UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _____________ Commission File Number 0-25666 BANK WEST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-3203447 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2185 Three Mile Road, N.W., Grand Rapids, Michigan 49544 (Address of principal executive offices) Registrant's telephone number, including area code: (616) 785-3400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Shares of common stock, par value $.01 per share, outstanding as of November 12, 1996: 1,981,475. BANK WEST FINANCIAL CORPORATION FORM 10-Q Quarter Ended September 30, 1996 PART I - FINANCIAL INFORMATION Interim Financial Information required by Rule 10-01 of Regulation S-X and Item 303 of Regulation S-K is included in this Form 10-Q as referenced below: ITEM 1 - Financial Statements Consolidated Statements of Financial Condition - September 30, 1996 (unaudited) and June 30, 1996 Consolidated Statements of Income (unaudited) - For The Three Months Ended September 30, 1996 and 1995 Consolidated Statements of Cash Flows (unaudited) - For The Three Months Ended September 30, 1996 and 1995 Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings ITEM 2 - Changes in Securities ITEM 3 - Defaults upon Senior Securities ITEM 4 - Submission of Matters to a Vote of Security Holders ITEM 5 - Other Information ITEM 6 - Exhibits and Reports on Form 8-K SIGNATURES BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, June 30, 1996 1996 ------------- ------------- (Unaudited) ASSETS Cash and due from banks ............................ $ 851,190 $ 1,571,662 Interest-bearing deposits .......................... 3,660,080 5,122,427 ------------- ------------- Total cash and cash equivalents .............. 4,511,270 6,694,089 Interest-bearing time deposits ..................... 199,000 298,000 Securities available for sale (Note 6) ............. 25,686,242 22,779,280 Securities held to maturity (market value: $2,005,625 at September 30, 1996, $2,006,000 at June 30, 1996) (Note 6) .......... 2,003,049 2,004,288 Trading securities ................................. 1,481,663 708,438 Loans held for sale (Note 7) ...................... 3,413,269 4,297,092 Loans, net (Note 8) ................................ 96,588,808 95,737,191 Federal Home Loan Bank stock ....................... 1,475,000 1,475,000 Premises and equipment ............................. 3,109,896 3,106,972 Accrued interest receivable ........................ 608,509 632,043 Mortgage servicing rights .......................... 142,575 142,697 Other assets ....................................... 296,926 107,216 ------------- ------------- Total assets .................................. $ 139,516,207 $ 137,982,306 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits ........................................... $ 92,773,780 $ 91,028,072 Short-term FHLB borrowings ......................... 8,000,000 6,000,000 Long-term FHLB borrowings .......................... 13,000,000 13,000,000 Accrued interest payable ........................... 178,228 156,946 Advance payments by borrowers for taxes and insurance ......................... 226,680 459,391 Deferred federal income tax ........................ 248,315 225,760 Other liabilities .................................. 899,839 301,691 ------------- ------------- Total liabilities ........................... 115,326,842 111,171,860 ------------- ------------- BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued) September 30, June 30, 1996 1996 ------------- ------------- (Unaudited) Stockholders' Equity: Common stock, $.01 par value; 10,000,000 shares authorized; issued and outstanding 1,981,475 shares at September 30, 1996 and 2,199,575 shares at June 30, 1996 (Note 3) ..... 19,815 21,996 Additional paid-in-capital ......................... 13,964,510 16,542,107 Retained earnings, substantially restricted ........ 12,055,678 12,231,242 Net unrealized loss on securities available for sale, net of tax of $73,526 at September 30, 1996 and $106,834 at June 30, 1996 .................. (142,726) (207,387) Unallocated ESOP shares (Note 4) ................... (1,101,648) (1,134,048) Unearned Management Recognition Plan shares (Note 5) (606,264) (643,464) ------------- ------------- Total stockholders' equity .................. 24,189,365 26,810,446 ------------- ------------- Total liabilities and stockholders' equity .. $ 139,516,207 $ 137,982,306 ============= ============= See accompanying notes to consoldiated financial statements. BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, 1996 1995 ----------- ----------- Interest and dividend income Loans ................................. $ 1,946,286 $ 1,886,829 Securities ............................ 97,692 178,860 Mortgage-backed securities ............ 324,768 333,569 Other interest-bearing deposits ....... 75,709 100,489 Dividends ............................. 29,105 40,799 ----------- ----------- 2,473,560 2,540,546 ----------- ----------- Interest expense Deposits .............................. 1,165,740 1,153,227 Short-term FHLB borrowings ............ 81,160 106,991 Long-term FHLB borrowings ............. 181,889 269,304 ----------- ----------- 1,428,789 1,529,522 ----------- ----------- Net interest income ........................... 1,044,771 1,011,024 Provision for loan losses ..................... 15,000 7,000 ----------- ----------- Net interest income after provision for loan losses ........................... 1,029,771 1,004,024 ----------- ----------- Other income Gain (loss) on sale of securities ..... (1,870) 3,500 Gain on trading securities ............ 191,525 -- Gain on sale of loans ................. 134,671 121,742 Fees and service charges .............. 49,016 39,256 Miscellaneous income .................. 12,385 3,486 ----------- ----------- 385,727 167,984 ----------- ----------- BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited) Three Months Ended September 30, 1996 1995 ----------- ----------- Other expenses Compensation and benefits ............. 533,831 448,644 Professional fees ..................... 44,030 42,112 Federal Deposit Insurance ............. 51,002 48,184 FDIC Special Assessment (Note 9) ...... 553,000 -- Occupancy ............................. 67,045 38,471 Furniture, fixtures and equipment ..... 31,391 29,943 Data processing ....................... 38,966 36,018 Advertising ........................... 21,028 13,429 State taxes ........................... 6,000 15,000 Miscellaneous ......................... 118,319 108,235 ----------- ----------- 1,464,612 780,036 ----------- ----------- Income (loss) before federal income tax expense (49,114) 391,972 Federal income tax expense (benefit) .......... (17,600) 133,175 ----------- ----------- Net income (loss) ............................. ($ 31,514) $ 258,797 =========== =========== Earnings (loss) per share (Note 2) ............ $ (.02) $ .12 =========== =========== Dividends per share ........................... $ .07 $ .07 =========== =========== See accompanying notes to consolidated financial statements. BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30, 1996 1995 ----------- ----------- Cash flows from operating activities Net income (loss) ........................................ ($ 31,514) $ 258,797 Adjustments to reconcile net income (loss) to net cash from operating activities Origination and purchase of loans for sale .......... (8,419,487) (8,158,929) Proceeds from sale of mortgage loans ................ 9,437,981 8,347,225 Net (gain) on sales of: Loans ............................................ (134,671) (121,742) Securities ....................................... (189,655) (3,500) Depreciation ........................................ 44,650 42,250 Amortization of premiums, net ....................... 5,527 27,003 ESOP expense ........................................ 45,563 41,006 MRP expense ......................................... 37,200 -- Provision for loan losses ........................... 15,000 7,000 Change in: Deferred loan fees ............................... 3,634 37,214 Other assets ..................................... (166,054) (192,538) Other liabilities ................................ 375,963 (354,662) ----------- ----------- Net cash from operating activities .......... 1,024,137 (70,876) ----------- ----------- Cash flows from investing activities Increase in interest-bearing time deposits ............... 99,000 -- Purchases of securities available for sale ............... (4,477,770) (4,079,736) Proceeds from sale of securities available for sale ...... 1,495,001 701,750 Proceeds from maturity or call of securities ............. 0 2,000,000 Purchase of equity securities - trading .................. (1,549,350) -- Proceeds from sale of equity securities - trading ........ 967,650 -- Loan originations, net of repayments ..................... (846,501) 452,790 Loans purchased .......................................... (23,750) (498,850) Principal payments on mortgage-backed securities and CMO's 167,621 843,981 Property and equipment expenditures ...................... (47,574) (107,127) ----------- ----------- Net cash from investing activities .......... (4,215,673) (687,192) ----------- ----------- BANK WEST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Three Months Ended September 30, 1996 1995 ----------- ----------- Cash flows from financing activities Increase in FHLB advances ................................ 733,821 1,651,644 Repayment of long-term FHLB borrowings ................... -- (3,000,000) Increase in deposits ..................................... 3,011,887 888,730 Dividends paid on common stock ........................... (144,050) (162,006) Repurchase of common stock ............................... (2,592,941) -- Additional conversion costs .............................. -- (3,107) ----------- ----------- Net cash from financing activities .......... 1,008,717 (624,739) ----------- ----------- Net change in cash and cash equivalents .......................... (2,182,819) (1,382,807) Cash and cash equivalents at beginning of period ................. 6,694,089 4,595,231 ----------- ----------- Cash and cash equivalents at end of period ....................... $ 4,511,270 $ 3,212,424 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for Interest .......................................... $ 1,407,507 $ 1,572,897 Income taxes ...................................... -- 10,000 See accompanying notes to consolidated financial statements. BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended September 30, 1996 (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements consist of the accounts of Bank West Financial Corporation (the Company) and its wholly owned subsidiary, Bank West, F.S.B. (the Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three months ended September 30, 1996 are not necessarily indicative of the results to be expected for the year ending June 30, 1997. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto, for the fiscal year ended June 30, 1996, included in the Company's 1996 Annual Report. NOTE 2 - EARNINGS PER SHARE Earnings per share is based on the weighted average number of outstanding common shares and common stock equivalents which would arise from the exercise of stock options and the vesting of Management Recognition Plan (MRP) shares. Employee Stock Ownership Plan (ESOP) shares are considered outstanding for earnings per share calculations as they are committed to be released; unallocated shares are not considered outstanding. Common stock equivalents associated with the stock options and MRP shares were not material to the computation of earnings per share for the three months ended September 30, 1996 and 1995, respectively. The weighted average number of shares outstanding for the three months ended September 30, 1996 and 1995 was 1,921,875 and 2,158,444, respectively. NOTE 3 - ADOPTION OF PLAN OF CONVERSION On October 24, 1994, the Board of Directors of the Bank, subject to regulatory approval and approval by the members of the Bank, unanimously adopted a Plan of Conversion to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank with the concurrent formation of a holding company (the "Conversion"). On December 13, 1994, the Bank incorporated the Company in the state of Michigan to facilitate the Conversion of the Bank from mutual to stock form. Proceeds of $18,515,000 were received by the Company from the sale of 2,314,375 shares of common stock. Conversion costs totalling $694,236 were deducted from the proceeds of the shares sold in the Conversion. The Company used 50% of the net proceeds to purchase all of the common stock issued by the Bank. The Bank is now a wholly-owned subsidiary of the Company. BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three Months Ended September 30, 1996 (Unaudited) NOTE 4 - EMPLOYEE STOCK OWNERSHIP PLAN The Company has established an Employee Stock Ownership Plan (ESOP) for the benefit of employees who have completed at least twelve consecutive months of service and have been credited with at least 500 hours of service with the Bank. The Company has received a favorable determination letter from the Internal Revenue Service ("IRS") that the ESOP is a tax-qualified plan. To fund the ESOP, $1,296,048 was borrowed from the Company for the purpose of purchasing 162,006 shares of common stock at $8.00 per share. Principal and interest payments on the loan are due in quarterly installments, with the final payment of principal and accrued interest being due and payable at maturity, which is June 30, 2005. Interest is payable during the term of the loan at a fixed rate of 7.0%. The loan is collateralized by the shares of the Company's common stock purchased with the proceeds. As the Bank periodically makes contributions to the ESOP to repay the loan, shares are allocated among participants on the basis of total compensation, as defined. ESOP expense of $45,563 and $41,006 was recorded for the three months ended September 30, 1996 and 1995, respectively. NOTE 5 - STOCK BASED COMPENSATION PLANS An employee stock option plan and a directors' stock option plan (SOPs) and an officers' and a directors' management recognition plan (MRPs) were authorized by the shareholders at the October 25, 1995 annual meeting. The employee stock option plan and the officers' MRP are administered by a committee of non-employee directors of the Company, while grants under the directors' stock option plan and the directors' MRP are pursuant to formulas set forth in the plans. Total shares made available under the SOPs and MRPs were 231,437 and 92,575, respectively. The committee has awarded under the SOPs options to purchase 91,173 shares of common stock at exercise prices between $9.9375 and $11.00 per share, which represent the average selling price of the Company's stock on the dates of the awards. At September 30, 1996, there were 140,264 option shares reserved for future grants. As of September 30, 1996, no options have been exercised or canceled. No compensation expense was recognized in connection with the issuance of the options. In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). The Statement establishes a fair value based method of accounting for employee stock options and similar equity instruments, such as warrants, and encourages all companies to adopt that method of accounting for their employee stock compensation plans. However, SFAS No. 123 allows companies to continue measuring compensation cost for such plans using accounting guidance in place prior to SFAS No.123. Companies that elect to remain with the former method of accounting must make pro-forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. This Statement is effective for the Company at the beginning of its fiscal year ending June 30, 1997. Management has concluded that the Company will not adopt the fair value accounting provisions of SFAS No. 123 and will continue to apply its current method of accounting. Accordingly, adoption of SFAS No. 123 will have no impact on the Company's consolidated financial position or results of operations. BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three Months Ended September 30, 1996 (Unaudited) NOTE 5 - STOCK BASED COMPENSATION PLANS (Continued) On November 13, 1995, the Company repurchased 4% of its outstanding shares and placed them in a trust for the exclusive use of the MRPs. As of September 30, 1996, 74,240 shares have been awarded under the MRPs. MRP awards vest in five equal annual installments, with the first award vesting on October 25, 1996. Compensation expense for the MRPs is recognized on a pro-rata basis over the vesting period of the awards. During the three months ended September 30, 1996, $37,200 was charged to compensation expense for the MRPs. The unearned compensation value of the MRPs is shown as a reduction to stockholders' equity in the accompanying consolidated statements of financial condition. NOTE 6 - SECURITIES The amortized cost and estimated fair values of securities at September 30, 1996 and June 30, 1996 are as follows: Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ------- -------- ----------- September 30, 1996 (unaudited) U.S. agencies $ 3,997,804 $ 5,313 $ 48,252 $ 3,954,865 Mortgage-backed securities 2,190,066 8,678 18,209 2,180,535 Collateralized mortgage obligations 19,714,622 9,898 173,678 19,550,842 ----------- ------- -------- ----------- $25,902,492 $23,889 $240,139 $25,686,242 =========== ======= ======== =========== June 30, 1996 U.S. agencies $ 4,997,678 $ 7,500 $ 60,110 $ 4,945,068 Corporate bonds 496,870 - 4,271 492,599 Mortgage-backed securities 2,330,061 3,524 26,089 2,307,496 Collateralized mortgage obligations 15,268,892 302 235,077 15,034,117 ----------- ------- -------- ----------- $23,093,501 $11,326 $325,547 $22,779,280 =========== ======= ======== =========== Held to Maturity September 30, 1996 (unaudited) U.S. agencies $2,003,049 $ 3,544 $ 968 $ 2,005,625 =========== ======= ======== =========== June 30, 1996 U.S. agencies $2,004,288 $ 3,998 $ 2,286 $ 2,006,000 =========== ======= ======== =========== BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three Months Ended September 30, 1996 (Unaudited) NOTE 7 - SECONDARY MARKET MORTGAGE ACTIVITIES The following summarizes the Company's secondary market mortgage activities, which consist solely of one- to four-family real estate loans: Three Months Ended September 30, 1996 1995 ---------- ---------- Loans held for sale - beginning of period $4,297,092 $2,746,019 Activity during the periods: Loans originated and purchased for sale 8,419,487 8,158,929 Proceeds from sale of loans originated and purchased for sale (9,437,981) (8,347,225) Gain on sale of loans 134,671 121,742 ---------- ---------- Loans held for sale - end of period $3,413,269 $2,679,465 ========== ========== The unpaid principal balance of mortgage loans serviced for others amounted to $28.2 million and $28.6 million at September 30, 1996 and June 30, 1996, respectively. Custodial escrow balances maintained in connection with the foregoing loans serviced for others were $67,184 and $135,011 at September 30, 1996 and June 30, 1996, respectively. BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three Months Ended September 30, 1996 (Unaudited) NOTE 8 - LOANS Loans are classified as follows: September 30, June 30, 1996 1996 ------------ ------------ Real estate loans: One-to four-family residential - fixed rate $ 19,618,218 $ 20,351,715 One-to four-family residential - balloon 12,523,456 12,841,337 One-to four-family residential - adjustable 47,132,107 47,544,192 Construction 15,409,764 14,073,497 Commercial mortgages 1,486,741 1,193,464 Home equity lines of credit 2,860,376 2,214,227 Second mortgages 2,171,975 1,927,282 ------------ ------------ Total mortgage loans 101,202,637 100,145,714 Consumer loans 750,919 622,353 Commercial non-mortgage 1,064,468 1,010,076 ------------ ------------ Total 103,018,024 101,778,143 Less: Loans in process 6,204,604 5,827,705 Deferred fees and costs 43,750 47,385 Allowance for loan losses 180,862 165,862 ------------ ------------ $ 96,588,808 $ 95,737,191 ============ ============ BANK WEST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Three Months Ended September 30, 1996 (Unaudited) NOTE 9 - FDIC SPECIAL ASSESSMENT On September 30, 1996, as part of the omnibus appropriations package signed by President Clinton, the government mandated a special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The one-time, special SAIF assessment amounted to $.657 for every $100 of SAIF-insured deposits as of March 31, 1995. The FDIC notified the Bank that the Bank's special assessment was $553,000, which after taxes reduced the Company's net income by $365,000 or $0.19 per share in the quarter ended September 30, 1996. The Bank's deposit premiums, which are currently $.23 for every $100 of assessable deposits, will be reduced to $.064 for every $100 of assessable deposits beginning January 1, 1997. Based on the Bank's deposits at September 30, 1996, the premium reduction should result in a pre-tax cost savings of approximately $154,000 per year for the Bank, or approximately $.05 per share after taxes. NOTE 10 - SUBSEQUENT EVENTS On October 21, 1996, the Company declared a quarterly dividend of $.07 per share payable November 15, 1996 to shareholders of record on November 4, 1996. The Board of Directors also approved the repurchase of up to 198,000 shares or 10% of its outstanding common stock. The repurchase of common stock is subject to the prior approval of the Company's principal federal regulator, the Office of Thrift Supervision, which has not yet been received. BANK WEST FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion compares the financial condition of Bank West Financial Corporation and its wholly owned subsidiary, Bank West, F.S.B., at September 30, 1996 and June 30, 1996 and the results of operations for the three months ended September 30, 1996 with the same period in 1995. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included herein. FINANCIAL CONDITION Total assets increased by $1.5 million or 1.1% from $138.0 million at June 30, 1996 to $139.5 million at September 30, 1996. The increase was primarily attributable to the purchase of additional collateralized mortgage obligations with liquidity generated from deposit growth and additional FHLB borrowings. The increase was partially offset by approximately $2.6 million as cash was utilized to repurchase ten percent of the Company's outstanding common stock during the quarter. 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 and $8.3 million in the three months ended September 30, 1996 and 1995, respectively. Loans held for sale amounted to $3.4 million and $2.7 million at September 30, 1996 and 1995, respectively. The dollar amount of loans sold have increased in the most recent three months due to the Bank increasing the amount of loans purchased from correspondent lending relationships and the hiring of additional mortgage loan officers to increase retail loan volume. The Bank intends to continue to expand its correspondent lending relationships and to hire additional mortgage loan officers. The majority of loans originated and purchased in the current fiscal year have been 30-year fixed-rate loans. The Bank has sold the majority of these loans as one way to increase the ratio of its interest-sensitive assets to its interest-sensitive liabilities. Mortgage-backed securities (including collateralized mortgage obligations) have increased from $17.3 million at June 30, 1996 to $21.7 million at September 30, 1996. As permitted by the Financial Accounting Standards Board (FASB), the Bank made a one-time reclassification of all of its mortgage-backed securities and collateralized mortgage obligations on November 20, 1995. At September 30, 1996, the unrealized loss on securities (including mortgage-backed securities and collateralized mortgage obligations) classified as available for sale totalled $143,000 net of federal income taxes and is shown as a reduction in stockholders' equity. The Bank's nonperforming assets totalled $143,000 or .10% of total assets at September 30, 1996. The Bank's low nonperforming assets are primarily due to the Bank's conservative underwriting criteria. At September 30, 1996, $94.7 million or 91.9% 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 69.2% of total assets. During the three months ended September 30, 1996, there were no net charge-offs. The Company has recently expanded its loan product line to include additional consumer loan products and small business loans. The Company expects these activities to improve its net interest margin and make the Bank more competitive in the market. As of September 30, 1996, the outstanding balances of consumer and small business loans were $.8 million and $2.6 million, respectively. BANK WEST FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total deposits increased by $1.7 million or 1.9% from June 30, 1996 to September 30, 1996 primarily due to an increase in certificates of deposit of $1.5 million. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. Based on its experience, the Bank believes that its passbook savings, statement savings, money market accounts, NOW and demand 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, has 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 began using FHLB advances. Short-term FHLB advances have generally been used to fund the Bank's mortgage banking activities, loan and investment securities growth. Short-term FHLB advances increased from $6.0 million at June 30, 1996 to $8.0 million at September 30, 1996. Stockholders' equity decreased from $26.8 million at June 30, 1996 to $24.2 million at September 30, 1996. The decrease was primarily due to $2.6 million being utilized to repurchase ten percent of the Company's outstanding common stock during the September 30, 1996 quarter. RESULTS OF OPERATIONS Net Income. Net income decreased by $290,000 or 112.0% in the quarter ended September 30, 1996 to a loss of $32,000 from net income of $259,000 in the comparable 1995 period. The decrease was primarily due to the FDIC special assessment which had an after tax impact of $365,000 (See Note 9 for further discussion). Excluding the impact of the FDIC special assessment on net income, net income actually increased by $75,000 or 29.0% due to an increase in net interest income and other income. These amounts were partially offset by increases in other expenses. Net Interest Income. Net interest income increased by $34,000 or 3.4% in the quarter ended September 30, 1996 over the comparable 1995 period. Net interest income increased for the quarter due to an increase in the average interest rate spread, which increased to 2.32% in the quarter ended September 30, 1996 from 1.97% in the comparable 1995 quarter. The increased spread was primarily due to a decrease in the average cost of funds from 5.54% in the September 30, 1995 quarter to 5.13% in the September 30, 1996 quarter, reflecting the continued emphasis on attracting lower costing core deposits. The positive impact of the lower cost of funds was partially offset by a decrease in average interest-earning assets by $2.6 million or 1.9%, as excess cash flow was utilized to repurchase ten percent of the Company's outstanding common stock and to pay-down higher costing FHLB borrowings. BANK WEST FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Provision for Loan Losses. The provision for loan losses increased by $8,000 or 114.3% in the three months ended September 30, 1996 over the comparable 1995 period. The allowance for loan losses totalled $181,000 or .18% of the total loan portfolio at September 30, 1996. However, the allowance for loan losses represented 126.6% of total non-performing loans at such date. Because of the stability of the loan portfolio's credit quality, management budgets a provision for the entire year, and, on a quarterly basis, reviews this amount to determine if any change in the amount of the provision is necessary. For fiscal 1997, management increased the amount of the provision to $15,000 in the first quarter and anticipates providing additional reserves relative to the growth in the small business and consumer loan portfolios. Management of the Company believes that the allowance is adequate to cover losses that are probable and reasonably estimable based on past loss experience, general economic conditions, information about specific borrower situations, and other factors and estimates which are subject to change over time. Other Income. Total other income increased by $218,000 or 129.8% in the three months ended September 30, 1996 from the comparable prior period. The increase was primarily due to a $192,000 gain on trading securities achieved in the three months ended September 30, 1996, an increase in the gain on sale of loans of $12,000 or 9.8% and an increase in fees and service charges of $10,000 or 25.6%. The higher gains on the sale of loans and the increases in fees and service charges are primarily due to the Bank increasing the volume of loans purchased from correspondent lending relationships and originated at the retail level. The Bank intends to continue to expand its correspondent lending relationships and hire additional mortgage loan officers. The amount of loans sold in the quarter ended September 30, 1996 totalled $9.4 million, of which $6.9 million were originated and $2.5 million were purchased from correspondents. Other Expenses. Total other expenses increased by $685,000 or 87.8% in the quarter ended September 30, 1996 over the comparable 1995 period. The increase was primarily due to a $553,000 FDIC special assessment to recapitalize the SAIF insurance fund (See Note 9 of Notes to Consolidated Financial Statements). In addition, compensation and benefits expense increased by $85,000 or 18.9% as a result of the hiring of additional staff to expand the Bank's core business activities of mortgage, consumer and small business lending. Occupancy expense also increased by $29,000 or 76.3% due to the opening of the new corporate office/branch facility and higher depreciation expense associated with the renovation of the previous main office building. The other categories of other expenses did not significantly change in the September 30, 1996 quarter. Federal Income Tax Expense. Federal income tax expense decreased by $151,000 or 113.5% in the quarter ended September 30, 1996 from the comparable 1995 period. The decrease was due to a decrease in pre-tax income. LIQUIDITY Bank West's principal sources of funds are deposits, principal and interest payments on loans, sales of loans, maturities of securities, and FHLB advances. While scheduled loan repayments and maturing investments are readily predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions and competition. Bank West uses its capital resources principally to fund mortgage loan commitments, maturing certificates of deposit and savings withdrawals, and provide for its foreseeable short and long-term liquidity needs. BANK WEST FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Bank West is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings institution maintain liquid assets of not less than 5% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. At September 30, 1996, Bank West's liquidity was 12.1% or $6.9 million in excess of the minimum OTS requirement. CAPITAL RESOURCES Savings institutions insured by the Federal Deposit Insurance Corporation and regulated by the OTS are required to meet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance must submit a recapitalization or merger plan. At September 30, 1996, under these capital requirements, the Bank had: Actual Requirement Excess ------ ----------- ------ Tangible capital ratio 14.8% 1.5% 13.3% Leverage capital ratio 14.8 3.0 11.8 Risk-based capital ratio 30.2 8.0 22.2 At June 30, 1996, under these capital requirements, the Bank had: Actual Requirement Excess ------ ----------- ------ Tangible capital ratio 15.4% 1.5% 13.9% Leverage capital ratio 15.4 3.0 12.4 Risk-based capital ratio 31.4 8.0 23.4 NEW ACCOUNTING STANDARDS In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. The Statement establishes accounting measurement, recognition and reporting standards for impaired loans. SFAS No. 114 was amended in October 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 amended SFAS No. 114 primarily to remove its income recognition requirements and add some disclosure requirements. The adoption of SFAS No. 114, as amended by SFAS No. 118, has not been material to the Company's consolidated financial condition or results of operations. BANK WEST FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," will require the Company to periodically consider whether an impairment loss should be recognized on long-lived assets and other certain intangible assets based on an estimate of future cash flows. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995, and earlier adoption is encouraged. Adoption of this Statement is not expected to have a material impact on the Company's consolidated financial condition or results of operations. BANK WEST FINANCIAL CORPORATION Form 10-Q Quarter Ended September 30, 1996 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There are no matters required to be reported under this item. Item 2 - Changes in Securities: There are no matters required to be reported under this item. Item 3 - Defaults Upon Senior Securities: There are no matters required to be reported under this item. Item 4 - Submission of Matters to a Vote of Security-Holders: At the Annual Meeting of Stockholders held on October 23, 1996, the stockholders of the Company approved each of the proposals as set forth below. The number of shares present at the Annual Meeting in person or by proxy was 1,734,455. The matters voted upon together with the applicable voting results were as follows: FOR WITHHOLD --- -------- 1. Election of Directors Richard L. Bishop 1,727,955 6,500 Thomas D. DeYoung 1,724,147 10,308 Jacob Haisma 1,723,897 10,558 FOR AGAINST ABSTAIN --- ------- ------- 2. Ratification of appointment of Crowe Chizek and Company as independent auditors. 1,722,125 400 11,930 Item 5 - Other Information: There are no matters required to be reported under this item. Item 6 - Exhibits and Reports on Form 8-K: (a) Exhibits: The following exhibit is filed herewith: Exhibit No. Description ----------- ----------- 27.1 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANK WEST FINANCIAL CORPORATION Registrant Date: November 12, 1996 /s/ Paul W. Sydloski ----------------------- --------------------- Paul W. Sydloski, President and Chief Executive Officer (Duly Authorized Officer) Date: November 12, 1996 /s/ Kevin A. Twardy ------------------------ --------------------- Kevin A. Twardy, Vice President and Chief Financial Officer (Principal Financial Officer)