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, 1999
[ ] 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 10,
1999: 2,521,059.
BANK WEST FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
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, 1999 (unaudited) and June 30, 1999........
Consolidated Statements of Income (unaudited) -
For The Three Months Ended September 30, 1999 and 1998..
Consolidated Statements of Comprehensive Income (unaudited) -
For The Three Months Ended September 30, 1999 and 1998..
Consolidated Statements of Cash Flows (unaudited) -
For The Three Months Ended September 30, 1999 and 1998..
Notes to Consolidated Financial Statements.....................
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Not applicable since the registrant is a small business
issuer.
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,
1999 1999
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks ..................................... $ 3,458,479 $ 1,527,481
Interest-bearing deposits ................................... 1,208,651 7,578,387
------------- -------------
Total cash and cash equivalents ....................... 4,667,130 9,105,868
Securities available for sale (Note 5) ...................... 45,314,344 42,272,306
Loans held for sale (Note 6) ............................... 421,892 2,380,576
Loans, net (Note 7) ......................................... 159,055,423 145,205,691
Federal Home Loan Bank stock ................................ 3,600,000 2,700,000
Premises and equipment ...................................... 3,452,316 3,000,951
Accrued interest receivable ................................. 1,253,109 1,019,165
Mortgage servicing rights ................................... 235,581 232,561
Real estate owned ........................................... 628,228 309,826
Other assets ................................................ 212,051 442,257
------------- -------------
Total assets ........................................... $ 218,840,074 $ 206,669,201
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................... $ 126,234,591 $ 132,401,205
Federal Home Loan Bank borrowings ........................... 69,509,561 50,000,000
Accrued interest payable .................................... 410,106 292,289
Advance payments by borrowers
for taxes and insurance .................................. 310,717 509,218
Deferred federal income tax ................................. 42,720 67,362
Other liabilities ........................................... 512,262 846,996
------------- -------------
Total liabilities .................................... 197,019,957 184,117,070
------------- -------------
Stockholders' Equity:
Common stock, $.01 par value; 10,000,000 shares authorized;
2,521,059 issued at September 30, 1999
and 2,597,729 at June 30, 1998 ........................... 25,211 25,978
Additional paid-in-capital .................................. 10,622,586 11,328,830
Retained earnings, substantially restricted ................. 12,584,784 12,517,215
Net unrealized loss on securities available for
sale, net of tax benefit of $289,822 at September 30,
1999 and tax benefit of $211,018 at June 30, 1999 ........ (562,595) (409,623)
Unallocated ESOP shares (Note 3) ............................ (712,848) (745,248)
Unearned Management Recognition Plan shares (Note 4) ........ (137,021) (165,021)
------------- -------------
Total stockholders' equity ........................... 21,820,117 22,552,131
------------- -------------
Total liabilities and stockholders' equity ........... $ 218,840,074 $ 206,669,201
============= =============
See accompanying notes to consoldiated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
1999 1998
----------- -----------
Interest and dividend income
Loans ................................ $ 2,994,308 $ 2,593,045
Securities ........................... 704,105 632,934
Other interest-bearing deposits ...... 33,290 43,121
Dividends on FHLB stock .............. 61,151 43,076
----------- -----------
3,792,854 3,312,176
----------- -----------
Interest expense
Deposits ............................. 1,454,227 1,499,690
FHLB borrowings ...................... 788,424 534,597
----------- -----------
2,242,651 2,034,287
----------- -----------
Net interest income .......................... 1,550,203 1,277,889
Provision for loan losses .................... 75,000 27,000
----------- -----------
Net interest income after provision
for loan losses .......................... 1,475,203 1,250,889
----------- -----------
Other income
Loss on sale of securities ........... -- (278,063)
Gain on sale of loans ................ 55,762 159,065
Fees and service charges ............. 75,163 73,835
----------- -----------
130,925 (45,163)
Other expenses
Compensation and benefits ............ 733,977 729,531
Professional fees .................... 156,998 56,492
Federal Deposit Insurance ............ 18,164 17,503
Occupancy ............................ 85,081 85,399
Furniture, fixtures and equipment .... 45,814 42,857
Data processing ...................... 59,891 63,530
Advertising .......................... 13,806 26,402
State taxes .......................... 13,000 17,500
Miscellaneous ........................ 145,591 150,716
----------- -----------
1,272,322 1,189,930
----------- -----------
Income before federal income tax expense ..... 333,806 15,796
Federal income tax expense ................... 120,000 8,960
----------- -----------
Net income ................................... $ 213,806 $ 6,836
=========== ===========
Earnings per share (Note 2) .................. $ .09 $ .003
=========== ===========
Earnings per share assuming dilution (Note 2) $ .09 $ .003
=========== ===========
Dividends per share .......................... $ .06 $ .06
=========== ===========
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,
1999 1998
--------- -------
Net Income ............................................ $ 213,806 $ 6,836
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available
for sale arising during the year ..... (152,972) 8,507
--------- -------
Comprehensive income .................................. $ 60,834 $15,343
========= =======
See accompanying notes to consolidated fianancial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................... $ 213,806 $ 6,836
Adjustments to reconcile net income to
net cash from operating activities
Origination and purchase of loans for sale .. (2,605,926) (7,570,481)
Proceeds from sale of mortgage loans ........ 4,620,372 10,148,392
Net (gain) loss on sales of:
Loans .................................... (55,762) (159,065)
Securities ............................... -- 278,063
Depreciation ................................ 62,088 59,145
Amortization of premiums, net ............... 12,490 81,404
ESOP expense ................................ 53,156 61,130
MRP expense ................................. 28,000 38,100
Provision for loan losses ................... 75,000 27,000
Change in:
Deferred loan fees ....................... (41,669) (48,792)
Other assets ............................. (6,758) (21,497)
Other liabilities ........................ (361,257) 2,630
------------ ------------
Net cash from operating activities 1,993,540 2,902,865
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale ....... (3,986,675) (14,342,119)
Purchases of securities held to maturity ......... -- (2,074,375)
Proceeds from sale of securities ................. -- 10,430,186
Proceeds from maturities, calls and principal
payments of securities available for sale .... 700,566 4,861,879
Loan originations, net of repayments ............. (12,796,999) (5,448,289)
Loans purchased for portfolio .................... (1,404,466) (1,272,200)
Purchase of FHLB stock ........................... (900,000) (150,000)
Proceeds from sale of real estate owned .......... -- 60,989
Property and equipment expenditures .............. (513,647) (20,480)
------------ ------------
Net cash from (used in) investing
activities .................. (18,901,221) (7,954,409)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from FHLB borrowings .................... 24,509,561 13,375,332
Repayment of FHLB borrowings ..................... (5,000,000) (7,000,000)
Increase (decrease) in deposits .................. (6,166,614) 135,198
Repurchase of common stock ....................... (751,937) --
Exercise of stock options ........................ 24,170 --
Dividends paid on common stock ................... (146,237) (144,569)
------------ ------------
Net cash from financing activities 12,468,943 6,365,961
------------ ------------
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended
September 30,
1999 1998
----------- ----------
Net change in cash and cash equivalents ................... (4,438,738) 1,314,417
Cash and cash equivalents at beginning of period .......... 9,105,868 4,205,539
----------- ----------
Cash and cash equivalents at end of period ................ $ 4,667,130 $5,519,956
=========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest .................................. $ 2,124,834 $2,071,238
Income taxes .............................. -- --
See accompanying notes to consolidated financial statements.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 1999
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements consist of the accounts of
Bank West Financial Corporation (the Company) and its wholly owned subsidiary,
Bank West (the Bank). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have been
included.
The results of operations for the three months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending June
30, 2000. 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, 1999, included in the
Company's 1999 Annual Report.
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.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1999
(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,
1999 and 1998 are as follows:
Three Months Ended
September 30,
1999 1998
---------- ----------
Earnings Per Share
Net Income .............................. $ 213,806 $ 6,836
========== ==========
Weighted average common shares
outstanding ........................... 2,371,328 2,388,506
========== ==========
Earnings Per Share ...................... $ .09 $ .003
========== ==========
Earnings Per Share Assuming Dilution
Net Income .............................. $ 213,806 $ 6,836
========== ==========
Weighted average common shares
outstanding ........................... 2,371,328 2,388,506
Add: dilutive effects of assumed
exercise of stock options
and unvested MRP's
Stock options .................. 48,990 100,541
MRP shares ..................... -- 10,562
---------- ----------
Weighted average common and dilutive
potential common shares outstanding ... 2,420,318 2,499,609
========== ==========
Earnings Per Share Assuming Dilution .... $ .09 $ .003
========== ==========
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, 1999
(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 $53,000 was recorded for the three
months ended September 30, 1999.
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
315,503 shares of common stock at exercise prices between $6.625 and $13.25 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, 1999, there were 31,652 option shares reserved for future grants.
As of September 30, 1999, 24,430 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.
During 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 59,099 shares of common stock under the officers' MRP and 41,657 shares
of common stock under the directors' MRP, net of forfeitures. 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,
1999, $28,000 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, 1999
(Unaudited)
NOTE 5 - SECURITIES
The amortized cost and estimated fair values of securities at September 30, 1999
and June 30, 1999 are as follows:
AVAILABLE FOR SALE
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- ----------- -----------
September 30, 1999 (unaudited)
- ------------------------------
U.S. agencies ..................... $11,403,704 $ 68 $ 147,522 $11,256,250
Equity securities ................. 562,139 -- 9,435 552,704
Corporate bonds ................... 6,269,906 13,040 16,412 6,266,534
Taxable municipal bonds ........... 3,656,161 -- 43,926 3,612,235
Mortgage-backed securities ........ 3,442,964 -- 139,402 3,303,562
Collateralized mortgage obligations 20,831,885 10,643 519,469 20,323,059
----------- -------- ----------- -----------
$46,166,759 $ 23,751 $ 876,166 $45,314,344
=========== ======== =========== ===========
June 30, 1999
- -------------
U.S. agencies ..................... $10,898,521 $ 5,382 $ 130,128 $10,773,775
Equity securities ................. 62,140 -- 2,215 59,925
Corporate bonds ................... 3,285,678 570 7,723 3,278,525
Taxable municipal bonds ........... 3,659,131 -- 37,463 3,621,668
Mortgage-backed securities ........ 3,501,610 -- 94,083 3,407,527
Collateralized mortgage obligations 21,485,867 40,689 395,670 21,130,886
----------- -------- ----------- -----------
$42,892,947 $ 46,641 $ 667,282 $42,272,306
=========== ======== =========== ===========
During September of 1998, equity securities were written-down by $401,000
relating to what management perceived to be an other-than-temporary decline in
the market value of these investments resulting from the 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, 1999
(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,
1999 1998
----------- ------------
Loans held for sale - beginning of period ... $ 2,380,576 $ 8,156,572
Activity during the periods:
Loans originated and purchased for sale ..... 2,605,926 7,570,481
Proceeds from sale of loans originated
and purchased for sale .................... (4,620,372) (10,148,392)
Gain on sale of loans ....................... 55,762 159,065
----------- ------------
Loans held for sale - end of period ......... $ 421,892 $ 5,737,726
=========== ============
The unpaid principal balance of mortgage loans serviced for others amounted to
$26.7 million and $27.2 million at September 30, 1999 and June 30, 1999,
respectively. Custodial escrow balances maintained in connection with the
foregoing loans serviced for others were approximately $98,000 and $174,000 at
September 30, 1999 and June 30, 1999, respectively.
BANK WEST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended September 30, 1999
(Unaudited)
NOTE 7 - LOANS
Loans are classified as follows:
September 30, June 30,
1999 1999
------------- -------------
Real estate loans:
One-to four-family residential - fixed rate $ 15,795,503 $ 14,559,680
One-to four-family residential - balloon .. 58,199,843 51,842,742
One-to four-family residential - adjustable 18,069,337 18,833,825
Construction and land development ......... 30,413,861 26,585,310
Commercial mortgages ...................... 17,843,476 15,457,293
Home equity lines of credit ............... 11,000,671 10,512,823
Second mortgages .......................... 12,333,761 10,820,377
------------- -------------
Total mortgage loans ................. 163,656,452 148,612,050
Consumer loans ..................................... 1,855,249 1,849,363
Commercial non-mortgage ............................ 5,506,108 3,823,834
------------- -------------
Total ................................ 171,017,809 154,285,247
Less:
Loans in process .......................... 11,850,923 9,001,424
Deferred fees and costs ................... (443,804) (402,135)
Allowance for loan losses ................. 555,267 480,267
------------- -------------
$ 159,055,423 $ 145,205,691
============= =============
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 and its wholly owned subsidiary, Bank West, at
September 30, 1999 and June 30, 1999 and the consolidated results of operations
for the three months ended September 30, 1999 with the same period in 1998. 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. During the quarter ended September 30, 1999,
the Bank purchased a branch office in Jenison, Michigan, a suburb of Grand
Rapids. This branch will operate as a full-service office. In addition, the Bank
opened a loan production office in Caledonia, Michigan, also a suburb of Grand
Rapids.
FINANCIAL CONDITION
Total assets increased by $12.1 million or 5.9% from $206.7 million at June 30,
1999 to $218.8 million at September 30, 1999. The increase in total assets was
primarily attributable to an increase in total loans by $13.9 million or 9.6%.
Total loans increased as greater emphasis was placed on originating one- to
four-family balloon mortgages, construction and land development loans, and
commercial mortgages. Management expects continued growth in these types of
portfolio lending activities, which is expected to significantly improve the
Bank's net interest income. The strategic realignment that occurred during March
of 1999 with the appointment of the Bank's President and Chief Executive Officer
and the establishment of the Commercial Lending Division is expected to
contribute significantly toward future loan growth.
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, 1999 decreased
by $5.0 million or 65.8% to $2.6 million from $7.6 million. The decrease in loan
originations and purchases for resale is primarily due to the recent increase in
overall market interest rates. Mortgage loans originated and purchased for
resale in the current quarter consisted primarily of 30-year fixed-rate and
balloon loans. The Bank's recent strategy has been to sell 30-year fixed-rate
loans and to portfolio the balloon loans. The Bank has increased its portfolio
of balloon loans over the past twelve months by $27 million or 86.5% in an
effort to offset the prepayments of adjustable-rate and longer-term fixed-rate
mortgages that occurred over the past year. Also, the current strategy will
leverage the balance sheet which is expected to provide additional net interest
income.
Total loans sold amounted to $4.6 million and $10.1 million in the three months
ended September 30, 1999 and 1998, respectively. Loans held for sale amounted to
$422,000 and $5.7 million at September 30, 1999 and 1998, respectively. During
the quarter, the Bank decreased the number of its correspondent financial
institution relationships in an effort to concentrate on those correspondents
that actively sell loans to the Bank. In addition, personnel in the Bank's
correspondent lending department were re-assigned to the retail residential
lending department to assist in developing retail mortgage loan volume.
Total securities increased by $3.0 million during the quarter to $45.3 million.
The increase was primarily related to the purchase of $3.0 million of fixed-rate
investment grade corporate bonds. Collateralized mortgage obligations ("CMO's")
have decreased from $21.1 million at June 30, 1999 to $20.3 million at September
30, 1999. Generally, the Bank's CMO's have floating interest rates (prime rate
or LIBOR) and are collateralized by residential mortgages with a weighted
average gross note rate of approximately 7.1%. The recent increase in overall
market interest rates and the corresponding decrease in prepayment speeds has
extended the average lives of the CMO portfolio. The unrealized loss on
collateralized mortgage obligations was $336,000, net of taxes which is included
in the total unrealized loss on available for sale securities of $563,000 shown
as a component of stockholders' equity.
Total deposits decreased by $6.2 million or 4.7% from June 30, 1999 to September
30, 1999, primarily due to a decrease in broker-arranged certificates of
deposit. 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,
1999, the Bank increased FHLB advances by $19.5 million since short-term FHLB
advances have had lower borrowing costs than broker-arranged certificates of
deposit. FHLB advances have generally been used to fund the Bank's loan growth
and mortgage banking activities.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Stockholders' equity decreased from $23.3 million at June 30, 1998 to $22.8
million at March 31, 1999. The decrease was primarily due to dividends of
$440,000 paid during the nine month period and a change in the net unrealized
loss on securities available for sale by $240,000 primarily from collateralized
mortgage obligations and equity securities. These amounts were partially offset
by net income of $103,000.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The table below sets forth the amounts and categories of non-performing assets
at September 30, 1999 and June 30, 1999:
September 30, June 30,
1999 1999
------ ------
(Dollars in Thousands)
Non-accrual loans
One- to four-family ............... $ 100 $ 207
Construction and land development . 472 930
Commercial ........................ 264 --
Consumer .......................... 95 142
------ ------
Total .......................... 931 1,279
Foreclosed assets
One- to four-family ............... 628 310
------ ------
Total non-performing assets ................ $1,559 $1,589
====== ======
Total as a percentage of total assets ...... .71% .77%
====== ======
Non-performing assets in the construction and land development category consist
of four construction spec loans to four builders in the western and southwestern
Michigan area. These loans, which are collateralized by single-family homes,
require a loan-to-value ratio of 75%. The majority of these homes are
substantially complete. Management believes that these loans are adequately
collateralized. Accordingly, no specific reserves have been assigned to these
loans at September 30, 1999. The allowance for loan losses totalled $555,000 or
60% of total non-performing loans at September 30, 1999. A reserve of $2,000 has
been allocated to one specific second mortgage loan. During the three months
ended September 30, 1999, there were no charge-offs. At September 30, 1999,
$120.9 million or 70.7% of the Bank's total loan portfolio was collateralized by
first liens on one-to four-family residences, and the net loan portfolio
amounted to 72.7% of total assets.
RESULTS OF OPERATIONS
NET INCOME. Net income increased by $207,000 in the quarter ended September 30,
1999 to $214,000. The increase was primarily due to growth in net interest
income and the absence of losses on the sales of securities. See the following
sections for additional information.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
NET INTEREST INCOME. Net interest income increased by $272,000 or 21.3% in the
quarter ended September 30, 1999 over the comparable 1998 period. Net interest
income increased due to higher average loans outstanding by $28.0 million or
21.9% resulting from strong growth in residential balloon mortgages and
commercial mortgages. The Bank's interest rate spread also increased from 2.35%
September 30, 1998 to 2.65% in the quarter ended September 30, 1999. The
increased interest rate spread is due to a decline in the Bank's average cost of
funds from 5.16% as of September 30, 1998 to 4.73% in the quarter ended
September 30, 1999, reflecting certificates of deposit and FHLB advances
repricing to lower rates as a result of the decline in the overall interest rate
environment experienced during the previous year.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by $48,000 or
178% in the three months ended September 30, 1999 over the comparable 1998
period. Management has increased the provision for loan losses over the past
several quarters due primarily to the increase in commercial loans, both on a
dollar basis and as a percentage of total loans requiring additional general
reserves. In addition, management increased the general reserve assumptions
utilized for construction and land development loans due to a recent increase in
delinquencies of builder spec loans. The allowance for loan losses totalled
approximately $555,000 or .32% of the total loan portfolio and 60% of
non-performing loans at September 30, 1999.
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 increased by $176,000 in the three months ended
September 30, 1999 from the comparable prior period. The increase was primarily
due to the absence of a $278,000 loss on sale of securities recognized in the
September 30, 1998 quarter. This amount was partially offset by a decrease in
gain on sale of loans by $103,000 or 64.8% due to the lower mortgage loan sales
volume resulting from the recent rise in mortgage interest rates.
OTHER EXPENSES. Total other expenses increased by $82,000 or 6.9% in the quarter
ended September 30, 1999 over the comparable 1998 period. The increase was
primarily due to higher professional fees by $100,000 or 175.4% primarily
attributable to legal costs associated with defending a class action lawsuit
filed on July 17, 1998 by a Bank West borrower. The Bank is a defendant under
two legal proceedings alleging the unauthorized practice of law and various
violations of law. Management intends to continue to contest these cases
vigorously. Based on a review of current facts and circumstances, management is
unable to determine the amount of loss, if any, that is possible (See Part II,
Item 1 for additional information).
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The other categories of miscellaneous and other expenses did not significantly
change in the quarter ended September 30, 1999 when compared to the September
30, 1998 quarter.
FEDERAL INCOME TAX EXPENSE. Federal income tax expense increased by $111,000 in
the three months ended September 30, 1999 over the comparable 1998 period due to
higher pre-tax income levels.
LIQUIDITY AND CAPITAL RESOURCES
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, 1999, the Bank has approximately $13
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.
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.
THE YEAR 2000
GENERAL. The Year 2000 issue confronting us, as well as our suppliers,
customers' suppliers and competitors, centers on the inability of many computer
systems to recognize the Year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000 unless they are corrected or replaced.
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Like most financial service providers, we may be significantly affected by the
Year 2000 issue due to our dependence on technology and date-sensitive data.
Computer software, hardware and other equipment, both within and outside the
Bank's direct control, and third parties with whom the Bank electronically or
operationally interfaces are likely to be affected. If computer systems are not
modified in order to be able to identify the Year 2000, many computer
applications could fail or create erroneous results. In this event, calculations
which rely on date field information, such as interest, payment or due dates and
other operating functions, could generate results which are significantly
misstated.
In accordance with federal regulatory pronouncements, the Bank's Year
2000 plan addressed issues involving awareness, assessment, renovation,
validation, implementation and contingency planning. These phases are discussed
below.
AWARENESS AND ASSESSMENT. The Bank has a Year 2000 team, consisting of
a committee of the Board of Directors which consists of two outside directors,
the Chief Executive Officer, three Vice Presidents, and an Information Systems
Coordinator. The Year 2000 Committee meets monthly and the Chairman of the
Committee, an outside director, reports to the Board of Directors on a monthly
basis.
Management has conducted an assessment of all software, hardware,
environmental systems and other computer-controlled systems. In addition,
management has identified and developed an inventory of all technological
components and vendors. All "mission critical" areas have been identified.
RENOVATION PHASE. The Bank completed its upgrade of in-house hardware
and software that is mission critical by June 30, 1999. The Bank's core data
processing software is provided by Fiserv Milwaukee, Inc. ("Fiserv"), an outside
vendor. Fiserv represents that they are fully compliant.
VALIDATION OR TESTING PHASE. Utilizing a test lab environment, the Bank
during 1998 tested its loan origination, loan servicing, savings deposits,
savings withdrawal, general ledger and other activities for Year 2000
compliance. Extensive testing also took place with applications that interface
with Fiserv. The Bank explored during 1998 the steps involved in switching its
data processing to a different service provider in the event its current
provider was unable to become Year 2000 compliant in a timely manner. Based on
the results of the testing, the Bank does not believe that a switch to a new
service provider will be necessary.
IMPLEMENTATION PHASE. Additional testing was conducted during the first
quarter of calendar 1999, and the Bank completed the implementation phase by
June 30, 1999.
CONTINGENCY PLANNING. The Bank has adopted a contingency plan in the
event that one or more of its internal and external computer systems fail to
operate on or after January 1, 2000. In a worst case scenario, the Bank would
need to post accounts and general ledger entries manually. This system is in the
process of being set up. Testing of the Bank's business resumption plan was
completed by June 30, 1999.
The Bank has in place a $2 million line of credit from the Federal Home
Loan Bank of Indianapolis
BANK WEST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
that can be used for liquidity purposes if other sources of funds are not
available when needed. The Bank can also obtain short-term FHLB advances if
necessary.
RISKS. If one or more internal or external computer systems fail to
operate properly on or after January 1, 2000, the Bank may be unable to process
transactions, prepare statements or engage in similar normal business
activities. If all transactions were required to be handled manually due to
computer or other failures, the Bank would need to hire additional personnel
which could significantly increase expenses.
In the event any of our local utility companies were unable to provide
electricity or other needed services, our operations would be disrupted. Our
electricity provider has represented that they are Year 2000 compliant; however,
the Bank is unable to provide any assurances as to the Year 2000 readiness of
the electricity provider or other utility companies.
We believe we have taken appropriate steps with respect to matters that
are within our control in order to become ready for the Year 2000 in a timely
manner. Based on the steps taken to date, including testing and other
documentation, management believes that issues related to Year 2000 will not
have a material adverse effect on the Company's liquidity, capital resources or
consolidated results of operations. However, we are unable to provide any
assurances that we have foreseen all problems that may develop on or after
January 1, 2000 or that we have taken all actions that may be considered
necessary in hindsight. In addition, the readiness of all third parties,
including customers and suppliers, is inherently uncertain and cannot be
guaranteed by us. While our outside service providers have shared with us their
testing results, none of the service providers have provided us with enforceable
assurances.
COSTS. To-date, the Bank has incurred approximately $150,000 in Year
2000-related costs. These costs covered the replacement of depreciable assets,
primarily personal computers and consulting costs. In addition, the Bank
recognized an $83,000 loss on disposal of non-compliant hardware and software.
STATUS OF BORROWERS AND OTHER CUSTOMERS. The Bank's customer base
consists primarily of individuals who use the Bank's services for personal,
household or consumer uses. Management believes these customers are not likely
to individually pose material Year 2000 risks directly. It is not possible at
this time to gauge the indirect risks which could be faced if the employers of
these customers encounter unresolved Year 2000 issues. Most of the Bank's loans
are residential or consumer in nature. 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 concerns have been identified. Accordingly, no specific Year 2000
related reserves have been assigned to these loans.
For new commercial loans, the Bank requires the borrower to represent
that it expects to become Year 2000 compliant in a timely manner and that it
will promptly notify the Bank if the borrower or any of its material vendors or
suppliers will not achieve compliance timely. The Bank believes these
representations will assist management in monitoring the status of new
commercial borrowers.
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended September 30, 1999
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
Bank West is a defendant under two legal proceedings pending
in Kent County Circuit Court: Cowles v. Bank West and Newton v. Bank West.
Cowles' original complaint was filed on July 17, 1998 and was premised upon a
claim that the Bank was engaged in the unauthorized practice of law because it
charged residential mortgagors a $250 document preparation fee and that the Bank
also violated the Michigan Consumer Protection Act. The complaint contained
additional claims, largely dependent upon the foregoing allegations. Plaintiff
later filed amendments, alleging claims under the Federal Truth in Lending Act.
Judge Johnston dismissed on August 30, 1999 the claim for unauthorized practice
of law and the claim under the Michigan Consumer Protection Act. He earlier had
dismissed one of the Truth in Lending Act claims. There currently remains in the
case a claim for violation of the Truth in Lending Act, and claims for unjust
enrichment and innocent and negligent misrepresentation. On September 9, 1999,
plaintiff filed a motion to file yet a third amended complaint, trying to
conform the allegations concerning the remaining claims to Judge Johnston's
August 30, 1999 opinion. An order was entered by Judge Johnston denying the
motion on September 24, 1999.
The case of Newton v. Bank West, filed on August 12, 1999 in
Kent County Circuit Court by the same attorneys who represent the plaintiff in
Cowles, also is based upon Bank West=s charging of a document preparation fee
and contains claims for the unauthorized practice of law and violation of the
Michigan Consumer Protection Act. Newton also is pending before Judge Johnston
and if the judge follows his reasoning in Cowles, those claims should be
dismissed. Newton also contains claims for unjust enrichment and negligent and
innocent misrepresentation and replevin. These latter claims have not yet been
sought to be amended to conform to Judge Johnston=s August 30, 1999 rulings in
Cowles.
Management intends to continue to contest these cases
vigorously. Based on a review of current facts and circumstances, management is
unable to determine the amount of loss, if any, that is possible.
The Company and the Bank are also subject to certain other
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these other matters is not expected to have a material adverse effect on the
consolidated financial position of the Company.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
BANK WEST FINANCIAL CORPORATION
Form 10-Q
Quarter Ended September 30, 1999
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 27,
1999, 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 2,021,101. The
matters voted upon together with the applicable voting results
were as follows:
FOR WITHHOLD
--- --------
1. Election of Directors
Jacob Haisma 1,944,271 76,830
Richard L. Bishop 1,950,104 70,997
Thomas D. DeYoung 1,946,007 75,094
FOR AGAINST ABSTAIN
--- ------- -------
2. Ratification of appointment of
Crowe, Chizek and Company
as independent auditors. 2,001,323 9,725 10,053
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, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK WEST FINANCIAL CORPORATION
Registrant
DATE: NOVEMBER 12, 1999 /s/RONALD A. VAN HOUTEN
----------------- -----------------------
Ronald A. Van Houten
Chief Executive Officer
(Duly Authorized Officer)
DATE: NOVEMBER 12, 1999 /s/KEVIN A. TWARDY
----------------- ------------------
Kevin A. Twardy, Vice President and
Chief Financial Officer
(Principal Financial Officer)