Table of Contents
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Section 1
Letter to Shareholders ......................................... 1
Selected Consolidated Financial Data ........................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 3
Section 2
Report of Independent Auditors ................................. 15
Consolidated Financial Statements ..............................
Consolidated Balance Sheets .................................... 16
Consolidated Statements of Income .............................. 17
Consolidated Statements of Changes
in Shareholders' Equity .................................... 18
Consolidated Statements of Cash Flows .......................... 20
Notes to Consolidated Financial Statements ..................... 22
Annual Meeting
The Annual Meeting of Shareholders is scheduled for Wednesday, October 28,
1998 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard
Street, N.W., Grand Rapids, Michigan.
[GRAPHIC-LOGO FOR BANK WEST FINANCIAL CORPORATION]
Letter to Shareholders
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In this report to our shareholders I will attempt to clarify where we have
been, where we are and where we are going.
Since March of 1995 we have been attempting to change this organization from
a traditional savings and loan to a full service community bank which would
offer new products and services for our customers and provide for the greatest
possible return to our shareholders. Our plan calls for a highly skilled and
dedicated staff with a strong emphasis on customer service. To accomplish this,
we formed a five-year strategic plan utilizing a building block strategy which
has been implemented. The strategy calls for a shift from total dependence on
single-family loans to one of diversification which is reflected by consumer and
commercial loan growth, with balances of approximately $19.7 million and $9.7
million, respectively, at June 30, 1998. Our current strategy also produced a
30% increase in total assets since 1995, which currently stand at approximately
$181 million.
The confidence exhibited by our customers and our stockholders is reflected
in our growth in assets and our improving franchise value. That confidence is
much appreciated and the appreciation is manifested in the fact that at every
level of the company we are committed to generating and maintaining long-term
relationships. We are also committed to providing profitability by offering
premier services and programs and at the same time managing our resources in the
most efficient manner possible.
On the deposit side, our concentration has shifted from dependence on
certificates of deposits to more reasonably priced funds. Since 1995, checking
account balances have increased from $4.1 million to $11.4 million, and total
deposits increased from $85.2 million to $120 million.
In the past year total assets increased nearly 17%, loan volume increased 49%
and our deposit base increased 17%. The profitability generated from the record
loan production volume has been offset by the fact that nearly 50% of the loans
we produced in the last fiscal year were refinances. Pre-payment penalties are
now part of the adjustable loan instrument (ARM) and should help us control
future refinancing of these loans.
In the next year our primary goal will be to improve the value of our
franchise through market expansion and full utilization of the products we now
offer, relying on our building block strategy. We intend to concentrate on cost
control and improve our significant ratios by attaining the goals we have set.
We have completed the majority of human resource additions which were necessary
to support the continued growth of the franchise.
One significant event which will have an impact on all businesses is the
coming of the new millennium. Making sure that the Bank is Year 2000 (Y2K)
compliant is an assignment no financial institution can ignore. Adherence to
regulatory requirements, internal training and testing, external testing and a
customer information program are all elements of Bank West's Y2K program.
Our directors, management and staff want to thank you for your continuing
confidence. We will always remain mindful of our mission to enhance shareholder
value and to provide quality service that will meet your expectations. With this
in mind, we look forward to fiscal year 1999.
Sincerely,
/s/Paul W. Sydloski
-------------------
Paul W. Sydloski
President/CEO
1
Selected Consolidated Financial Data
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(Dollars in thousands except per share data)
1998 1997 1996 1995 1994
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Summary of Operations
Net interest income $ 4,937 $ 4,279 $ 4,158 $ 3,185 $ 2,861
Provision for loan losses 81 60 60 21 25
Other income 1,012 1,554 1,202 270 226
One-time special SAIF assessment -- 551 -- -- --
Other expenses 4,585 3,821 3,469 2,352 2,045
Income taxes 453 478 622 366 337
Net income 830 923 1,208 716 680
Balance Sheet Data
Total assets $181,469 $155,675 $137,982 $139,648 $106,594
Cash and cash equivalents 4,206 3,673 6,694 4,595 4,923
Securities 6,745 3,978 7,422 11,405 4,029
Mortgage collateralized securities 36,507 25,578 17,341 18,335 3,440
Loans, net 118,906 111,530 95,737 95,836 91,329
Loans held for sale 8,157 2,231 4,297 2,746 1,282
Deposits 119,979 102,862 91,028 85,180 89,960
FHLB advances 37,000 29,000 19,000 24,922 5,000
Equity 23,275 22,592 26,810 28,171 10,844
Per Share Data(1)
Basic earnings per share(2) $ .35 $ .36 $ .39 $ .07 --
Diluted earnings per share(2) .33 .36 .39 .07 --
Dividends per share .22 .19 .19 -- --
Book value per share 8.87 8.59 8.13 8.11 --
Ratios
Average yield on interest-earning assets 7.74% 7.61% 7.52% 6.97% 6.55%
Average rate on interest-bearing liabilities 5.26 5.15 5.37 4.76 4.12
Average interest spread 2.48 2.46 2.15 2.21 2.43
Net interest margin 3.04 3.12 3.10 2.83 2.86
Return on average assets(3) .49 .64 .87 .62 .67
Return on average equity(3) 3.58 3.89 4.38 4.34 6.38
Efficiency ratio 76.34 74.89 68.56 69.56 63.85
Dividend pay-out ratio 64.96 54.94 49.93 -- --
Average equity to average assets 13.60 16.42 19.77 14.46 10.57
Non-performing loans as a % of loans, net .71 .37 .04 .15 .04
(1) All per share data has been adjusted for stock splits.
(2) Earnings per share for the year ended June 30, 1995 was computed by dividing
net income subsequent to the conversion on March 30, 1995 by the weighted
average number of shares outstanding subsequent to March 30, 1995.
(3) When excluding the impact of the government mandated one-time Savings
Association Insurance Fund assessment of $364,000,net of tax, or $0.14 per
share, Return on Average Assets (ROA) equalled .89% and Return on Average Equity
(ROE) equalled 5.43% for fiscal 1997.
2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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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
("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,
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 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.
Effective December 29, 1997, Bank West completed its conversion to a Michigan
chartered savings bank. Substantially all of the Company's assets are currently
held in, and its operations are conducted through, its sole subsidiary Bank
West. The Company's business consists primarily of attracting deposits from the
general public and using such deposits, together with Federal Home Loan Bank
("FHLB") advances, to make loans for the purchase and construction of
residential properties. To a lesser extent, the Company also makes commercial
loans and consumer loans.
The Company's operations and profitability are subject to changes in interest
rates, applicable regulations and general economic conditions, as well as other
factors beyond the Company's control. The profitability of Bank West depends
primarily on its net interest income, which is the difference between interest
and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits and FHLB
borrowings. Net interest income 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 sale of
loans in connection with its mortgage banking activities and fees and service
charges.
During December 1997, the Bank formed Sunrise Mortgage Corporation, a
wholly-owned subsidiary engaged to originate and purchase non-conforming
mortgage loans including sub-prime mortgage loans for resale. All of the loans
originated and purchased have a commitment to sell in place to an investor on a
servicing released basis. Sunrise Mortgage Corporation is expected to break-even
in twelve to eighteen months.
The Company's net income was $830,000, $923,000 and $1,208,000 for fiscal
1998, 1997 and 1996, respectively. Fiscal 1998 net income was positively
impacted by an increase in net interest income through continued capital
leveraging efforts. This increase was offset by a decrease in gains on
securities and higher general and administrative expenses. See "Results of
Operations for the Year Ended June 30, 1998 Compared to the Year Ended June 30,
1997" section for additional information. Fiscal 1997 net income was negatively
impacted by a $364,000, net of tax, or $0.14 per share government mandated
special assessment to recapitalize the Savings Association
3
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). See Note 6 to consolidated financial statements for
additional information.
Changes in Financial Condition
Assets. Total assets increased by $25.8 million or 16.6% from June 30, 1997
to June 30, 1998. The increase is primarily due to a $10.8 million or 33.2%
increase in securities as additional adjustable-rate collateralized mortgage
obligations were purchased to partially offset the decline in one-to four-family
adjustable-rate loans. In addition, loans increased by $7.4 million or 6.6% as
greater emphasis was placed on originating commercial and consumer loans for
portfolio instead of concentrating primarily on residential mortgage banking
activities. The additional emphasis on adding the aforementioned loan types to
portfolio during fiscal 1998 was in an effort to diversify the Bank's loan
portfolio from its traditional first residential mortgage business and to react
to increased competitiveness in the residential mortgage banking business. Total
commercial and consumer loans increased as a percent of total loans from 14.0%
at the end of fiscal 1997 to 23.1% at the end of fiscal 1998. Management expects
continued growth in the commercial and consumer loan portfolios during fiscal
1999.
The Bank's mortgage banking activities consist of selling newly originated
and purchased loans into the secondary market. Total loans sold amounted to
$45.0 million, $32.9 million and $45.8 million in fiscal 1998, 1997 and 1996,
respectively. Loans held for sale amounted to $8.2 million, $2.2 million and
$4.3 million at June 30, 1998, 1997 and 1996, respectively. The dollar amount of
loans sold and loans held for sale increased in fiscal 1998 due to higher
refinancing volume as a result of lower prevailing market interest rates
compared to the prior fiscal year as well as increased loan origination
personnel. The majority of loans originated and purchased for resale have been
30-year fixed-rate loans.
Mortgage-backed securities and collateralized mortgage obligations increased
from $25.6 million at June 30, 1997 to $36.5 million at June 30, 1998. During
fiscal 1998, the Bank purchased additional adjustable-rate collateralized
mortgage obligations which is consistent with the Bank's strategy of increasing
the ratio of interest-sensitive assets to interest-sensitive liabilities.
Collateralized mortgage obligations also were purchased to partially offset the
decline in one-to four-family adjustable-rate mortgage loans. The collateralized
mortgage obligations earn interest based on either the prime or the London
Interbank Offered Rate ("LIBOR") indexes and reprice monthly. These securities
were generally purchased with relatively low weighted average collateral rates
as compared to current market rates in an effort to minimize prepayment risk.
Other securities classified as available for sale or held to maturity,
primarily consisting of U.S. agency securities and equity securities, increased
from $4.0 million at June 30, 1997 to $6.7 million at June 30, 1998. The
increase is primarily due to the purchase of equity securities. In addition, on
May 31, 1998, the Company reclassified securities with a carrying and fair value
of $1.2 million from the trading classification to the available for sale
classification, to reflect management's intent to realize the long-term
potential underlying such securities rather than to benefit from short-term
changes in market values. The recent downturn in the U.S. equity markets,
especially in small cap stocks, has had a negative impact on the Company's
remaining equity investments. As a result, management determined than an
other-than-temporary decline in the market value of certain equity securities
occurred totaling $260,000 as of June 30, 1998. Over time, management believes
the market price of the Company's remaining equity investments will reach
estimated values based on underlying fundamentals. At June 30, 1998, the Company
had no remaining trading securities.
Liabilities. Deposits increased $17.1 million or 16.6% from June 30, 1997 to
June 30, 1998. The increase in total deposits was primarily attributable to
growth in certificates of deposit of $11.5 million, or 14.9%, and growth in
non-interest bearing deposits of $3.0 million or 76.8%. Certificates of deposit
accounted for approxi-
4
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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mately 74% of total deposits at June 30, 1998 and approximately 76% of total
deposits at June 30, 1997. At June 30, 1998, $65.4 million or 73.4% of total
certificates of deposit mature in one year or less, and $17.2 million or 19.3%
of the total certificates of deposit had balances of $100,000 or more. The
increase in deposits was achieved primarily through continued development of new
and existing commercial and retail account relationships. In addition, the Bank
has attracted and retained certificates of deposit including out-of-state jumbo
accounts by offering competitive interest rates.
Because the growth in deposits has not matched the growth in assets in recent
years, the Bank began utilizing FHLB advances. During fiscal 1998, the Bank
increased FHLB advances by $8.0 million. The proceeds of these advances, as well
as deposit growth discussed above, were primarily used to fund loan and
securities growth as well as mortgage banking activities.
Shareholders' Equity. Shareholders' equity amounted to $23.3 million or 12.8%
of total assets at June 30, 1998 compared to $22.6 million or 14.5% of total
assets at June 30, 1997. The Company's trend of profitability continued in
fiscal 1998 with the Company earning $830,000. The primary change in total
shareholders' equity relates to net income offset by dividends and stock
repurchases.
The cost of shares issued to the Company's Employee Stock Ownership Plan
("ESOP") but not yet allocated to participants totaling $875,000 at June 30,
1998 is presented in the consolidated balance sheet as a reduction of
shareholders' equity. The unearned compensation value of the Company's MRPs at
June 30, 1998 totaling $361,000 also is 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, 1998, the net
unrealized gain was $5,000, while at June 30, 1997, the net unrealized gain was
$13,000.
Results of Operations for the Year Ended June 30, 1998, Compared to the Year
Ended June 30, 1997
Net Income. Net income for fiscal 1998 was $830,000 or $.35 per basic share,
compared to $923,000 or $.36 per basic share for fiscal 1997. The Company's net
income decreased by $93,000 or 10.1% in fiscal 1998 from fiscal 1997. The
results of operations for fiscal 1997 include a one-time assessment of $364,000,
net of taxes, or $.14 per share relating to legislation signed into law on
September 30, 1996 to recapitalize the SAIF. Net income for fiscal 1997 without
the SAIF assessment would have been $1.3 million or $.50 per share. On a SAIF
adjusted basis, net income decreased $457,000 or 35.5% for the year ended June
30, 1998 compared to June 30, 1997. The decrease was primarily due to a
reduction of other income of $542,000 as a result of less successful equity
securities trading activities by $531,000 a write-down of available for sale
equity securities of $260,000 relating to an other-than-temporary market decline
and an increase in other expenses (excluding the one-time SAIF assessment) of
$764,000, primarily due to an increase in compensation and benefits. These
decreases were partially offset by growth in net interest income and in gain on
sale of loans of $658,000 and $163,000, respectively.
Net income for fiscal 1998 represents a return on average equity ("ROE") of
3.58%, a decrease from 3.89% for fiscal 1997, and a return on average assets
("ROA") of .49%, a decrease from .64% for fiscal 1997.
Net Interest Income. The Company's net income is largely dependent upon net
interest income. Net interest income is the difference between the average yield
earned on loans, securities and other earning assets, and the average rate paid
on deposits and FHLB advances. Net interest income is affected by changes in
volume and composition of earning assets and interest-bearing liabilities,
market rates of interest, the level of nonperforming assets, demand for loans
and other market forces.
5
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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Net interest income increased $658,000 for the year ended June 30, 1998 as
compared to the year ended June 30, 1997. The increase in net interest income
was primarily attributable to a $17.5 million or 17.0% increase in the average
loan portfolio (including loans held for sale) and a $9.1 million or 39.7%
increase in the average mortgage collateralized securities portfolio. The
Company's average interest spread improved slightly from 2.46% to 2.48%, with
improvements in yield on total interest-earning assets substantially offset by
an increase in the cost of interest-bearing liabilities.
The yield on total interest-earning assets improved from 7.61% for fiscal
1997 to 7.74% for fiscal 1998. The yield improved primarily due to the growth in
the commercial and consumer loan portfolios, which in total represent 23.1% of
total loans at the end of fiscal 1998 compared to 14% of total loans at the end
of fiscal 1997. Management expects the continued growth in the commercial and
consumer loan portfolios during fiscal 1999 will positively impact the yield on
loans.
The cost of interest-bearing liabilities increased from 5.15% for fiscal 1997
to 5.26% for fiscal 1998. The cost of interest-bearing liabilities increased
primarily due to an increase in FHLB advances as a percent of total
interest-bearing liabilities and, to a lesser extent, a shift in mix from lower
costing demand deposit and savings accounts to higher costing money market and
certificate accounts.
Net interest margin decreased from 3.12% for fiscal 1997 to 3.04% for fiscal
1998. The reduction in net interest margin was primarily attributable to the
Company becoming more leveraged through internal growth. This increase in
leverage is reflected in the ratio of average interest-earning assets to average
interest-bearing liabilities, which declined to 1.12x for the year ended June
30,1998 compared to 1.15x for the same period in 1997.
The future trend of the Company's net interest income and net interest margin
may be impacted by the level of loan originations, purchases, repayments,
refinances, and sales, and a resulting change in the Company's composition of
interest-earning assets. The relatively flat yield curve during the second half
of the fiscal year resulted in a shift in borrower preference to fixed-rate
mortgage loans. This resulted in borrowers converting adjustable-rate mortgage
loans to 30-year fixed-rate loans, which are generally sold in the secondary
market. A continued high level of refinances and conversions of adjustable-rate
mortgages to fixed-rate mortgages could have a negative impact on future net
interest income. Additional factors that may affect the Company's net interest
income are changes in interest rates, slope of the yield curve, asset growth,
maturity and repricing activity and competition.
6
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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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,
1998 1997 1996
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Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate
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(Dollars in Thousands)
Interest-earning assets:
Loans receivable(2) $120,844 $9,795 8.11% $103,324 $8,206 7.94% $100,350 $7,902 7.87%
Securities 4,461 326 7.31 5,540 387 6.99 7,987 509 6.37
Mortgage-backed securities(3) 32,208 2,120 6.58 23,061 1,520 6.59 18,790 1,231 6.55
Interest-bearing deposits 2,738 152 5.55 3,633 199 5.48 5,476 326 5.95
FHLB stock 1,958 156 7.97 1,483 116 7.81 1,475 120 8.14
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Total interest-earning assets 162,209 12,549 7.74 137,041 10,428 7.61 134,078 10,088 7.52
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Noninterest-earning assets 8,522 7,419 5,410
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Total assets $170,731 $144,460 $139,488
====================================================================================================================================
Interest-bearing liabilities:
Savings, checking and MMDA's $25,821 794 3.08 $23,507 729 3.10 $21,641 721 3.33
Certificates of deposit 83,032 4,808 5.79 73,465 4,195 5.71 66,532 3,884 5.84
FHLB advances 35,803 2,010 5.61 22,433 1,225 5.46 22,236 1,325 5.96
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Total interest-bearing liabilities 144,656 7,612 5.26 119,405 6,149 5.15 110,409 5,930 5.37
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Noninterest-bearing liabilities 2,853 1,340 1,504
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Total liabilities 147,509 120,745 111,913
Stockholders' equity 23,222 23,715 27,575
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Total liabilities and
stockholders' equity $170,731 $144,460 $139,488
====================================================================================================================================
Net interest income; average
interest rate spread $ 4,937 2.48% $4,279 2.46% $4,158 2.15%
====================================================================================================================================
Net interest margin(4) 3.04% 3.12% 3.10%
====================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 1.12x 1.15x 1.21x
====================================================================================================================================
(1) At June 30, 1998, the weighted average yields earned and rates paid were as
follows: loans receivable, 7.92%; securities, 6.28%; mortgage-backed securities,
6.68%; interest-bearing deposits, 5.50%; FHLB stock, 8.00%; total
interest-earning assets, 7.60%; savings, checking and MMDA's, 3.26%;
certificates of deposits, 5.74%; FHLB advances, 5.48%; total interest-bearing
liabilities, 5.24%; and interest spread, 2.36%.
(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) Includes collateralized mortgage obligations.
(4) Net interest margin equals net interest income divided by average
interest-earning assets.
7
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (change in rate multiplied by prior year volume), and (ii)
changes in volume (change in volume multiplied by prior year rate). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
Year Ended Year Ended
June 30, 1998 June 30, 1997
vs. vs.
Year Ended Year Ended
June 30, 1997 June 30, 1996
- ------------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
- ------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
- ------------------------------------------------------------------------------------------------------------
(In Thousands)
Interest income:
Loans receivable $178 $1,411 $1,589 $ 70 $ 234 $ 304
Securities 17 (78) (61) 46 (168) (122)
Mortgage-backed securities (2) 602 600 8 281 289
Interest-bearing deposits 3 (50) (47) (24) (103) (127)
FHLB stock 2 38 40 (5) 1 (4)
- ------------------------------------------------------------------------------------------------------------
Total interest income 198 1,923 2,121 95 245 340
- ------------------------------------------------------------------------------------------------------------
Interest expense:
Savings, checking and MMDA's (5) 70 65 (52) 60 8
Certificates of deposit 60 553 613 (87) 398 311
FHLB advances 35 750 785 (112) 12 (100)
- ------------------------------------------------------------------------------------------------------------
Total interest expense 90 1,373 1,463 (251) 470 219
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $108 $ 550 $ 658 $ 346 $(225) $ 121
============================================================================================================
Provision for Loan Losses. The provision for loan losses increased by $21,000
or 35% when comparing fiscal 1998 and 1997. The provision for loan losses is a
result of management's periodic analysis of the allowance for loan losses.
The allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations, and other factors and estimates which are subject to change over
time.
Management believes that the allowance is adequate to provide for potential
losses; however, there can be no assurance the related allowance may not have to
be increased in the future. Management expects the
8
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
provision for loan losses to increase in the next fiscal year to keep pace with
the growth in the loan portfolio and to prepare for the higher risk of loss
associated with management's intention to increase the commercial and consumer
loan portfolios.
The Company's ratio of nonperforming assets, consisting of loans 90 days or
more delinquent and foreclosed assets, to total assets was .57% as of June 30,
1998 compared to .28% as of June 30, 1997. The allowance for loan losses as a
percentage of total loans at June 30, 1998 increased to .21% compared to .19% at
June 30, 1997. The allowance for loan losses equalled 34.5% of nonperforming
loans at June 30, 1998. Nonperforming loans consisted primarily of one- to
four-family properties. The ratio of net charge-offs to average loans
outstanding was .01% for fiscal 1998 compared to none for fiscal 1997.
Total Other Income. Total other income decreased by $542,000 or 34.9% in
fiscal 1998 from fiscal 1997, primarily due to a $531,000 or 72.6% decrease in
the net gains on trading equity securities and a $201,000 increase in net loss
on securities available for sale. This amount was partially offset by a $163,000
or 32.7% increase in gain on sale of loans. The decrease in net gain on trading
equity securities was primarily due to the Company's decision to stop trading
equity securities in light of recent stock market volatility. The increase in
net loss in securities available for sale was due to an other-than-temporary
decline in certain equity securities resulting in a write-down of $260,000. The
increase in gain on sale of loans is a result of higher refinancing volume from
lower prevailing market interest rates compared to the prior fiscal year. The
Company expects that the formation of Sunrise Mortgage Corporation and continued
expansion of its retail and wholesale mortgage banking business will increase
core mortgage banking volume in fiscal 1999 compared to fiscal 1998.
Total Other Expenses. Total other expenses increased by $213,000 or 4.9% in
fiscal 1998 from fiscal 1997. The increase was primarily due to higher
compensation and benefits expense of $576,000 or 25.8%, and higher professional
fees of $74,000 or 39.2%. In addition, fiscal 1997 total other expenses include
a one-time assessment of $551,000 relating to legislation signed into law on
September 30, 1996 to recapitalize the SAIF. On a SAIF adjusted basis, total
other expenses increased $764,000 or 20.0% for the year ended June 30, 1998
compared to June 30, 1997.
The increase in compensation and benefits is due in part to a greater number
of full-time equivalent employees to support the growth in the mortgage banking,
consumer and commercial loan departments, and a $157,000 increase in ESOP
expense attributable to the higher market price of the Company's stock in fiscal
1998 compared to fiscal 1997. The Bank has completed the majority of personnel
additions necessary to support continued growth in its lending areas and
branches. Management expects that additional loan and deposit growth given the
current staffing level should result in an improvement to the Bank's efficiency
ratio for fiscal 1999. Professional fees increased due to higher consulting fees
and out-sourcing the human resources function.
Federal Income Tax Expense. Federal income tax expense decreased by $26,000
or 5.4% in fiscal 1998 from fiscal 1997, due to a decrease in pretax income.
Results of Operations for the Year Ended June 30, 1997, Compared to the Year
Ended June 30, 1996
Net Income. The Company's net income decreased by $285,000 or 23.6% in fiscal
1997 from fiscal 1996. The decrease in fiscal 1997 was primarily due to a
$364,000 or $0.14 per share government mandated special assessment to
recapitalize the SAIF, which is administered by the FDIC. In addition, other
expenses (excluding the SAIFassessment) increased by $351,000. These amounts
were partially offset by increases in net interest income and other income of
$121,000 and $352,000, respectively.
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Net Interest Income. The $121,000 or 2.9% increase in net interest income in
fiscal 1997 was primarily due to a $3.0 million or 3.0% increase in the average
loan portfolio and a $4.3 million or 22.7% increase in the average mortgage
collaterized securities portfolio. In addition, the Company's average interest
spread increased from 2.15% to 2.46%. The average interest spread increased as a
result of an increase in the average yield on interest-earning assets, primarily
loans, as well as a decline in the average cost of interest-bearing liabilities
both in deposits and FHLB advances. These amounts were partially offset by a
$9.0 million or 8.1% increase in average interest-bearing liabilities.
Interest Income. Total interest income increased by $340,000 or 3.4% in
fiscal 1997 compared to fiscal 1996. The increase was primarily due to a $3.0
million or 3.0% increase in the average loan portfolio and a $4.3 million or
22.7% increase in the average mortgage collateralized securities portfolio. The
interest on loans also increased due to the average yield increasing from 7.87%
in fiscal 1996 to 7.94% in fiscal 1997 resulting in a $70,000 or .9% increase in
interest on loans (before giving effect to the increase in the average balance)
as adjustable-rate loans repriced higher to reflect the higher prevailing market
interest rates during fiscal 1997 as well as the growth in the commercial and
consumer loan portfolios. These amounts were partially offset by a decline in
interest on securities and other interest-earning deposits of $122,000 and
$127,000, respectively, as the proceeds from sold or called securities and other
available liquidity were utilized to fund loans instead of being invested in
securities.
Interest Expense. Total interest expense increased by $219,000 or 3.7% in
fiscal 1997 compared to fiscal 1996, primarily due to an increase in the average
deposit balance of $8.8 million. This amount was partially offset by a decrease
in the average cost of deposits from 5.22% in fiscal 1996 to 5.08% in fiscal
1997.
Interest on FHLB advances decreased $100,000 in fiscal 1997 from fiscal 1996,
as the average rate paid decreased to 5.46% in fiscal 1997 from 5.96% in fiscal
1996. FHLB advances have primarily been used in addition to deposits to fund
loan originations for the Bank's loan portfolio as well as to purchase
adjustable-rate collateralized mortgage obligations.
Provision for Loan Losses. The provision for loan losses did not change when
comparing fiscal 1996 to fiscal 1997. The allowance for loan losses totalled
$226,000, which represented .19% of the total loan portfolio and 54.2% of
nonperforming loans at June 30, 1997. The nonperforming loans at June 30, 1997
were comprised of one- to four-family mortgage loans.
Total Other Income. Total other income increased by $352,000 or 29.3% in
fiscal 1997 from fiscal 1996, primarily due to a $365,000 improvement in the
results of trading equity securities and a $117,000 increase in fees and service
charges. These amounts were partially offset by a $118,000 decrease in gain on
sale of loans. The equity securities trading portfolio was comprised of equity
investments in financial institutions. The unrealized gain recognized on
securities classified as trading was $131,000 at June 30, 1997.
Gain on the sale of loans decreased by $118,000 or 19.1% due to a decline in
loans sold of $12.9 million as a result of lower refinancing volume from higher
prevailing market interest rates compared to the prior fiscal year as well as
increased market competition. However, the decline in gain on the sale of loans
was offset by an increase in fee and service charge income of $117,000 or 58.4%
which was primarily related to new loan programs both at the retail level and
with correspondent financial institutions. In an effort to offset the financial
statement impact of lower mortgage banking volume, management placed greater
emphasis on originating commercial and consumer loans for portfolio.
Total Other Expenses. Total other expenses increased by $903,000 or 26.0% in
fiscal 1997 from fiscal 1996, primarily due to a government mandated special
assessment to recapitalize the SAIF, which is administered by the FDIC. The FDIC
notified the Bank that the Bank's special assessment was $551,000 on a pretax
basis.
10
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Compensation and benefits increased by $407,000 or 22.3%, which was primarily
due to hiring individuals to support the growth in the mortgage banking,
consumer and commercial loan departments. In addition, the Employee Stock
Ownership Plan and Management Recognition Plans expenses were higher by $26,000
and $51,000 for fiscal 1997, respectively, compared to fiscal 1996. Also,
occupancy expense was $60,000 higher during fiscal 1997 compared to fiscal 1996
due to the opening of the Bank's third branch location. These amounts were
partially offset by a decrease in professional fees of $83,000 or 30.5% due to a
reduction in consulting fees related to one-time projects.
Federal Income Tax Expense. Federal income tax expense decreased by $143,000
or 23.0% in fiscal 1997 from fiscal 1996, due to a decline in pretax 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, swaps or
options. However, the Company is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates. Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party up to a
stipulated amount and with specified terms and conditions. Commitments to extend
credit and standby letters of credit are not recorded as an asset or liability
by the Bank until the instrument is exercised.
The Bank's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. See "Asset and Liability Management" section for
additional information. Interest rate risk is the potential for economic losses
due to future interest rate changes. These economic losses can be reflected as a
loss of future net interest income and/or a loss of current fair market values.
Management realizes that certain risks are inherent and the goal is to identify
and minimize the risks. The Bank has no market risk sensitivity instruments held
for trading purposes.
Asset and Liability Management
Consistent net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap," provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates.
The Bank attempts to manage its interest rate risk by maintaining a high
percentage of its assets in adjustable-rate mortgage loans ("ARMs"), other
adjustable-rate loans and mortgage collateralized securities. The interest rate
on its ARMs, however, adjusts no more frequently than once a year, with the
amount of the change subject to annual limitations, whereas the interest rates
on most deposits can change more frequently and are not subject to annual
limitations. Significant effort has been made to reduce the duration and average
life of the Bank's interest-earning assets. During fiscal 1998, the Bank's ratio
of interest-sensitive assets to interest-sensitive liabilities increased
primarily due to purchasing additional adjustable-rate collateralized mortgage
obligations. These efforts were partially offset by a decline in the ARM
portfolio by $17.1 million or 34.5% resulting from borrowers refinancing
primarily to fixed-rate loans in the current low interest rate environment.
11
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Another way the Bank has managed interest rate risk is by selling most of the
newly originated or purchased, fixed-rate mortgages with terms of fifteen years
or greater, while originating adjustable-rate loans and balloon mortgage loans
for retention in the loan portfolio. In addition, the Bank continues to
emphasize consumer, home equity and commercial loans which are shorter term in
nature than the mortgage portfolio. At June 30, 1998, the Bank's adjustable-rate
and balloon mortgage loans amounted to $57.0 million or 31.4% of total assets.
Although the Bank experienced a high level of ARM prepayments during fiscal
1998, it is anticipated that the Bank will retain a sufficient amount of newly
originated balloons and other loan types to offset loan prepayments and
repayments in the next fiscal year.
With its funding sources, management has attempted to reduce the impact of
interest rate changes by emphasizing non-interest bearing products, and term
advances from the FHLB.
Management presently measures the Bank's interest rate risk by computing
estimated changes in net interest income ("NII") and the net portfolio value
("NPV") of equity in the event of a range of assumed changes in market interest
rates. The Bank's exposure to interest rates is reviewed quarterly by senior
management and the Board of Directors. Exposure to interest rate risk is
measured with the use of interest rate sensitivity analysis to determine the
change in 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, 1998:
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 $17,428 (14.98)% $6,488 24.38%
+300 18,356 (10.46) 6,291 20.61
+200 19,129 (6.68) 5,992 14.88
+100 19,771 (3.55) 5,625 7.84
Static 20,499 -- 5,216 --
(100) 19,546 (4.65) 4,703 (9.84)
(200) 17,857 (12.89) 4,110 (21.21)
(300) 16,506 (19.48) 3,539 (32.16)
(400) 15,211 (25.80) 2,996 (42.57)
As illustrated in the table, a decrease in interest rates will result in
larger net decreases in the Bank's NPV as compared to an increase in interest
rates. This occurs principally because, when rates decline, the Bank does not
experience a significant rise in market value for its loans because borrowers
prepay at relatively high rates. Also when rates decline, the yield on the
Bank's adjustable-rate loans and collateralized mortgage obligations would
reprice downward faster than the average cost of funds on its deposits and FHLB
advances.
12
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react differently to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. In addition, certain
assets, such as adjustable-rate mortgage loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, expected rates of prepayments on
loans, decay rates of deposits and early withdrawals from certificates could
likely deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Bank has no regulatory mandated minimum liquidity requirements. The Bank
maintains a level of liquidity consistent with management's assessment of
expected loan demand, proceeds from loan sales, deposit flows and yields
available on interest-earning deposits and investment securities. When overnight
deposits fall below management's targeted level, management generally borrows
FHLB advances instead of selling securities.
The Bank's principal sources of liquidity are deposits, principal and
interest payments on loans, proceeds from loan sales, maturities of securities,
sales of securities available for sale and FHLB advances. While scheduled loan
repayments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions and competition.
The Bank routinely borrows FHLB advances when overnight deposits are drawn to
low levels. These borrowings are made pursuant to the blanket collateral
agreement with the FHLB. At June 30, 1998, the Bank has approximately $35
million of excess borrowing capacity under the blanket collateral agreement with
the FHLB.
The Company (excluding the Bank) also has a need for, and sources of,
liquidity. Dividends from the Bank and interest income and gains on investments
are its primary sources. The Company also has modest operating costs and has
paid a regular quarterly cash dividend.
The Bank is subject to three capital to asset requirements in accordance with
banking regulations. Bank West's capital ratios are well in excess of minimum
capital requirements specified by federal banking regulations. See Note 13 to
consolidated financial statements for more information on the Bank's capital
requirements.
Year 2000
Management and a committee of the Board of Directors have developed a formal
action plan which outlines the Bank's process for preparing itself for Year 2000
issues. The Bank's core data processing software is provided by an outside
vendor. The outside vendor projects the software they provide will be Year 2000
compliant, including testing, during the fourth quarter of 1998. The Bank
anticipates testing the software and integration with other third party software
during the fourth quarter of 1998. Management also anticipates testing its
remaining systems for Year 2000 compliance during the fourth quarter of 1998 and
first quarter of 1999.
Management presently anticipates that the costs of addressing the Year 2000
will approximate $200,000 to $250,000. These costs will be primarily for the
replacement of depreciable assets. The costs associated with Year 2000 readiness
are based on management's best estimates. There can be no guarantee that these
estimates will be achieved and actual results that might cause differences
include, but are not limited to, the ability of other
13
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
companies on which the Company's systems rely to modify or convert their systems
to be Year 2000 compliant, the ability to locate and correct all relevant
computer codes, and similar uncertainties. As testing continues and more
progress is made, management will continuously be assessing the estimated Year
2000 costs. As of June 30, 1998, the Bank has not incurred any direct costs
relating to Year 2000 readiness, except for staff personnel time.
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.
Impact of New Accounting Standards
Information pertaining to this topic appears at the conclusion of Note 1 to
the consolidated financial statements, which are included as part of this
report.
14
Report of Independent Auditors
- --------------------------------------------------------------------------------
[GRAPHIC-LOGO FOR CROWE CHIZEK]
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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 21, 1998, except for Note 2,
for which the date is September 18, 1998
15
Consolidated Balance Sheets
June 30, 1998 and 1997
- --------------------------------------------------------------------------------------------------
1998 1997
ASSETS
Cash and due from financial institutions $ 2,408,476 $ 1,722,734
Interestbearing deposits in financial institutions 1,797,063 1,950,522
------------- -------------
Total cash and cash equivalents 4,205,539 3,673,256
Interest-bearing time deposits -- 99,000
Trading securities -- 2,921,251
Securities available for sale 32,167,697 25,550,974
Securities held to maturity (fair value:
1998 - $11,079,178; 1997 - $4,001,875) 11,084,361 4,003,575
Loans held for sale 8,156,572 2,231,151
Loans, net 118,905,611 111,530,092
Federal Home Loan Bank (FHLB) stock 2,100,000 1,550,000
Premises and equipment - net 3,164,905 3,128,158
Accrued interest receivable 879,082 762,990
Mortgage servicing rights 280,869 148,569
Real estate owned 192,080 19,912
Other assets 332,136 56,263
------------- -------------
$ 181,468,852 $ 155,675,191
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 119,979,379 $ 102,862,152
FHLB borrowings 37,000,000 29,000,000
Accrued interest payable 253,037 202,217
Advanced payments by borrowers for taxes and insurance 512,538 491,710
Deferred federal income tax 335,182 287,635
Other liabilities 114,029 239,168
------------- -------------
Total liabilities 158,194,165 133,082,882
Commitments and contingencies
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 10,000,000 shares authorized;
2,623,629 and 1,753,475 issued at June 30, 1998 and 1997 26,237 17,535
Additional paid-in capital 11,551,136 11,432,798
Retained earnings, substantially restricted 12,928,028 12,647,112
Net unrealized gain on securities available for sale,
net of tax of ($2,644) in 1998 and ($6,548) in 1997 5,132 12,710
Management Recognition Plan (unearned shares) (360,998) (513,398)
Employee Stock Ownership Plan (unallocated shares) (874,848) (1,004,448)
------------- -------------
23,274,687 22,592,309
------------- -------------
$ 181,468,852 $ 155,675,191
============= =============
See accompanying notes to consolidated financial statements.
16
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
Interest and dividend income
Loans $ 9,795,291 $ 8,206,364 $ 7,901,948
Securities 2,446,042 1,907,129 1,739,792
Other interest-earning deposits 152,152 199,210 325,796
Dividends on FHLB stock 155,825 115,838 120,467
- -------------------------------------------------------------------------------------------------------------
12,549,310 10,428,541 10,088,003
Interest expense
Deposits 5,601,870 4,924,144 4,605,347
FHLB borrowings 2,010,465 1,224,959 1,324,732
- -------------------------------------------------------------------------------------------------------------
7,612,335 6,149,103 5,930,079
- -------------------------------------------------------------------------------------------------------------
Net interest income 4,936,975 4,279,438 4,157,924
Provision for loan losses 81,000 60,000 60,000
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,855,975 4,219,438 4,097,924
Other income
Net gain on sales of loans 662,203 498,666 617,286
Fees and service charges 340,967 317,286 200,330
Net gain on trading securities 200,148 731,156 366,465
Net gain (loss) on securities
available for sale (201,890) (285) 10,529
Other income 10,911 7,050 7,402
- -------------------------------------------------------------------------------------------------------------
1,012,339 1,553,873 1,202,012
Other expenses
Compensation and benefits 2,809,557 2,234,337 1,827,177
Federal deposit insurance expense 64,306 121,246 196,397
FDIC special assessment -- 550,556 --
Professional fees 263,374 188,561 272,163
Data processing expense 197,487 177,878 172,596
Occupancy expense 301,185 266,457 206,058
Furniture, fixtures and equipment expense 153,899 137,249 124,366
Advertising 111,351 119,993 87,770
Provision to adjust loans held for sale
to lower of cost or market -- -- 22,039
Other expense 683,532 575,481 560,482
- -------------------------------------------------------------------------------------------------------------
4,584,691 4,371,758 3,469,048
- -------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 1,283,623 1,401,553 1,830,888
Federal income tax expense 453,255 478,724 622,400
- -------------------------------------------------------------------------------------------------------------
Net income $ 830,368 $ 922,829 $ 1,208,488
=============================================================================================================
Basic earnings per share $ .35 $ .36 $ .39
=============================================================================================================
Diluted earnings per share $ .33 $ .36 $ .39
=============================================================================================================
Dividends per share $ .22 $ .19 $ .19
=============================================================================================================
See accompanying notes to consolidated financial statements.
17
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- -----------------------------------------------------------------------------------------------------------------------
Balance at July 1, 1995 $23,144 $17,812,757 $11,626,136 $(27,295) $(1,263,648) $28,171,094
Net income for the year
ended June 30, 1996 1,208,488 1,208,488
Issuance of 92,575 shares
of common stock for
Management Recognition
Plan (MRP) 926 741,658 $(742,584)
Shares earned under MRP 99,120 99,120
Cash dividends of
$.19 per share (603,382) (603,382)
Repurchase of 207,375
shares of stock (2,074) (2,046,987) (2,049,061)
Shares committed to
be released under
Employee Stock
Ownership Plan 34,679 129,600 164,279
Change in net unrealized
gain (loss) on securities
available for sale, net
of tax of $92,775 (180,092) (180,092)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 21,996 16,542,107 12,231,242 (207,387) (643,464) (1,134,048) 26,810,446
Net income for the year
ended June 30, 1997 922,829 922,829
Net grant of 1,742 shares of
common stock for MRP 19,852 (19,852)
Shares earned under MRP 149,918 149,918
Cash dividends of
$.19 per share (506,959) (506,959)
Repurchase of 446,100 shares
of stock (4,461) (5,189,405) (5,193,866)
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Years ended June 30, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- -----------------------------------------------------------------------------------------------------------------------
Shares committed to be
released under Employee
Stock Ownership Plan $ 60,244 $ 129,600 $ 189,844
Change in net unrealized
gain (loss) on securities
available for sale, net
of tax of $113,383 $220,097 220,097
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $17,535 11,432,798 $12,647,112 12,710 $(513,398) (1,004,448) 22,592,309
Net income for the year
ended June 30, 1998 830,368 830,368
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
Change in net unrealized
gain (loss) on securities
available for sale, net of
tax benefit of $3,904 (7,578) (7,578)
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $26,237 $11,551,136 $12,928,028 $ 5,132 $(360,998) $(874,848) $23,274,687
========================================================================================================================
See accompanying notes to consolidated financial statements.
19
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 830,368 $ 922,829 $ 1,208,488
Adjustments to reconcile net income to
net cash from operating activities
Purchase of trading securities (2,530,635) (5,428,775) (2,224,537)
Proceeds from sales of trading securities 4,486,385 3,947,118 1,882,564
Origination and purchase of mortgage
loans for sale (50,245,577) (30,350,557) (48,488,782)
Proceeds from sales of mortgage loans 44,982,359 32,915,164 45,798,332
Net (gain) loss on sales of:
Loans (662,203) (498,666) (617,286)
Securities 1,742 (730,871) (376,994)
Real estate owned (2,241) (210) (4,806)
Depreciation 213,787 192,495 179,742
Amortization of premium, net 79,741 13,848 103,072
ESOP expense 346,528 189,844 164,279
MRP expense 152,400 149,918 99,120
Loss on disposal of fixed assets -- -- 2,662
Provision for loan losses 81,000 60,000 60,000
Provision to adjust loans held for sale
to lower of cost or market -- -- 22,039
Change in:
Deferred loan fees (180,698) (77,301) (47,292)
Other assets and accrued interest receivable (541,027) (85,866) (15,373)
Other liabilities and accrued interest payable (2,039) (36,442) (144,282)
- --------------------------------------------------------------------------------------------------------------
Net cash from operating activities (2,990,110) 1,182,528 (2,399,054)
Cash flows from investing activities
Purchase of FHLB stock (550,000) (75,000) --
Net decrease in interest-bearing time deposits 99,000 199,000 989,000
Loan originations, net of repayments (4,296,879) (13,664,118) 3,696,997
Loans purchased for portfolio (3,295,025) (2,156,750) (1,921,400)
Purchase of securities available for sale (24,143,884) (14,725,895) (21,217,480)
Proceeds from sales of securities available for sale 15,634,260 10,731,577 14,077,014
Purchase of securities held to maturity (11,102,747) (3,002,813) --
Proceeds from maturities, calls and principal
payments of securities available for sale 2,786,772 1,545,498 8,874,974
Proceeds from maturities, calls and principal
payments of securities held to maturity 4,000,625 1,000,000 2,877,708
Property and equipment expenditures (250,534) (213,681) (202,205)
Proceeds from sale of real estate owned 162,918 25,566 50,181
- --------------------------------------------------------------------------------------------------------------
Net cash from investing activities (20,955,494) (20,336,616) 7,224,789
See accompanying notes to consolidated financial statements.
20
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net increase in deposits $ 17,117,227 $ 11,834,080 $ 5,847,822
Repayment of FHLB borrowings (43,000,000) (11,000,000) (11,922,256)
Proceeds from FHLB borrowings 51,000,000 21,000,000 6,000,000
Repurchase of common stock (105,938) (5,193,866) (2,049,061)
Issuance of shares upon exercise of
stock options 7,283 -- --
Dividends paid on common stock (540,685) (506,959) (603,382)
- --------------------------------------------------------------------------------------------------------------
Net cash from financing activities 24,477,887 16,133,255 (2,726,877)
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 532,283 (3,020,833) 2,098,858
Cash and cash equivalents at beginning of period 3,673,256 6,694,089 4,595,231
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,205,539 $ 3,673,256 $ 6,694,089
==============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 7,561,515 $ 6,103,832 $ 5,954,870
Income taxes 768,119 456,050 520,000
Supplemental disclosure of noncash investing activities:
Transfer of loans from held for sale
to held to maturity -- -- 1,756,663
Transfer from loans to real estate owned 316,083 45,268 45,375
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.
During November of 1995, securities with a carrying value of $15,008,666 and
a fair value of $14,964,245 were transferred from securities held to maturity to
securities available for sale.
See accompanying notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Bank West Financial Corporation (the "Company") was
organized as a thrift holding company for Bank West (the "Bank"), a
state-chartered stock savings bank. The consolidated financial statements
include the accounts of the Company and the Bank. All significant intercompany
transactions and balances have been eliminated in consolidation. The Bank's
primary services include accepting deposits and making 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. The Bank has formed a wholly-owned mortgage
company for the purpose of selling non-conforming originated and purchased loans
into the secondary market.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The primary estimates incorporated
into the Company's consolidated financial statements which are susceptible to
change in the near term include the allowance for loan losses, the
classification and carrying value of securities, mortgage servicing rights, and
loans held for sale and the fair value of stock options and other financial
instruments.
Concentrations of Credit Risk: The Bank grants mortgage loans to customers
primarily in Kent County and Eastern Ottawa County, Michigan. No significant
number of the Bank's customers are employed at any one specific entity or in any
one specific industry. The Bank grants primarily one-to four-family residential
real estate loans. Substantially all loans are secured by specific items of
collateral, primarily single-family residences.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and other investments with original maturities of three months or
less. Net cash flows are reported for customer loan transactions, deposit
transactions, and deposits made with other financial institutions.
Trading Securities: Securities that are bought and held principally for
resale in the near term (thus held for only a short period of time) are
classified as trading securities and recorded at their fair values. Realized and
unrealized gains and losses on trading securities are included immediately in
other income.
Securities: Securities which the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. Securities, other than trading securities, that might be sold prior to
maturity are classified as available for sale. Securities classified as
available for sale are reported at their fair value and the related unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of shareholders' equity, until realized. Securities are
written down to fair value when a decline in fair value is not temporary.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method. 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.
22
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and costs, and charge-offs. Interest income
on loans is accrued over the term of the loans based upon the principal
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.
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: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position and collateral values and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 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 related components are depreciated using
the straight-line method with useful lives ranging from 31 to 40 years.
Furniture and equipment are depreciated using the straight-line method with
useful lives ranging from three to ten years. Maintenance and repairs are
charged to expense and improvements are capitalized. These assets are reviewed
for impairment when events indicate the carrying amount may not be recoverable.
Real Estate Owned: Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value 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.
23
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is based on the amount of taxes due on the
Company's tax return plus changes in the deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP
but not yet allocated to participants is presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the market price
of the shares as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to additional paid-in
capital. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings while dividends on unallocated ESOP shares are reflected as a
reduction of debt and accrued interest.
Management Recognition Plan (MRP): The MRP is a stock award plan for which
the measurement of total compensation cost is based upon the fair value of the
shares on the date of grant. MRP awards vest in five equal annual installments
from the date of grant, subject to the continuous employment of the recipients
as defined under such plans. Compensation expense for the MRPs is recognized on
a prorata basis over the vesting period of the awards. The unearned compensation
value of the MRPs is shown as a reduction of shareholders' equity.
Stock Option Plan (SOP): Expense for employee compensation under SOPs is
recognized only if options are granted below the market price at the grant date.
As shown in a separate note, pro forma disclosures of net income and earnings
per share are provided as if the fair value method were used for stock-based
compensation.
Preferred Stock: The Company is authorized to issue 5,000,000 shares of
preferred stock. Such stock may be issued with such preferences and designations
as the Board of Directors may determine. The Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength of the holders of
the Common Stock and may have the effect of impeding an unfriendly takeover or
attempted change in control.
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: The accounting standard for computing
earnings per share was revised for fiscal 1998, and all earnings per share data
previously reported have been restated to follow the new standard. 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 retroactively
adjusted for a three-for-two stock split paid in December, 1997.
Issued But Not Yet Adopted Accounting Standards: Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, was issued by the FASB in
1996. It revised the accounting for transfers of financial assets, such as loans
and securities, and for distinguishing between sales and secured borrowings. It
was effective for some transactions in fiscal 1997 and will be effective for
others in fiscal 1998. The effect on the consolidated financial statements was
not material.
24
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, has
been issued which will require future reporting of comprehensive income
beginning with the quarter ended September 30, 1998. Comprehensive income is net
income plus changes in the unrealized gain (loss) on securities available for
sale, net of tax.
A new accounting standard, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments beginning with the year ended
June 30, 1999. The Company is in the process of determining whether the new
standard would result in the identification of additional reportable business
segments.
A new accounting standard, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, will require all derivatives to be
recognized at fair value as either assets or liabilities in the Consolidated
Balance Sheets beginning with the quarter ended September 30, 1999. Changes in
the fair value of derivatives not designated as hedging instruments are to be
recognized currently in earnings. Gains or losses on derivatives designated as
hedging instruments are either to be recognized currently in earnings or are to
be recognized as a component of other comprehensive income, depending on the
intended use of the derivatives and the resulting designations. The Company does
not believe adoption of this new standard will have a material impact on its
consolidated financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities at June 30, are
as follows:
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
1998
U.S. agencies $ 3,995,488 -- $ (3,613) $ 3,991,875
Mortgage-backed securities 817,236 -- (9,916) 807,320
Collateralized mortgage obligations 24,596,237 $230,029 (210,089) 24,616,177
Equity securities 2,750,960 61,250 (59,885) 2,752,325
- --------------------------------------------------------------------------------------------------------------
$32,159,921 $291,279 $ (283,503) $32,167,697
==============================================================================================================
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
==============================================================================================================
25
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Held to Maturity Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
1998
Collateralized mortgage obligations $11,084,361 $42,498 $(47,681) $11,079,178
=============================================================================================================
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
=============================================================================================================
The scheduled maturities of securities available for sale and securities held
to maturity at June 30, 1998 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.
-- Available for Sale -- -- Held to Maturity --
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
Due after one year through
five years $ 3,995,488 $ 3,991,875 -- --
Mortgage-backed securities
and collateralized mortgage
obligations 25,413,473 25,423,497 $11,084,361 $11,079,178
Equity securities 2,750,960 2,752,325
- --------------------------------------------------------------------------------------------------------------
$32,159,921 $32,167,967 $11,084,361 $11,079,178
==============================================================================================================
Proceeds from sales of securities amounted to approximately $20,121,000,
$14,679,000 and $15,969,000 for the years ended June 30, 1998, 1997 and 1996,
respectively, including approximately $4,486,000, $3,947,000, and $1,883,000
relative to trading securities for the years ended June 30, 1998, 1997 and 1996.
Gains (losses) on securities, reflected in the consolidated statements of
income, were as follows for the years ended June 30:
26
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Gross realized gains on sales of:
Securities available for sale $ 59,447 $ 17,075 $ 27,965
Trading securities 667,238 602,570 372,278
- ---------------------------------------------------------------------------------------------
726,685 619,645 400,243
Gross realized losses on sales of:
Securities available for sale (1,059) (17,360) (17,436)
Trading securities -- (1,977) --
- ---------------------------------------------------------------------------------------------
(1,059) (19,337) (17,436)
- ---------------------------------------------------------------------------------------------
Net realized gains 725,626 600,308 382,807
Net unrealized gain (loss) on trading securities (467,070) 130,563 (5,813)
Other-than-temporary market decline of
available for sale securities (260,278) -- --
- ---------------------------------------------------------------------------------------------
$ (1,742) $730,871 $376,994
=============================================================================================
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.
As of September 18, 1998, the fair value of certain equity securities
included in the available for sale classification have declined by $269,000 from
June 30, 1998.
NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Bank's secondary market mortgage activities,
which consist solely of one-to four-family real estate loans:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Loans held for sale - beginning of period $ 2,231,151 $ 4,297,092 $ 2,746,019
Activity during the periods:
Loans originated and purchased for sale 50,245,577 30,350,557 48,488,782
Proceeds from sale of mortgage loans (44,982,359) (32,915,164) (45,798,332)
Transfer of loans from held for sale to
held to maturity -- -- (1,756,663)
Gain on sale of loans 662,203 498,666 617,286
- ---------------------------------------------------------------------------------------------
Loans held for sale - end of period $ 8,156,572 $ 2,231,151 $ 4,297,092
=============================================================================================
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
June 30 are summarized as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Mortgage loan portfolios serviced for
FHLMC $33,201,177 $26,980,056 $28,590,578
=============================================================================================
Loan servicing fee income $ 78,433 $ 70,661 $ 66,725
=============================================================================================
27
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES (Continued)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $192,262 and $116,813 at June 30, 1998 and 1997.
Following is the activity for mortgage servicing rights for the years ended
June 30:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Balance at July 1 $148,569 $142,697 $ 68,196
Additions 190,800 16,372 124,501
Amortization (58,500) (10,500) (50,000)
- ---------------------------------------------------------------------------------------------
Balance at June 30 $280,869 $148,569 $142,697
=============================================================================================
NOTE 4 - LOANS
Loans are classified as follows at June 30:
1998 1997
- ---------------------------------------------------------------------------------------------
Real estate loans:
One-to four-family residential - fixed rate $ 15,383,013 $ 18,595,586
One-to four-family residential - balloon 24,413,846 12,493,524
One-to four-family residential - adjustable 32,599,924 49,743,799
Construction 24,730,805 21,500,849
Commercial mortgages 6,485,449 2,764,314
Home equity lines of credit 9,877,359 6,370,698
Second mortgages 8,148,412 4,252,996
Land development 675,498 59,764
- ---------------------------------------------------------------------------------------------
Total mortgage loans 122,314,306 115,781,530
Consumer loans 1,665,606 1,081,391
Commercial non-mortgage 3,253,091 2,032,190
- ---------------------------------------------------------------------------------------------
Total 127,233,003 118,895,111
Less:
Loans in process 8,248,310 7,169,073
Net deferred fees (costs) (210,614) (29,916)
Allowance for loan losses 289,696 225,862
- ---------------------------------------------------------------------------------------------
$118,905,611 $111,530,092
=============================================================================================
An analysis of the allowance for loan losses for the years ended June 30 is
follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Beginning balance $225,862 $165,862 $108,000
Provision charged to operations 81,000 60,000 60,000
Charge-offs, net of recoveries (17,166) -- (2,138)
- ----------------------------------------------------------------------------------------------
Ending balance $289,696 $225,862 $165,862
==============================================================================================
28
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
During the years ended June 30, 1998, 1997 and 1996, the Company had no loans
which were considered impaired.
Certain directors and executive officers of the Company and the Bank
(including family members, affiliates, and companies in which they are principal
owners) had loans outstanding with the Bank in the ordinary course of business.
The amounts were not material for the years ended June 30, 1998 and 1997.
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment is as follows at June 30:
1998 1997
- --------------------------------------------------------------------------------------------
Land $ 529,300 $ 529,300
Bank building and improvements 2,399,476 2,361,987
Furniture and equipment 1,180,697 967,652
- --------------------------------------------------------------------------------------------
4,109,473 3,858,939
Accumulated depreciation (944,568) (730,781)
- --------------------------------------------------------------------------------------------
$3,164,905 $3,128,158
============================================================================================
NOTE 6 - DEPOSITS
Deposits at June 30 are summarized as follows:
1998 1997
- ------------------------------------------------------------------------------------------------------------
Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 7,010,473 5.84% $ 3,965,790 3.86%
Now accounts and MMDAs 4,434,858 3.70 3,848,395 3.74
Passbook and statement savings 19,334,577 16.11 17,387,602 16.90
Certificates of deposit 89,199,471 74.35 77,660,365 75.50
- -----------------------------------------------------------------------------------------------------------
$119,979,379 100.00% $102,862,152 100.00%
===========================================================================================================
At June 30, 1998, the scheduled maturities of all certificates of deposit are
as follows by fiscal year-end:
1999 $65,436,775
2000 17,718,016
2001 1,944,699
2002 1,953,959
2003 2,096,984
Thereafter 49,038
- --------------------------------------------------------------------------------
$89,199,471
================================================================================
29
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
As of June 30, 1998 and 1997, the Bank had time deposit accounts with
balances of $100,000 or more of $17,183,000 and $14,120,000. Related party
deposits were $2,095,000 and $974,000 at June 30, 1998 and 1997.
On September 30, 1996, as part of the omnibus appropriations package signed
by President Clinton, the government mandated a special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The
one-time, special SAIF assessment amounted to $.657 for every $100 of
SAIF-insured deposits as of March 31, 1995. The FDIC notified the Bank that the
Bank's special assessment was $551,000 which, after taxes, reduced the Company's
net income by $364,000 or $.14 per share for the year ended June 30, 1997. The
Bank's deposit premiums, which were $.23 for every $100 of assessable deposits
in 1996, were reduced to $.064 for every $100 of assessable deposits beginning
January 1, 1997.
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank (FHLB) of Indianapolis,
collateralized by mortgage loans and securities under a blanket collateral
agreement, consist of the following at June 30:
Rate at
Date Due June 30, 1998 1998 1997
- -------------------------------------------------------------------------------------------------------------
Putable advances:
January 29, 2003 5.23% $10,000,000 --
January 16, 2008 5.33 10,000,000 --
April 30, 2008 5.23 2,000,000 --
Adjustable rate advances:
August 4, 1997 - reprices quarterly -- $ 3,000,000
September 22, 1997 - reprices quarterly -- 1,000,000
October 27, 1997 - reprices daily -- 1,000,000
October 30, 1997 - reprices monthly -- 2,000,000
November 3, 1997 - reprices daily -- 1,000,000
December 15, 1997 - reprices quarterly -- 1,000,000
December 18, 1997 - reprices quarterly -- 1,000,000
December 22, 1997 - reprices daily -- 3,000,000
December 24, 1997 - reprices quarterly -- 2,000,000
March 27, 1998 - reprices quarterly -- 2,000,000
April 30, 1998 - reprices quarterly -- 1,000,000
September 14, 1998 - reprices daily 5.75 1,000,000 --
September 16, 1998 - reprices daily 5.75 1,000,000 --
October 13, 1998 - reprices daily 5.75 1,000,000 --
October 30, 1998 - reprices monthly 5.81 4,000,000 4,000,000
November 16, 1998 - reprices daily 5.75 1,000,000 --
December 28, 1998 - reprices daily 5.75 1,000,000 --
April 30, 1999 - reprices quarterly 5.69 1,000,000 --
October 30, 1999 - reprices monthly 5.81 5,000,000 5,000,000
August 26, 2001 - reprices monthly -- 2,000,000
- -------------------------------------------------------------------------------------------------------------
$37,000,000 $29,000,000
=============================================================================================================
30
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued)
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, 1998 are as follows for the
next 5 years:
1999 $10,000,000
2000 5,000,000
2001 --
2002 --
2003 10,000,000
Thereafter 12,000,000
- --------------------------------------------------------------------------------
$37,000,000
================================================================================
Prepayment of certain remaining advances is permitted only upon the Bank's
termination of its FHLB membership, while others are subject to prepayment
penalties under the provisions and conditions of the credit policy of the FHLB.
The Bank did not incur prepayment penalties for the years ended June 30, 1998
and 1997.
NOTE 8 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended June 30 consists
of the following:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Current income tax expense $401,804 $530,231 $496,158
Deferred income tax expense (benefit) 51,451 (51,507) 126,242
- ---------------------------------------------------------------------------------------------
$453,255 $478,724 $622,400
=============================================================================================
Deferred tax assets and liabilities at June 30 consist of the following:
1998 1997
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
Loan fees -- $ 20,120
Accrued expenses $ 15,300 16,116
Management Recognition Plan 34,054 34,200
Loans marked-to-market 89,422 27,736
Other 31,084 3,067
- ---------------------------------------------------------------------------------------------
169,860 101,239
Deferred tax liabilities
Loan fees 81,172 --
Bad debt allowance 162,555 188,779
FHLB stock dividend 49,116 49,116
Fixed assets 114,060 93,917
Mortgage servicing rights 95,495 50,514
Unrealized gain on securities available for sale 2,644 6,548
- ---------------------------------------------------------------------------------------------
505,042 388,874
- ---------------------------------------------------------------------------------------------
Net deferred tax liability $(335,182) $(287,635)
=============================================================================================
31
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL INCOME TAXES (Continued)
No valuation allowance was provided on deferred tax assets.
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
Years ended
---------------- June 30, ------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Statutory rate 34% 34% 34%
Tax expense at statutory rate $436,432 $476,528 $622,502
Tax exempt interest -- -- (639)
Stock compensation plans 16,982 3,150 2,669
Other (159) (954) (2,132)
- ---------------------------------------------------------------------------------------------
$453,255 $478,724 $622,400
=============================================================================================
Effective rate 35% 34% 34%
Differences in the deduction for bad debts for tax and financial statement
purposes after 1988 are included in deferred taxes. For years prior to 1988, the
Bank had determined taxable income after deducting a provision for bad debts in
excess of such provisions recorded in the financial statements. Accordingly,
retained earnings at June 30, 1998 and 1997 includes approximately $3,364,000 on
which no provision for federal income taxes has been made. The amount of
unrecorded deferred taxes is $1,144,000. If this portion of retained earnings is
used for any purpose other than to absorb bad debts, the amount used will be
added to future taxable income.
The Company files consolidated federal income tax returns on a fiscal year
basis. Prior to July 1, 1997, if certain conditions were met in determining
taxable income, the Bank was allowed a special bad debt deduction based on a
percentage of taxable income. Tax legislation passed in August 1996 now requires
the Bank to deduct a provision for bad debts for tax purposes based on actual
loss experience and recapture the excess bad debt reserve accumulated in tax
years after 1987. The related amount of deferred tax liability which must be
recaptured is approximately $265,572 and is payable over a six-year period
beginning no later than 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:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share
Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488
- -------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .35 $ .36 $ .39
=============================================================================================================
32
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - EARNINGS PER SHARE (Continued)
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488
- --------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934
Add: dilutive effects of assumed exercise of
stock options and unvested MRP's
Stock options 107,670 10,827 269
MRP shares 10,413 -- --
- --------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive
potential common shares outstanding 2,488,326 2,583,162 3,097,203
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .33 $ .36 $ .39
==============================================================================================================
Stock options for 26,026 and 78,113 shares of common stock were not
considered in the computation of diluted earnings per share for the years ended
June 30, 1997 and 1996, respectively, as they were antidilutive. All share and
per share amounts have been retroactively adjusted for stock splits.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit, loans in process and letters of credit. The Company's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument is represented by the contractual amount of those instruments. The
Company follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements.
The contract amounts of these financial instruments are as follows at June
30:
1998 1997
- --------------------------------------------------------------------------------
Commitments to make loans $7,035,000 $3,201,000
Unused lines of credit 11,172,000 6,208,000
Loans in process 8,248,000 7,169,000
Letters of credit 278,000 --
Approximately 61% and 33% of commitments to make loans and to fund loans in
process were made at fixed rates as of June 30, 1998 and 1997. Rate ranges for
these fixed rate commitments were 7.0% to 9.125% and 7.625% to 12.25% as of June
30, 1998 and 1997. 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.
33
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
The Company is a defendant in a lawsuit. The complaint alleges that the
Company has been engaged in the unauthorized practice of law as the result of
charging a fee for preparing loan documents. The complaint seeks class action
certification, restitution of all fees paid for the last six years, interest,
attorney fees and other costs. Management believes after consultation with legal
counsel, that the complaint is wholly without merit, and intends to vigorously
defend against this suit and has filed a motion for summary judgment and
dismissal.
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 of the Company.
The Company has entered into employment agreements with four of its officers.
Under the terms of those agreements, certain events leading to separation from
the Company could result in cash payments aggregating up to approximately
$728,000 if termination occurred in calendar 1999.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company participates in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan. Substantially all employees are
eligible for participation in the Plan. The benefits are based on a percentage
of the participant's career average salary for each year of service. An employee
becomes fully vested upon completion of five years of qualifying service. The
plan is currently overfunded and did not require contributions or charges
against income for the years ended June 30, 1998, 1997 and 1996. Specific plan
assets and accumulated benefit information for the Company's portion of the Fund
is not available. Under the Employee Retirement Income Security Act (ERISA), a
contributor to a multi-employer pension plan may be liable in the event of
complete or partial withdrawal for the benefit payments guaranteed under ERISA.
Since the plan is overfunded, no liability for contributions is necessary.
The Company maintains a qualified 401(k) plan covering substantially all
employees. Employees who are 18 years and older and who have completed 1,000
hours of service in a 12 consecutive-month period are eligible. 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 contribution for fiscal 1998, 1997 and 1996 was
approximately $9,600, $5,200 and $3,000, respectively.
NOTE 12 - STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan (ESOP)
An ESOP was established for the benefit of substantially all employees. The
ESOP borrowed $1,296,048 from the Company and used those funds to acquire
243,009 shares of the Company's stock at $5.33 per share.
Shares issued to the ESOP are committed to be released based on the number of
unallocated shares held immediately before release for the current plan year
multiplied by a fraction. The numerator of the fraction is the amount of
quarterly principal and interest paid. The denominator of the fraction is the
sum of the numerator plus the principal and interest to be paid for all future
periods. The loan is secured by shares purchased with the loan
34
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
proceeds and will be repaid by the ESOP with funds from the Company's
contributions to the ESOP and earnings on ESOP assets. Principal and interest
payments are scheduled to occur in quarterly amounts of $45,326 over a ten-year
period. The balance of the loan was $968,684 at June 30, 1998. 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 1998, 1997 and 1996, 24,300 shares of stock with an average fair value
of $14.26 per share in 1998, $7.81 per share in 1997 and $6.76 per share in 1996
were committed to be released. Distributions of 4,802 and 1,295 shares were made
to participants during the years ended June 30, 1998 and 1997. ESOP compensation
expense for the years ended June 30, 1998, 1997 and 1996 was $346,528, $189,844,
and $164,279. Shares held by the ESOP at June 30 are as follows:
1998 1997
- ------------------------------------------------------------------------------
Allocated to participants 72,878 53,380
Unallocated 164,034 188,334
- ------------------------------------------------------------------------------
Total ESOP shares 236,912 241,714
- ------------------------------------------------------------------------------
Fair value of unallocated shares $2,316,980 $1,695,006
==============================================================================
All share and per share amounts have been retroactively adjusted for stock
splits.
Stock Option Plan (SOP) and Management Recognition Plan (MRP)
Employee and director Stock Option Plans (SOPs) and officer and director
Management Recognition Plans (MRPs) were authorized by the shareholders at the
October 25, 1995 annual meeting. The MRPs are restricted stock award plans. The
employee SOP and the officers' MRP are administered by a committee of directors
of the Company, while grants under the directors' SOP and the directors' MRP are
pursuant to formulas set forth in the plans. MRP shares are granted at the
closing market price of the Company's stock on the date of grant and vest in
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.
35
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
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, 1995
Grant 10/25/95 78,113 $ 6.96 37,488 $6.67
Grant 10/26/95 73,875 $6.67
Grant 11/1/95 36,000 $6.63
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1996 78,113 6.96 36,000 6.63 37,488 6.67 73,875 6.67
Granted 7/8/96 21,450 7.33
Granted 10/25/96 26,026 7.25 4,169 7.25
Granted 12/20/96 88,350 7.17
Forfeited (6,150) 7.08 (1,555) 6.67
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1997 104,139 7.03 139,650 7.06 41,657 6.73 72,320 6.67
Granted 9/2/97 69,000 11.375
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
==============================================================================================================
Options/shares exercisable
(vested) 36,450 34,450 15,827 28,928
==============================================================================================================
Options/shares available for
future grant 7 37,509 0 24,886
==============================================================================================================
During the years ended June 30, 1998, 1997 and 1996, $152,400, $149,918, and
$99,120 was charged to compensation expense for the MRPs.
The following pro forma information presents net income and earnings per
share had the fair value method of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123) been used to measure compensation cost for stock options
granted during fiscal 1998, 1997 and 1996. No compensation cost was actually
recognized for stock options for the years ended June 30, 1998, 1997 and 1996.
36
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
Years ending
---------------- June 30, ----------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Net income as reported $ 830,368 $922,829 $1,208,488
Pro forma net income 716,649 885,286 1,175,228
Basic earnings per share as reported .35 .36 .39
Pro forma basic earnings per share .30 .33 .38
Diluted earnings per share as reported .33 .36 .39
Pro forma diluted earnings per share .29 .33 .38
Weighted-average grant-date fair value per option 2.07 .96 .92
In future years, the pro forma effect of not applying SFAS No. 123 is
expected to increase as additional options are granted.
The fair value of options granted during the years ended June 30, 1998, 1997
and 1996, respectively, is estimated using the following weighted-average
information: risk-free interest rate of 6.22%, 6%, and 5.75%, expected life of 5
years, expected monthly volatility of stock price of 7.1%, 6.3% and 6.3%, and
expected dividends of 1.90%, 3% and 2.49% per year.
At June 30, 1998, options outstanding were as follows:
Number of options 308,639
Range of exercise price $6.63 - $11.375
Weighted-average exercise price $8.00
Weighted-average remaining option life 8.13 years
For options now exercisable: number 70,900
Weighted-average exercise price $6.98
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 these
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.
37
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-
Weighted Assets Tier 1 Capital
- --------------------------------------------------------------------------------
Total Tier 1 to Adjusted Assets
- --------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
As a result of the Bank's charter change, the June 30, 1998 and 1997
regulatory capital levels are based upon the Federal Deposit Insurance
Corporation and Office of Thrift Supervision guidelines, respectively.
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
- ---------------------------------------------------------------------------------------------------------------------------
1998
Total capital (to risk weighted assets) $20.1 20.9% $7.7 8.0% $ 9.6 10.0%
Tier 1 capital (to risk weighted assets) 19.8 20.6 3.9 4.0 5.8 6.0
Tier 1 capital (to average total assets) 19.8 11.3 7.0 4.0 8.8 5.0
1997
Total capital (to risk weighted assets) $18.7 23.4% $6.4 8.0% $ 8.0 10.0%
Tier 1 (core) capital (to risk weighted
assets) 18.4 23.1 3.2 4.0 4.8 6.0
Tier 1 (core) capital (to adjusted total
assets) 18.4 12.2 4.5 3.0 7.6 5.0
Tangible capital (to adjusted total
assets) 18.4 12.2 2.3 1.5 N/A
At June 30, 1998 and 1997, the Bank was categorized as well capitalized.
During fiscal 1997, the Bank made a capital distribution to the Company in
the amount of $2,500,000. This distribution was made primarily to allow the
Company to make stock repurchase transactions discussed in Note 14.
38
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
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, 1998, approximately
$10,963,000 was available to the Bank for the payment of dividends to the
holding company without prior regulatory approval.
NOTE 14 - STOCK REPURCHASE PROGRAMS
During fiscal 1998, the Company repurchased 7,500 shares of its common stock
after receiving approval from its federal regulator to repurchase up to 5%, or
133,500 shares of the Company's common stock. The shares were repurchased at an
average price of $14.125 and remain available for general corporate purposes,
including issuance in connection with stock-based compensation plans.
39
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Bank West Financial Corporation is as
follows at June 30:
CONDENSED BALANCE SHEETS
1998 1997
- ---------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 284,085 $ 70,523
Interest-bearing time deposits -- 99,000
Trading securities -- 2,921,251
Securities available for sale 2,752,325 --
Federal income tax receivable 149,171 --
Loan receivable from Employee
Stock Ownership Plan 968,684 1,077,382
Investment in subsidiary bank 19,857,357 18,451,967
Accrued interest receivable 894 1,122
Other assets 12,670 5,540
- ---------------------------------------------------------------------------------------------
Total assets $24,025,186 $22,626,785
=============================================================================================
LIABILITIES
Note payable to subsidiary $ 750,000 --
Deferred taxes 464 --
Other liabilities 35 $ 34,476
SHAREHOLDERS' EQUITY 23,274,687 22,592,309
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $24,025,186 $22,626,785
=============================================================================================
40
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME,
for the years:
------------------ June 30, --------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Interest and dividend income
Securities $ 150,447 $ 55,455 $ 253,122
Loan to Employee Stock Ownership Plan 72,605 79,892 86,691
Other interest-bearing deposits 18,595 53,732 164,328
Dividends from subsidiary bank -- 2,500,000 --
- --------------------------------------------------------------------------------------------------------
241,647 2,689,079 504,141
Interest expense 99,850 11,794 --
- --------------------------------------------------------------------------------------------------------
Net interest income 141,797 2,677,285 504,141
Other income
Net gain on trading securities 200,148 731,156 366,465
Net gain (loss) on securities
available for sale (259,730) (14,995) (7,725)
- --------------------------------------------------------------------------------------------------------
(59,582) 716,161 358,740
Operating expenses 152,108 88,468 90,521
- --------------------------------------------------------------------------------------------------------
Income before federal income taxes and
equity in undistributed earnings of
subsidiary bank (69,893) 3,304,978 772,360
Federal income tax expense (benefit) (23,745) 273,700 262,500
- --------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiary bank (46,148) 3,031,278 509,860
Equity in undistributed (excess distributed)
earnings of subsidiary Bank 876,516 (2,108,449) 698,628
- --------------------------------------------------------------------------------------------------------
Net income $ 830,368 $ 922,829 $1,208,488
========================================================================================================
41
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASHFLOWS,
for the years:
-------------------- June 30, --------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 830,368 $ 922,829 $ 1,208,488
Adjustments to reconcile net income to
cash provided by operations
Equity in undistributed (excess distributed)
earnings of subsidiary Bank (876,516) 2,108,449 (698,628)
Purchase of trading securities (2,530,635) (5,428,775) (2,224,537)
Proceeds from sale of trading securities 4,486,385 3,947,118 1,882,564
(Gain) loss on securities 59,582 (716,161) (358,740)
Net accretion of securities -- -- (1,411)
Change in
Accrued interest receivable 228 18,611 64,357
Other assets (156,302) 30,089 21,884
Other liabilities (34,441) 22,495 (55,739)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 1,778,669 904,655 (161,762)
Cash flows from investing activities
Purchases of securities available for sale (1,904,438) -- (2,000,000)
Proceeds from sales of securities available
for sale 59,399 2,481,875 1,091,200
Proceeds from maturities and calls of
securities available for sale -- -- 3,782,408
Principal reduction on ESOP note receivable 108,698 101,410 94,611
Contribution to subsidiary Bank (38,426) (37,921) (42,527)
Net (increase) decrease in interest-bearing
time deposits 99,000 99,000 1,089,000
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,675,767) 2,644,364 4,014,692
Cash flows from financing activities
Proceeds of loan from subsidiary Bank 2,450,000 1,300,000 --
Repayment of loan to subsidiary Bank (1,700,000) (1,300,000) --
Dividends paid on common stock (540,685) (506,959) (603,382)
Repurchase of common stock (105,938) (5,193,866) (2,049,061)
Issuance of shares upon exercise of
stock options 7,283 -- --
- ----------------------------------------------------------------------------------------------------------
Net cash from financing activities 110,660 (5,700,825) (2,652,443)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 213,562 (2,151,806) 1,200,487
Cash and cash equivalents at beginning
of period 70,523 2,222,329 1,021,842
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 284,085 $ 70,523 $ 2,222,329
==========================================================================================================
42
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
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.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and cash equivalents, Federal Home Loan Bank stock, demand, savings and
money market deposits, accrued interest, the allowance for loan losses, and
variable rate loans or deposits that reprice frequently and fully. Securities
fair values are based on quoted market prices or, if no quotes are available, on
the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, the fair value is estimated by discounted cash
flow analysis using current market rates for the estimated life and credit risk.
Fair value of loans held for sale is based on market estimates. The fair value
of Federal Home Loan Bank borrowings is based on currently available rates for
similar financing. The fair value of off-balance-sheet items is based on the
fees or costs that would currently be charged to enter into or terminate such
arrangements. The fair value of off-balance-sheet items was not material for
this presentation.
The estimated fair values of the Company's financial instruments (in
thousands) are as follows at June 30:
1998 1997
- --------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents $4,206 $4,206 $3,673 $3,673
Interest-bearing time deposits -- -- 99 99
Securities 43,252 43,247 32,476 32,474
Loans, net 118,906 119,380 111,530 113,366
Loans held for sale 8,157 8,298 2,231 2,265
Mortgage servicing rights 281 281 149 149
Federal Home Loan Bank stock 2,100 2,100 1,550 1,550
Accrued interest receivable 879 879 763 763
Financial liabilities
Deposits 119,979 120,229 102,862 102,733
Federal Home Loan Bank borrowings 37,000 36,802 29,000 29,000
Accrued interest payable 253 253 202 202
Advance payments by borrowers
for taxes and insurance 513 513 492 492
43
Your Partners in Bank West Financial Corporation
- --------------------------------------------------------------------------------
DIRECTORS
George A. Jackoboice, Chairman of the Board;
President of Monarch Hydraulics, Inc.
Hydraulics, Inc.
Carl A. Rossi, Treasurer; President of
Kentwater Land Co.
Paul W. Sydloski, President, Chief Executive Officer
Jacob Haisma, Owner of Jacob Haisma Builders, Inc.
Thomas D. DeYoung, Owner and President
of DeYoung &Associates
Robert J. Stephan, Vice Chairman of the Board;
President, Chief Executive Officer of
SecureOne Benefit Administrators, Inc.
Richard L. Bishop, President of Jurgens &
Holtvluwer Men's Store, Inc.
John H. Zwarensteyn, President, Chief Executive Officer
and owner of Gemini Corporation
Harry E. Mika, Retired, formerly Director and Senior
Vice President of Ameribank in Muskegon,
Michigan from 1989 to 1996.
LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
Suite 1200
734 15th Street, N.W.
Washington, D.C. 20005
EXECUTIVE OFFICERS
Paul W. Sydloski, President,
Chief Executive Officer
Kevin A. Twardy, Vice President,
Chief Financial Officer
James A. Koessel, Vice President,
Chief Lending Officer
Laurie S.Adams, Vice President,
Director of RetailBanking
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
400 Riverfront Plaza Building
55 Campau, N.W.
Grand Rapids, Michigan 49502
44
CORPORATE HEADQUARTERS 2185 Three Mile Rd., N.W.
Grand Rapids, Michgian 49544-1451
STOCK INFORMATION
Bank West Financial Corporation is traded on the Nasdaq National Market under
the symbol of "BWFC." Total shares outstanding as of June 30, 1998 were
2,623,629. As of September 26, 1998, the Company had approximately 631
shareholders of record. The high and low bid quotations for the common stock as
reported on the Nasdaq, as well as dividends declared per share, were as
follows:
Quarter Ended High Low Dividends
- --------------------------------------------------------------------------------
September 30, 1996 $ 8.500 $ 7.000 $.04
December 31, 1996 7.667 6.833 .05
March 31, 1997 8.083 7.000 .05
June 30, 1997 9.500 7.417 .05
September 30, 1997 12.667 9.000 .05
December 31, 1997 17.625 12.583 .05
March 31, 1998 16.250 12.750 .06
June 30, 1998 14.750 13.500 .06
The information set forth in the table above was provided by The Nasdaq Stock
Market. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
All per share amounts have been adjusted for stock splits.
INVESTOR INFORMATION
A copy of Bank West Financial Corporation's Annual Report on Form 10-K and a
list of the exhibits thereto, as filed with the Securities and Exchange
Commission, may be obtained without charge upon written request to Kevin A.
Twardy, Chief Financial Officer, Bank West Financial Corporation, 2185 Three
Mile Road, N.W., Grand Rapids, MI 49544, or by calling (616) 785-3400.