UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25666
BANK WEST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-3203447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2185 Three Mile Road, N.W., Grand Rapids, Michigan 49544
(Address of principal executive offices)
Registrant's telephone number, including area code: (616) 785-3400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Shares of common stock, par value $.01 per share, outstanding as of November 13,
1998: 2,623,629.
BANK WEST FINANCIAL CORPORATION
FORM 10-Q
Quarter Ended September 30, 1998
PART I - FINANCIAL INFORMATION
Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below:
ITEM 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1998 (unaudited) and June 30, 1998
Consolidated Statements of Income (unaudited) -
For The Three Months Ended September 30, 1998 and 1997
Consolidated Statements of Comprehensive Income (unaudited) -
For The Three Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) -
For The Three Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities and Use of Proceeds
ITEM 3 - Defaults upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Information
ITEM 6 - Exhibits and Reports on Form 8-K
SIGNATURES
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1998 1998
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 3,133,139 $ 2,408,476
Interest-bearing deposits 2,386,817 1,797,063
------------- -------------
Total cash and cash equivalents 5,519,956 4,205,539
Securities available for sale (Note 5) 30,888,051 32,167,697
Securities held to maturity
(fair value: $13,158,191 at September 30, 1998, 13,141,860 11,084,361
$11,079,178 at June 30, 1998) (Note 5)
Loans held for sale (Note 6) 5,737,726 8,156,572
Loans, net (Note 7) 125,647,892 118,905,611
Federal Home Loan Bank stock 2,250,000 2,100,000
Premises and equipment 3,126,240 3,164,905
Accrued interest receivable 849,862 879,082
Mortgage servicing rights 279,373 280,869
Real estate owned 133,435 192,080
Other assets 382,005 332,136
------------- -------------
Total assets $ 187,956,400 $ 181,468,852
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 120,114,577 $ 119,979,379
Federal Home Loan Bank borrowings 43,375,332 37,000,000
Accrued interest payable 216,086 253,037
Advance payments by borrowers
for taxes and insurance 355,024 512,538
Deferred federal income tax 339,566 335,182
Other liabilities 311,124 114,029
------------- -------------
Total liabilities 164,711,709 158,194,165
------------- -------------
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, June 30,
1998 1998
------------- -------------
(Unaudited)
Stockholders' Equity:
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,623,629
issued at September 30, 1998
and at June 30, 1998 26,237 26,237
Additional paid-in-capital 11,579,866 11,551,136
Retained earnings, substantially restricted 12,790,295 12,928,028
Net unrealized gain on securities available for
sale, net of tax of $7,026 at September 30, 1998
and $2,644 at June 30, 1998 13,639 5,132
Unallocated ESOP shares (Note 3) (842,448) (874,848)
Unearned Management Recognition Plan shares (Note 4) (322,898) (360,998)
------------- -------------
Total stockholders' equity 23,244,691 23,274,687
------------- -------------
Total liabilities and stockholders' equity $ 187,956,400 $ 181,468,852
============= =============
See accompanying notes to consoldiated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
---------------------------
1998 1997
----------- ----------
Interest and dividend income
Loans $ 2,593,045 $2,376,391
Securities 632,934 530,416
Other interest-bearing deposits 43,121 28,196
Dividends on FHLB stock 43,076 36,537
----------- ----------
3,312,176 2,971,540
----------- ----------
Interest expense
Deposits 1,499,690 1,335,560
FHLB borrowings 534,597 490,072
----------- ----------
2,034,287 1,825,632
----------- ----------
Net interest income 1,277,889 1,145,908
Provision for loan losses 27,000 18,000
----------- ----------
Net interest income after provision
for loan losses 1,250,889 1,127,908
----------- ----------
Other income
Gain (loss) on sale of securities (278,063) 7,105
Gain on trading securities -- 560,044
Gain on sale of loans 159,065 159,853
Fees and service charges 67,579 89,641
Miscellaneous income 6,256 1,503
----------- ----------
(45,163) 818,146
----------- ----------
Other expenses
Compensation and benefits 729,531 658,554
Professional fees 56,492 78,103
Federal Deposit Insurance 17,503 15,537
Occupancy 85,399 63,652
Furniture, fixtures and equipment 42,857 33,746
Data processing 63,530 43,337
Advertising 26,402 25,690
State taxes 17,500 29,478
Miscellaneous 150,716 101,296
----------- ----------
1,189,930 1,049,393
----------- ----------
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(continued)
Three Months Ended
September 30,
---------------------------
1998 1997
----------- ----------
Income before federal income tax expense 15,796 896,661
Federal income tax expense 8,960 304,300
----------- ----------
Net income $ 6,836 $ 592,361
=========== ==========
Earnings per share (Note 2) $ .003 $ .25
=========== ==========
Earnings per share assuming dilution (Note 2) $ .003 $ .25
=========== ==========
Dividends per share $ .06 $ .05
=========== ==========
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,
--------------------
1998 1997
------- --------
Net Income $ 6,836 $592,361
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available
for sale 8,507 136,460
------- --------
Comprehensive income $15,343 $728,821
======= ========
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
Cash flows from operating activities
Net income $ 6,836 $ 592,361
Adjustments to reconcile net income to
net cash from operating activities
Origination and purchase of loans for sale (7,570,481) (11,981,770)
Proceeds from sale of mortgage loans 10,148,392 10,376,610
Purchase of trading securities -- (1,923,656)
Proceeds from sale of trading securities -- 2,171,849
Net (gain) loss on sales of:
Loans (159,065) (159,853)
Securities 278,063 (567,149)
Depreciation 59,145 49,172
Amortization of premiums, net 81,404 8,993
ESOP expense 61,130 76,950
MRP expense 38,100 38,100
Provision for loan losses 27,000 18,000
Change in:
Deferred loan fees (48,792) (48,229)
Other assets (21,497) (182,481)
Other liabilities 2,630 69,144
------------ ------------
Net cash from operating activities 2,902,865 (1,461,959)
------------ ------------
Cash flows from investing activities
Purchases of securities available for sale (14,342,119) (7,723,954)
Purchases of securities held to maturity (2,074,375) (2,620,510)
Proceeds from sale of securities 10,430,186 6,047,969
Proceeds from maturities, calls and principal
payments of securities available for sale 4,861,879 1,214,129
Loan originations, net of repayments (5,448,289) (2,783,784)
Loans purchased for portfolio (1,272,200) (133,350)
Purchase of FHLB stock (150,000) (300,000)
Proceeds from sale of real estate owned 60,989 --
Property and equipment expenditures (20,480) (2,709)
------------ ------------
Net cash from investing activities (7,954,409) (6,302,209)
------------ ------------
Cash flows from financing activities
Proceeds from FHLB borrowings 13,375,332 10,000,000
Repayment of FHLB borrowings (7,000,000) (4,000,000)
Increase in deposits 135,198 2,309,758
Dividends paid on common stock (144,569) (114,014)
------------ ------------
Net cash from financing activities 6,365,961 8,195,744
------------ ------------
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended
September 30,
---------------------------
1998 1997
---------- ----------
Net change in cash and cash equivalents 1,314,417 431,576
Cash and cash equivalents at beginning of period 4,205,539 3,673,256
---------- ----------
Cash and cash equivalents at end of period $5,519,956 $4,104,832
========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $2,071,238 $1,775,550
Income taxes -- 63,119
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 1998
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements consist of the accounts of
Bank West Financial Corporation (the Company), its wholly owned subsidiary, Bank
West (the Bank) and Sunrise Mortgage Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have been
included.
The results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year ending June
30, 1999. The unaudited consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and
notes thereto, for the fiscal year ended June 30, 1998, included in the
Company's 1998 Annual Report.
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS No.
130"). The Company adopted SFAS No. 130 retroactively beginning with the quarter
ended September 30, 1998. Under this standard, comprehensive income is defined
as all changes in equity other than those resulting from investments by owners
and distributions to owners, and therefore includes both net income and other
comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available for sale.
NOTE 2 - EARNINGS PER SHARE
Earnings Per Share and Earnings Per Share Assuming Dilution were computed under
the provisions of SFAS No. 128, "Earnings Per Share," which was adopted
retroactively beginning with the quarter ended December 31, 1997. All earnings
per share data for prior periods have been restated to be comparable. Earnings
Per Share is calculated by dividing net income by the weighted average number of
shares outstanding during the period, including shares that have been released
or committed to be released by the Employee Stock Ownership Plan (ESOP) and
fully vested Management Recognition Plan (MRP) shares. Earnings Per Share
Assuming Dilution further assumes the issuance of dilutive potential common
shares relating to outstanding stock options and unvested MRP shares. All
earnings and dividends per share amounts have been retroactively adjusted for
the three-for-two stock split in December 1997.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1998
(Unaudited)
NOTE 2 - EARNINGS PER SHARE (Continued)
A reconciliation of the numerators and denominators of Earnings Per Share and
Earnings Per Share Assuming Dilution for the three months ended September 30,
1998 and 1997 are as follows:
Three Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
Earnings Per Share
Net Income $ 6,836 $ 592,361
========== ==========
Weighted average common shares
outstanding 2,388,506 2,349,096
========== ==========
Earnings Per Share $ .003 $ .25
========== ==========
Earnings Per Share Assuming Dilution
Net Income $ 6,836 $ 592,361
========== ==========
Weighted average common shares
outstanding 2,388,506 2,349,096
Add: dilutive effects of assumed
exercise of stock options
and unvested MRP's
Stock options 100,541 55,544
MRP shares 10,562 0
---------- ----------
Weighted average common and dilutive
potential common shares outstanding 2,499,609 2,404,640
========== ==========
Earnings Per Share Assuming Dilution $ .003 $ .25
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan (ESOP) for the
benefit of employees who have completed at least twelve consecutive months of
service and have been credited with at least 500 hours of service with the Bank.
The Company has received a favorable determination letter from the Internal
Revenue Service that the ESOP is a tax-qualified plan.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1998
(Unaudited)
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
To fund the ESOP, $1,296,048 was borrowed from the Company for the purpose of
purchasing 243,009 shares of common stock at $5.33 per share. Principal and
interest payments on the loan are due in quarterly installments, with the final
payment of principal and accrued interest being due and payable at maturity,
which is June 30, 2005. Interest is payable during the term of the loan at a
fixed rate of 7.0%. The loan is collateralized by the shares of the Company's
common stock purchased with the proceeds. As the Bank periodically makes
contributions to the ESOP to repay the loan, shares are allocated among
participants on the basis of total compensation, as defined. The unallocated
ESOP shares are shown as a reduction to stockholders' equity in the accompanying
consolidated balance sheets. ESOP expense of $61,000 was recorded for the three
months ended September 30, 1998.
NOTE 4 - STOCK BASED COMPENSATION PLANS
An employee and a directors' stock option plan (SOPs) and an officers' and a
directors' management recognition plan (MRPs) were authorized by the
shareholders at the October 25, 1995 annual meeting. The employee stock option
plan and the officers' MRP are administered by a committee of non-employee
directors of the Company, while grants under the directors' stock option plan
and the directors' MRP are pursuant to formulas set forth in the plans. Total
shares made available under the SOPs and MRPs were 347,155 and 138,862,
respectively. The Committee has awarded under the SOPs options to purchase
309,689 shares of common stock at exercise prices between $6.625 and $11.375 per
share, which represent the average of the high and low sales prices of the
Company's stock on the dates of the awards. Both the option shares and grant
prices have been adjusted for the three-for-two stock split in December 1997. At
September 30, 1998, there were 37,516 option shares reserved for future grants.
As of September 30, 1998, 1,000 options have been exercised. No compensation
expense was recognized in connection with the issuance of the options.
Management has concluded that the Company will not adopt the accounting
provisions of SFAS No. 123 and will continue to apply its current method of
accounting. Accordingly, SFAS No. 123 will have no impact on the Company's
consolidated financial position or results of operations.
On November 13, 1995, the Company repurchased 4% of its then outstanding shares
and placed them in a trust for the exclusive use of the MRPs. The Committee has
awarded 72,320 shares of common stock under the officers' MRP and 41,657 shares
of common stock under the directors' MRP. MRP awards vest in five equal annual
installments, with the first award vesting on October 25, 1996. Compensation
expense for the MRPs is recognized on a pro-rata basis over the vesting period
of the awards. During the three months ended September 30, 1998, $38,100 was
charged to compensation expense for the MRPs. The unearned compensation value of
the MRPs is shown as a reduction to stockholders' equity in the accompanying
consolidated balance sheets.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1998
(Unaudited)
NOTE 5 - SECURITIES
The amortized cost and estimated fair values of securities at September 30, 1998
and June 30, 1998 are as follows:
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- ----------- -----------
September 30, 1998 (unaudited)
U.S. agencies $ 2,996,625 $ 18,875 $ -- $ 3,015,500
Equity securities 1,096,149 4,380 11,070 1,089,459
Mortgage-backed securities 704,904 -- 9,678 695,226
Collateralized mortgage obligations 26,069,706 109,127 90,967 26,087,866
----------- -------- ----------- -----------
$30,867,384 $132,382 $ 111,715 $30,888,051
=========== ======== =========== ===========
June 30, 1998
U.S. agencies $ 3,995,488 $ -- $ 3,613 $ 3,991,875
Equity securities 2,750,960 61,250 59,885 2,752,325
Mortgage-backed securities 817,236 -- 9,916 807,320
Collateralized mortgage obligations 24,596,237 230,029 210,089 24,616,177
----------- -------- ----------- -----------
$32,159,921 $291,279 $ 283,503 $32,167,697
=========== ======== =========== ===========
Held to Maturity
September 30, 1998 (unaudited)
Collateralized mortgage obligations $13,141,860 $ 46,417 $ 30,086 $13,158,191
=========== ======== =========== ===========
June 30, 1998
Collateralized mortgage obligations $11,084,361 $ 42,498 $ 47,681 $11,079,178
=========== ======== =========== ===========
During September of 1998, equity securities were written-down by $401,000
relating to what management believes to be an other-than-temporary decline in
the market value of these investments resulting from the recent downturn in the
U.S. stock market, especially in small cap stocks.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1998
(Unaudited)
NOTE 6 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Company's secondary market mortgage activities,
which consist solely of one- to four-family real estate loans:
Three Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
Loans held for sale - beginning of period $ 8,156,572 $ 2,231,151
Activity during the periods:
Loans originated and purchased for sale 7,570,481 11,981,770
Proceeds from sale of loans originated
and purchased for sale (10,148,392) (10,376,610)
Gain on sale of loans 159,065 159,853
------------ ------------
Loans held for sale - end of period $ 5,737,726 $ 3,996,164
============ ============
The unpaid principal balance of mortgage loans serviced for others amounted to
$33.0 million and $33.2 million at September 30, 1998 and June 30, 1998,
respectively. Custodial escrow balances maintained in connection with the
foregoing loans serviced for others were approximately $115,000 and $192,000 at
September 30, 1998 and June 30, 1998, respectively.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1998
(Unaudited)
NOTE 7 - LOANS
Loans are classified as follows:
September 30, June 30,
1998 1998
------------- -------------
Real estate loans:
One-to four-family residential - fixed rate $ 15,392,770 $ 15,383,013
One-to four-family residential - balloon 31,150,253 24,413,846
One-to four-family residential - adjustable 28,811,417 32,599,924
Construction and land development 26,855,724 25,406,303
Commercial mortgages 7,757,288 6,485 449
Home equity lines of credit 10,551,738 9,877,359
Second mortgages 8,577,180 8,148,412
------------- -------------
Total mortgage loans 129,096,370 122,314,306
Consumer loans 1,722,252 1,665,606
Commercial non-mortgage 3,181,463 3,253,091
------------- -------------
Total 134,000,085 127,233,003
Less:
Loans in process 8,294,903 8,248,310
Deferred fees and costs (259,406) (210,614)
Allowance for loan losses 316,696 289,696
------------- -------------
$ 125,647,892 $ 118,905,611
============= =============
Provisions for losses on loans are charged to operations based on management's
evaluation of potential losses in the portfolio. In addition to providing
reserves on specific loans where a decline in value has been identified, general
provisions for losses are established based upon the overall portfolio
composition and general market conditions. In establishing both specific and
general valuation allowances, management reviews individual loans, recent loss
experience, current and future impact of economic conditions, the overall
balance and composition of the portfolio, and such other factors which, in
management's judgment, deserve recognition in estimating possible losses.
Management believes the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions and borrower
circumstances.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the consolidated financial condition of Bank
West Financial Corporation, its wholly owned subsidiary, Bank West, and Sunrise
Mortgage Corporation a wholly-owned subsidiary of Bank West, at September 30,
1998 and June 30, 1998 and the consolidated results of operations for the three
months ended September 30, 1998 with the same period in 1997. This discussion
should be read in conjunction with the interim consolidated financial statements
and footnotes included herein.
This quarterly report on Form 10-Q includes statements that may constitute
forward-looking statements, usually containing the words "believe," "estimate,"
"project," "expect," "intend" or similar expressions. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that could cause future
results to vary from current expectations include, but are not limited to, the
following: changes in economic conditions (both generally and more specifically
in the markets in which Bank West operates); changes in interest rates, deposit
flows, loan demand, real estate values and competition; changes in accounting
principles, government legislation and regulation; and other risks detailed in
this quarterly report on Form 10-Q and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
Bank West Financial Corporation is the holding company for Bank West, a state
chartered savings bank. Substantially all of the Company's assets are currently
held in, and its operations are conducted through, its sole subsidiary Bank
West. The Company's business consists primarily of attracting deposits from the
general public and using such deposits, together with Federal Home Loan Bank
(FHLB) advances, to make loans for the purchase and construction of residential
properties. The Company also originates commercial loans, home equity loans and
various types of consumer loans.
FINANCIAL CONDITION
Total assets increased by $6.5 million or 3.6% from $181.5 million at June 30,
1998 to $188.0 million at September 30, 1998. The increase in total assets was
primarily attributable to an increase in total loans by $6.7 million or 5.6%.
Total loans increased as greater emphasis was placed on originating one- to
four-family balloon mortgages to offset prepayments of adjustable-rate and
longer term fixed-rate mortgages in the current interest rate environment. In
addition, greater emphasis was placed on originating home equity, second
mortgages and commercial loans. Management expects continued growth in these
types of portfolio lending activities which is expected to improve the Bank's
net interest income.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Bank's mortgage banking activities consist of selling newly originated and
purchased loans into the secondary market. The dollar amount of loans originated
and purchased for resale in the three months ended September 30, 1998 decreased
by $4.4 million or 36.7% to $7.6 million compared to $12.0 million in the
September 30, 1997 quarter. The decrease in loan originations and purchases for
resale is primarily the result of the Bank's recent strategy to portfolio ten
year balloons in effort to offset prepayments of adjustable-rate and longer-term
fixed-rate mortgages. Also, the current strategy will leverage the balance sheet
which is expected to provide additional net interest income. Total loans sold
amounted to $10.1 million and $10.4 million in the three months ended September
30, 1998 and 1997, respectively. Loans held for sale amounted to $5.8 million
and $4.0 million at September 30, 1998 and 1997, respectively. The Bank
continues to increase the number of correspondent lending relationships and is
exploring additional options to increase retail loan volume. The majority of
loans originated and purchased for resale in the current quarter have been
30-year fixed-rate loans.
During December 1997, the Bank formed Sunrise Mortgage Corporation, a
wholly-owned subsidiary engaged to originate and purchase non-conforming first
and second mortgage loans including sub-prime mortgage loans for resale. All of
the loans originated and purchased must have a commitment in place to sell the
loan to an investor on a servicing released basis. Sunrise Mortgage Corporation
is nearing break-even and is expected to contribute additional revenues as loan
volume increases.
Mortgage-backed securities and collateralized mortgage obligations have
increased from $36.5 million at June 30, 1998 to $39.9 million at September 30,
1998. During the quarter ended September 30, 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. At September 30, 1998, the unrealized gain on
securities classified as available for sale totalled $14,000 net of federal
income taxes and is shown as a component of stockholders' equity.
Total deposits increased by $135,000 or .1% from June 30, 1998 to September 30,
1998 primarily due to an increase in money market accounts. The variety of
deposit accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
The Bank has become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. Based on its
experience, the Bank believes that its passbook savings, statement savings, NOW
and demand accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be affected by
market conditions.
When deposit growth does not match the growth of assets, other funding sources
such as FHLB advances are utilized. During the three months ended September 30,
1998, the Bank increased FHLB advances by $6.4 million since loan growth
exceeded deposit growth. FHLB advances have generally been used to fund the
Bank's loan growth and mortgage banking activities.
Stockholders' equity decreased from $23.3 million at June 30, 1998 to $23.2
million at September 30, 1998. The decrease was primarily due to dividends paid
during the quarter of approximately $145,000.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The table below sets forth the amounts and categories of non-performing assets
at September 30, 1998 and June 30, 1998:
September 30, June 30,
1998 1998
------ ------
(Dollars in Thousands)
Non-accrual loans
One- to four-family $ 960 $ 682
Commercial 14 32
Consumer 17 127
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Total 991 841
Foreclosed assets
One- to four-family 133 192
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Total non-performing assets $1,124 $1,033
====== ======
Total as a percentage of total assets .59% .57%
====== ======
Non-performing assets in the one- to four-family category consists primarily of
construction spec loans to builders collateralized by single-family homes.
However, since these loans require a loan-to-value ratio of 75%, management
believes that these loans are adequately collateralized. Accordingly, no
specific reserves have been assigned to loans in the one- to four-family
category at September 30, 1998. The allowance for loan losses totalled $317,000
or 28.2% of total non-performing loans, and approximately $13,000 of the
allowance for loan losses was allocated to specific loans. During the three
months ended September 30, 1998, there were no net charge-offs. At September 30,
1998, $102.3 million or 76.3% of the Bank's total loan portfolio was
collateralized by first liens on one-to four-family residences, and the net loan
portfolio amounted to 66.8% of total assets.
RESULTS OF OPERATIONS
Net Income. Net income decreased by $585,000 or 98.8% in the quarter ended
September 30, 1998 from $592,000 in the comparable 1997 period to $7,000 in the
current quarter. The decline in net income in the current quarter was primarily
due to a write-down to reflect what management believes to be an
other-than-temporary market decline of certain equity investments of $401,000
versus gains of $560,000 on equity trading activities achieved during the
quarter ended September 30, 1997.
Net Interest Income. Net interest income increased by $132,000 or 11.5% in the
quarter ended September 30, 1998 over the comparable 1997 period. Net interest
income increased due to an increase in average interest-earning assets by $23.5
million or 15.4% in the quarter ended September 30, 1998 over the comparable
prior period primarily due to an increase in loans and collateralized mortgage
obligations. The increase in average interest-earning assets was partially
offset by a decrease in the interest rate spread to 2.35% in the quarter ended
September 30, 1998 from 2.47% in the quarter ended September 30, 1997. The
decreased spread was primarily due to an decrease in the yield on
interest-earning assets to 7.52% from 7.78% reflecting the flat or inverted
yield curve resulting in refinances of adjustable -rate and thirty-year loans
with higher rates into lower rate mortgages. The cost of interest-bearing
liabilities decreased from 2.47% as of September 30, 1997 to 2.35% as of
September 30, 1998, reflecting certificates of deposit and FHLB advances
repricing to lower rates as a result of the recent decline in the overall
interest rate environment.
Provision for Loan Losses. The provision for loan losses increased by $9,000 or
50.0% in the three months ended September 30, 1998 over the comparable 1997
period. The allowance for loan losses totalled approximately $317,000 or .24% of
the total loan portfolio and 32.0% of non-performing loans at September 30,
1998. The non-performing loans at September 30, 1998 were comprised primarily of
one- to four-family construction spec loans to builders which require a
loan-to-value ratio of 75%.
The Bank's management establishes allowances for loan losses. On a quarterly
basis, management evaluates the loan portfolio and determines the amount that
must be added. These allowances are charged against income in the year they are
established. When establishing the appropriate levels for the provision and the
allowance for loan losses, management considers a variety of factors, in
addition to the fact that an inherent risk of loss always exists in the lending
process. Consideration is also given to the current and future impact of
economic conditions, the diversification of the loan portfolio, historical loss
experience, delinquency rates, the review of loans by loan review personnel, the
individual borrower's financial and managerial strengths, and the adequacy of
underlying collateral.
Other Income. Total other income decreased by $863,000 or 105.5% in the three
months ended September 30, 1998 from the comparable prior period. The decrease
was primarily due to an $838,000 or 150.0% decrease in gain on equity
securities. The decrease in gain on equity securities was primarily due to a
current quarter's write-down of a portion of the Company's remaining equity
investments totaling $401,000 to reflect what management believes to be an
other-than-temporary market decline resulting from the recent downturn in the
U.S. stock market, especially in small cap stocks. This write-down exceeded the
gains on sales of equity investments realized during the quarter resulting in a
$278,000 net loss on sale of available for sale securities. In the prior year's
quarter, a gain of approximately $560,000 on trading equities securities was
recognized. At September 30, 1998, the remaining equity securities portfolio was
$1.1 million. Management intends to continue to orderly liquidate the remaining
equity securities portfolio.
Fees and service charges decreased by $22,000 or 24.4% during the quarter
reflecting higher amortization of mortgage servicing rights than in the
September 30, 1997 quarter as a result of higher prepayments of the Bank's
mortgage servicing portfolio.
Other Expenses. Total other expenses increased by $141,000 or 13.4% in the
quarter ended September 30, 1998 over the comparable 1997 period. The increase
was primarily due to an increase in compensation and benefits expense of $71,000
or 10.8% attributable to higher overall staff levels. Recently, the Bank
announced staff reductions by approximately 5%, which should result in
compensation and benefits expense leveling-off in subsequent quarters. Occupancy
expense increased by $21,000 or 32.8% due to leasing expenses incurred by
Sunrise Mortgage Corp. that did not exist in the September 30, 1997 quarter, and
one-time repairs and maintenance expenses. Data processing expenses increased by
$21,000 or 48.8% due to Year 2000 pass-through charges by the Bank's outside
vendor which handles the core data processing. These amounts were partially
offset by a decline in professional fees by $22,000 or 28.2% related to higher
legal fees unrelated to litigation incurred during the September 30, 1997
quarter. State taxes decreased by $11,000 or 37.9% due to lower pre-tax income
levels, as defined. Miscellaneous expenses increased by $51,000 or 49.5% due
primarily to higher FHLB service charges by $6,000 reflecting increased DDA/NOW
account clearings and higher education and training by $7,000. The other
categories of miscellaneous expenses and other expenses did not significantly
change in the quarter ended September 30, 1998 when compared to September 30,
1997.
Federal Income Tax Expense. Federal income tax expense decreased by $295,000 in
the quarter ended September 30, 1998 over the comparable 1997 period. Federal
income tax expenses were based on pre-tax income levels for the respective
periods.
LIQUIDITY
The Bank maintains a level of liquidity consistent with management's assessment
of expected loan demand, proceeds from loan sales, deposit flows and yields
available on interest-earning deposits and investment securities. When overnight
deposits fall below management's targeted level, management generally borrows
FHLB advances instead of selling securities.
The Bank's principal sources of liquidity are deposits, principal and interest
payments on loans, proceeds from loan sales, maturities of securities, sales of
securities available for sale and FHLB advances. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and loan
prepayments are more influenced by interest rates, general economic conditions
and competition.
The Bank routinely borrows FHLB advances when overnight deposits are drawn to
low levels. These borrowings are made pursuant to the blanket collateral
agreement with the FHLB. At September 30, 1998, the Bank has approximately $29
million of excess borrowing capacity based on eligible collateral 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.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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. Their testing is scheduled to be completed during the quarter ended
December 31, 1998. Recently, the Bank successfully tested the vendor's software
and its integration with other third party software. Management anticipates
testing the Bank's remaining systems for Year 2000 compliance during the
quarters ended December 31, 1998 and March 31, 1999.
Management has performed a review of its commercial borrowers to determine if
there are any Year 2000 issues or concerns of the borrower that could affect
repayment of the Bank's loan. To-date, no issues or concern have been
identified.
Management presently anticipates that the costs of addressing the Year 2000 will
approximate $150,000 to $200,000. 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 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
September 30, 1998, the Bank incurred approximately $20,000 representing data
processing pass-through charges relating to Year 2000 readiness and the
compensation and benefits expense associated with staff time.
NEW ACCOUNTING STANDARDS
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.
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended September 30, 1998
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
Other than as set forth in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998, there are no material legal
proceedings to which the Company or its subsidiaries is a party or to which any
of their property is subject. The July 17, 1998 complaint, filed in Kent County,
Michigan by Kristine Cowles; alledged that Bank West had violated the
prohibition against the unauthorized practice of law, by a corporation, because
it charged borrowers in residential mortgage transactions a $250 fee for
document preparation. The complaint contained related counts, grounded in the
claim concerning unauthorized practice of law, that Bank West had made
misrepresentations and had violated the Michigan Consumer Protection Act. On
July 23, 1998, a Kent County Circuit Court judge dismissed a similar complaint
alleging unauthorized practice or law against another financial institution. On
July 29, 1998, Bank West filed a motion for summary disposition. On August 20,
1998, plaintiff amended her complaint to add a count based upon alleged
violations of the Federal Truth in Lending Act. Bank West amended its motion for
summary disposition to address that count also. At a hearing on October 15,
1998, the Court dismissed the count alleging violation of the Truth in Lending
Act and denied, without prejudice, the motion concerning the unauthorized
practice of law, pending further discovery. After further discovery, Bank West
intends to file another motion for summary disposition. Plaintiff filed the case
as a purported class action, but plaintiff has not yet asked the Court to
certify a class.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security-Holders:
At the Annual Meeting of Stockholders held on October 28,
1998, the stockholders of the Company approved each of the
proposals as set forth below. The number of shares present at
the Annual Meeting in person or by proxy was 2,302,803. The
matters voted upon together with the applicable voting results
were as follows:
FOR WITHHOLD
--- --------
1. Election of Directors
George A. Jackoboice 2,264,580 38,223
Carl A. Rossi 2,233,570 69,233
Robert J. Stephan 2,234,742 68,061
Wallace D. Riley 2,213,101 89,702
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended September 30, 1998
Item 4 - Submission of Matters to a Vote of Security-Holders (continued):
FOR AGAINST ABSTAIN
--- ------- -------
2. Ratification of appointment of
Crowe, Chizek and Company
as independent auditors. 2,141,022 152,343 9,438
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits: The following exhibit is filed herewith:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK WEST FINANCIAL CORPORATION
Registrant
Date: November 13, 1998 /s/ Paul W. Sydloski
----------------- ---------------------
Paul W. Sydloski, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1998 /s/ Kevin A. Twardy
----------------- ---------------------
Kevin A. Twardy, Vice President and
Chief Financial Officer
(Principal Financial Officer)