and MMDA's $ 36,291 968 2.67 $ 31,883 857 2.69 $ 25,821 794 3.08
Certificates of deposit 102,655 5,557 5.41 91,307 5,044 5.52 83,032 4,808 5.79
Other borrowings 78,298 4,387 5.60 47,185 2,412 5.11 35,803 2,010 5.61
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 217,244 10,912 5.02 170,375 8,313 4.88 144,656 7,612 5.26
------- ---- ------- ---- ------- ----
Noninterest-bearing liabilities 1,453 3,247 2,853
-------- -------- --------
Total liabilities 218,697 173,622 147,509
Stockholders' equity 21,981 23,049 23,222
-------- -------- --------
Total liabilities and
stockholders' equity $240,678 $196,671 $170,731
======== ======== ========
Net interest income; average
interest rate spread $ 6,693 2.60% $ 5,352 2.35% $ 4,937 2.48%
======== ==== ======= ==== ======= ====
Net interest margin(3) 2.90% 2.83% 3.04%
== ==== ==== ====
Average interest-earning assets to
Avg. interest-bearing liabilities 1.06x 1.11x 1.12x
==== ==== ====
(1) At June 30, 2000, the weighted average yields earned and rates paid were as
follows: loans receivable 8.41%; securities 6.99%; interest-bearing deposits
6.47%; FHLB stock 8.00%; total interest-earning assets 8.17%; savings, checking
and MMDA's 2.88%; certificates of deposit 5.89%; FHLB advances 6.65%; total
interest-bearing liabilities 5.73%; and interest rate spread 2.44%.
(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.
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, 2000 June 30, 1999
vs. vs.
Year Ended Year Ended
June 30, 1999 June 30, 1998
Increase Increase
(Decrease) (Decrease)
Due to Due to
-------------------------------- -----------------------------
Total
Rate Increase Rate Total
Effect Volume (Decrease) Effect Volume Increase
------ ------ ---------- ------ ------ --------
(In Thousands)
Interest income:
Loans receivable $ 138 $ 3,449 $ 3,587 $ (460) $ 1,263 $ 803
Securities 428 (104) 324 (342) 573 231
Interest-bearing deposits 13 (95) (82) (9) 48 39
FHLB stock 3 108 111 (2) 45 43
------- ------- ------- ------- ------- -------
Total interest income 582 3,358 3,940 (813) 1,929 1,116
------- ------- ------- ------- ------- -------
Interest expense:
Savings, checking and MMDA's (6) 117 111 (109) 172 63
Certificates of deposit (102) 615 513 (230) 466 236
Other borrowings 251 1,724 1,975 (192) 594 402
------- ------- ------- ------- ------- -------
Total interest expense 143 2,456 2,599 (531) 1,232 701
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income $ 439 $ 902 $ 1,341 $ (282) $ 697 $ 415
======= ======= ======= ======= ======= =======
Provision for Loan Losses. Provisions for loan losses are charged to
operations based on management's evaluation of probable losses in the portfolio.
In addition to providing loss allocations 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 loss allocations, 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 probable 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.
The provision for loan losses increased by $180,000 or 81.8% when comparing
fiscal 2000 to fiscal 1999. During the fiscal year, management increased the
provision for loan losses primarily as a result of increases, both on a dollar
basis and as a percentage of total loans, in commercial loans. Management
believes commercial lending has a higher degree of credit risk compared to
residential mortgage lending and intends to add to the allowance for loan losses
based on the increased credit risk.
The Company's ratio of nonperforming assets, consisting of loans 90 days or
more delinquent and foreclosed assets, to total assets was .29% as of June 30,
2000 compared to .77% as of June 30, 1999. The allowance for loan losses as a
percentage of total loans at June 30, 2000 increased to .38% from .31% at June
30, 1999. The allowance for loan losses equaled 208.9% of nonperforming loans at
June 30, 2000. The ratio of net charge-offs to average loans outstanding was
.02% for both fiscal 1999 and 2000.
Total Other Income. Total other income decreased by $192,000 or 31.0% in
fiscal 2000 from fiscal 1999, primarily due to a $547,000 or 82.3% decrease in
gain on sales of loans. The significantly lower gain was partially due to the
increase in overall market interest rates during fiscal 2000 compared to fiscal
1999 resulting in lower loan sales volume. In addition, the Bank portfolioed
ten-year residential balloon mortgages in an effort to deploy excess capital.
The lower gain on sale of loans was partially offset by lower losses on the sale
of securities available for sale by $320,000 or 92.1%. Fiscal 1999 losses on
securities available for sale resulted from the liquidation of the Company's
equity investments and the sale of certain CMO's in order to reposition the
securities portfolio with shorter average life bonds to anticipate future
liquidity needs.
Total Other Expenses. Total other expenses decreased by $314,000 or 5.9% in
fiscal 2000 as compared to fiscal 1999. The decrease was primarily due to the
factors discussed below. Compensation and benefits expense decreased by $79,000
or 2.7%. Fiscal 1999 compensation and benefits included a $225,000 settlement
accrual related to the former President and Chief Executive Officer. Absent the
settlement accrual, compensation and benefits expense was higher in fiscal 2000
by $146,000, or 5.3% primarily due to the hiring of additional staff for the
newly opened Jenision branch as well as regular annual wage increases. These
amounts were partially offset by lower ESOP expense of $51,000 resulting from a
decline in the market value of the Company's stock in fiscal 2000 as compared to
1999. 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 current staffing levels
should result in an improvement to the Bank's efficiency ratio for fiscal 2001.
Professional fees decreased by $280,000, or 42.0%. The Company incurred
approximately $165,000 in legal costs during fiscal 2000 compared to $384,000
during fiscal 1999 associated with defending a class action lawsuit. See Note 10
to Consolidated Financial Statements for more information. During March of 2000,
the Kent County Circuit Court entered judgment in favor of Bank West on all
claims. While the plaintiffs have a right to appeal, Bank West won all aspects
of the case and expects to prevail in the appeals that have been filed.
During fiscal 1999, the Company incurred an $83,000 loss on the disposal of
fixed assets considered non-compliant with respect to the Year 2000 event. No
losses on the disposal of fixed assets occurred during fiscal 2000.
The above decreases in other expenses were partially offset by an increase in
furniture, fixtures and equipment expense of $56,000 or 30.6% due to
depreciation expense related to the purchase of a new teller service platform
and new lending software. In addition, advertising expense increased by $71,000
or 78.9% due to the grand opening of the Jenison branch as well as the increased
emphasis on advertising loan and deposit products.
Cumulative Effect of a Change in Accounting Principle. During fiscal 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 Hedging Activities. The transfer resulted in the
recognition of a $92,000, net of tax charge, in fiscal1999. The transfer allowed
the Company to subsequently sell such securities in fiscal 1999. Federal Income
Tax Expense.
Federal income tax expense increased by $458,000 or 313.7% in fiscal 2000
from fiscal 1999, due to an increase in pre-tax income.
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 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. Second, the Company incurred approximately
$253,000, net of tax, in legal costs in fiscal 1999 associated with the
previously mentioned class action lawsuit. Third, the Company incurred a
$140,000, net of tax, 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% in fiscal 1999.
Net Interest Income. 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 fiscal 1999.
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 fiscal
1999, the Federal Reserve lowered the federal funds rate by 75 basis points, and
overall market interest rates declined substantially from the previous year.
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 at June 30, 1999 compared to $30.7
million or 25.6% of total deposits at June 30, 1998.
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 certificates of
deposit and FHLB advances.
Provision for Loan Losses. The provision for loan losses increased by
$139,000 or 171.6% when comparing fiscal 1999 to fiscal 1998. 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 .31% compared to .23% at June 30, 1998. The
allowance for loan losses equaled 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, primarily due to a $217,000 decrease in net gains
on trading securities. In addition, the loss on sales of securities available
for sale increased by $157,000. The increase in net loss on securities available
for sale was primarily due to a first quarter charge 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. Absent the
settlement accrual, compensation and benefits expense was lower in fiscal 1999
by $76,000 or 2.7% primarily due to lower ESOP expense of $112,000 resulting
from a decline in the market value of the Company's stock in fiscal 1999 as
compared to 1998.
Professional fees increased by $404,000, or 153.2% in fiscal 1999. The
Company incurred approximately $384,000 in legal costs during fiscal 1999
associated with defending the previously mentioned class action lawsuit.
The Company incurred an $83,000 loss in fiscal 1999 on the disposal of fixed
assets considered non-compliant with respect to the Year 2000 event.
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.
Cumulative Effect of a Change in Accounting Principle. During fiscal 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 Hedging Activities. The transfer resulted in the
recognition of a $92,000, net of tax charge, in fiscal 1999. The transfer
allowed the Company to subsequently sell such securities in fiscal 1999.
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.
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 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
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 sensitive instruments held
for trading purposes.
Asset and Liability Management
Consistent net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities that 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 loans (consisting of ARM's,
commercial, home equity and builder spec 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 by porfolioing commercial and residential balloon
loans versus longer-term fixed-rate mortgages. During fiscal 2000, the Bank's
ratio of interest-sensitive assets to interest-sensitive liabilities decreased
from 1.11 to 1.06 due to the large growth in the loan portfolio funded by
interest-bearing liabilities.
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 the previously mentioned adjustable-rate loan
types and balloon mortgage loans for retention in the loan portfolio. At June
30, 2000, the Bank's adjustable-rate and balloon mortgage loans amounted to
$96.4 million or 43.4% of total loans. Management's strategy for fiscal 2001 is
to emphasize growth in commercial loans and de-emphasize residential balloon
loans due to the present inverted U.S. Treasury yield curve and its effect on
pricing different loan types.
With its funding sources, management has attempted to reduce the impact of
interest rate changes by matching FHLB borrowings and certificate of deposit
terms to the average lives of interest-earning assets.
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, 2000:
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 $ 9,167 (56.83)% $ 5,549 (19.49)%
+300 12,004 (43.47) 5,902 (14.38)
+200 15,250 (28.18) 6,262 (9.15)
+100 18,481 (12.97) 6,609 (4.12)
Static 21,235 -- 6,893 --
(100) 23,030 8.45 7,097 2.97
(200) 22,871 7.70 7,060 2.43
(300) 22,546 6.17 6,991 1.43
(400) 22,348 5.24 6,930 .55
As illustrated in the above table, an increase in interest rates will result
in a decrease in the Bank's NPV as compared to a decrease in interest rates
which will result in an increase in the Bank's NPV. This occurs principally
because, when rates increase, the Bank's shorter-term certificates of deposit
and adjustable-rate borrowings reprice upward faster than fixed-rate loans with
longer maturities. An increase in interest rates also will negatively impact the
securities available for sale, which is shown as a component of stockholders'
equity. A decrease in interest rates assumes an increase in prepayments in
loans, which reduces the extent of a positive impact as compared to the extent
of a negative impact when rates increase.
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 that 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 of
deposit 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 or brokered certificates of deposit instead of selling securities.
The Bank's principal sources of liquidity are deposits, principal and
interest payments on loans, proceeds from loan sales, maturities of securities,
sales of securities available for sale and FHLB advances. While scheduled loan
repayments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions and competition.
The significant loan growth during fiscal 2000 reduced the availability of
additional FHLB advances to approximately $9.8 million at June 30, 2000, based
on collateral. The Bank also has a $4 million federal funds facility with its
correspondent bank. As a result of the lower level of liquidity than in the
prior year, the Bank has increased its reliance upon brokered certificates of
deposit in addition to retail deposit growth to fund loan growth. During fiscal
2001, management intends to de-emphasize adding residential balloon loans to the
portfolio and focus on commercial loan growth as a strategy to preserve
liquidity. In addition, a portion of the Bank's available for sale securities
may be liquidated as an additional liquidity source. See Consolidated Statement
of Cash Flows for additional information on major cash flow items for fiscal
1998, 1999 and 2000.
The Company (excluding the Bank) also has a need for, and provides sources
of, liquidity. Dividends from the Bank and interest income on securities 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 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.
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, 2000 and 1999 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, 2000. 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000 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 9, 2000
Consolidated Balance Sheets
June 30, 2000 and 1999
2000 1999
------------- -------------
ASSETS
Cash and due from financial institutions $ 3,564,615 $ 1,527,481
Interest-bearing deposits in financial institutions 169,330 7,578,387
------------- -------------
Total cash and cash equivalents 3,733,945 9,105,868
Securities available for sale 42,601,603 42,272,306
Loans held for sale 572,731 2,380,576
Loans, net 210,717,246 145,205,691
Federal Home Loan Bank (FHLB) stock 4,500,000 2,700,000
Premises and equipment - net 3,694,888 3,000,951
Accrued interest receivable 1,439,246 1,019,165
Mortgage servicing rights 230,703 232,561
Real estate owned 380,332 309,826
Other assets 499,404 442,257
------------- -------------
$ 268,370,098 $ 206,669,201
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,099,390 $ 8,419,022
Interest-bearing 148,740,440 123,982,183
------------- -------------
Total deposits 155,839,830 132,401,205
FHLB borrowings 88,803,024 50,000,000
Accrued interest payable 655,568 292,289
Advanced payments by borrowers for taxes and insurance 574,319 509,218
Other liabilities 274,531 914,358
------------- -------------
Total liabilities 246,147,272 184,117,070
Commitments and contingencies
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, none issued
Common stock, $.01 par value; 10,000,000 shares authorized;
2,521,059 and 2,597,729 issued at June 30, 2000 and 1999 25,211 25,978
Additional paid-in capital 10,645,624 11,328,830
Retained earnings, substantially restricted 13,034,267 12,517,215
Accumulated other comprehensive income (loss), net
of tax of $428,081 in 2000 and $211,018 in 1999 (830,981) (409,623)
Management Recognition Plan (unearned shares) (35,647) (165,021)
Employee Stock Ownership Plan (unallocated shares) (615,648) (745,248)
------------- -------------
22,222,826 22,552,131
------------- -------------
$ 268,370,098 $ 206,669,201
============= =============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Interest and dividend income
Loans $ 14,185,674 $ 10,598,406 $ 9,795,291
Securities 3,000,715 2,677,378 2,446,042
Other interest-earning deposits 109,538 190,711 152,152
Dividends on FHLB stock 309,554 199,142 155,825
------------ ------------ ------------
17,605,481 13,665,637 12,549,310
Interest expense
Deposits 6,524,850 5,900,947 5,601,870
FHLB borrowings 4,333,999 2,412,433 2,010,465
Federal funds purchased 53,616 -- --
------------ ------------ ------------
10,912,465 8,313,380 7,612,335
------------ ------------ ------------
Net interest income 6,693,016 5,352,257 4,936,975
Provision for loan losses 400,000 220,000 81,000
------------ ------------ ------------
Net interest income after provision for loan losses 6,293,016 5,132,257 4,855,975
Other income
Net gain on sales of loans 117,925 664,568 662,203
Fees and service charges 377,578 333,584 349,637
Net gain (loss) on trading securities -- (16,498) 200,148
Net loss on securities available for sale (28,406) (358,784) (201,890)
Gain (loss) on real estate owned (38,856) (2,501) 2,241
------------ ------------ ------------
428,241 620,369 1,012,339
Other expenses
Compensation and benefits 2,880,128 2,959,351 2,809,557
Federal deposit insurance 51,010 70,427 64,306
Professional fees 386,924 666,946 263,374
Data processing 260,550 261,093 197,487
Occupancy 356,014 336,370 301,185
Furniture, fixtures and equipment 238,546 183,228 153,899
Advertising 160,796 89,876 111,351
Loss on disposal of fixed assets -- 83,460 --
Other 691,360 687,861 683,532
------------ ------------ ------------
5,025,328 5,338,612 4,584,691
------------ ------------ ------------
Income before federal income tax expense and
cumulative effect of accounting change 1,695,929 414,014 1,283,623
Federal income tax expense 604,000 145,600 453,255
------------ ------------ ------------
Income before cumulative effect of
accounting change 1,091,929 268,414 830,368
Cumulative effect of change in accounting for
certain securities, net of tax benefit of $47,600 -- (92,399) --
Net income $ 1,091,929 $ 176,015 $ 830,368
============ ============ ============
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.46 $ 0.11 $ 0.35
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.46 $ 0.07 $ 0.35
============ ============ ============
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.46 $ 0.11 $ 0.33
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.46 $ 0.07 $ 0.33
============ ============ ============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2000, 1999 and 1998
Accumulated
Additional Other Unearned Unallocated Total
Common Paid-in Retained Comprehensive MRP ESOP Shareholders'
Stock Capital Earnings Income (Loss) Shares Shares Equity
--------- ------------ ----------- ---------- ----------- ------------ ------------
Balance at July 1, 1997 $ 17,535 $ 11,432,798 $12,647,112 $ 12,710 $ (513,398) $ (1,004,448) $ 22,592,309
Net income -- -- 830,368 -- -- -- 830,368
Other comprehensive income
(loss), net of tax:
Unrealized gains (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 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)
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 -- -- 176,015 -- -- -- 176,015
Other comprehensive income
(loss), net of tax:
Unrealized loss on transfer
of securities held to maturity
to available for sale -- -- -- (26,469) -- -- (26,469)
Unrealized gains (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 loss -- -- -- (414,755) -- -- (414,755)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Years ended June 30, 2000, 1999 and 1998
Accumulated
Additional Other Unearned Unallocated Total
Common Paid-in Retained Comprehensive MRP ESOP Shareholders'
Stock Capital Earnings Income (Loss) Shares Shares Equity
--------- ------------ ----------- ---------- ----------- ------------ ------------
Comprehensive 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
Net income -- -- 1,091,929 -- -- -- 1,091,929
Other comprehensive income
(loss), net of tax:
Unrealized gains (losses) arising
during the year -- -- -- (440,106) -- -- (440,106)
Less reclassification adjustments
for net losses included
in net income -- -- -- 18,748 -- -- 18,748
Other comprehensive loss -- -- -- (421,358) -- -- (421,358)
Comprehensive income -- -- -- -- -- -- 670,571
Shares earned under MRP -- -- -- -- 119,000 -- 119,000
Shares forfeited under MRP-- (10,374) -- -- 10,374 --
Cash dividends of $.24 per share -- -- (574,877) -- -- -- (574,877)
Repurchase of 80,000 shares
of stock (800) (751,137) -- -- -- -- (751,937)
Shares committed to be released
under Employee Stock
Ownership Plan -- 54,168 -- -- -- 129,600 183,768
Shares issued upon exercise
of stock options 33 24,137 -- -- -- -- 24,170
-------- ------------ ------------ --------- ----------- ----------- ------------
Balance at June 30, 2000 $ 25,211 $ 10,645,624 $ 13,034,267 $(830,981) $ (35,647) $ (615,648) $ 22,222,826
======== ============ ============ ========= =========== =========== ============
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities
Net income $ 1,091,929 $ 176,015 $ 830,368
Adjustments to reconcile net income to
net cash from operating activities
Purchase of trading securities -- -- (2,530,635)
Proceeds from sales of trading securities -- -- 4,486,385
Origination and purchase of mortgage
loans for sale (7,441,349) (35,127,650) (50,245,577)
Proceeds from sales of mortgage loans 9,367,119 41,568,214 44,982,359
Net (gain) loss on sales of:
Loans (117,925) (664,568) (662,203)
Securities 28,406 515,281 1,742
Real estate owned 38,856 2,501 (2,241)
Depreciation 302,509 247,685 213,787
Amortization of premium, net 34,681 242,923 79,741
Loss on disposal of fixed assets -- 83,460 --
ESOP expense 183,768 234,647 346,528
MRP expense 119,000 107,800 152,400
Provision for loan losses 400,000 220,000 81,000
Change in:
Deferred loan fees (207,727) (191,521) (180,698)
Other assets and accrued interest receivable (289,961) (218,843) (541,027)
Other liabilities and accrued interest payable (211,447) 768,899 (2,039)
------------ ------------ ------------
Net cash from operating activities 3,297,859 7,964,843 (2,990,110)
Cash flows from investing activities
Purchase of FHLB stock (1,800,000) (600,000) (550,000)
Net decrease in interest-bearing time deposits -- -- 99,000
Loan originations, net of repayments (45,801,372) (19,099,197) (4,296,879)
Loans purchased for portfolio (20,510,756) (7,539,188) (3,295,025)
Securities available for sale:
Purchases (5,164,654) (36,282,467) (24,143,884)
Proceeds from sales 2,446,275 27,518,645 15,634,260
Proceeds from maturities, calls and principal
repayments 1,687,575 11,450,457 2,786,772
Securities held to maturity:
Purchases -- (3,093,501) (11,102,747)
Proceeds from maturities, calls and principal
repayments -- -- 4,000,625
Property and equipment expenditures (996,639) (170,143) (250,534)
Proceeds from disposal of fixed assets -- 2,952 --
Proceeds from sale of real estate owned 530,784 189,579 162,918
------------ ------------ ------------
Net cash from investing activities (69,608,787) (27,622,863) (20,955,494)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- -------------
Cash flows from financing activities
Net increase in deposits $ 23,438,625 $ 12,421,826 $ 17,117,227
Repayment of FHLB borrowings (79,000,000) (39,000,000) (43,000,000)
Proceeds from FHLB borrowings 117,803,024 52,000,000 51,000,000
Repurchase of common stock (751,937) (416,312) (105,938)
Issuance of shares upon exercise of
stock options 24,170 139,663 7,283
Dividends paid on common stock (574,877) (586,828) (540,685)
------------- ------------- -------------
Net cash from financing activities 60,939,005 24,558,349 24,477,887
------------- ------------- -------------
Net change in cash and cash equivalents (5,371,923) 4,900,329 532,283
Cash and cash equivalents at beginning of period 9,105,868 4,205,539 3,673,256
Cash and cash equivalents at end of period $ 3,733,945 $ 9,105,868 $ 4,205,539
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 10,549,186 $ 8,274,128 $ 7,561,515
Income taxes 717,000 281,000 768,119
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 608,300 309,826 316,083
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
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, the Bank and the Bank's wholly-owned subsidiaries,
Sunrise Mortgage Company and BW Investments LLC. 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.
While the Company's chief decision-makers monitor the revenue streams of the
various products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
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 and loans held for sale, the
fair value of stock options and other financial instruments and the status of
contingencies.
Concentrations of Credit Risk: The Bank grants loans to and accepts deposits
from 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. Substantially all loans are secured by
specific items of collateral, primarily residential and commercial real estate.
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. There were no trading securities at June 30, 2000 and 1999.
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 that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the unpaid
principal balances, less the allowance for loan losses, net deferred loan fees
and costs, and charge-offs. Interest income on loans is accrued over the term of
the loans based upon the principal outstanding. Interest income is not reported
when full loan repayment is in doubt, typically when payments are past due 90
days or more. Payments received on such loans are reported as principal
reductions.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loan situations, the
whole allowance is available for any loan charge-offs that occur. A loan is
charged-off against the allowance by management when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Mortgage Loan Servicing Rights: Servicing rights represent both purchased
rights and the allocated value of servicing rights retained on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated using the
straight-line-method over the useful lives of the assets. 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
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.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 the SOP 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.
Such financial instruments are recorded when they are funded.
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. The
Company 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.
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
earnings and dividends per share amounts have been 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.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 2 - SECURITIES
The amortized cost and fair values of securities available for sale at June
30, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
2000
U.S. agencies $ 10,919,802 $ -- $ (357,927) $ 10,561,875
Mortgage-backed securities 2,885,607 -- (180,195) 2,705,412
Collateralized mortgage obligations 19,551,885 53,582 (443,363) 19,162,104
Corporate bond 5,762,543 -- (149,730) 5,612,813
Non-taxable municipal bonds 680,950 5,046 -- 685,996
Taxable municipal bonds 3,559,878 -- (88,975) 3,470,903
Trust preferred stock 500,000 -- (97,500) 402,500
------------ ------------ ------------ ------------
$ 43,860,665 $ 58,628 $ (1,317,690) $ 42,601,603
============ ============ ============ ============
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
============ ============ ============ ============
The scheduled maturities of securities available for sale at June 30, 2000
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 $17,783,727 $17,256,953
Due after five years through
ten years 3,139,446 3,074,634
Mortgage-backed securities
and collateralized
mortgage obligations 22,437,492 21,867,516
Trust preferred stock 500,000 402,500
----------- -----------
$43,860,665 $42,601,603
=========== ===========
Proceeds from sales of securities amounted to approximately $2,446,000,
$27,519,000 and $20,121,000 for 2000, 1999 and 1998, including approximately
$4,486,000 relative to trading securities for the year ended June 30, 1998.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 2 - SECURITIES(Continued)
Gains (losses) on securities, reflected in the consolidated statements of
income, were as follows for the years ended June 30:
2000 1999 1998
-------- --------- ---------
Gross realized gains on:
Securities available for sale $ 11,492 $ 263,474 $ 59,447
Trading securities -- -- 667,238
11,492 263,474 726,685
Gross realized losses on:
Securities available for sale (39,898) (622,258) (261,337)
Trading securities -- (156,497) --
(39,898 (778,755) (261,337)
Net realized gains (losses) (28,406) (515,281) 465,348
Net unrealized loss on trading securities -- -- (467,090)
-------- --------- ---------
$(28,406) $(515,281) $ (1,742)
======== ========= =========
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 value of $7,884,252,
resulting in a loss of $139,999 at the date of transfer. This amount has been
shown net of a $47,600 tax benefit 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.
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 secondary market mortgage activities, which consist
solely of one-to-four-family real estate loans:
2000 1999 1998
------------ ------------ ------------
Loans held for sale - beginning of period $ 2,380,576 $ 8,156,572 $ 2,231,151
Activity during the periods:
Loans originated and purchased for sale 7,441,349 35,127,650 50,245,577
Proceeds from sales of mortgage loans (9,367,119) (41,568,214) (44,982,359)
Gain on sale of loans 117,925 664,568 662,203
------------ ------------ ------------
Loans held for sale - end of period $ 572,731 $ 2,380,576 $ 8,156,572
============ ============ ============
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES (Continued)
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
June 30 and income earned on loans serviced for others during the years ended
June 30 are summarized as follows:
2000 1999 1998
----------- ----------- -----------
Mortgage loan portfolios serviced for
FHLMC $25,140,223 $27,179,312 $33,201,177
=========== =========== ===========
Loan servicing fee income $ 65,601 $ 77,241 $ 78,433
=========== =========== ===========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $169,897 and $173,793 at June 30, 2000 and 1999.
Following is the activity for mortgage servicing rights for the years ended
June 30:
2000 1999 1998
--------- --------- --------
Balance at July 1 $ 232,561 $ 280,869 $148,569
Additions 12,142 65,692 190,800
Amortization (14,000) (114,000) (58,500)
--------- --------- --------
Balance at June 30 $ 230,703 $ 232,561 $280,869
========= ========= ========
A valuation allowance for mortgage servicing rights was not considered
necessary for 2000, 1999 and 1998.
NOTE 4 - LOANS, NET
Net loans are classified as follows at June 30:
2000 1999
------------- -------------
Real estate loans:
One-to four-family residential - fixed rate $ 15,425,090 $ 14,559,680
One-to four-family residential - balloon 79,222,832 51,842,742
One-to four-family residential - adjustable 17,215,143 18,833,825
Construction 27,652,791 25,395,916
Commercial mortgages 32,867,625 15,457,293
Home equity lines of credit 12,516,347 10,512,823
Second mortgages 16,580,734 10,820,377
Land development 1,803,163 1,189,394
------------- -------------
Total mortgage loans 203,283,725 148,612,050
Consumer loans 2,368,998 1,849,363
Commercial non-mortgage 16,324,067 3,823,834
------------- -------------
Total 221,976,790 154,285,247
Less:
Loans in process 11,025,478 9,001,424
Net deferred costs (609,862) (402,135)
Allowance for loan losses 843,928 480,267
------------- -------------
$ 210,717,246 $ 145,205,691
============= =============
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 4 - LOANS, NET (Continued)
Activity in the allowance for loan losses for the years ended June 30 is as
follows:
2000 1999 1998
-------- -------- --------
Beginning balance $480,267 $289,696 $225,862
Provision charged to operations 400,000 220,000 81,000
Loans charged-off (36,339) (29,429) (17,166)
Recoveries -- -- --
-------- -------- --------
Ending balance $843,928 $480,267 $289,696
======== ======== ========
During the years ended June 30, 2000, 1999 and 1998, the Company had no loans
which were considered impaired. Non-performing loans, consisting of loans past
due over 90 days and still accruing and loans on nonaccrual, were $404,000,
$1,279,000 and $841,000 at June 30, 2000, 1999 and 1998.
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 2000 and 1999 and balances as of June 30,
2000 and 1999 did not exceed 5% of shareholders' equity.
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment is as follows at June 30:
2000 1999
---------- ----------
Land $ 756,100 $ 529,300
Building and improvements 2,642,537 2,411,654
Furniture and equipment 1,593,971 1,051,429
4,992,608 3,992,383
Accumulated depreciation (1,297,720) (991,432)
---------- ----------
$3,694,888 $3,000,951
========== ==========
NOTE 6 - DEPOSITS
Deposits at June 30 are summarized as follows:
2000 1999
------------------------ ----------------------
Amount % Amount %
------------ ------ ------------ ------
Noninterest-bearing $ 7,099,390 4.56% $ 8,419,022 6.36%
Now accounts and MMDAs 11,816,567 7.58 9,731,425 7.35
Passbook and statement savings 16,409,469 10.53 19,267,901 14.55
Certificates of deposit 120,514,404 77.33 94,982,857 71.74
------------ ------ ------------ ------
$155,839,830 100.00% $132,401,205 100.00%
============ ====== ============ ======
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 6 - DEPOSITS (Continued)
At June 30, 2000, the scheduled maturities of certificates of deposit are as
follows by fiscal year-end:
2001 $92,966,776
2002 18,803,559
2003 5,671,997
2004 1,327,105
2005 1,742,911
Thereafter 2,056
------------
$120,514,404
============
As of June 30, 2000 and 1999, the Bank had issued through brokers $37,644,000
and $19,194,000 of time deposits with maturities ranging from 3 to 24 months
which are included in the table above.
As of June 30, 2000 and 1999, the Bank had time deposit accounts with
balances of $100,000 or more of $51,476,000 and $20,890,000. Related party
deposits were $1,769,000 and $1,296,000 at June 30, 2000 and 1999.
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS
Borrowings from the Federal Home Loan Bank (FHLB) of Indianapolis consist of
the following at June 30:
2000 1999
----------- -----------
Fixed-rate advance with a maturity of
November 2001 and a rate of 7.46% $ 5,000,000 $ --
Putable advances with maturities
June 2005 through August 2008
and rates ranging from 5.33% to 6.75% at
June 30, 2000, averaging 5.9% at June
30, 2000 and 5.22% at June 30, 1999 25,000,000 30,000,000
Adjustable-rate advances with maturities
July 2000 through December 2000 and
rates ranging from 6.87% to 6.90% at June
30, 2000, averaging 6.89% at June 30,
2000 and 5.01% at June 30, 1999 58,000,000 20,000,000
$2,000,000 adjustable-rate line of credit
with a maturity of September 2000 and rate
of 6.90% at June 30, 2000 803,024 --
----------- -----------
$88,803,024 $50,000,000
=========== ===========
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, 2000 are as follows:
2001 $58,803,024
2002 5,000,000
2003 --
2004 --
2005 10,000,000
Thereafter 15,000,000
-----------
$88,803,024
===========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued)
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 2000, 1999 and 1998.
In addition to FHLB stock, the advances are collateralized by approximately
$142,764,000 and $121,000,000 of first mortgage loans and securities at June 30,
2000 and 1999.
NOTE 8 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended June 30 consists
of the following:
2000 1999 1998
--------- --------- ---------
Current income tax expense $ 636,902 $ 199,758 $ 401,804
Deferred income tax expense (benefit) (32,902) (54,158) 51,451
--------- --------- ---------
Total expense attributable to operations 604,000 145,600 453,255
Tax benefit attributable to cumulative effect
of accounting change -- (47,600) --
Deferred expense allocated to other
comprehensive loss items:
Unrealized loss on transfer of securities
held to maturity to available for sale -- (13,635) --
Unrealized losses arising during the year (226,721) (375,222) (72,546)
Less reclassification adjustments for net
losses included in net income 9,658 175,195 68,642
--------- --------- ---------
Other comprehensive loss (217,063) (213,662) (3,904)
--------- --------- ---------
$ 386,937 $(115,662) $ 449,351
========= ========= =========
Deferred tax assets and liabilities at June 30 consist of the following:
2000 1999
-------- ---------
Deferred tax assets:
Accrued expenses $ 20,662 $ 70,963
Bad debt allowance 109,888 --
Management Recognition Plan 22,224 18,744
Loans marked-to-market 10,905 --
Unrealized loss on securities available for sale 428,081 211,018
Other 56,899 72,774
-------- ---------
648,659 373,499
Deferred tax liabilities
Loan fees 215,249 139,329
Bad debt allowance -- 58,019
FHLB stock dividend 49,116 49,116
Fixed assets 123,252 114,389
Loans marked-to-market -- 938
Mortgage servicing rights 78,439 79,070
-------- ---------
466,056 440,861
-------- ---------
Net deferred tax asset (liability) $182,603 $ (67,362)
======== =========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 8 - FEDERAL INCOME TAXES (Continued)
No valuation allowance was provided on deferred tax assets.
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,-------------
2000 1999 1998
-------- -------- --------
Statutory rate 34% 34% 34%
Tax expense at statutory rate $576,616 $140,765 $436,432
Stock compensation plans 18,420 35,717 16,982
Other 8,964 (30,882) (159)
-------- -------- --------
$604,000 $145,600 $453,255
======== ======== ========
Effective rate 36% 35% 35%
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, 2000 and 1999 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 tax is approximately $177,000 and is
payable over a six-year period beginning with the year ending June 30, 1999.
NOTE 9 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended June 30 are as follows:
2000 1999 1998
---------- ---------- ----------
Basic earnings per share
Net income available to common shareholders $1,091,929 $ 176,015 $ 830,368
---------- ---------- ----------
Weighted average common shares outstanding 2,364,352 2,399,997 2,370,243
---------- ---------- ----------
Basic earnings per share $ .46 $ .07 $ .35
========== ========== ==========
Diluted earnings per share
Net income available to common shareholders $1,091,929 $ 176,015 $ 830,368
---------- ---------- ----------
Weighted average common shares outstanding 2,364,352 2,399,997 2,370,243
Add: dilutive effects of assumed exercise of
stock options and unvested MRP's
Stock options 22,060 49,155 107,670
MRP shares 4,101 5,913 10,413
---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 2,390,513 2,455,065 2,488,326
---------- ---------- ----------
Diluted earnings per share$ .46 $ .07 $ .33
========== ========== ==========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 9 - EARNINGS PER SHARE (Continued)
Stock options for 46,313 and 67,995 shares of common stock were not
considered in the computation of diluted earnings per share for the years ended
June 30, 2000 and 1999 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:
2000 1999
----------- -----------
Commitments to make loans $13,974,000 $ 7,092,000
Unused lines of credit 21,412,000 14,392,000
Loans in process 11,025,000 9,001,000
Letters of credit 1,986,000 330,000
Approximately 47% and 80% of commitments to make loans and to fund loans in
process were made at fixed rates as of June 30, 2000 and 1999. Interest rates
for these fixed rate commitments were 8.00% to 10.00% and 6.625% to 9.125% as of
June 30, 2000 and 1999. Lines of credit are issued at current market rates.
The Company does not anticipate any losses as a result of these commitments.
Collateral obtained upon exercise of the commitment is determined using the
Bank's credit evaluation of the borrower, and may include real estate, business
assets and other items. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future cash commitments.
The Bank was a defendant under two legal proceedings alleging the
unauthorized practice of law and various violations of law. During fiscal 2000,
a final judgment in favor of the Bank was made in one case and an order granting
summary disposition to the Bank was made in the second case. A claim for appeal
has been made in each case. Management intends to continue to contest the
appeals 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 and 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 bi-weekly installments, ending in March of
2001. Approximately $84,000 is included in other liabilities at June 30, 2000
and represents the remaining amount to be paid under the agreement.
The Company has entered into employment agreements with six 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 employee's compensation payable in 24 equal monthly
installments, and continued participation in medical and dental plans the
employee was entitled to prior to the date of separation. There has been no
liability recorded for these contingent payments.
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
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
options granted in April of 1999 under the Stock Option Plan, 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. There has been no liability
recorded for this contingent expense.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company participated in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan. Effective February 1, 2000, the
Company withdrew its participation in the plan. Substantially all employees were
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. At the
date of withdrawal from the plan, no liability for contributions to the plan was
necessary and no contributions were required during the year ended June 30,
2000. For the year ended June 30, 1999 and 1998, the plan was overfunded and did
not require contributions or charges against income. 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.
The Company maintains a qualified 401(k) plan covering substantially all
employees. Employees who are 18 years and older and who have completed 1,000
hours of service in a 12 consecutive-month period are eligible. Employees may
elect to contribute to the plan from 1% to 15% of their salary subject to
statutory limitations. The Company makes matching contributions equal to 25% of
the first 3% of employee contributions. Although not required, the Company also
has the option to make an additional, nonelective contribution to the plan.
Beginning after 2 years of service, employees become vested in the Company's
contributions at the rate of 20% per year, with 100% vesting occurring after 6
years of service. The Company's contributions for 2000, 1999 and 1998 were
approximately $11,500, $10,600 and $9,600.
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 10-year period. The balance of the
loan was $727,296 at June 30, 2000. 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 fiscal 2000, 1999 and 1998, 24,300 shares of stock with an average
fair value of $7.56 per share in 2000, $9.66 per share in 1999 and $14.26 per
share in 1998 were committed to be released. Distributions of 6,201 and 2,244
shares were made to participants during the years ended June 30, 2000 and 1999.
ESOP compensation expense for the years ended June 30, 2000, 1999 and 1998 was
$183,768, $234,647 and $346,528. Shares held by the ESOP at June 30 are as
follows:
2000 1999
-------- ----------
Allocated to participants 113,033 94,934
Unallocated 115,434 139,734
-------- ----------
Total ESOP shares 228,467 234,668
-------- ----------
Fair value of unallocated shares $692,604 $1,406,073
======== ==========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
Stock Option Plan (SOP) and Management Recognition Plan (MRP) Employee and
director Stock Option Plans (SOPs) and officer and director Management
Recognition Plans (MRPs) were authorized by the shareholders at the October 25,
1995 annual meeting. The MRPs are restricted stock award plans. The employee SOP
and the officers' MRP are administered by a committee of directors of the
Company, while grants under the directors' SOP and the directors' MRP are
pursuant to formulas set forth in the plans. MRP shares are granted at the
closing market price of the Company's stock on the date of grant and vest in
five equal annual installments from the date of grant. SOP options are granted
at the average of the high and low market prices of the Company's stock on the
date of grant and vest in five equal annual installments and expire ten years
from the date of grant.
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, 1997 104,139 $7.03 139,650 $ 7.06 41,657 $6.73 72,320 $6.67
Granted September 2, 1997 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 July 30, 1998 37,495 13.25
Granted April 14, 1999 33,334 8.66
Granted May 6, 1999 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
Granted October 1, 1999 2,000 8.75
Exercised (3,330) 7.26
Forfeited (9,145) 10.86 (778) 6.67
------- ------- ------ ------
Balance outstanding June 30, 2000 104,139 $7.03 187,434 $ 9.05 41,657 $6.73 58,321 $6.67
======= ======= ====== ======
Options/shares exercisable
(vested) 78,106 83,607 33,800 50,553
====== ====== ====== ======
Options/shares available for
future grant 7 31,145 -- 38,885
====== ====== ====== ======
Subsequent to June 30, 2000, employee stock options totaling 61,550 with a
weighted-average exercise price of $12.06 were canceled under the provisions of
the SOP.
During 2000, 1999 and 1998, $119,000, $107,800 and $152,400 was charged to
compensation expense for the MRPs.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
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.
Years ended
------------June 30,---------
2000 1999 1998
---------- -------- --------
Net income as reported $ 1,091,92 $176,015 $830,368
Pro forma net income 1,047,473 113,933 716,649
Basic earnings per share as reported .46 .07 .35
Pro forma basic earnings per share .44 .05 .30
Diluted earnings per share as reported .46 .07 .33
Pro forma diluted earnings per share .44 .05 .29
Weighted-average fair value of options
granted during the year 1.32 1.39 2.07
The fair value of options granted during 2000, 1999 and 1998 is estimated
using the following weighted-average information: risk-free interest rate of
5.90%, 5.33% and 6.22%, expected life of 5 years, expected monthly volatility of
stock price of 9.1%, 8.7% and 7.1% and expected dividends of 2.7%, 2.7% and 1.9%
per year. At June 30, 2000, options outstanding were as follows:
Number of options 291,573
Range of exercise prices $6.63 to $13.25
Weighted-average exercise price $8.33
Weighted-average remaining option life 6.59 Years
For options now exercisable: number 161,713
Weighted-average exercise price $7.69
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.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
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.
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
------ ----- ------ ----- ------ -----
2000
Total capital (to risk weighted assets) $22.6 12.4% $14.6 8.0% $18.3 10.0%
Tier 1 capital (to risk weighted assets) 21.7 11.9 7.3 4.0 11.0 6.0
Tier 1 capital (to average total assets) 21.7 8.3 10.5 4.0 13.1 5.0
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
At June 30, 2000 and 1999, the Bank was categorized as well capitalized.
At the time of conversion to a stock association, the Bank established a
liquidation account with an initial balance of $11,150,000, which is equal to
its total net worth as of the date of the latest balance sheet appearing in the
final conversion prospectus. The liquidation account is maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the conversion. The liquidation account is reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends a bank can pay to its holding company. Under the most
restrictive of these dividend limitations, at June 30, 2000, approximately
$7,979,000 was available for the payment of dividends to the holding company
without prior regulatory approval.
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 14 - STOCK REPURCHASE PROGRAMS
During 2000 and 1999, the Company repurchased 80,000 and 46,000 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 $9.40 and $9.05 during 2000 and 1999 and
remain available for general corporate purposes, including issuance in
connection with stock-based compensation plans.
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,-------
2000 1999
----------- -----------
ASSETS
Cash and cash equivalents $ 52,697 $ 1,409,630
Securities available for sale 402,500 59,925
Loan receivable from Employee Stock Ownership Plan 727,296 852,176
Investment in subsidiary bank 20,976,390 20,204,318
Accrued interest receivable 32 4,249
Other assets 63,942 21,880
----------- -----------
Total assets $22,222,857 $22,552,178
=========== ===========
LIABILITIES
Other liabilities $ 31 $ 47
SHAREHOLDERS' EQUITY 22,222,826 22,552,131
----------- -----------
Total liabilities and shareholders' equity $22,222,857 $22,552,178
=========== ===========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME,
for the years ended:
-----------------June 30,-----------------
2000 1999 1998
--------- --------- --------
Interest and dividend income
Securities $ 45,833 $ 76,079 $150,447
Loan to Employee Stock Ownership Plan 56,954 64,794 72,605
Other interest-bearing deposits 14,514 47,064 18,595
Dividends from subsidiary bank 300,000 -- --
--------- --------- --------
417,301 187,937 241,647
Interest expense -- 3,719 99,850
--------- --------- --------
Net interest income 417,301 184,218 141,797
Other income
Net gain on trading securities -- -- 200,148
Net loss on securities available for sale (22,139) (332,714) (259,730)
--------- --------- --------
(22,139) (332,714) (59,582)
Operating expenses 98,672 95,806 152,108
--------- --------- --------
Income (loss) before federal income taxes
and equity in undistributed earnings of
subsidiary bank 296,490 (244,302) (69,893)
Federal income tax benefit (1,200) (83,000) (23,745)
--------- --------- --------
Income (loss) before equity in undistributed
earnings of subsidiary bank 297,690 (161,302) (46,148)
Equity in undistributed earnings
of subsidiary Bank 794,239 337,317 876,516
--------- --------- --------
Net income 1,091,929 176,015 830,368
Other comprehensive loss, net of tax:
Change in unrealized gain (loss) on
securities, net of reclassification effects (421,358) (414,755) (7,578)
--------- --------- --------
Comprehensive income (loss) $ 670,571 $(238,740) $822,790
========= ========= ========
Notes to Consolidated Financial Statements (Continued)
June 30, 2000, 1999 and 1998
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS,
for the years:
----------------- June 30,-----------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities
Net income $ 1,091,929 $ 176,015 $ 830,368
Adjustments to reconcile net income to
cash provided by operations
Equity in undistributed earnings of
subsidiary bank (794,239) (337,317) (876,516)
Trading securities:
Purchases -- -- (2,530,635)
Proceeds from sales -- -- 4,486,385
Net loss on sales of securities 22,139 332,714 59,582
Change in
Accrued interest receivable 4,217 (3,355) 228
Other assets (9,664) 140,712 (156,302)
Other liabilities (16) 12 (34,441)
----------- ----------- -----------
Net cash from operating activities 314,366 308,781 1,778,669
Cash flows from investing activities
Securities available for sale:
Purchases (500,000) (350,000) (1,904,438)
Proceeds from sales 40,000 2,706,107 59,399
Principal reduction on ESOP note receivable 124,880 116,508 108,698
Contribution to subsidiary Bank (33,535) (42,374) (38,426)
Net decrease in interest-bearing time deposits -- -- 99,000
Net cash from investing activities (368,655) 2,430,241 (1,675,767)
Cash flows from financing activities
Proceeds of loan from subsidiary Bank -- -- 2,450,000
Repayment of loan to subsidiary Bank -- (750,000) (1,700,000)
Dividends paid on common stock (574,877) (586,828) (540,685)
Repurchase of common stock (751,937) (416,312) (105,938)
Issuance of shares upon exercise of stock options 24,170 139,663 7,283
----------- ----------- -----------
Net cash from financing activities (1,302,644) (1,613,477) 110,660
----------- ----------- -----------
Net change in cash and cash equivalents (1,356,933) 1,125,545 213,562
Cash and cash equivalents at beginning of period 1,409,630 284,085 70,523
----------- ----------- -----------
Cash and cash equivalents at end of period $ 52,697 $ 1,409,630 $ 284,085
=========== =========== ===========
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, 2000, 1999 and 1998
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. Fair values
of securities 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:
2000 1999
------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and cash equivalents $ 3,734 3,734 $ 9,106 $ 9,106
Securities available for sale 42,602 42,602 42,272 42,272
Loans, net 210,717 208,088 145,206 144,517
Loans held for sale 573 581 2,381 2,407
Mortgage servicing rights 231 231 233 233
Federal Home Loan Bank stock 4,500 4,500 2,700 2,700
Accrued interest receivable 1,439 1,439 1,019 1,019
Financial liabilities
Deposits 155,840 155,464 132,401 132,496
Federal Home Loan Bank borrowings 88,803 87,777 50,000 50,019
Accrued interest payable 656 656 292 292
Advance payments by borrowers
for taxes and insurance 574 574 509 509
40