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 December 31, 1997
[ ] 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 February 12,
1998: 2,623,629.
BANK WEST FINANCIAL CORPORATION
FORM 10-Q
Quarter Ended December 31, 1997
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 Balance Sheets -
December 31, 1997 (unaudited) and June 30, 1997 . . . . . . .
Consolidated Statements of Income (unaudited) -
For The Three and Six Months Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows (unaudited) -
For The Six Months Ended December 31, 1997 and 1996. . . . . .
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 and Use of Proceeds . . . . . . . . . . . . . . .
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 BALANCE SHEETS
December 31, June 30,
1997 1997
------------- --------------
(Unaudited)
ASSETS
Cash and due from banks $ 2,014,947 $ 1,722,734
Interest-bearing deposits 3,971,211 1,950,522
------------- -------------
Total cash and cash equivalents 5,986,158 3,673,256
Interest-bearing time deposits 99,000 99,000
Securities available for sale (Note 6) 30,030,356 25,550,974
Securities held to maturity
(fair value: $5,906,788 at December 31, 1997, 5,880,551 4,003,575
$4,001,875 at June 30, 1997) (Note 6)
Trading securities 2,240,003 2,921,251
Loans held for sale (Note 7) 2,375,882 2,231,151
Loans, net (Note 8) 116,336,613 111,530,092
Federal Home Loan Bank stock 1,950,000 1,550,000
Premises and equipment 3,171,082 3,128,158
Accrued interest receivable 791,122 762,990
Mortgage servicing rights 254,224 148,569
Other assets 462,389 76,175
------------- -------------
Total assets $ 169,577,380 $ 155,675,191
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 109,548,230 $ 102,862,152
Federal Home Loan Bank borrowings 36,000,000 29,000,000
Accrued interest payable 277,754 202,217
Advance payments by borrowers
for taxes and insurance 187,680 491,710
Deferred federal income tax 257,758 287,635
Other liabilities 145,716 239,168
------------- -------------
Total liabilities 146,417,138 133,082,882
------------- -------------
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1997 1997
------------- --------------
(Unaudited)
Stockholders' Equity:
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,622,629
issued at December 31, 1997
and 1,753,475 issued at June 30, 1997 (Note 3) 26,226 17,535
Additional paid-in-capital 11,438,649 11,432,798
Retained earnings, substantially restricted 12,933,754 12,647,112
Net unrealized gain on securities available for
sale, net of tax of $76,669 at December 31, 1997
and $6,548 at June 30, 1997 148,829 12,710
Unallocated ESOP shares (Note 4) (939,648) (1,004,448)
Unearned Management Recognition Plan shares (Note 5) (447,568) (513,398)
------------- -------------
Total stockholders' equity 23,160,242 22,592,309
------------- -------------
Total liabilities and stockholders' equity $ 169,577,380 $ 155,675,191
============= =============
See accompanying notes to consoldiated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest and dividend income
Loans $ 2,441,005 $ 2,003,201 $ 4,817,396 $ 3,949,487
Securities 598,220 483,185 1,128,636 905,645
Other interest-bearing deposits 35,962 46,882 64,158 122,591
Dividends on FHLB stock 38,532 29,105 75,069 58,210
----------- ----------- ----------- -----------
3,113,719 2,562,373 6,085,259 5,035,933
----------- ----------- ----------- -----------
Interest expense
Deposits 1,394,933 1,213,173 2,730,493 2,378,913
FHLB borrowings 506,366 296,791 996,438 559,840
----------- ----------- ----------- -----------
1,901,299 1,509,964 3,726,931 2,938,753
----------- ----------- ----------- -----------
Net interest income 1,212,420 1,052,409 2,358,328 2,097,180
Provision for loan losses 18,000 15,000 36,000 30,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 1,194,420 1,037,409 2,322,328 2,067,180
----------- ----------- ----------- -----------
Other income
Gain (loss) on sale of securities 5,490 -- 12,595 (1,870)
Gain (loss) on trading securities (390,742) 287,546 169,302 479,071
Gain on sale of loans 158,759 141,547 318,612 276,218
Fees and service charges 78,903 87,867 168,544 148,190
Miscellaneous income 4,113 1,426 5,616 2,504
----------- ----------- ----------- -----------
(143,477) 518,386 674,669 904,113
----------- ----------- ----------- -----------
Other expenses
Compensation and benefits 684,987 567,830 1,343,541 1,101,661
Professional fees 84,165 59,968 162,268 103,998
Federal Deposit Insurance 15,943 37,551 31,480 88,553
FDIC Special Assessment (Note 9) -- -- -- 553,000
Occupancy 73,672 56,844 137,324 123,889
Furniture, fixtures and equipment 35,016 33,858 68,762 65,249
Data processing 49,291 47,081 92,628 86,047
Advertising 29,926 42,053 55,616 63,081
State taxes 18,500 21,000 47,978 27,000
Miscellaneous 150,673 133,430 251,969 251,749
----------- ----------- ----------- -----------
1,142,173 999,615 2,191,566 2,464,227
----------- ----------- ----------- -----------
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Income (loss) before federal income tax expense (91,230) 556,180 805,431 507,066
Federal income tax expense (benefit) (31,040) 190,300 273,260 172,700
----------- ----------- ----------- -----------
Net income (loss) ($ 60,190) $ 365,880 $ 532,171 $ 334,366
=========== =========== =========== ===========
Basic Earnings (loss) per share (Note 2) $ (.03) $ .14 $ .23 $ .12
=========== =========== =========== ===========
Diluted Earnings (loss) per share (Note 2) $ (.02) $ .14 $ .21 $ .12
=========== =========== =========== ===========
Dividends per share $ .05 $ .05 $ .10 $ .10
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1997 1996
------------ ------------
Cash flows from operating activities
Net income $ 532,171 $ 334,366
Adjustments to reconcile net income to
net cash from operating activities
Origination and purchase of loans for sale (21,362,888) (17,961,331)
Proceeds from sale of mortgage loans 21,536,769 19,164,556
Purchase of trading securities (2,230,635) (2,908,400)
Proceeds from sale of trading securities 3,081,185 2,237,771
Net (gain) on sales of:
Loans (318,612) (276,218)
Securities (181,897) (477,201)
Real estate owned (2,241) --
Depreciation 98,228 91,710
Amortization of premiums, net 22,554 8,063
ESOP expense 174,909 88,594
MRP expense 76,200 75,400
Provision for loan losses 36,000 30,000
Change in:
Deferred loan fees (94,824) 25,278
Other assets (539,913) (22,738)
Other liabilities (421,945) (174,931)
------------ ------------
Net cash from operating activities 405,061 234,919
------------ ------------
Cash flows from investing activities
Increase in interest-bearing time deposits -- 199,000
Purchases of securities available for sale (15,191,249) (5,685,895)
Purchases of securities held to maturity (2,879,260) --
Proceeds from sale of securities 10,575,313 1,495,001
Proceeds from maturity or call of securities 1,000,000 --
Loan originations, net of repayments (3,103,222) (2,294,118)
Loans purchased (1,644,475) (311,750)
Principal payments on mortgage-collateralized securities 335,121 307,269
Purchase of FHLB stock (400,000) --
Proceeds from sale of real estate owned 22,153 --
Property and equipment expenditures (141,152) (170,552)
------------ ------------
Net cash used in investing activities (11,426,771) (6,461,045)
------------ ------------
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1997 1996
------------ ------------
Cash flows from financing activities
Proceeds from FHLB borrowings 23,000,000 6,780,390
Repayment of FHLB borrowings (16,000,000) (5,000,000)
Increase in deposits 6,686,078 7,684,919
Dividends paid on common stock (245,529) (273,116)
Repurchase of common stock (105,937) (4,402,941)
------------ ------------
Net cash from financing activities 13,334,612 4,789,252
------------ ------------
Net change in cash and cash equivalents 2,312,902 (1,436,874)
Cash and cash equivalents at beginning of period 3,673,256 6,694,089
------------ ------------
Cash and cash equivalents at end of period $5,986,158 $5,257,215
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $3,651,394 $2,906,145
Income taxes 528,119 171,050
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements consist of the accounts of
Bank West Financial Corporation (the Company), its wholly owned subsidiary, Bank
West (the Bank) and Sunrise Mortgage Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have been
included.
The results of operations for the three and six months ended December 31, 1997
are not necessarily indicative of the results to be expected for the year ending
June 30, 1998. 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, 1997, included in the
Company's 1997 Annual Report.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted earnings per share are computed under a new accounting
standard effective for the quarter ended December 31, 1997. All earnings per
share ("EPS") data for prior periods have been restated to be comparable. Basic
earnings per share is calculated by dividing net income by the weighted average
number of shares outstanding during the period, including shares that have been
released or committed to be released by the Employee Stock Ownership Plan (ESOP)
and fully-vested Management Recognition Plan (MRP) shares. Diluted earnings per
share is computed as net income divided by the weighted average number of
outstanding common shares used to derive Basic EPS, plus the dilutive effect of
common stock equivalents relating to outstanding stock options and unvested MRP
shares, as determined under the treasury stock method. All EPS data and weighted
average share amounts have been adjusted retroactively for the three-for-two
stock split on December 3, 1997.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 2 - EARNINGS PER SHARE (Continued)
A reconciliation of the numerators and denominators of Basic EPS and Diluted EPS
for the three and six months ended December 31, 1997 and 1996 are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
----------- ----------- ---------- -----------
Earnings Per Share
Net Income ($ 60,190) $ 365,880 $ 532,171 $ 334,366
=========== =========== ========== ===========
Weighted average common shares
outstanding 2,348,025 2,606,687 2,347237 2,744,586
=========== =========== ========== ===========
Earnings Per Share ($ .03) $ .14 $ .23 $ .12
=========== =========== ========== ===========
Earnings Per Share Assuming Dilution
Net Income ($ 60,190) $ 365,880 $ 532,171 $ 334,366
=========== =========== ========== ===========
Weighted average common shares
outstanding 2,348,025 2,606,687 2,347,237 2,744,586
Add: dilutive effects of assumed
exercise of stock options and
unvested MRP's
Stock options 292,322 5,871 202,756 8,486
MRP shares 35,994 5,175 31,083 9,536
----------- ----------- ---------- -----------
Weighted average common and dilutive
potential common shares outstanding 2,676,341 2,617,733 2,581,076 2,762,608
=========== =========== ========== ===========
Earnings Per Share Assuming Dilution ($ .02) $ .14 $ .21 $ .12
=========== =========== ========== ===========
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan (ESOP) for the
benefit of employees who have completed at least twelve consecutive months of
service and have been credited with at least 500 hours of service with the Bank.
The Company has received a favorable determination letter from the Internal
Revenue Service ("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
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
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. The unallocated ESOP shares are shown as a reduction
to stockholders' equity in the accompanying consolidated balance sheets. ESOP
expense of $98,000 and $175,000 was recorded for the three and six months ended
December 31, 1997.
NOTE 4 - 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 347,155 and
138,862, respectively. The Committee has awarded under the SOPs options to
purchase 312,790 shares of common stock at exercise prices between $6.625 and
$11.375 per share, which represent the average of the high and low sales prices
of the Company's stock on the dates of the awards. Both the option shares and
grant prices have been adjusted for the three-for-two stock split on December 3,
1997 . At December 31, 1997, there were 34,365 option shares reserved for future
grants. As of December 31, 1997, no options have been exercised or canceled. No
compensation expense was recognized in connection with the issuance of the
options. Management has concluded that the Company will not adopt the accounting
provisions of SFAS No. 123 and will continue to apply its current method of
accounting. Accordingly, adoption of SFAS No. 123 will have no impact on the
Company's consolidated financial position or results of operations.
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. The Committee has
awarded 71,931 shares of common stock under the officers' MRP and 41,653 shares
of common stock under the directors' MRP. MRP awards vest in five equal annual
installments, with the first award vesting on October 25, 1996. Compensation
expense for the MRPs is recognized on a pro-rata basis over the vesting period
of the awards. During the three and six months ended December 31, 1997, $38,100
and $76,200 was charged to compensation expense for the MRPs, respectively. The
unearned compensation value of the MRPs is shown as a reduction to stockholders'
equity in the accompanying consolidated balance sheets.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 5 - SECURITIES
The amortized cost and estimated fair values of securities at December 31, 1997
and June 30, 1997 are as follows:
Available for Sale Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 1997 (unaudited)
U.S. agencies $ 1,499,630 $ 2,500 $ 1,561 $ 1,500,569
Equity securities 1,904,438 26,250 86,313 1,844,375
Mortgage-backed securities 1,309,389 168 10,546 1,299,011
Collateralized mortgage obligations 25,091,399 303,789 8,787 25,386,401
----------- ----------- ----------- -----------
$29,804,856 $ 332,707 $ 107,207 $30,030,356
=========== =========== =========== ===========
June 30, 1997
U.S. agencies $ 2,998,182 $ -- $ 21,544 $ 2,976,638
Mortgage-backed securities 1,579,891 4,016 1,212 1,582,695
Collateralized mortgage obligations 20,953,643 88,217 50,219 20,991,641
----------- ----------- ----------- -----------
$25,531,716 $ 92,233 $ 72,975 $25,550,974
=========== =========== =========== ===========
Held to Maturity
December 31, 1997 (unaudited)
Collateralized mortgage obligations 5,880,551 28,993 2,756 5,906,788
=========== =========== =========== ===========
June 30, 1997
U.S. agencies $ 1,000,762 $ 1,113 $ -- $ 1,001,875
Collateralized mortgage obligations 3,002,813 -- 2,813 3,000,000
----------- ----------- ----------- -----------
$ 4,003,575 $ 1,113 $ 2,813 $ 4,001,875
=========== =========== =========== ===========
Trading securities totalled approximately $2.2 million and $2.9 million at
December 31, 1997 and June 30, 1997, respectively. Realized and unrealized gains
and losses on trading securities are included immediately in other income.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 6 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Company's secondary market mortgage activities,
which consist solely of one- to four-family real estate loans:
Six Months Ended
December 31,
--------------------------------
1997 1996
----------- -----------
Loans held for sale - beginning of period $ 2,231,151 $4,297,092
Activity during the periods:
Loans originated and purchased for sale 21,362,888 17,961,331
Proceeds from sale of loans originated
and purchased for sale (21,536,769) (19,164,556)
Gain on sale of loans 318,612 276,218
----------- -----------
Loans held for sale - end of period $2,375,882 $3,370,085
========== ==========
During the past quarter, loans were generally sold with servicing retained to
take advantage of the lower interest rate environment. The unpaid principal
balance of mortgage loans serviced for others amounted to $32.3 million and
$27.0 million at December 31, 1997 and June 30, 1997, respectively. Custodial
escrow balances maintained in connection with the foregoing loans serviced for
others were $57,323 and $116,813 at December 31, 1997 and June 30, 1997,
respectively.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 7 - LOANS
Loans are classified as follows:
December 31, June 30,
1997 1997
--------- ---------
Real estate loans:
One-to four-family residential - fixed rate $17,253,968 $ 18,595,586
One-to four-family residential - balloon 16,387,412 12,493,524
One-to four-family residential - adjustable 45,148,318 49,743,799
Construction 21,144,670 21,500,849
Commercial mortgages 3,187,233 2,764,314
Home equity lines of credit 8,090,760 6,370,698
Second mortgages 6,955,222 4,312,760
--------- ---------
Total mortgage loans 118,167,583 115,781,530
Consumer loans 1,207,048 1,081,391
Commercial non-mortgage 2,879,509 2,032,190
----------- -----------
Total 122,254,140 118,895,111
Less:
Loans in process 5,780,405 7,169,073
Deferred fees and costs (124,740) (29,916)
Allowance for loan losses 261,862 225,862
------------- ------------
$116,336,613 $111,530,092
============= ============
Provisions for losses on loans are charged to operations based on management's
evaluation of potential losses in the portfolio. In addition to providing
reserves on specific loans where a decline in value has been identified, general
provisions for losses are established based upon the overall portfolio
composition and general market conditions. In establishing both specific and
general valuation allowances, management reviews individual loans, recent loss
experience, current and future impact of economic conditions, the overall
balance and composition of the portfolio, and such other factors which, in
management's judgment, deserve recognition in estimating possible losses. At
December 31, 1997, no portion of the allowance for loan losses was allocated to
a specific loan.
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.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three and Six Months Ended December 31, 1997
(Unaudited)
NOTE 8 - 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
$551,000, 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 were $.13 for every $100 of assessable deposits in 1996, were
reduced to $.064 for every $100 of assessable deposits beginning January 1,
1997. Based on the Bank's deposits at June 30, 1997, the premium reduction
should result in a pre-tax cost savings of approximately $171,000 per year for
the Bank, or approximately $.04 per share after taxes.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the consolidated financial condition of Bank
West Financial Corporation and its wholly owned subsidiary, Bank West, at
December 31, 1997 and June 30, 1997 and the consolidated results of operations
for the three and six months ended December 31, 1997 with the same period in
1996. This discussion should be read in conjunction with the interim
consolidated financial statements and footnotes included herein.
This quarterly report on Form 10-Q includes statements that may constitute
forward-looking statements, usually containing the words "believe," "estimate,"
"project," "expect," "intend" or similar expressions. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that could cause future
results to vary from current expectations include, but are not limited to, the
following: changes in economic conditions (both generally and more specifically
in the markets in which Bank West operates); changes in interest rates, deposit
flows, loan demand, real estate values and competition; changes in accounting
principles, policies or guidelines and in government legislation and regulation
(which change from time to time and over which Bank West has no control); and
other risks detailed in this quarterly report on Form 10-Q and in the Company's
other Securities and Exchange Commission filings. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof.
Bank West Financial Corporation is the holding company for Bank West. In
December 1997, Bank West converted from a federally chartered savings bank to a
state chartered savings bank. Also, during December, Bank West formed Sunrise
Mortgage Corporation, a wholly-owned subsidiary engaged in originating and
purchasing non-conforming loans which, in turn, are all sold to investors on a
servicing released basis. Sunrise Mortgage Corporation did not materially impact
the Company's financial condition and results of operations i the quarter ended
December 31, 1997. Substantially all of the Company's assets are currently held
in, and its operations are conducted through, its sole subsidiary Bank West. The
Company's business consists primarily of attracting deposits from the general
public and using such deposits, together with Federal Home Loan Bank (FHLB)
advances, to make loans for the purchase and construction of residential
properties. The Company also originates commercial loans, home equity loans and
various types of consumer loans.
FINANCIAL CONDITION
Total assets increased by $13.9 million or 8.9% from $155.7 million at June 30,
1997 to $169.6 million at December 31, 1997. The increase was primarily
attributable to net loan growth of $4.8 million and an increase in securities
available for sale of $4.5 million. Total loans increased as greater emphasis
was placed on originating home equity, second mortgages and commercial loans
instead of concentrating primarily on residential mortgage banking activities.
Management expects continued growth in these types of lending activities and
expects these activities to improve the Bank's net interest spread. Securities
available for sale increased due to the purchase of additional adjustable-rate
collateralized mortgage obligations.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Bank's mortgage banking activities consist of selling newly originated and
purchased loans into the secondary market. The dollar amount of loans originated
and purchased for resale in the six months ended December 31, 1997 increased by
$3.4 million or 18.9% to $21.4 million compared to $18.0 million in the
comparable prior period. The increase in loan originations and purchases for
resale is primarily the result of the current decline in the overall interest
rate environment compared to the prior year as well as from the growth in the
Bank's wholesale mortgage banking operation. Total loans sold amounted to $21.5
million and $19.2 million in the six months ended December 31, 1997 and 1996,
respectively. Loans held for sale amounted to $2.4 million and $3.4 million at
December 31, 1997 and 1996, respectively. The Bank continues to increase the
number of correspondent lending relationships and is exploring additional
options to increase retail loan volume. During the current quarter, the Bank has
sold the majority of its loans held for sale on a servicing retained basis
versus servicing released to take advantage of the significant decline in
interest rates. This strategy is expected to extend the weighted average life of
the one-to four-family servicing portfolio. 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, increasing the ratio of its
interest-sensitive assets to its interest-sensitive liabilities.
During December 1997, the Bank formed Sunrise Mortgage Corporation, a
wholly-owned subsidiary engaged to originate and purchase non-conforming
mortgage loans including sub-prime mortgage loans. All of the loans originated
and purchased shall have a commitment in place to sell the loan to an investor
on a servicing released basis. The Bank expects that Sunrise Mortgage
Corporation will contribute significantly to future total mortgage banking
revenues.
Mortgage-backed securities and collateralized mortgage obligations have
increased from $25.6 million at June 30, 1997 to $32.6 million at December 31,
1997. During the quarter ended December 31, 1997, the Bank purchased additional
adjustable-rate collateralized mortgage obligation floaters which is consistent
with the Bank's strategy of increasing the ratio of interest-sensitive assets to
interest-sensitive liabilities. Also during the quarter, the Company purchased
equity securities classified as available for sale which consist of a trust
preferred security and a real estate investment trust. At December 31, 1997, the
unrealized gain on securities (including mortgage-backed securities and
collateralized mortgage obligations) classified as available for sale totalled
$149,000 net of federal income taxes and is shown as a reduction in
stockholders' equity.
The Bank's nonperforming assets totalled $818,000 or .48% of total assets at
December 31, 1997 compared to $437,000 or .28% of total assets at June 30, 1997.
The increase in nonperforming assets is primarily due to single family
construction loans to builders. However, since these loans require a
loan-to-value ratio of 75% or less, management believes that these loans are
adequately collateralized. Accordingly, no specific reserves have been assigned
to these nonperforming assets. The Bank's relatively low nonperforming assets
are primarily due to the Bank's conservative underwriting criteria. At December
31, 1997, $99.9 million or 81.7% of the Bank's total loan portfolio was
collateralized by first liens on one-to four-family residences, and the net loan
portfolio amounted to 68.6% of total assets. During the six months ended
December 31, 1997, there were no net charge-offs.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Total deposits increased by $6.7 million or 6.5% from June 30, 1997 to December
31, 1997 primarily due to an increase in certificates of deposit of $4.3
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, 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.
When deposit growth does not match the growth of assets, other funding sources
such as FHLB advances are utilized. During the six months ended December 31,
1997, the Bank increased FHLB advances by $7.0 million since loan and securities
growth exceeded deposit growth. FHLB advances have generally been used to fund
the Bank's mortgage banking activities, loan and investment securities growth.
Stockholders' equity increased from $22.6 million at June 30, 1997 to $23.2
million at December 31, 1997. The increase was primarily due to net income of
approximately $532,000 and an increase in the unrealized gain on securities
available for sale of approximately $136,000. In accordance with SFAS No. 115,
which the Bank adopted effective June 30, 1994, 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 stockholders' equity, net of
federal income taxes. At December 31, 1997, the net unrealized gain was
$148,829, while at June 30, 1997, the net unrealized gain was $12,710.
The Bank has performed a review to determine whether or not any Bank West system
is exposed to the risk of year 2000 noncompliance. An inventory of electronic
systems and programs has been completed. All electronic systems and programs
utilized by Bank West are maintained by third party vendors. The most
significant vendor, Fiserv, which acts as a service bureau for the Bank's
on-line data processing expects to complete its year 2000 project by mid-1998.
The Bank intends to participate in the testing and verification of year 2000
related changes made by Fiserv and other vendors. The Bank has received
representation letters from most of its vendors indicating that their system is
or will be year 2000 compliant. Based on management's review, the cost of
achieving year 2000 compliance is minimal.
RESULTS OF OPERATIONS
Net Income. Net income decreased by $426,000 in the quarter ended December 31,
1997 from $366,000 in the comparable 1996 period to a net loss of $60,000 in the
current quarter. The net loss in the quarter ended December 31, 1997 was due to
a mark to market loss in the Company's equities trading portfolio of $391,000
due to recent stock market volatility compared to a gain of $288,000 in the
comparable prior period. For the six months ended December 31, 1997, net income
increased by $198,000 or 59.3%. The increase was primarily due to the one-time
FDIC special assessment taken during the prior year's quarter which had a
negative after tax impact of $365,000 (See Note 8 for
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
further discussion). This amount did not re-occur in the current quarter. The
special assessment amount however, was largely offset by a decrease in trading
gains by $310,000, which had an after tax impact of $205,000.
Net Interest Income. Net interest income increased by $160,000 or 15.2%, and by
$261,000 or 12.4% in the three and six months ended December 31, 1997 over the
comparable 1996 periods, respectively. Net interest income increased due to an
increase in the average interest rate spread, which increased to 2.54% and 2.51%
in the three and six months ended December 31, 1997, respectively, from 2.45%
and 2.39%in the comparable 1996 periods. The increased spreads were primarily
due to an increase in the yield on interest-earning assets to 7.85% and 7.82% in
the three and six months ended December 31, 1997, respectively, from 7.64% and
7.55% in the comparable prior periods reflecting continued emphasis on higher
yielding constru ction, home equity, consumer and commercial loans. In addition,
average interest-earning assets increased by $24.6 and $22.3 million in the
three and six months ended December 31, 1997, respectively, over the comparable
prior periods primarily due to an increase in loans and collateralized mortgage
obligations. These increases were partially offset by an increase in the cost of
interest-bearing liabilities to 5.31% both for the three and six months ended
December 31, 1997, from 5.19% and 5.13% in the comparable prior periods
reflecting higher costing FHLB borrowings. Also, the increase in yield on
interest-earning assets was partially offset by a decline in the net interest
margin from 3.14% in both the three and six months ended December 31, 1996 to
3.06% and 3.03% in the three and six months ended December 31, 1997 primarily
due to utilizing excess capital to repurchase shares of the Company's common
stock, which reduced interest income.
Provision for Loan Losses. The provision for loan losses increased by $3,000 or
20.0%, and by $6,000 or 20.0% in the three and six months ended December 31,
1997, respectively, over the comparable 1996 periods. The allowance for loan
losses totalled $262,000 or .21% of the total loan portfolio and 44.5% of
nonperforming loans at December 31, 1997. The nonperforming loans at December
31, 1997 were comprised primarily of one- to four-family mortgage loans and
construction loans to builders which require a loan-to-value ratio of 75% or
less. Management believes that these loans are adequately collateralized.
Accordingly, no specific reserves have been assigned to these loans.
The Bank's management establishes allowances for loan losses. On a quarterly
basis, management evaluates the loan portfolio and determines the amount that
must be added. These allowances are charged against income in the year they are
established. When establishing the appropriate levels for the provision and the
allowance for loan losses, management considers a variety of factors, in
addition to the fact that an inherent risk of loss always exists in the lending
process. Consideration is also given to the current and future impact of
economic conditions, the diversification of the loan portfolio, historical loss
experience, delinquency rates, the review of loans by loan review personnel, the
individual borrower's financial and managerial strengths, and the adequacy of
underlying collateral.
Other Income. Total other income decreased by $661,000 or 127.6% in the three
months ended December 31, 1997 from the comparable prior period. The decrease
was primarily due to a $679,000 or 235.8% decrease in gain on trading
securities. The decrease in gain on trading securities was
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
primarily due to recent stock market volatility which resulted in a $391,000
mark to market loss in the current quarter compared to a $288,000 mark to market
gain recorded in the comparable prior quarter. The trading securities portfolio
is comprised of equity securities in various financial institutions. Despite the
current quarter's performance in the trading portfolio, the trading portfolio
has performed above expectations contributing a weighted average return since
its inception two years ago of approximately 37% per year, which includes the
most recent quarter's results. However, in an effort to achieve more normalized
quarterly earnings and to minimize any future negative effect of volatile equity
markets, the Company has adopted a plan to divest the existing trading portfolio
through an orderly liquidation over the next several months. During the six
months ended December 31, 1997, total other income decreased by $229,000 or
25.3% primarily due to a decline in trading gains of $310,000 or 64.7%. This
amount was partially offset by an increase in mortgage banking revenues of
$39,000 or 9.9% due to an increase in loans sold from $19.2 million in the six
months ended December 31, 1996 to $21.5 million in the six months ended December
31, 1997.
Other Expenses. Total other expenses increased by $142,000 or 14.2% in the
quarter ended December 31, 1997 over the comparable 1996 period. The increase
was primarily due to an increase in compensation and benefits expense of
$117,000 or 20.6% attributable to hiring additional staff to support the
expansion of the Bank's core business activities and a $55,000 increase in ESOP
expense due to the appreciation of the Company's common stock price.
Professional fees increased by $24,000 or 40.0% due to legal costs associated
with the Bank's conversion from a federally chartered savings bank to a state
chartered savings bank, the formation of Sunrise Mortgage Corporation and other
professional fees unrelated to litigation. These amounts were partially offset
by a $22,000 or 57.9% decline in FDIC insurance expense as a result of the
annual premium reduction from .23% to .064%. The other categories of other
expenses did not significantly change in the three months ended December 31,
1997.
Total other expenses decreased by $272,000 or 11.0% in the six months ended
December 31, 1997 over the comparable 1996 period. The decrease was primarily
due to a $553,000 one-time government mandated FDIC special assessment to
recapitalize the SAIF insurance fund on September 30, 1996 that did not occur
during the current six month period. Excluding the one-time FDIC special
assessment, other expenses increased by $281,000 or 14.7% in the six months
ended December 31, 1997 over the comparable 1996 period. The increase was
primarily due to increased compensation and benefits expense of $242,000 or
22.0% as a result of the hiring of additional staff to expand the Bank's core
business activities. In addition, ESOP expense, a component of compensation and
benefits expense, was higher by $86,000 due to the increase in the Company's
stock price compared to the prior period. Professional fees increased by $58,000
or 55.8% related to higher legal fees unrelated to litigation. State taxes
increased by $21,000 or 77.8% due to higher pre-tax income levels, as defined.
These amounts were partially offset by a $58,000 or 65.2% decline in FDIC
insurance expense (excluding the one-time assessment) as a result of the annual
premium reduction from .23% to .064%. The other categories of other expenses did
not significantly change in the six months ended December 31, 1997.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Federal Income Tax Expense. Federal income tax expense decreased by $221,000 in
the quarter ended December 31, 1997 and increased by $100,000 in the six months
ended December 31, 1997 over the comparable 1996 periods. Federal income tax
expenses were based on pre-tax income levels for the respective periods.
LIQUIDITY
Bank West's primary 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 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 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
federal 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. At December 31, 1997, Bank
West's liquidity was 8.5% or $4.3 million in excess of the 5% minimum federal
requirement.
REGULATORY CAPITAL
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative and qualitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices.
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 only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-
Weighted Assets Tier 1 Capital to
Total Tier 1 Average Assets
----- ------ --------------
Well capitalized 10.0% 6.0% 5.0%
Adequately capitalized 8.0 4.0 4.0
Undercapitalized 6.0 3.0 3.0
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
At December 31, 1997, the Bank's capital satisfied the well capitalized
requirement. 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
------ ----- ------ ----- ------ -----
1997
Total capital (to risk-weighted assets) $19.4 22.2% $7.0 8.0% $8.7 10.0%
Tier 1 capital (to risk-weighted assets) 19.2 21.9 3.5 4.0 5.2 6.0
Tier 1 capital (to average assets) 19.2 11.6 6.6 4.0 8.2 5.0
Prior to December 1997, the Bank was a federally chartered savings bank and
subject to the following regulatory requirements:
1996
Total capital (to risk-weighted assets) $19.0 27.5% $5.5 8.0% $6.9 10.0%
Tier 1 capital (to risk-weighted assets) 18.8 27.2 2.8 4.0 4.2 6.0
Tier 1 capital (to adjusted total assets) 18.8 13.5 5.6 4.0 7.0 5.0
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," provides
authoritative guidance as to the accounting and financial reporting for
transfers and servicing of financial assets and extinguishment of liabilities.
Example transactions covered by SFAS No. 125 include asset securitization,
repurchase agreements, wash sales, loan participations, transfers of loans with
recourse and servicing of loans. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The Statement also requires measuring instruments that
have a substantial prepayment risk at fair value, much like debt instruments
classified as available for sale or trading. While SFAS No. 125 supersedes SFAS
No. 122, "Accounting for Mortgage Servicing Rights," it only marginally modifies
the accounting and disclosure requirements of SFAS No. 122. SFAS No. 125, as
amended by SFAS No. 127, is expected to have no material impact on the Company's
consolidated financial condition or results of operations.
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended December 31, 1997
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
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:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits: The following exhibit is filed herewith:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarter ended December 31, 1997.
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: /s/Paul W. Sydloski
-------------------
Paul W. Sydloski, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: /s/Kevin A. Twardy
------------------
Kevin A. Twardy, Vice President and
Chief Financial Officer
(Principal Financial Officer)