SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [ NO FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _______________
Commission File No.: 0-25666
Bank West Financial Corporation
(Exact name of registrant as specified in its charter)
Michigan 38-3203447
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2185 Three Mile Road N.W.
Grand Rapids, Michigan 49544
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (616) 785-3400
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
Based upon the $18.3125 closing price of the Registrant's common stock as of
September 23, 1997, the aggregate market value of the 1,388,502 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was $25.4 million. Although directors and executive officers of the Registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of September 23, 1997: 1,753,475
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are the documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) portions of the
Annual Report to Stockholders for the year ended June 30, 1997 are incorporated
into Part II, Items 5 through 8 of this Form 10-K; and (2) portions of the
definitive proxy statement for the 1997 Annual Meeting of Stockholders are
incorporated into Part III, Items 9 through 13 of this Form 10-K.
<PAGE>
PART I.
Item 1. Business.
General
Bank West Financial Corporation (the "Company") is a Michigan
corporation organized in December 1994 by Bank West, F.S.B. ("Bank West" or the
"Bank") for the purpose of becoming a unitary holding company of the Bank. The
only significant assets of the Company are the capital stock of the Bank, the
Company's loan to the Company's Employee Stock Ownership Plan (the "ESOP"), and
the portion of the net proceeds retained by the Company in connection with the
conversion of the Bank from the mutual to stock form of organization in March
1995 (the "Conversion"). The business and management of the Company consists of
the business and management of the Bank.
Bank West is a federally chartered stock savings bank that was
originally formed in 1887 as a Michigan-chartered mutual savings and loan
association known as West Side Building and Loan. In 1938, the Bank converted to
a federal savings association known as West Side Federal Savings and Loan
Association. The Bank changed its name and became a federally chartered mutual
savings bank in 1993. In March 1995, the Bank converted from a federally
chartered mutual savings bank to a federally chartered stock savings bank.
Bank West conducts business from three offices located in Grand Rapids,
Michigan. At June 30, 1997, the Company had $155.7 million of total assets,
$133.1 million of total liabilities, including $102.9 million of deposits, and
$22.6 million of total stockholders' equity.
Bank West is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured primarily by one- to four-family residences located
in the western Michigan area. Bank West is a community-oriented savings
institution which emphasizes customer service. It generally has sought to
enhance its net income by, among other things, maintaining strong asset quality.
In pursuit of these goals, Bank West has adopted a business strategy that
emphasizes lending and deposit products and services traditionally offered by
savings institutions. In addition, since April 1993, the Bank has engaged in
mortgage banking activities by originating (and since fiscal 1994 purchasing)
one- to four-family residential loans for sale into the secondary market. The
implementation of such strategy has enabled the Bank to be profitable and to
exceed regulatory capital requirements.
During the last five fiscal years, the Company's return on average
assets has averaged .71% and its return on average equity has averaged 5.18%
(including the impact of the government mandated, one-time SAIF assessment of
$364,000 net of tax on September 30, 1996). Net income decreased by $285,000 or
23.6% in fiscal 1997 from fiscal 1996 primarily due to the one-time SAIF
assessment of $364,000, net of tax. At June 30, 1997, the Bank exceeded all of
its regulatory capital requirements, with tangible, core and risk-based capital
ratios of 12.2%, 12.2% and 23.4%, respectively, as compared to the minimum
requirements of 1.5%, 3.0% and 8.0%, respectively. See "Regulation - The Bank -
Regulatory Capital Requirements."
The Company's total nonperforming assets, which consist of $417,000 of
non-accruing loans 90 days or more delinquent and $20,000 of net real estate
owned, totalled $437,000 or .39% of the net loan portfolio at June 30, 1997. At
the end of each of the last five fiscal years, the Company's total nonperforming
assets have not exceeded $437,000 or .39% of the net loan portfolio. At June 30,
1997, the Company's allowance for loan losses amounted to $226,000, representing
0.19% of the total loan portfolio and 51.7% of total nonperforming assets at
such date. See "Asset Quality."
Beginning in fiscal 1995, the Bank expanded its loan products by
offering small business loans and various types of consumer loans. At June 30,
1997, there were $16.6 million in loans receivable outstanding for these loan
products compared to $7.0 million and $2.2 million outstanding for such loan
products at June 30, 1996 and 1995, respectively. The Bank expects these loan
products will improve its net interest margin and make the Bank more competitive
in the marketplace.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), the administrator of the Savings Association
Insurance Fund ("SAIF"). The Bank is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis,
which is one of the 12 regional banks comprising the FHLB System.
This Form 10-K includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "project,"
"expect," "intend" or similar expressions. These statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary from
current expectations include, but are not limited to, the following: changes in
economic conditions (both generally and more specifically in the markets in
which Bank West operates); changes in interest rates, deposit flows, loan
demand, real estate values and competition; changes in accounting principles,
policies or guidelines and in government legislation and regulation (which
change from time to time and over which Bank West has no control); and other
risks detailed in this Form 10-K 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.
The Company's executive office is located at 2185 Three Mile Road N.W.,
Grand Rapids, Michigan 49544, and its telephone number is (616) 785-3400.
Market Area
The Company's market area consists of western Michigan, with its
primary market area consisting of Grand Rapids, Michigan and the surrounding
metropolitan statistical area. Grand Rapids is located in west central Michigan
on the Grand River, the state's longest, and is the seat of Kent County,
Michigan. With a population of 189,000 as of 1990, the city is the 83rd largest
in the United States and the second largest in Michigan after Detroit, the 7th
largest in the nation. Grand Rapids is part of the Grand Rapids Metropolitan
Statistical Area with a population of 688,000 people as of 1990, a 14.4%
increase from the 1980 census. Per capita income has increased 90.2% from 1980
to $18,000 in 1990. Major industries include furniture manufacture, metal
fabrication, medical supplies, plastics, footwear, processed foods, agricultural
products, mining of gypsum (for which Michigan is the leading supplier in the
nation), appliance manufacture, and health care services. Approximately 360,000
persons were employed in Grand Rapids in 1990, and major employers in the area
include Meijer, Inc., Steelcase, General Motors Corp., Amway Corporation and
Butterworth Hospital.
Lending Activities
Loan Portfolio Composition. At June 30, 1997, the Company's total loan
portfolio, including loans held for sale but before net items, amounted to
$121.1 million. The net loan portfolio, excluding loans held for sale, amounted
to $111.5 million at June 30, 1997, representing approximately 71.6% of the
Company's $155.7 million of total assets at that date. The lending activities
are conducted through Bank West, and the principal lending activity of Bank West
is the origination of one- to four-family residential loans. The Bank has also
purchased such loans to supplement its loan originations. At June 30, 1997, one-
to four-family residential loans amounted to $83.1 million or 68.6% of the total
loan portfolio, including loans held for sale. To a lesser extent, the Bank
originates construction loans, home equity lines of credit, second mortgages and
commercial and consumer loans. Construction loans amounted to $21.5 million or
17.8%, home equity lines of credit amounted to $6.4 million or 5.2%, and second
mortgages amounted to $4.3 million or 3.5%, of the total loan portfolio,
including loans held for sale. At June 30, 1997, commercial mortgages amounted
to $2.8 million or 2.3%, commercial non-mortgages amounted to $2.0 million or
1.7%, and consumer loans amounted to $1.1 million or .9%, of the total loan
portfolio, including loans held for sale.
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of Bank West's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- -----------------------
Amount % Amount % Amount %
---------- --------- ---------- ---------- -------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:(1)
One- to four-family residential $ 83,065 68.6% $ 85,034 80.2% $ 92,673 91.7%
Construction 21,500 17.8 14,074 13.3 6,146 6.1
Commercial mortgages 2,764 2.3 1,194 1.1 90 .1
Home equity lines of credit 6,371 5.2 2,214 2.1 1,453 1.4
Second mortgages 4,313 3.5 1,927 1.8 683 .7
Consumer loans 1,081 .9 622 0.6 30 --
Commercial non-mortgage 2,032 1.7 1,010 0.9 -- --
------- ----- -------- ----- -------- -----
Total loans 121,126 100.0% 106,075 100.0% 101,075 100.0%
===== ===== =====
Less:
Loans held for sale 2,231 4,297 2,746
Loans in process 7,169 5,828 2,290
Deferred fees and discounts (30) 47 95
Allowance for loan losses 226 166 108
-------- -------- --------
Net loans $111,530 $ 95,737 $ 95,836
======== ======== ========
<PAGE>
<CAPTION>
June 30,
-------------------------------------------------
1994 1993
---------------------- ----------------------
Amount % Amount %
-------- -------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Real estate loans:(1)
One- to four-family residential $87,177 91.1% $77,056 91.5%
Construction 7,412 7.8 6,296 7.5
Commercial mortgages 159 .2 104 .1
Home equity lines of credit 545 .5 -- --
Second mortgages 363 .4 768 .9
Consumer loans -- -- -- --
Commercial non-mortgage -- -- -- --
------- ----- ------ -----
Total loans 95,656 100.0% 84,224 100.0%
===== =====
Less:
Loans held for sale 1,282 3,250
Loans in process 2,888 2,173
Deferred fees and discounts 159 128
Allowance for loan losses 88 63
Net loans $91,239 $78,610
======= =======
</TABLE>
- -------------------------
(1) Includes loans held for sale.
<PAGE>
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of Bank West's loans at June 30, 1997. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdraft loans are reported as due in one year or less. The amounts shown for
each period do not take into account loan prepayments but do reflect normal
amortization.
<TABLE>
<CAPTION>
One- to
Four-Family Commercial Home Second
Residential Construction Mortgages Equity Mortgages
------------- --------------- -------------- -------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due after June 30, 1997 in:
One year or less $2,735 $21,500 $1,196 $ -- $ 766
After one year through two years 3,675 -- 142 -- 331
After two years through three years 3,032 -- 151 -- 439
After three years through five years 14,429 -- 1,275 921 718
After five years through ten years 14,490 -- -- 5,450 2,047
After ten years through fifteen years 12,074 -- -- -- 12
After fifteen years 32,630 -- -- -- --
------- ------- ------ ------ ------
Total(1) $83,065 $21,500 $2,764 $6,371 $4,313
======= ======= ====== ====== ======
<CAPTION>
Commercial
Consumer Non-mortgage Total
------------ --------------- --------
(In Thousands)
<S> <C> <C> <C>
Amounts due after June 30, 1997 in:
One year or less $ 315 $1,238 $27,750
After one year through two years 260 276 4,684
After two years through three years 215 265 4,102
After three years through five years 291 241 17,875
After five years through ten years -- 12 21,999
After ten years through fifteen years -- -- 12,086
After fifteen years -- -- 32,630
------ ------ --------
Total(1) $1,081 $2,032 $121,126
====== ====== ========
</TABLE>
- ------------------------------------
(1) Gross of loans in process, deferred fees and discounts, and allowance
for loan losses.
<PAGE>
The following table sets forth the dollar amount of all loans, before
net items, due after one year from June 30, 1997, based on the scheduled
contractual maturities shown in the preceding table, which have fixed interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed-Rate Adjustable-Rate Total
------------------------- ---------------------------- --------------------
(In Thousands)
<S> <C> <C> <C>
One- to four-family residential $31,633 $48,697 $80,330
Commercial mortgages 90 1,478 1,568
Home equity -- 6,371 6,371
Second mortgages 3,547 -- 3,547
Consumer 766 -- 766
Commercial non-mortgage 266 528 794
------- ------- -------
Total $36,302 $57,074 $93,376
======= ======= =======
</TABLE>
Scheduled contractual maturities of loans do not necessarily reflect
the actual term of Bank West's portfolio. The average life of mortgage loans is
substantially less than their average contractual terms because of loan
prepayments and enforcement of due-on-sale clauses, which give Bank West the
right to declare a loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase,
however, when current mortgage loan rates substantially exceed rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
substantially exceed current mortgage loan rates.
Origination, Purchase and Sale of Loans. The lending activities of Bank
West are subject to the written, non-discriminatory, underwriting standards and
loan origination procedures established by Bank West's Board of Directors and
management. Loan originations are obtained through a variety of sources,
including referrals from real estate brokers, developers, builders and existing
customers. Written loan applications are taken by lending personnel, and the
loan department supervises the procurement of credit reports, appraisals and
other documentation involved with a loan. Property valuations are performed by
independent outside appraisers. Except for second mortgages and home equity
lines of credit, as to which only title searches are performed, Bank West
generally requires title insurance with respect to residential and construction
loans. Hazard insurance is also required on all secured property, as is flood
insurance if the property is located within a designated flood zone.
Bank West's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. If the loan is to be sold to
one of the investors with which the Bank has an agreement, as discussed below,
the Bank's loan underwriter may approve the loan if the investor has delegated
such authority to the Bank. If the investor requires that the loan be
underwritten by it, the loan is submitted to the investor for its approval. If
the loan is to be held in the Bank's portfolio, it must also be approved by
individuals granted loan approval authority if the loan does not exceed
$250,000. If the loan is to be held in the portfolio and exceeds $250,000 but
does not exceed $500,000, it must be approved by the Loan Committee. Loans in
excess of $500,000 must be approved by the Board of Directors.
The Bank has entered into agreements with several investors, each of
whom has agreed to purchase loans, together with servicing thereof, from the
Bank on a loan-by-loan best efforts basis, provided that it is satisfied after
its review of the loan that the loan complies with its established underwriting
guidelines and lending requirements. The Bank does not approve a loan to be
originated for sale unless either the loan has been satisfactorily reviewed by
one of the investors or the loan is to be sold to an investor which has
delegated the approval authority to the Bank. The Bank makes certain
representations and warranties regarding the loans it sells pursuant to the
above agreements, primarily with respect to the origination of the loans, the
loan documents and the existence of valid liens and insurance policies. Any
violation of these representations and warranties or, with respect to certain of
the agreements, the existence of certain deficiencies in the loans during a
specified period may result in the Bank being required to repurchase the
affected loans that were sold. As of June 30, 1997, the Bank has not been
required to repurchase any of the loans it has sold. The above agreements may be
terminated by either party at any time with respect to future loan commitments,
with varying amounts of termination notice required.
To supplement its loan originations, the Bank has entered into third
party origination agreements with a number of mortgage banking companies and
financial institutions. Pursuant to such agreements, the third party originators
sell loans, together with the servicing thereof, to the Bank on a loan-by-loan
basis. The Bank is under no obligation to purchase any of such loans, and the
Bank agrees to purchase specific loans only after it has determined that the
loan meets its underwriting standards and the standards of the secondary market.
The third party originator makes certain representations and warranties
regarding the loans it sells to the Bank. If there is a violation of the
representations and warranties, the Bank may require the third party originator
to repurchase the affected loans. The above agreements may be terminated by
either party at any time with respect to future loan commitments. Pursuant to
the third party origination agreements, the Bank purchased $21.9 million of
loans in the year ended June 30, 1997. Of the loans purchased in fiscal 1997,
$5.6 million consisted of fixed-rate, one- to four-family residential loans,
$2.0 million consisted of mortgage loans which provide for periodic interest
rate adjustments ("ARMs"), $.9 million consisted of balloon mortgages and $13.4
million consisted of construction loans, part of which were included in loans in
process at June 30, 1997. Other than the construction loans, most of the loans
purchased by the Bank were either sold or are held for sale.
The Bank sold $32.9 million, $45.8 million and $14.4 million of loans
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively, representing 42.5%,
66.2% and 46.2%, respectively, of total loans originated and purchased in such
periods. Loan originations and purchases were at record levels in fiscal 1997,
as greater emphasis was placed on originating residential construction, home
equity, commercial and consumer loans for portfolio instead of concentrating
primarily on residential mortgage banking activities. Total loan originations
and purchases were $77.4 million in fiscal 1997 compared to $69.2 million and
$31.2 million in fiscal 1996 and 1995, respectively.
At June 30, 1997, Bank West was servicing $27.0 million of loans for
others.
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated, including in each case loans held for sale.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- ------------------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
One- to four-family residential:
Adjustable-rate $ 9,290 $ 6,201 $ 3,126
Fixed-rate 14,890 26,524 5,328
Construction:
Adjustable-rate 14,758 7,693 5,470
Fixed-rate 1,470 4,078 2,981
Commercial mortgages 2,002 1,212 --
Consumer loans 1,006 768 30
Home equity loans 5,565 1,039 1,466
Second mortgages 4,194 1,645 695
Commercial non-mortgage 2,315 1,139 --
------- ------- -------
Total loan originations 55,490 50,299 19,096
Loans purchased:
One- to four-family residential 21,892 18,919 12,069
------- ------- -------
Total loans originated
and purchased 77,382 69,218 31,165
------- ------- -------
Sales and loan principal repayments:
Loans sold 32,915 45,798 14,383
Loan principal repayments 29,416 18,420 11,364
------- ------- -------
Total loans sold and
principal repayments 62,331 64,218 25,747
------- ------- -------
Increase (decrease) due to other
items, net (1) 742 (5,099) (821)
------- ------- -------
Net increase (decrease) in
loan portfolio, net $15,793 $ (99) $ 4,597
======= ======= ========
</TABLE>
- ----------------------
(1) Other items consist of loans in process, deferred fees and discounts,
allowance for loan losses and loans held for sale.
<PAGE>
Real Estate Lending Standards and Underwriting Policies. Effective
March 19, 1993, all financial institutions were required to adopt and maintain
comprehensive written real estate lending policies that are consistent with safe
and sound banking practices. These lending policies must reflect consideration
of the Interagency Guidelines for Real Estate Lending Policies adopted by the
federal banking agencies, including the OTS, in December 1992 ("Guidelines").
The Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as extensions of credit secured
by liens on interests in real estate or made for the purpose of financing the
constructions of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including LTV limits, loan administration procedures,
underwriting standards, portfolio diversification standards and requirements for
documentation, approval and reporting. These policies must also be appropriate
to the size of the institution and the nature and scope of its operations, and
must be reviewed and approved by the institution's board of directors at least
annually. The LTV ratio framework, with the LTV ratio being the total amount of
credit to be extended divided by the appraised value or purchase price of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio.
Certain institutions can make real estate loans that do not conform
with the established LTV ratio limits up to 100% of the institution's total
capital. Within this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one- to-four family residential
properties should not exceed 30% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches these
levels. Certain loans are exempt from the LTV ratios (e.g., those guaranteed by
a government agency, loans to facilitate the sale of real estate owned, loans
renewed, refinanced or restructured by the original lender(s) to the same
borrower(s) where there is no advancement of new funds, etc.).
Bank West is in compliance with the above standards.
Although federal laws and regulations permit federal savings
institutions, such as Bank West, to originate and purchase loans secured by real
estate located throughout the United States, Bank West's present lending is
primarily done within western Michigan. Subject to Bank West's loans-to-one
borrower limitation, Bank West is permitted to invest without limitation in
residential mortgage loans and up to 400% of its capital in loans secured by
non-residential or commercial real estate. Bank West may also invest in secured
and unsecured consumer loans in an amount not exceeding 35% of Bank West's total
assets. This 35% limitation may be exceeded for certain types of consumer loans,
such as home equity and property improvement loans secured by residential real
property. In addition, Bank West may invest up to 10% of its total assets in
secured and unsecured loans for commercial, corporate, business or agricultural
purposes. At June 30, 1997, Bank West was well within each of the above lending
limits.
Bank West requires title insurance insuring the priority of its lien,
as well as fire and extended coverage casualty insurance, in order to protect
the properties securing its real estate loans. Borrowers must also obtain flood
insurance policies when the property is in a flood hazard area as designated by
the Federal Emergency Management Agency. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage loan account from which Bank West makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they become due.
Loans on Existing Residential Properties. The primary real estate
lending activity of Bank West is the origination of loans secured by first
mortgage liens on one- to four-family residences. At June 30, 1997, $83.1
million or 68.6% of Bank West's total loan portfolio, including loans held for
sale but before net items, consisted of one- to four-family residential loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by Bank West generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
Bank West. Bank West's lending policies on one- to four-family residential
mortgage loans generally limit the maximum loan-to-value ratio to 97% of the
lesser of the appraised value or purchase price of the property, and generally
one- to four-family residential loans in excess of an 80% loan-to-value ratio
require private mortgage insurance. Prior to November 1992, the Bank had
required a minimum 25% down payment with respect to such loans. For 95% loans,
the borrower's down payment must come from the borrower's own funds and cannot
be in the form of a gift. A borrower's total debt to income ratio generally may
not exceed 41%.
Bank West offers fixed-rate one- to four-family residential loans with
terms up to 30 years. Such loans are amortized on a monthly basis with principal
and interest due each month and customarily include "due-on-sale" clauses, which
are provisions giving Bank West the right to declare a loan immediately due and
payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage or the loan is not repaid. Bank West enforces
due-on-sale clauses to the extent permitted under applicable laws.
Various legislative and regulatory changes have given Bank West the
authority to originate and purchase ARMs, subject to certain limitations. At
June 30, 1997, one- to four-family residential ARMs represented $49.7 million or
41.1% of the total loan portfolio, including loans held for sale.
Bank West's one- to four-family residential ARMs are fully amortizing
loans with contractual maturities of up to 30 years. These loans have interest
rates which are scheduled to adjust annually in accordance with a designated
index (which, at present, is the one-year Treasury security index, plus a range
from 2.75% to 2.875%). Bank West currently offers a one-year adjustable mortgage
with a 2% cap on the rate adjustment per period and a 6% cap rate adjustment
over the life of the loan. The adjustable-rate loans in Bank West's loan
portfolio are not convertible by their terms into fixed-rate loans, may be
assumable and do not produce negative amortization. Bank West also offers 3, 5
and 7 year balloon mortgages. During the past fiscal year, the Bank experienced
a higher dollar amount of ARM prepayments and refinancings than anticipated. As
a result, in fiscal 1997 the Bank instituted a 1% prepayment penalty on newly
originated or purchased ARMs for portfolio. ARM loans originated or purchased
for sale do not contain such prepayment penalties.
The demand for adjustable-rate loans in Bank West's primary market area
has been a function of several factors, including the level of interest rates,
and the difference between the interest rates offered for fixed-rate loans and
adjustable-rate loans. Due to the generally lower rates of interest prevailing
in recent periods, the market demand for adjustable-rate loans has decreased as
consumer preference for fixed-rate loans has increased. Nevertheless, ARMs have
represented a substantial portion of residential mortgage loan originations for
Bank West. For fiscal 1997, ARMs represented 38.4% of total one- to four-family
residential loan originations, compared to 18.9% and 37.0% for fiscal 1996 and
1995, respectively.
Construction Loans. Construction loans represent loans to individuals
who have a contract with a builder for the construction of their residence as
well as loans to builders of residential real estate property. This type of
lending has significantly increased in recent years and represents the second
most significant type of loan for the Bank. At the end of fiscal 1997, 1996 and
1995, construction loans amounted to $21.5 million, $14.1 million and $6.1
million, respectively, or 17.8%, 13.3% and 6.1% of the total loan portfolio
(including loans held for sale), respectively. The Bank purchased $13.4 million
of construction loans in fiscal 1997, a portion of which were included in loans
in process at June 30, 1997. The Bank expects additional growth in its
construction loan portfolio in fiscal 1998.
Construction loans extended pursuant to a builder's line of credit are
for up to the Bank's regulatory lending limit at the prime rate plus a specified
percentage. A first mortgage on each home constructed is given as collateral.
Interest payments only are due for six months, after which the balance extended
is due. The Board of Directors has adopted a policy limiting builder's lines of
credit to four mortgages outstanding at any one time, for an aggregate balance
not to exceed the Bank's regulatory lending limit. Loans to builders under a
line of credit are limited to 75% of appraised value. The maximum term for any
loan pursuant to a builder's line of credit is one year. Pursuant to Bank West's
Construction Loan Policy, construction loans to individuals are limited to 95%
of the appraised value, or purchase price, whichever is less, of the security
property. Construction loans are offered with both fixed and adjustable interest
rates. Appropriate documentation related to the construction process must be
submitted by applicants for construction loans.
Bank West has also adopted a policy for "spec loans" to builders for
construction of homes not under sales contract. For these loans, the permissible
LTV limit is 75%. A maximum of two "spec loans" is permitted to any one builder
to be outstanding at one time, unless an exception is made based upon the
financial stability of the builder.
Construction lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending. Such lending typically
involves large loan balances concentrated in a single borrower or groups of
related borrowers for properties that are dependent upon sale of the home being
constructed. Construction financing also is generally considered to involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate because of the uncertainties of construction,
including the possibility of costs exceeding the initial estimates and the need
to obtain a tenant or purchaser if the property will not be owner-occupied. Bank
West generally attempts to mitigate the risks associated with construction
lending by, among other things, lending primarily in its market area, using
conservative underwriting guidelines, and closely monitoring the construction
process.
Home Equity Lines of Credit. Bank West established a Home Equity Credit
Line Program in November 1993 to further develop its second mortgage lending.
The lines of credit are secured by one- to four-family residences and are
available for any purpose. Loans are offered at the prime rate plus a range from
1% to 1.5%. The minimum credit line is $1,000, and the maximum line of credit is
equal to (a) either 95% of the property's appraised value or two times its
assessed valuation, minus (b) any existing indebtedness secured by the property.
The term of the line of credit is seven years, with a minimum monthly payment of
the greater of 1% of the unpaid balance, $100 or the interest due on the line of
credit. At June 30, 1997, $6.4 million or 5.2% of the Bank's total loan
portfolio, including loans held for sale but before net items, consisted of home
equity loans. In addition, the Bank had unused commitments of $5.0 million of
home equity lines of credit at June 30, 1997. The Bank expects additional growth
in its home equity lines of credit in fiscal 1998.
Second Mortgages. At June 30, 1997, $4.3 million or 3.5% of the Bank's
total loan portfolio, including loans held for sale but before net items,
consisted of second mortgages. The second mortgages are secured by one- to
four-family residences, are for a fixed amount and a fixed term, and are made to
individuals for a variety of purposes. Because the home equity lines of credit
offer greater flexibility to the borrower, it is anticipated that the lines of
credit will continue to be more popular than the second mortgages. However, the
Bank expects additional growth in its second mortgage loan portfolio in fiscal
1998.
Other Lending. Bank West's commercial mortgage and commercial
non-mortgage loans amounted to $2.8 million and $2.0 million, respectively,
representing 2.3% and 1.7% of the total loan portfolio, including loans held for
sale but before net items at June 30, 1997. At June 30, 1997, Bank West's
consumer loan portfolio amounted to $1.1 million or .9% of the total loan
portfolio, including loans held for sale but before net items. The Bank expects
additional growth in its commercial and consumer loan portfolio during fiscal
1998.
Loan Fees and Servicing Income. In addition to interest earned on
loans, Bank West receives income through the servicing of loans and loan fees
charged in connection with loan originations and modifications, late payments,
prepayments, changes of property ownership and for miscellaneous services
related to its loans. Income from these activities varies from period-to-period
with the volume and type of loans made.
Loan origination fees or "points" are a percentage of the principal
amount of the mortgage loan and are charged to the borrower in connection with
the origination of the loan. Bank West's loan origination fees and certain
related direct loan origination costs are offset, and the resulting net amount
is deferred and amortized against interest income over the contractual life of
the related loans as an adjustment to the yield of such loans. At June 30, 1997,
Bank West had approximately $30,000 of net loan costs which had been deferred
and are being recognized as income over the lives of the related loans.
<PAGE>
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1997, in dollar amounts and as a percentage of the
Company's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------------------------------------
30-59 90 or More Days
Days Overdue 60-89 Days Overdue Overdue
-------------------------- ------------------------ ------------------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
----------- ------------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family
residential real estate
loans $ 1,560 1.29% $ 63 .05% $417 .34%
Second mortgages 18 .01 7 .01 -- --
Consumer loans 29 .02 -- -- -- --
</TABLE>
Non-Performing Assets. When a borrower fails to make a required loan
payment, Bank West attempts to cause the default to be cured by contacting the
borrower. In general, contacts are made after a payment is more than 15 days
past due, at which time a late charge is assessed. Defaults are cured promptly
in most cases. If the delinquency on a mortgage loan exceeds 90 days and is not
cured through Bank West's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, Bank West will institute
measures to remedy the default, including commencing a foreclosure action or, in
special circumstances, accepting from the borrower a voluntary deed of the
secured property in lieu of foreclosure with respect to mortgage loans or title
and possession of collateral in the case of consumer loans.
If foreclosure is effected, the property is sold at a sheriff's sale.
If Bank West is the successful bidder, the acquired real estate property is then
included in Bank West's "real estate owned" account until it is sold. Under
Michigan law, there is generally a six-month redemption period with respect to
one- to four- family residential properties during which the borrower has the
right to repurchase the property. Bank West is permitted under federal
regulations to finance sales of real estate owned by "loans to facilitate" which
may involve more favorable interest rates and terms than generally would be
granted under Bank West's underwriting guidelines. At June 30, 1997 and at the
end of each of the prior four fiscal years, Bank West had no loans to
facilitate.
All loans are reviewed on a regular basis under the Bank's asset
classification policy. Loans are placed on a non-accrual status when the loan
becomes 90 days delinquent, in which case the accrual of interest is
discontinued. At June 30, 1997, the Bank had $417,000 of loans on non-accrual
status.
<PAGE>
The following table sets forth the amounts of the Company's
nonperforming assets at the dates indicated, all of which consisted of
non-accruing, one- to four-family residential loans 90 days or more delinquent.
At such dates, there were no troubled debt restructurings.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total nonperforming assets:
Non-accruing loans 90 days
or more delinquent $417 $43 $145 $35 $281
Real estate owned 20 -- -- -- --
---- --- ---- --- ----
Total $437 $43 $145 $35 $281
==== === ==== === ====
Total nonperforming loans as
a percentage of loans, net .39% .04% .15% .04% .36%
==== === ==== === ====
Total nonperforming assets as
a percentage of total assets .28% .03% .10% .03% .29%
==== === ==== === ====
</TABLE>
The $437,000 of nonperforming assets at June 30, 1997 consisted of
three spec construction loans and two one- to four-family residential loans. The
increase in nonperforming assets at June 30, 1997 was attributable to
construction mortgage loans with two home builders. However, due to the Bank's
low loan-to-value ratio required for each of these loans, no portion of the
allowance for loan losses was allocated to these loans or to any other specific
loan.
The Bank's total classified assets at June 30, 1997 amounted to
$500,000, of which $63,000 was classified as special mention and $437,000 was
classified as substandard.
At June 30, 1997, management was not aware of any additional loans with
possible credit problems which caused it to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which in management's
view may result in the future inclusion of such items in the non-performing
asset categories.
Allowance for Loan Losses. At June 30, 1997, Bank West's allowance for
loan losses amounted to $226,000 or .19% of the total loan portfolio, including
loans held for sale. Bank West's loan portfolio consists primarily of one- to
four-family residential loans and, to a lesser extent, construction loans, home
equity lines of credit, second mortgage loans, nonresidential loans and consumer
loans. The Bank believes that there are no material elements of risk in its loan
portfolio, and total nonperforming assets have remained at low levels. The
classification of assets policy is reviewed quarterly by the Board of Directors.
The loan loss allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations, and other factors and estimates which are subject to change
over time. Although management believes that it uses the best information
available to make such determinations, future adjustments to allowances may be
necessary, and net income could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations.
At June 30, 1997, none of the $226,000 allowance for loan losses was
allocated to any specific loan or loan category. The Bank presently does not
expect any net charge-offs in fiscal 1998.
<PAGE>
The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
At or For the At or For the
Year Ended June 30, Nine Months
------------------------------------------------------------------------ Ended June 30,
1997 1996 1995 1994 1993
--------------- -------------- -------------- ------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding(1) $121,126 $106,075 $101,075 $95,656 $84,224
======== ======= ======== ======= =======
Allowance for loan losses,
beginning of period $ 166 $ 108 $ 88 $ 63 $ 50
Provision for loan losses 60 60 20 25 13
Charge-offs -- 2 -- -- --
-------- ------- -------- ------- -------
Allowance for loan losses,
end of period $ 226 $ 166 $ 108 $ 88 $ 63
======== ======= ======== ======= =======
Allowance for loan losses
as a percent of total loans
outstanding .19% .16% .11% .09% .07%
======== ======= ======== ======= =======
One- to four-family residential
loans as a percent of total
loans outstanding
68.6% 80.2% 91.7% 91.1% 91.5%
======== ======= ======== ======= =======
</TABLE>
- ---------------------------
(1) Includes loans held for sale.
<PAGE>
Mortgage-Backed Securities
The Company has invested in a portfolio of mortgage-backed securities
and related securities. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of one- to four-family or multi-family
residential mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company. The Company's mortgage-backed securities are insured or guaranteed by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA and FHLMC are public corporations chartered
by the U.S. government. These institutions guarantee the timely payment of
interest and the ultimate return of principal. FNMA and FHLMC mortgage-backed
securities are not backed by the full faith and credit of the United States, but
because FNMA and FHLMC are U.S. government sponsored enterprises, these
securities are considered high quality investments with minimal credit risks.
During fiscal 1997, 1996 and 1995, the Company purchased $15.7 million,
$13.7 million and $1.8 million, respectively, of adjustable-rate collateralized
mortgage obligations ("CMOs"). The CMOs are not classified as "high-risk
mortgage securities" under OTS Thrift Bulletin 52 ("TB 52"). CMOs are a special
type of pass-through debt in which the stream of principal and interest payments
on the underlying mortgages or mortgage-backed securities is used to create
classes with different maturities and, in some cases, amortization schedules
with each such class possessing different risk characteristics. The CMOs reprice
monthly based on either the prime rate index or the London Interbank Offered
Rate ("LIBOR") index.
At June 30, 1997, the Company's mortgage-backed securities classified
as available for sale had a market value of $1.6 million (gross of $2,800 in
unrealized gains), while CMOs classified as available for sale had a market
value of $21.0 million (gross of $38,000 in unrealized gains). During fiscal
1996, mortgage-backed securities and CMOs with a carrying value and fair value
of $14.5 million were transferred from held to maturity to available for sale to
provide the Company with greater flexibility in managing its liquidity and
interest rate risk. The book value and market value of CMOs classified as held
to maturity at June 30, 1997 totalled $3.0 million. In accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
mortgage-backed and related securities classified as available for sale are
reported at fair value and mortgage-backed and related securities classified as
held for investment are reported at amortized cost. For additional information
relating to the Company's mortgage-backed and related securities held to
maturity or available for sale, see Note 3 to the Consolidated Financial
Statements in the 1997 Annual Report to Stockholders, filed as Exhibit 13.1
hereto (the "1997 Annual Report").
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees or credit
enhancements that result in nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize obligations of the Company. In general, mortgage-backed
pass-through securities are weighted at no more than 20% for risk-based capital
purposes, compared to an assigned risk weighting of 50% to 100% for whole
residential mortgage loans. As a result, these types of securities allow the
Company to optimize regulatory capital to a greater extent than non-securitized
whole loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. In contrast to mortgage-backed securities in
which cash flow is received (and, hence, prepayment risk is shared) pro rata by
all securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche of CMOs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches.
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio at each of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1997 1996 1995
---------------- ------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 1,583 $ 2,308 $14,100
Collateralized mortgage obligations 23,995 15,034 4,255
------- ------- -------
Total mortgage-backed securities $25,578 $17,342 $18,355
======= ======= =======
</TABLE>
Information regarding the contractual maturities and weighted average
yield of the Company's mortgage-backed securities portfolio at June 30, 1997 is
presented below. Due to repayments of the underlying loans, the actual
maturities of mortgage-backed securities generally are substantially less than
the scheduled maturities.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Which Mature In
------------------------------------------------------------------------------------------------
After Five
One Year After One to to Over 10
or Less Five Years 10 Years Years Total
----------- ----------------- ---------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed
securities $ -- $ 74 $ -- $ 1,509 $ 1,583
Collateralized mortgage
obligations -- -- -- 23,995 23,995
----- ----- ------ ------- -------
Total $ -- $ 74 $ -- $25,504 $25,578
===== ===== ====== ======= =======
Weighted average yield --% 7.75% --% 7.08% 7.09%
===== ===== ====== ====== ======
</TABLE>
<PAGE>
The following table sets forth the purchases, sales and principal
repayments of the Company mortgage-backed securities during the periods
indicated.
<TABLE>
<CAPTION>
At or For the
Year Ended June 30,
----------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------- ------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
and CMOs at beginning of period $ 17,342 $ 18,355 $ 3,440
Purchases 15,729 14,721 15,309
Repayments (545) (2,970) (439)
Sales (7,247) (12,485) --
Gain on sales 12 17 --
Amortization of premiums, net (11) (90) (5)
Change in unrealized loss on
securities available for sale 298 (206) 50
-------- -------- --------
Mortgage-backed securities
and CMOs at end of period $ 25,578 $ 17,342 $ 18,355
======== ======== ========
Weighted average yield at
end of period 7.09% 6.52% 7.21%
======== ======== ========
</TABLE>
Securities
The investment policy of the Company, which is established by the
Investment Committee and approved by the Board of Directors, is designed
primarily to provide a portfolio of high quality, diversified instruments while
seeking to optimize net interest income within acceptable limits of interest
rate risk, credit risk and liquidity. Bank West is required to maintain certain
liquidity ratios and does so by investing in securities that qualify as liquid
assets under OTS regulations. See "Regulation - The Bank - Liquidity
Requirements" for a description of such regulations. Such securities include
certain federal agency obligations.
Securities (excluding FHLB stock, mortgage-backed securities and CMO's)
totalled $4.0 million or 2.6% of total assets at June 30, 1997. Such securities
consist of U.S. government agency securities. The aggregate market value of such
securities was $4.0 million at June 30, 1997. At June 30, 1997, approximately
$3.0 million of the securities are classified as available for sale, with the
remaining $1.0 million classified as held to maturity.
The Company began trading equity securities in fiscal 1996. The trading
portfolio consists of equity securities of various financial institutions.
Trading activities are conducted at the holding company level only. Although to
date the Company's equity trading strategy has been successful, there is no
guarantee that future results will equal the past fiscal year's performance. The
unrealized gain recognized on securities classified as trading was $131,000 at
June 30, 1997. The market value of the Company's trading securities portfolio
was $2.9 million at June 30, 1997.
<PAGE>
The following table sets forth certain information relating to the
Company's securities portfolio (excluding mortgage-backed securities and CMOs)
at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------- ------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- --------- ---------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agency securities $3,999 $3,979 $6,949 $6,951 $ 8,537 $8,525
Corporate bonds -- -- 493 493 1,869 1,869
Municipal bonds -- -- -- -- 1,000 1,003
FHLB stock 1,550 1,550 1,475 1,475 1,475 1,475
------ ------ ------ ------ ------- -------
Total $5,549 $5,529 $8,917 $8,919 $12,881 $12,872
====== ====== ====== ====== ======= =======
</TABLE>
<PAGE>
The following table sets forth the amount of securities which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at June 30, 1997.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Which Mature In
---------------------------------------------------------------------------------------------
Over One Over Five
Weighted Year Weighted Years Weighted
One Year Average Through Average Through Average
or Less Yield Five Years Yield Ten Years Yield
---------- ------------- ------------ ------------ ----------- ---------
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C>
Bonds and other debt securities:
U.S. Government and
federal agencies $ 1,001 6.05% $2,977 6.43% $ -- --%
Equity securities:
FHLB stock(1) 1,550 7.85 -- -- -- --
</TABLE>
- ---------------------------
(1) As a member of the FHLB of Indianapolis, Bank West is required to
maintain its investment in FHLB stock, which has no stated maturity.
At June 30, 1997, the Company did not have securities in any one issuer
which exceeded more than 10% of the Company's stockholders' equity.
Interest-Bearing Deposits
At June 30, 1997, the Company had interest-bearing deposits at
financial institutions of $2.0 million, as compared to $5.1 million and $4.2
million at June 30, 1996 and 1995, respectively. The $3.1 million decrease in
interest-bearing deposits from June 30, 1996 to June 30, 1997 is due to excess
liquidity being utilized to fund loan originations.
Sources of Funds
General. Deposits are the primary source of Bank West's funds for
lending and other investment purposes. In addition to deposits, Bank West
derives funds from principal repayments on loans and mortgage-backed securities.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and money
market conditions. FHLB advances may be used to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer-term
basis for general business purposes.
Deposits. Bank West's deposits are attracted principally from within
Bank West's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts, and term certificate accounts. Included among these deposit
products are individual retirement account certificates of approximately $8.9
million or 8.7% of total deposits at June 30, 1997. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
<PAGE>
The following table sets forth information regarding the types of
accounts offered by Bank West at June 30, 1997.
<TABLE>
<CAPTION>
Type of Account Minimum Opening Deposit Interest Rate
- ------------------------------------ ------------------------------------ --------------------------
<S> <C> <C>
Regular NOW accounts $ 300 2.50%
Gold NOW accounts(1) 500 2.50 - 4.00
Passbook accounts 100 2.00
Basic statement savings 100 2.75
Tiered statement savings(1) 2,500 3.45 - 4.41
Certificates of deposit(2):
3 to 5 months 500 4.67
6 to 11 months 500 5.09
12 to 23 months 500 5.39
24 to 35 months 500 5.63
36 to 47 months 500 5.87
48 to 59 months 500 6.01
60 months or more 500 6.35
</TABLE>
- ---------------
(1) Represents a tiered account.
(2) Excludes special certificate of deposit promotions.
The large variety of deposit accounts offered by Bank West has
increased Bank West's ability to retain deposits and allowed it to be more
competitive in obtaining new funds, but has not eliminated the threat of
disintermediation (the flow of funds away from savings institutions into direct
investment vehicles such as government and corporate securities). During periods
of high interest rates, deposit accounts that have adjustable interest rates
have been more costly than traditional passbook accounts. In addition, Bank West
has become increasingly subject to short-term fluctuations in deposit flows.
Bank West's ability to attract and maintain deposits is affected by the rate
consciousness of its customers and their willingness to move funds into higher-
yielding accounts. Bank West's cost of funds has been, and will continue to be,
affected by money market conditions.
<PAGE>
The following table shows the distribution of, and certain other
information relating to, Bank West's deposits by type of deposit, as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------- -------------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00% - 3.99% $ -- --% $ -- --% $ 188 .2%
4.00% - 5.99% 45,409 44.2 51,043 56.1 23,157 27.2
6.00% - 7.99% 32,230 31.3 17,351 19.1 40,535 47.6
8.00% - 9.99% 21 -- 21 -- 35 --
-------- ----- -------- ----- -------- -----
Total certificate accounts 77,660 75.5 68,415 75.2 63,915 75.0
-------- ----- -------- ----- -------- -----
Transaction accounts:
Passbook and statement savings 17,388 16.9 16,572 18.2 17,135 20.1
Money market accounts 786 .8 1,031 1.1 2,118 2.5
NOW and noninterest-bearing accounts 7,028 6.8 5,010 5.5 2,012 2.4
----- -------- ----- -------- -----
Total transaction accounts 25,202 24.5 22,613 24.8 21,265 25.0
-------- ----- -------- ----- -------- -----
Total deposits $102,862 100.0% $ 91,028 100.0% $ 85,180 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
The following table presents the average balance of each type of
deposit and the average rate paid on each type of deposit for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ -------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- --------- ----------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $17,247 3.61% $16,930 3.64% $17,700 3.42%
Money market accounts
and NOW accounts 6,260 1.69 4,711 2.21 4,511 3.59
Certificates of deposit 73,465 5.71 66,532 5.84 64,968 5.08
------- ---- ------- ---- ------- ----
Total $96,972 5.08% $88,173 5.22% $87,179 4.66%
======= ==== ======= ==== ======= ====
</TABLE>
The following table sets forth the savings flows of Bank West during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before
interest credited(1) $ 6,945 $1,234 $(8,778)
Interest credited 4,889 4,614 3,998
------- ------ -------
Net increase (decrease)
in deposits $11,834 $5,848 $(4,780)
====== ===== =======
</TABLE>
- -----------------
(1) Information provided is net because information necessary to present
the gross amounts of deposits and withdrawals is not readily available.
<PAGE>
Bank West attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its market area, but does not necessarily seek to match the highest rates paid
by competing institutions. Bank West has generally not taken a position of price
leadership in its markets unless there has been an opportunity to market longer
term deposits.
During fiscal 1995, total deposits decreased primarily due to customers
utilizing existing deposits to purchase the Company's common stock in the
initial public offering.
The principal methods used by Bank West to attract deposits include the
offering of a wide variety of services and accounts, competitive interest rates,
convenient office locations and cards that access deposits at Bank West through
automatic teller machines ("ATMs") established by other banking organizations.
Bank West uses traditional marketing methods to attract new customers and
deposits, including mass media advertising and direct mailings.
The following table sets forth the maturities of Bank West's
certificates of deposit having principal amounts of $100,000 or more at June 30,
1997.
<TABLE>
<CAPTION>
Quarter Ending: Amounts
- --------------- -------
(In Thousands)
<S> <C>
September 30, 1997 $ 1,636
December 31, 1997 2,140
March 31, 1998 2,211
June 30, 1998 2,115
After June 30, 1998 3,610
-------
Total certificates of deposit with
balances of $100,000 or more $11,712
=======
</TABLE>
Borrowings. Bank West may obtain advances from the FHLB of Indianapolis
based upon the security of the common stock it owns in that bank and certain of
its residential mortgage loans, investment securities and mortgage-backed
securities, provided certain standards related to credit worthiness have been
met. See "Regulation - The Bank - Federal Home Loan Bank System." Such advances
are made pursuant to several credit programs, each of which has its own interest
rate and range of maturities. Such advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending. At June 30, 1997, Bank West had $18 million of short-term advances from
the FHLB of Indianapolis, $4 million of which mature in the quarter ended
September 30, 1997, and $11 million of long-term variable-rate borrowings which
have maturities between fiscal 1999 and 2002. See Note 8 to the Consolidated
Financial Statements in the 1997 Annual Report for additional information.
During fiscal 1997, the Bank utilized $10 million in additional short-term
variable-rate FHLB borrowings to fund loan growth and to purchase
adjustable-rate CMOs. During fiscal 1996, the Bank reduced short-term advances
by $1.4 million and long-term advances by $4.5 million with excess liquidity
generated from deposit growth. In fiscal 1995, the Bank utilized $14.5 million
of the long-term borrowings to purchase adjustable-rate mortgage-backed
securities (including collateralized mortgage obligations). This strategy was
implemented to earn a positive spread during both an increasing or decreasing
interest rate environment and to supplement the decline in adjustable-rate loan
volume.
<PAGE>
The following table sets forth certain information regarding short-term
borrowings at or for the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
------------------------------------------------------------
1997 1996 1995
------------------- ---------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Average balance outstanding $11,433 $7,361 $ 9,109
Maximum amount outstanding
at any month-end during
the period $18,000 $9,074 $12,438
Balance outstanding at end
of period $18,000 $6,000 $ 7,422
Average interest rate
during the period 5.42% 5.95% 5.49%
Weighted average interest rate
at end of period 5.85% 5.52% 6.39%
</TABLE>
Subsidiaries
OTS regulations permit the Bank to invest up to 2% of its assets in the
capital stock of, and secured and unsecured loans to, subsidiary service
corporations, and an additional 1% of its assets when the additional funds are
utilized for community or inner-city purposes. In addition, federally-chartered
savings institutions which are in compliance with their minimum regulatory
capital requirements also may make conforming loans to service corporations in
which the institution owns or holds more than 10% of the capital stock or to
joint ventures of such service corporations in an aggregate amount of up to 50%
of the institutions' regulatory capital. OTS regulations also limit the
aggregate amount of direct investments, including loans, by a SAIF-insured
institution in real estate, service corporations, operating subsidiaries and
equity securities as defined therein. At June 30, 1997, the Bank had one wholly
owned subsidiary which is inactive.
Competition
Bank West faces significant competition both in attracting deposits and
in making loans. Some of the Bank's major competitors include NBD Bank, Comerica
Bank, Michigan National Bank, Old Kent Bank and Trust Company, and First of
America Bank. Its most direct competition for deposits has come historically
from commercial banks, credit unions and other savings institutions located in
its primary market area, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, Bank
West faces additional significant competition for investors' funds from
short-term money market mutual funds and issuers of corporate and government
securities. Bank West competes for deposits principally by offering depositors a
variety of deposit programs. Bank West does not rely upon any individual group
or entity for a material portion of its deposits. The Bank estimates that its
market share of total deposits in Kent County, Michigan is approximately 1%.
Bank West's competition for real estate loans comes principally from
mortgage banking companies, commercial banks and other savings institutions.
Bank West competes for loan originations primarily through the interest rates
and loan fees it charges, and the efficiency and quality of services it provides
borrowers and real estate brokers. Factors which affect competition include
general and local economic conditions, current interest rate levels and
volatility in the mortgage markets. The Bank estimates that its market share of
total mortgage loans secured by properties located in Kent County, Michigan is
approximately 3%.
Employees
Bank West and its subsidiaries had 53 full-time employees and 8
part-time employees at June 30, 1997. None of these employees is represented by
a collective bargaining agent, and Bank West believes that it enjoys good
relations with its personnel.
REGULATION
The Company
General. The Company, as a registered savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"), is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Bank West is subject to
certain restrictions in its dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test, as
discussed under "- The Bank - Qualified Thrift Lender Test," then such unitary
holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with Bank West, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than Bank West or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act and OTS regulations. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company context,
the parent holding company of a savings institution (such as the Company) and
any companies which are controlled by such parent holding company are affiliates
of the savings institution. Generally, such provisions (i) limit the extent to
which the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions. In addition to the restrictions imposed by such
provisions, no savings institution may (i) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in activities which are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At June 30, 1997, Bank West was in compliance with the above
restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the FRB. As a result of these provisions,
there have been a number of acquisitions of savings institutions by bank holding
companies in recent years.
The Bank
General. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. The investment and lending
authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provided
for, among other things, the recapitalization of the BIF; the authorization of
the FDIC to make emergency special assessments under certain circumstances
against BIF members and members of the SAIF; the establishment of risk-based
deposit insurance premiums; and improved examinations and reporting
requirements. The FDICIA also provided for enhanced federal supervision of
depository institutions based on, among other things, an institution's capital
level. See " Prompt Corrective Action."
Insurance of Accounts. The deposits of Bank West are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned
to one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging prior to September 30, 1996 from .23% for
well capitalized, healthy institutions to .31% for undercapitalized institutions
with substantial supervisory concerns. The insurance premiums for Bank West for
the two semi-annual periods in each of calendar 1994, calendar 1995 and calendar
1996 were .23% (per annum) of insured deposits.
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the BIF are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF has achieved a fully funded status,
and therefore as discussed below, in fiscal 1996 the FDIC substantially reduced
the average deposit insurance premium paid by BIF-insured banks to a level
approximately 75% below the average premium then paid by savings institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation
which eliminated the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio to 1.25% of insured deposits. The
legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was accrued as an expense on September 30, 1996. The Bank's one-time
special assessment amounted to $551,000. Net of related tax benefits, the
one-time special assessment amounted to $364,000 or $0.21 per share. The payment
of the special assessment had the effect of immediately reducing the Bank's
capital by such amount. However, management does not believe that this one-time
special assessment had a material adverse effect on the Company's consolidated
financial condition.
In the fourth quarter of 1996, the FDIC lowered the assessment rates
for SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 to 27 basis points in order
to include assessments paid to the Financing Corporation ("FICO"). From 1997
through 1999, SAIF members will pay 6.4 basis points to fund the FICO, while BIF
member institutions will pay approximately 1.3 basis points.
The Bank's insurance premiums, which had amounted to 23 basis points,
were thus reduced to 6.4 basis points effective January 1, 1997. Based on the
Bank's $102.9 million of assessable deposits at June 30, 1997, the premium
reduction should result in a pre-tax cost savings of approximately $171,000 per
year for the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution, including Bank West, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. Bank West had no goodwill or other
intangible assets at June 30, 1997 which are required to be considered in
computing regulatory capital. Both core and tangible capital are further reduced
by an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect Bank West's regulatory
capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of assets. The risk weights assigned by the OTS for principal categories of
assets are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one- to four-family
residences and qualifying multi-family residential loans; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
one- to four-family residential real estate loans more than 90 days delinquent,
and for repossessed assets.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital. As a result, such an
institution will be required to maintain additional capital in order to comply
with the risk-based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0% multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Director of the OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS published an
appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which
established (i) an appeals process to handle "requests for adjustments" to the
interest rate risk component and (ii) a process by which "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to determine their interest rate risk component. The Director of the OTS
indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will
continue to delay the implementation of the capital deduction for interest rate
risk pending the testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on debt securities reported as a separate component
of GAAP capital.
<PAGE>
At June 30, 1997, Bank West exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 12.2%, 12.2%
and 23.4%, respectively. The following table sets forth Bank West's compliance
with each of the above-described capital requirements as of June 30, 1997.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital(1) Capital (2)
------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Capital under GAAP $ 18,452 $ 18,452 18,452
Additional capital items:
Unrealized (gain) loss on securities available
securities available for sale, net of taxes (12) (12) (12)
General valuation allowances(3) -- -- 226
-------- -------- --------
Regulatory capital 18,440 18,440 18,666
Minimum required regulatory capital(4) 2,272 4,544 6,390
-------- -------- --------
Excess regulatory capital $ 16,168 $ 13,896 $ 12,276
======== ======== ========
Regulatory capital as a percentage 12.20% 12.20% 23.40%
Minimum capital required as a
percentage(4) 1.50% 3.00% 8.00%
-------- -------- --------
Regulatory capital as a percentage
in excess of requirements 10.70% 9.20% 15.40%
======== ======== ========
</TABLE>
- -----------------------------
(1) Does not reflect the 4.0% requirement to be met in order for an
institution to be "adequately capitalized." See "- Prompt Corrective
Action."
(2) Does not reflect the interest-rate risk component in the risk-based
capital requirement, the effective date of which has been postponed as
discussed above.
(3) General valuation allowances are only used in the calculation of
risk-based capital. Such allowances are limited to 1.25% of
risk-weighted assets.
(4) Tangible and core capital are computed as a percentage of adjusted
total assets of $151.5 million. Risk-based capital is computed as a
percentage of adjusted risk- weighted assets of $79.9 million.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency was required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar regulations to
implement Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio
of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk- based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Under specified
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At June 30, 1997, Bank West was deemed a well capitalized institution
for purposes of the above regulations and as such is not subject to the above
mentioned restrictions.
Safety and Soundness. On November 18, 1993, a joint notice of proposed
rulemaking was issued by the OTS, the FDIC, the Office of the Comptroller of the
Currency and the FRB (collectively, the "agencies") concerning standards for
safety and soundness required to be prescribed by regulation pursuant to Section
39 of the FDIA. In general, the standards relate to (1) operational and
managerial matters; (2) asset quality and earnings; and (3) compensation. The
operational and managerial standards cover (a) internal controls and information
systems, (b) internal audit system, (c) loan documentation, (d) credit
underwriting, (e) interest rate risk exposure, (f) asset growth, and (g)
compensation, fees and benefits. Under the proposed asset quality and earnings
standards, Bank West would be required to maintain (1) a maximum ratio of
classified assets (assets classified substandard, doubtful and to the extent
that related losses have not been recognized, assets classified loss) to total
capital of 1.0, and (2) minimum earnings sufficient to absorb losses without
impairing capital. The last ratio concerning market value to book value was
determined by the agencies not to be feasible. Finally, the proposed
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by the
individual being compensated. Legislation enacted in 1994: (1) authorizes the
agencies to establish safety and soundness standards by regulation or guideline
for all insured depository institutions; (2) gives the agencies greater
flexibility in prescribing asset quality and earnings standards by eliminating
the requirement that agencies establish quantitative standards; and (3)
eliminates the requirement that the standards referenced above apply to
depository institution holding companies. The agencies have published a final
rule and interagency guidelines ("Guidelines"), which were effective August 9,
1995, as well as asset quality and earning standards which were added to the
Guidelines effective October 1, 1996.
Under the Guidelines and final rule of the OTS, if an insured savings
institution fails to meet any of the standards promulgated by the Guidelines,
then the OTS may require such institution to submit a plan within 30 days (or
such different period specified by the OTS) specifying the steps it will take to
correct the deficiency. In the event that an institution fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth; (2) require the institution to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. Bank West believes that it is in
compliance with the Guidelines and final rule as adopted.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 5%. At June 30, 1997, Bank West's liquidity ratio was
9.0%.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's tangible, core or
risk-based capital ratio exceeds its tangible, core or risk-based capital
requirement. Failure to meet minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. At June 30, 1997, Bank West was a Tier 1 institution for purposes
of this regulation.
On December 5, 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "-Prompt Corrective Action." Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
Loans to One Borrower. The permissible amount of loans-to-one borrower
now generally follows the national bank standard for all loans made by savings
institutions. The national bank standard generally does not permit loans-to-one
borrower to exceed the greater of $500,000 or 15% of unimpaired capital and
surplus. At June 30, 1997, the 15% limit for the Bank was $2.8 million, and the
Bank did not have any loans to one borrower in excess of such amount. Loans in
an amount equal to an additional 10% of unimpaired capital and surplus also may
be made to a borrower if the loans are fully secured by readily marketable
collateral.
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets, with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital up to certain amounts, while specific valuation allowances
for loan losses do not qualify as regulatory capital. Federal examiners may
disagree with an insured institution's classifications and amounts reserved.
Branching by Federal Savings Institutions. OTS policy permits
interstate branching to the full extent permitted by statute (which is
essentially unlimited). Generally, federal law prohibits federal savings
institutions from establishing, retaining or operating a branch outside the
state in which the federal institution has its home office unless the
institution meets the IRS' domestic building and loan test (generally, 60% of a
thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (i) the branch(es) result(s) from an emergency acquisition of
a troubled savings institution (however, if the troubled savings institution is
acquired by a bank holding company, does not have its home office in the state
of the bank holding company bank subsidiary and does not qualify under the IRS
Test, its branching is limited to the branching laws for state-chartered banks
in the state where the savings institution is located); (ii) the law of the
state where the branch would be located would permit the branch to be
established if the federal savings institution were chartered by the state in
which its home office is located; or (iii) the branch was operated lawfully as a
branch under state law prior to the savings institution's conversion to a
federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
Qualified Thrift Lender Test. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test by either qualifying as a
domestic building and loan association as defined in Section 7701(a)(19) of the
Internal Revenue Code of 1986, as amended ("Code") or meeting the second prong
of the QTL test set forth in Section 10(m) of the HOLA. A savings institution
that does not meet the QTL test must either convert to a bank charter or comply
with the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any new advances
from its FHLB, other than special liquidity advances with the approval of the
OTS; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank. Upon the expiration of
three years from the date the savings institution ceases to be a QTL, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Currently, the prong of the QTL test that is not based on the Code
requires that 65% of an institution's "portfolio assets" (as defined) consist of
certain housing and consumer-related assets on a monthly average basis in nine
out of every 12 months. Assets that qualify without limit for inclusion as part
of the 65% requirement are loans made to purchase, refinance, construct, improve
or repair domestic residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLB of
Indianapolis; and direct or indirect obligations of the FDIC. In addition, the
following assets, among others, may be included in meeting the test subject to
an overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer and educational loans (limited to 10% of total portfolio
assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of
total assets minus the sum of (i) goodwill and other intangible assets, (ii)
property used by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets. At June 30, 1997, the
qualified thrift investments of Bank West were approximately 83.7% of its
portfolio assets.
Accounting Requirements. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than GAAP whenever the Director determines that such requirements are
necessary to ensure the safe and sound reporting and operation of savings
institutions.
Effective February 10, 1992, the OTS adopted a statement of policy
("Statement") set forth in Thrift Bulletin 52 concerning (i) procedures to be
used in the selection of a securities dealer, (ii) the need to document and
implement prudent policies and strategies for securities, whether held for
investment, trading or for sale, and to establish systems and internal controls
to ensure that securities activities are consistent with the financial
institution's policies and strategies, (iii) securities trading and sales
practices that may be unsuitable in connection with securities held in an
investment portfolio, (iv) high-risk mortgage securities that are not suitable
for investment portfolio holdings for financial institutions, and (v)
disproportionately large holdings of long-term, zero-coupon bonds that may
constitute an imprudent investment practice. The Statement applies to investment
securities, high-yield, corporate debt securities, loans, mortgage-backed
securities and derivative securities, and provides guidance concerning the
proper classification of and accounting for securities held for investment, sale
and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire to earn an interest yield
(held for investment), to realize a holding gain from assets held for indefinite
periods of time (held for sale), or to earn a dealer's spread between the bid
and asked prices (held for trading). Depository institution investment
portfolios are maintained to provide earnings consistent with the safety factors
of quality, maturity, marketability and risk diversification. Securities that
are purchased to accomplish these objectives may be reported at their amortized
cost only when the depository institution has both the intent and ability to
hold the assets for long-term investment purposes. Securities held for
investment purposes may be accounted for at amortized cost, securities held for
sale are to be accounted for at the lower of cost or market, and securities held
for trading are to be accounted for at market. Bank West believes that its
investment activities have been and will continue to be conducted in accordance
with the requirements of OTS policies and GAAP.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or market-based
measure of valuation is the appropriate measure for reporting the assets of such
institutions in their financial statements. Such proposal is controversial
because any change in applicable accounting principles which requires depository
institutions to carry mortgage-backed securities and mortgage loans at fair
market value could result in substantial losses to such institutions and
increased volatility in their liquidity and operations. Currently, it cannot be
predicted whether there may be any changes in the accounting principles for
depository institutions in this regard beyond those imposed by SFAS No. 115 or
when any such changes might become effective.
The Omnibus Reconciliation Act of 1993 added a new Section 475 to the
Code, which provides that certain financial institutions must recognize gain or
loss annually with regard to any securities held by them as inventory for
resale. Gain and loss is not required to be recognized with regard to securities
which are intended to be held until their maturity. Because all of the Bank's
investment securities and mortgage-backed securities are classified as held to
maturity, Section 475 of the Code does not have a material impact on the
financial statements of the Bank.
Federal Home Loan Bank System. Bank West is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. The
FHLB advances are collateralized by a blanket collateral loan agreement under
which the Bank must maintain minimum eligible collateral of 160% of the
outstanding advances. Under this agreement, the limit on the Bank's FHLB
advances was $69.2 million at June 30, 1997. At June 30, 1997, the Bank had
$29.0 million of FHLB advances. See Note 8 to the Consolidated Financial
Statements in the 1997 Annual Report.
As a member, Bank West is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At June 30, 1997, Bank West had
$1,550,000 in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. The dividend yield on the Bank's FHLB stock
has decreased from 9.7% in fiscal 1993 to 8.1% in fiscal 1996 and 7.8% in fiscal
1997.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of June 30, 1997, no
reserves were required to be maintained on the first $4.4 million of transaction
accounts, reserves of 3% were required to be maintained against the next $44.9
million of net transaction accounts (with such dollar amounts subject to
adjustment by the FRB), and a reserve of 10% (which is subject to adjustment by
the FRB to a level between 8% and 14%) against all remaining net transaction
accounts. Because required reserves must be maintained in the form of vault cash
or a noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
TAXATION
Federal Taxation
General. The Company and Bank West are subject to the generally
applicable corporate tax provisions of the Code, and Bank West is subject to
certain additional provisions of the Code which apply to thrift and other types
of financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive discussion of the tax rules applicable to the Company and
Bank West.
Fiscal Year. The Company and Bank West file a consolidated federal
income tax return on the basis of a fiscal year ending June 30.
Bad Debt Reserves. Savings institutions, such as Bank West, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the institution's taxable income.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) previously
used by many savings institutions to calculate their bad debt reserve for
federal income tax purposes. Savings institutions with $500 million or less in
assets may, however, continue to use the experience method. As a result, the
Bank must recapture that portion of its reserve which exceeds the amount that
could have been taken under the experience method for post-1987 tax years. At
June 30, 1996, the Bank's post-1987 excess reserves amounted to approximately
$781,000. The recapture will occur over a six-year period, the commencement of
which will be delayed until the first taxable year beginning after December 31,
1997, provided the Bank meets certain residential lending requirements. The
legislation also requires savings institutions to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995.
At June 30, 1997, the federal income tax reserves of Bank West included
$3.4 million for which no federal income tax has been provided. Because of these
federal income tax reserves and the liquidation account established for the
benefit of certain depositors of Bank West in connection with the conversion of
the Bank to stock form, the retained earnings of Bank West are substantially
restricted.
Distributions. If Bank West were to distribute cash or property to its
sole stockholder, and the distribution was treated as being from its accumulated
bad debt reserves, the distribution will cause Bank West to have additional
taxable income. A distribution is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-qualified distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to the amount
of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) depreciation and
(b) 75% of the excess (if any) of (i) adjusted current earnings as defined in
the Code, over (ii) AMTI (determined without regard to this preference and prior
to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and forward
to the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At June 30, 1997, Bank West had no NOL
carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 35%. Corporations which own 20% or
more of the stock of a corporation distributing a dividend may deduct 80% of the
dividends received. Corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of the dividends received.
However, a corporation that receives dividends from a member of the same
affiliated group of corporations may deduct 100% of the dividends received.
Other Matters. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect Bank West.
Bank West's federal income tax returns for the tax years ended June 30,
1994 forward are open under the statute of limitations and are subject to review
by the IRS.
State Taxation
The State of Michigan imposes a tax on intangible personal property in
the amount of $0.20 per $1,000 of deposits of a savings bank or a savings and
loan institution, less deposits owed to the federal or Michigan state
governments, their agencies or certain other financial institutions. In 1996,
the State of Michigan repealed this tax over a phase-out period beginning in
calendar 1995 and ending in calendar 1998. For calendar years 1997, 1996 and
1995, the amount of the tax calculated pursuant to the above formula is reduced
by 75%, 50% and 25%, respectively. The State of Michigan also imposes a "Single
Business Tax," which is a value-added type of tax and is for the privilege of
doing business in the State of Michigan. The major components of the Single
Business Tax base are compensation, depreciation and federal taxable income,
increased by NOLs, if any, utilized in arriving at federal taxable income, and
decreased by the cost of acquisition of depreciable tangible assets during the
year. The tax rate through September 30, 1994 was 2.35% of the Michigan adjusted
tax base. Beginning October 1, 1994, the rate decreased to 2.30% of the Michigan
adjusted tax base.
<PAGE>
Item 2. Properties.
At June 30, 1997, Bank West conducted its business from its main office
in Walker, Michigan and two branch offices in Grand Rapids, Michigan. The
following table sets forth the net book value (including leasehold improvement,
furnishings and equipment) and certain other information with respect to the
offices and other properties of Bank West at June 30, 1997.
<TABLE>
<CAPTION>
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
- -------------------------------------- ----------------------- ---------------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
2185 Three Mile Road N.W.
Grand Rapids, MI 49544 Owned $2,427 $ 23,373
910 Bridge Street
Grand Rapids, MI 49504 Owned 562 76,689
6740 Cascade Road S.E.
Grand Rapids, MI 49546 Leased 139 2,800
------ --------
Total $3,128 $102,862
====== ========
</TABLE>
Item 3. Legal Proceedings.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
<PAGE>
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein, to the extent applicable, is
incorporated by reference from page 44 of the Company's 1997 Annual Report.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page
2 of the 1997 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages
3 to 14 of the 1997 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
15 to 42 of the 1997 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from pages
3 to 4, 7 and 11 of the definitive proxy statement of the Company for the Annual
Meeting of Stockholders to be held on October 29, 1997, which will be filed
within 120 days of June 30, 1997 ("Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
12 to 18 of the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
8 to 11 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page
18 of the Definitive Proxy Statement.
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Balance Sheets as of June 30,
1997 and 1996
Consolidated Statements of Income for the Fiscal Periods Ended
June 30, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for
the Fiscal Periods Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal Periods
ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
<PAGE>
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
Exhibit Index
2.1* Plan of Conversion
3.1* Articles of Incorporation of Bank West Financial Corporation
3.2* Bylaws of Bank West Financial Corporation
4.1** Stock Certificate of Bank West Financial Corporation
10.1* Employee Stock Ownership Plan
10.2** Employment Agreement among Bank West
Financial Corporation, Bank West, F.S.B. and Paul W.
Sydloski dated March 30, 1995
10.3* Form of Employment Security Agreement among
Bank West Financial Corporation, Bank West, F.S.B. and
certain executive officers
10.4*** 1995 Key Employee Stock Compensation Program
10.5*** 1995 Directors' Stock Option Plan
10.6*** 1995 Management Recognition Plan for Officers
10.7*** 1995 Management Recognition Plan for Directors
13.1 1997 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant - Reference is made to "Item 2.
Business" for the required information
23.1 Consent of Crowe Chizek and Company LLP
27.1 Financial Data Schedule
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-87620) filed by the Company
with the SEC on December 21, 1994, as subsequently amended.
(**) Incorporated herein by reference from the Company's Annual Report on
Form 10-K filed by the Company with the SEC on September 28, 1995.
(***) Incorporated herein by reference from the Company's Annual Report on
Form 10-K filed by the Company with the SEC on September 26, 1996.
(b) The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1997.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no financial statements or schedules which were excluded
from Item 8 which are required to be reported herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: September 25, 1997 By: /s/ Paul W. Sydloski
--------------------
Paul W. Sydloski
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Paul W. Sydloski September 25, 1997
- -------------------------------
Paul W. Sydloski
President, Chief Executive
Officer and Director
/s/ George A. Jackoboice September 25, 1997
- ------------------------------
George A. Jackoboice
Chairman of the Board and
Director
/s/ Richard L. Bishop September 25, 1997
- ------------------------------
Richard L. Bishop
Director
/s/ Thomas D. DeYoung September 25, 1997
- ------------------------------
Thomas D. DeYoung
Director
<PAGE>
/s/ Jacob Haisma September 25, 1997
- ------------------------------
Jacob Haisma
Director
/s/ Carl A. Rossi September 25, 1997
- ------------------------------
Carl A. Rossi
Director
/s/ Robert J. Stephan September 25, 1997
- ------------------------------
Robert J. Stephan
Director
/s/ John H. Zwarensteyn September 25, 1997
- ------------------------------
John H. Zwarensteyn
Director
/s/ Kevin A. Twardy September 25, 1997
- ------------------------------
Kevin A. Twardy
Chief Financial Officer
(also principal accounting
officer)
BANK WEST FINANCIAL CORPORATION
1997 ANNUAL REPORT
<PAGE>
Table of Contents
Section 1
Letter to Shareholders 1
Selected Consolidated Financial Data 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations. 3
Section 2
Report of Independent Auditors 15
Consolidated Financial Statements
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Changes
in Shareholders' Equity 18
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 22
Annual Meeting
The Annual Meeting of Stockholders is scheduled for Wednesday, October 29,
1997 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard
Street, N.W., Grand Rapids, Michigan.
<PAGE>
Letter to Shareholders
Dear Fellow Shareholders:
It is with pride, satisfaction and optimism that I present the third annual
report of Bank West Financial Corporation, for your review.
Fiscal '97 was a year of putting in place additional building blocks and
keeping us focused on accomplishing our strategic goals. We have built the
foundation for the future by expanding our Consumer Lending, Retail Banking,
Small Business Services and Mortgage Lending departments. The addition of highly
skilled staff members has strengthened these core businesses, and we are
optimistic about the future. In addition, we overcame the government mandated
Savings Association Insurance Fund ("SAIF") one-time assessment and once again
proved that Bank West's long-range plan is working.
In order for a building block strategy to work, a successful strategic
planning process must be utilized. Last year we included the entire staff in the
planning. This provided experience and understanding. This year the entire
process was modified and improved, bringing staff involvement to a higher level
and giving management the ability to better communicate the process throughout
the Bank. The results of these efforts are reflected in the net income for
fiscal '97 which was $1.3 million (without the one-time $364,000, net of tax
SAIF assessment). This compared favorably to $1.2 million for fiscal '96. The
same criteria shows earnings per share of $.73 for fiscal '97 compared to $.57
for fiscal '96.
The earnings per share has also been enhanced due to our continuing
aggressive stock repurchase program. During fiscal 1997, we repurchased over 20%
of our outstanding common stock at an average cost of $11.64 per share. These
repurchases are consistent with our ongoing capital management strategy and had
the effect of increasing both our book value per share and our earnings per
share. We will continue to use this option as long as it makes good economic
sense.
Your Board of Directors is committed to enhancing shareholder value by
continuing to grow the Bank, increase our net income and increase our returns to
shareholders. Counting dividends, our original shareholders have seen the value
of their investment increase by over 130% in less than 2 1/2 years. We recently
increased our quarterly dividends, and we continue to make substantial progress
toward our strategic goals. In addition, we opened our third branch office in
fiscal 1997, and our deposits increased by 13.0% during the year. We continue to
take steps to leverage our capital and meet our strategic goals.
Each member of your Board of Directors has a substantial financial stake in
the Company's future and a strong incentive to maximize stockholder value. The
interests of our Board of Directors are similar to those of all of our
stockholders, and the Board of Directors is well aware of its fiduciary duties
to stockholders.
We are proud to have Harry E. Mika, who is the largest individual shareholder
in the Company, join our slate of nominees for election as a director. As
described in more detail in our proxy materials, Mr. Mika was previously a
director and senior officer of other local financial institutions, including
MetroBank in Grand Rapids and Ameribank in Muskegon, Michigan, prior to such
companies being sold. Mr. Mika remains active in the local community and is very
familiar with the Company's market area. We believe Mr. Mika will be a valuable
addition to the Board of Directors if elected.
Fiscal '98 promises to be another exciting and challenging year. One project
involves the charter conversion to a State Savings Bank, which will reduce our
costs. Michigan currently has 26 Savings Banks with over $20 billion in assets.
With Bank West being structured as a community bank, a state charter option is
most appropriate. We will also create a non-conforming mortgage loan company to
allow us to meet the needs of mortgage customers who do not fit exactly the
conforming market guidelines. This will provide additional products for both our
customers and our correspondent financial institution relationships. We will be
able to offer these services without the risk normally associated with
non-conforming loans, since these loans will be sold to institutional investors.
These two projects should provide positive contributions to earnings per share,
keep us focused on our long range strategic plan, help expand our market area
and allow us to continue to refine our financial service products.
Finally, I want to thank all of you for your support and confidence and for
once again making the past year a successful one for all Bank West shareholders,
customers, employees, directors and officers.
Sincerely,
/s/Paul W. Sydloski
Paul W. Sydloski
President/CEO
1
<PAGE>
Selected Consolidated Financial Data
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net interest income $ 4,279 $ 4,158 $ 3,185 $ 2,861 $ 2,187
Provision for loan losses 60 60 21 25 13
Other income 1,554 1,202 270 226 260
One-time special SAIF assessment 551 -- -- -- --
Other expenses 3,821 3,469 2,352 2,045 1,181
Income taxes 478 622 366 337 413
Cumulative effect of change in
accounting for income taxes -- -- -- -- (151)
Net income 923 1,208 716 680 689
Balance Sheet Data
Total assets $155,675 $137,982 $139,648 $106,594 $96,761
Cash and cash equivalents 3,673 6,694 4,595 4,923 3,388
Securities 3,978 7,422 11,405 4,029 4,042
Mortgage collateralized securities 25,578 17,341 18,355 3,440 2,378
Loans, net 111,530 95,737 95,836 91,329 78,610
Loans held for sale 2,231 4,297 2,746 1,282 3,250
Deposits 102,862 91,028 85,180 89,960 84,127
FHLB advances 29,000 19,000 24,922 5,000 2,000
Equity 22,592 26,810 28,171 10,844 10,541
Per Share Data
Earnings per share(1) $ .52 $ .57 $ .10 -- --
Dividends per share .28 .28 -- -- --
Book value per share 12.88 12.19 12.17 -- --
Ratios
Average yield on interest-earning assets 7.61% 7.52% 6.97% 6.55% 7.24%
Average rate on interest-bearing liabilities 5.15 5.37 4.76 4.12 4.48
Average interest spread 2.46 2.15 2.21 2.43 2.76
Net interest margin 3.12 3.10 2.83 2.86 3.24
Return on average assets(2) .64 .87 .62 .67 .76
Return on average equity(2) 3.89 4.38 4.34 6.38 6.90
Efficiency ratio 74.89 68.56 69.56 63.85 50.76
Dividend pay-out ratio 53.85 49.12 -- -- --
Average equity to average assets 16.42 19.77 14.46 10.57 11.01
Non-performing loans as a % of loans, net .37 .04 .15 .04 .33
</TABLE>
(1) Earnings per share for the year ended June 30, 1995 was computed by dividing
net income subsequent to the conversion on March 30, 1995 by the weighted
average number of shares outstanding subsequent to March 30, 1995.
(2) When excluding the impact of the government mandated one-time Savings
Association Insurance Fund assessment of $364,000, net of tax, or $0.21 per
share, Return on Average Assets (ROA) equalled .89% and Return on Average Equity
(ROE) equalled 5.43%.
2
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following sections are designed to provide a more detailed discussion of
Bank West Financial Corporation's (the "Company's") financial condition and
results of operations as well as provide additional information on the Company's
asset/liability management strategies, sources of liquidity and capital
resources. Management's Discussion and Analysis should be read in conjunction
with the consolidated financial statements contained herein. This discussion
provides information about the consolidated financial condition and results of
operations of the Company and its wholly owned subsidiary, Bank West, F.S.B.
(the "Bank" or "Bank West").
This Annual Report includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "project,"
"expect," "intend" or similar expressions. These statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary from
current expectations include, but are not limited to, the following: changes in
economic conditions (both generally and more specifically in the markets in
which Bank West operates); changes in interest rates, deposit flows, loan
demand, real estate values and competition; changes in accounting principles,
policies or guidelines and in government legislation and regulation (which
change from time to time and over which Bank West has no control); and other
risks detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
General
Bank West Financial Corporation is the holding company for Bank West, F.S.B.,
a federal savings bank. Substantially all of the Company's assets are currently
held in, and its operations are conducted through, its sole subsidiary Bank
West. In addition, equity securities trading portfolio activities are conducted
at the holding company. 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.
The Company's operations and profitability are subject to changes in interest
rates, applicable regulations and general economic conditions, as well as other
factors beyond the Company's control. The profitability of Bank West depends
primarily on its net interest income, which is the difference between interest
and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits and FHLB
borrowings. Net interest income is dependent upon the level of interest rates
and the extent to which such rates are changing. The Bank's profitability also
is dependent on the level of its other income, including gains on sale of loans
in connection with its mortgage banking activities, gains (losses) on the sale
or trading of securities, and fees and service charges. During fiscal 1997, 1996
and 1995, the sum of net interest income after provisions for loan losses and
total other income amounted to $5.8 million, $5.3 million, and $3.4 million,
respectively.
The Company's net income was $923,000, $1,208,000 and $680,000 for fiscal
1997, 1996 and 1995, respectively. The decrease in fiscal 1997 was primarily due
to a $364,000, net of tax or $0.21 per share government mandated one-time
special assessment to recapitalize the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). See Note 7 to consolidated financial statements for additional
information. In addition, net interest income increased by $121,000 and other
income increased by $352,000. These amounts were partially offset by an increase
in other
3
<PAGE>
expenses (excluding the SAIF assessment) by $351,000. See "Comparison of Year
Ended June 30, 1997 and Year Ended June 30, 1996" section for additional
information.
Asset and Liability Management
Consistent net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap," provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates.
The Bank attempts to manage its interest rate risk by maintaining a high
percentage of its assets in adjustable-rate loans and mortgage collateralized
securities. The interest rate on its adjustable rate mortgage loans ("ARMs"),
however, adjusts no more frequently than once a year, with the amount of the
change subject to annual limitations, whereas the interest rates on most
deposits can change more frequently and are not subject to annual limitations.
During fiscal 1997, the Bank increased the ratio of interest-sensitive assets to
interest-sensitive liabilities by increasing its percentage of assets in prime
rate-based commercial, home equity and residential construction loans.
Another way the Bank has increased the ratio of interest-sensitive assets to
interest-sensitive liabilities is by selling most of the newly originated,
fixed-rate mortgages, while originating various types of adjustable-rate loans
for retention in the loan portfolio. At June 30, 1997, the Bank's ARMs amounted
to $49.7 million or 32.0% of total assets while adjustable-rate mortgage-backed
securities (including collateralized mortgage obligations) amounted to $24.8
million or 15.9% of total assets. It is anticipated that the Bank will retain a
sufficient amount of newly originated ARMs and other adjustable-rate loans to
offset loan prepayments and repayments.
On the liability side of the balance sheet, management has continued to
pursue increasing its non-interest bearing or low-interest deposit products and
has maintained competitive pricing on longer-term certificates of deposit. The
Bank also uses FHLB advances as a funding source when it is more cost effective
than alternative funding sources.
Management presently monitors and evaluates the potential impact of interest
rate changes upon the market value of the Bank's equity and the level of net
interest income on a quarterly basis, in an attempt to ensure that interest rate
risk is maintained within limits established by the Board of Directors. The
Office of Thrift Supervision ("OTS") adopted a final rule in August 1993
incorporating an interest rate risk component into the risk-based capital rules.
Under the rule, an institution with a greater than "normal" level of interest
rate risk will be subject to a deduction of its interest rate component from
total capital for purposes of calculating the risk-based capital requirement. An
institution with a greater than "normal" interest rate risk is defined as an
institution that would suffer a loss of net portfolio value ("NPV") exceeding
2.0% of the estimated market value of its assets in the event of a 200 basis
point increase or decrease in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. A resulting change in NPV of more than 2% of the
estimated market value of an institution's assets will require the institution
to deduct from its capital 50% of that excess change when calculating regulatory
capital ratios. The rule provides that the OTS will calculate the interest rate
risk component quarterly for each institution. The effective date of the rule
has been postponed by the OTS until further notice. The following table presents
effects of changes in interest rates on the Bank's NPV as of June 30, 1997, as
calculated by the OTS, based on information provided to the OTS by the Bank.
4
<PAGE>
<TABLE>
<CAPTION>
Change in
Change in NPV as % of NPV as % of
Interest Rates Portfolio Portfolio
in Basis Points Net Portfolio Value Value Value
- ------------------------------------------------------------------------------------------------------------
(Rate Shock) Amount $Change %Change of Assets of Assets(1)
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $14,706 $(7,969) (35)% 10.2% (5.1)%
300 17,073 (5,602) (25) 11.6 (3.6)
200 19,286 (3,389) (15) 12.9 (2.2)
100 21,190 (1,485) (7) 13.9 (1.0)
Static 22,675 -- -- 14.6 --
(100) 23,360 685 3 14.9 .4
(200) 23,753 1,078 5 15.0 .7
(300) 24,333 1,657 7 15.3 1.1
(400) 25,189 2,513 11 15.6 1.6
</TABLE>
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
<PAGE>
The following table shows the effects of changes in interest rates on the
Bank's NPV as of June 30, 1996, as calculated by the OTS:
<TABLE>
<CAPTION>
Change in NPV as % of NPV as % of
Interest Rates Portfolio Portfolio
in Basis Points Net Portfolio Value Value Value
- ------------------------------------------------------------------------------------------------------------
(Rate Shock) Amount $Change %Change of Assets of Assets(1)
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $14,738 $(8,046) (35)% 12.1% (6.0)%
300 16,876 (5,907) (26) 13.5 (4.4)
200 18,881 (3,903) (17) 14.8 (2.9)
100 20,584 (2,200) (10) 15.8 (1.6)
Static 22,784 -- -- 17.1 --
(100) 23,677 893 4 17.5 .7
(200) 24,115 1,331 6 17.7 1.0
(300) 24,627 1,843 8 17.9 1.4
(400) 25,384 2,600 11 18.2 1.9
</TABLE>
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
As shown by the tables above, increases in interest rates will result in net
decreases in the Bank's net portfolio value, while decreases in interest rates
will result in smaller net increases in the Bank's net portfolio value. The
tables reflect the Bank's net portfolio value decreasing by 2.2% and 2.9% as of
June 30, 1997 and June 30, 1996, respectively, if interest rates increase by 200
basis points. As a result, the Bank would have been required to make a $155,000
and $600,000 deduction from total capital as of June 30, 1997 and 1996,
respectively, for purposes of calculating the Bank's risk-based capital
requirement if such capital deduction was currently required.
Management continually works to achieve a neutral position regarding interest
rate risk. During fiscal 1997, the Bank placed greater emphasis on reducing the
duration of its interest-earning assets by originating short-term balloons,
consumer and commercial loans. In addition, the Bank has placed greater emphasis
on increasing the percentage of adjustable-rate assets to total interest-earning
assets to better match its interest-bearing liabilities.
5
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react differently to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates.
Changes in Financial Condition
Assets. Total assets increased by $17.7 million or 12.8% from June 30, 1996
to June 30, 1997. The increase is primarily due to a $15.8 million increase in
loans as greater emphasis was placed on originating residential construction,
home equity, commercial and consumer loans for portfolio instead of
concentrating primarily on residential mortgage banking activities. The
additional emphasis on adding the aforementioned loan types to portfolio during
fiscal 1997 was due to increased competitiveness in the residential mortgage
banking business resulting in lower volume of residential loan originations and
reduced gains on the sale of loans. Management expects continued growth in the
construction, home equity, commercial and consumer loan portfolios during fiscal
1998.
The Bank's mortgage banking activities consist of selling newly originated
and purchased loans into the secondary market. Total loans sold amounted to
$32.9 million, $45.8 million and $14.4 million in fiscal 1997, 1996 and 1995,
respectively. Loans held for sale amounted to $2.2 million, $4.3 million and
$2.7 million at June 30, 1997, 1996 and 1995, respectively. The dollar amount of
loans sold and loans held for sale decreased in fiscal 1997 due to lower
refinancing volume as a result of higher prevailing market interest rates
compared to the prior fiscal year as well as increased market competition. The
majority of loans originated and purchased for resale have been 30-year fixed
rate loans. The Bank is continuing to search for ways to increase mortgage
banking volume in fiscal 1998.
Mortgage-backed securities and collateralized mortgage obligations increased
from $17.3 million at June 30, 1996 to $25.6 million at June 30, 1997. During
fiscal 1997, the Bank purchased 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. During fiscal
1996, mortgage-backed securities and collateralized mortgage obligations with a
carrying value and fair value of $14.5 million were transferred from securities
classified as held to maturity to a securities available for sale
classification.
Other securities primarily consisting of U.S. agency securities and corporate
bonds decreased from $7.4 million at June 30, 1996 to $4.0 million at June 30,
1997. The decrease is primarily due to the use of proceeds from sold or called
securities to fund higher yielding loans for portfolio instead of reinvesting
the proceeds in other securities. The Bank expects additional growth in its
consumer and commercial loan portfolios during fiscal 1998 which may be funded
by the sale of securities.
Cash and cash equivalents decreased from $6.7 million at June 30, 1996 to
$3.7 million at June 30, 1997. Current OTS regulations require that a savings
institution maintain liquid assets of not less than 5% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The Bank's regulatory liquidity ratio amounted to 9.0% at June 30,
1997.
The Bank's nonperforming assets totalled $437,000 or .28% of total assets at
June 30, 1997, compared to $43,000 or .03% of total assets at June 30, 1996. The
Bank sold real estate owned at a net gain of $210 and $4,800 during fiscal 1997
and 1996, respectively. The Bank had no net charge-offs during fiscal 1997 and
net
6
<PAGE>
charge-offs totaling $2,138 during fiscal 1996. The Bank's low nonperforming
assets are primarily due to the Bank's conservative underwriting criteria. The
recent increase in nonperforming assets was attributable to construction
mortgage loans with two home builders. However, due to the Bank's low
loan-to-value ratio of these loans, no portion of the allowance for loan losses
was allocated to these loans as well as to any other specific loan. At June 30,
1997, $102.3 million or 86.1% of the Bank's total loan portfolio (excluding
loans held for sale) was collateralized by first liens on one-to four-family
residences.
Liabilities. Total deposits increased $11.8 million or 13.0% from June 30,
1996 to June 30, 1997. The increase in total deposits was primarily attributable
to growth in certificates of deposit of $9.2 million, or 13.5%, and to growth in
non-interest bearing deposits of $1.6 million or 69.6%. Certificates of deposit
accounted for approximately 75% of total deposits both at June 30, 1997 and
1996. At June 30, 1997, $55.0 million or 70.8% of the total certificates of
deposit mature in one year or less, and $14.1 million or 18.2% of the total
certificates of deposit had balances of $100,000 or more. The increase in
deposits was achieved through the opening of the Bank's new main office/branch
and third branch office as well as increased efforts to attract commercial
deposit accounts. In addition, the Bank has attracted and retained certificate
of deposit accounts by offering competitive interest rates.
When deposit growth does not match the growth of assets, other funding
sources such as FHLB advances are utilized. During fiscal 1997, the Bank
increased FHLB advances by $10 million since loan growth and the proceeds
utilized for the Company's stock repurchase program exceeded deposit growth.
During fiscal 1996 the Bank reduced FHLB advances by $5.9 million with excess
liquidity generated from deposit growth. The advances have generally been used
to fund the Bank's mortgage banking activities.
Shareholders' Equity. Shareholders' equity amounted to $22.6 million or 14.5%
of total assets at June 30, 1997 compared to $26.8 million or 19.4% of total
assets at June 30, 1996. The Company's trend of profitability continued in
fiscal 1997 with the Company earning $923,000. During fiscal 1997, the Company
repurchased 446,100 shares, or 20.3% of its common stock at a cost of $5.2
million and paid cash dividends of $507,000. The repurchased shares contributed
to the increase in book value per share and earnings per share.
The cost of shares issued to the Company's Employee Stock Ownership Plan
("ESOP") but not yet allocated to participants totaling $1.0 million is
presented in the consolidated balance sheet as a reduction of shareholders'
equity. The unamortized unearned compensation value of the Company's MRPs also
is shown as a reduction of shareholders' equity.
In accordance with SFAS No. 115, which the Bank adopted effective June 30,
1994, the Company's securities classified as available for sale are carried at
market value, with unrealized gains or losses reported as a separate component
of shareholders' equity, net of federal income taxes. At June 30, 1997, the net
unrealized gain was $13,000, while at June 30, 1996, the net unrealized loss was
$207,000.
Results of Operations
While the Company's net income continues to be primarily dependent upon net
interest income and fee income, the Company's net income in recent years has
been affected by gains on the sale of loans in connection with its mortgage
banking activities, gains (losses) on the sale or trading of securities and
other miscellaneous other income. Other than the gains on mortgage banking
activities, the Company does not consider these items to be of a recurring
nature or part of the Company's "core" earnings.
7
<PAGE>
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table presents for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Tax-exempt income and yields
have not been adjusted to a tax-equivalent basis because the Bank's holdings of
tax-exempt securities were not material. All average balances are based on month
end balances.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30, Year Ended June 30,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2) $103,324 $ 8,206 7.94% $100,350 $ 7,902 7.87% $ 97,031 $6,882 7.09%
Securities 5,540 387 6.99 7,987 509 6.37 6,006 356 5.93
Mortgage-backed securities(3) 23,061 1,520 6.59 18,790 1,231 6.55 4,621 316 6.84
Interest-bearing deposits 3,633 199 5.48 5,476 326 5.95 3,910 229 5.86
FHLB stock 1,483 116 7.81 1,475 120 8.14 954 65 6.81
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 137,041 10,428 7.61 134,078 10,088 7.52 112,522 7,848 6.97
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 7,419 5,410 3,287
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $144,460 $139,488 $115,809
====================================================================================================================================
Interest-bearing liabilities:
NOWaccounts and MMDAs $ 6,260 106 1.69 $ 4,711 104 2.21 $ 4,511 162 3.59
Passbook and statement savings 17,247 623 3.61 16,930 617 3.64 17,700 606 3.42
Certificates of deposit 73,465 4,195 5.71 66,532 3,884 5.84 64,968 3,298 5.08
Short-term FHLB advances 11,433 620 5.42 7,361 438 5.95 9,109 500 5.49
Long-term FHLB advances 11,000 605 5.50 14,875 887 5.96 1,650 97 5.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 119,405 6,149 5.15 110,409 5,930 5.37 97,938 4,663 4.76
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 1,340 1,504 1,125
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 120,745 111,913 99,063
Stockholders' equity 23,715 27,575 16,746
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $144,460 $139,488 $115,809
====================================================================================================================================
Net interest income; average
interest rate spread $ 4,279 2.46% $4,158 2.15% $3,185 2.21%
====================================================================================================================================
Net interest margin(4) 3.12% 3.10% 2.83%
====================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 114.77% 121.44% 114.89%
====================================================================================================================================
</TABLE>
<PAGE>
(1) At June 30, 1997, the weighted average yields earned and rates paid
were as follows: loans receivable, 8.12%; securities, 6.34%;
mortgage-backed securities, 7.09%; interest-bearing deposits, 5.51%;
FHLB stock, 7.85%; total interest-earning assets, 7.84%; deposits,
5.15%; FHLB advances, 5.84%; total interest-bearing liabilities, 5.30%;
and interest spread, 2.54%.
(2) Includes nonaccrual loans during the respective periods. Calculated net
of deferred fees and discounts, loans in process and allowance for loan
losses.
(3) Includes collateralized mortgage obligations.
(4) Net interest margin equals net interest income divided by average
interest-earning assets.
8
<PAGE>
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (change in rate multiplied by prior year volume), and (ii)
changes in volume (change in volume multiplied by prior year rate). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1997 June 30, 1996
vs. vs.
Year Ended Twelve Months Ended
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
- ---------------------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $70 $234 $304 $778 $ 242 $1,020
Securities 46 (168) (122) 28 125 153
Mortgage-backed securities 8 281 289 (14) 929 915
Interest-bearing deposits (24) (103) (127) 4 93 97
FHLB stock (5) 1 (4) 13 42 55
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 95 245 340 809 1,431 2,240
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (127) 446 319 492 47 539
FHLB advances (112) 12 (100) 47 681 728
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense (239) 458 219 539 728 1,267
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $334 $(213) $121 $270 $ 703 $ 973
===========================================================================================================================
</TABLE>
Comparison of Year Ended June 30, 1997 and Year Ended June 30, 1996
Net Income. The Company's net income decreased by $285,000 or 23.6% in fiscal
1997 from fiscal 1996. The decrease in fiscal 1997 was primarily due to a
$364,000, net of tax or $0.21 per share government mandated one-time special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"),
which is administered by the Federal Deposit Insurance Corporation ("FDIC"). See
Note 7 to consolidated financial statements for additional information. In
addition, net interest income increased by $121,000 and other income increased
by $352,000. These amounts were largely offset by an increase in other expenses
(excluding the SAIF assessment) by $351,000.
Net Interest Income. The $121,000 or 2.9% increase in net interest income in
fiscal 1997 was primarily due to a $3.0 million or 3.0% increase in the average
loan portfolio and a $4.3 million or 22.7% increase in the
9
<PAGE>
average collateralized mortgage obligation portfolio. In addition, the Company's
average interest spread increased from 2.15% to 2.46%. The average interest
spread increased as a result of an increase in the average yield on
interest-earning assets, primarily loans as well as a decline in the average
cost of interest-bearing liabilities both in deposits and FHLB advances. These
amounts were partially offset by a $9.0 million or 8.1% increase in average
interest-bearing liabilities. During fiscal 1998, the Bank expects a positive
impact on its average interest spread as a result of the anticipated growth of
its loan portfolio. In addition, the Bank intends to continue its efforts in
attracting lower costing deposits.
Interest Income. Total interest income increased by $340,000 or 3.4% in
fiscal 1997 compared to fiscal 1996. The increase was primarily due to a $3.0
million or 3.0% increase in the average loan portfolio and a $4.3 million or
22.7% increase in the average collateralized mortgage obligation portfolio. The
interest on loans also increased due to the average yield increasing from 7.87%
in fiscal 1996 to 7.94% in fiscal 1997 resulting in a $70,000 or .9% increase in
interest on loans (before giving effect to the increase in the average balance)
as adjustable-rate loans repriced higher to reflect the higher prevailing market
interest rates during fiscal 1997 as well as the growth in the commercial and
consumer loan portfolios. These amounts were partially offset by a decline in
interest on securities and other interest-earning deposits by $122,000 and
$127,000, respectively, as the proceeds from sold or called securities and other
available liquidity were utilized to fund loans instead of investing the
proceeds in securities.
Interest Expense. Total interest expense increased by $219,000 or 3.7% in
fiscal 1997 compared to fiscal 1996, primarily due to an increase in the average
deposit balance by $8.8 million or 10.0%. This amount was partially offset by a
decrease in the average cost of deposits from 5.22% in fiscal 1996 to 5.08% in
fiscal 1997.
Interest on FHLB advances decreased by $100,000 or 7.5% in fiscal 1997 from
fiscal 1996, as the average rate paid decreased to 5.46% in fiscal 1997 from
5.96% in fiscal 1996. FHLB advances have primarily been used in addition to
deposits to fund loan originations for the Bank's loan portfolio as well as to
purchase adjustable-rate collateralized mortgage obligations.
Provision for Loan Losses. The provision for loan losses did not change when
comparing fiscal 1996 to fiscal 1997. The allowance for loan losses totalled
$226,000, which represented .19% of the total loan portfolio and 54.2% of
nonperforming loans at June 30, 1997. The nonperforming loans at June 30, 1997
were comprised of one- to four-family mortgage loans and construction loans.
Management believes these loans are adequately collateralized. Accordingly, no
specific reserves have been assigned to these loans.
Because of the stability of the loan portfolio's credit quality, management
budgets a provision for the entire year, and, on a quarterly basis, reviews this
amount to determine if any change in the amount of the provision is necessary.
For fiscal 1997, management determined that no change in the amount of the
quarterly provision was necessary as a result of the dollar amount and types of
loans added to the portfolio during the fiscal year. Management believes that
the allowance is adequate to cover losses that are probable and reasonably
estimable based on past loss experience, general economic conditions,
information about specific borrower situations, and other factors and estimates
which are subject to change over time. Management expects the provision for loan
losses to increase in the next fiscal year as general reserves continue to be
provided to correspond with the anticipated growth in commercial and consumer
loans.
Total Other Income. Total other income increased by $352,000 or 29.3% in
fiscal 1997 from fiscal 1996, primarily due to a $365,000 improvement in the
results of trading equity securities and a $117,000 increase in fees and service
charges. These amounts were partially offset by a $118,000 decrease in gain on
sale of loans. The equity securities trading portfolio is comprised of equity
investments in financial institutions. Although to date the Company's equity
trading strategy has been successful, there is no guarantee that future results
will equal the
10
<PAGE>
current fiscal year's performance. The unrealized gain recognized on securities
classified as trading was $131,000 at June 30, 1997.
Gain on the sale of loans decreased by $118,000 or 19.1% due to a decline in
loans sold by $12.9 million as a result of lower refinancing volume from higher
prevailing market interest rates compared to the prior fiscal year as well as
increased market competition. However, the decline in gain on the sale of loans
was offset by an increase in fee and service charge income by $117,000 or 58.4%,
which was primarily related to new loan programs both at the retail level and
with correspondent financial institutions. In an effort to offset the financial
statement impact of lower mortgage banking volume, management placed greater
emphasis on originating residential construction, home equity, commercial and
consumer loans for portfolio. The Company expects to continue to search for ways
to expand its mortgage banking activities during fiscal 1998 as well as to
continue to add non-mortgage loans to the loan portfolio.
Total Other Expenses. Total other expenses increased by $903,000 or 26.0% in
fiscal 1997 from fiscal 1996, primarily due to a government mandated special
assessment to recapitalize the SAIF, which is administered by the FDIC. The FDIC
notified the Bank that the Bank's special assessment was $551,000 on a pretax
basis. See Note 7 to consolidated financial statements for additional
information. In addition, compensation and benefits increased by $407,000 or
22.3% which was primarily due to hiring individuals to support the growth in the
mortgage banking, consumer and commercial loans departments. In addition, the
Employee Stock Ownership Plan and Management Recognition Plans expenses were
higher by $26,000 and $51,000 for fiscal 1997, respectively compared to fiscal
1996. Also, occupancy expense was $60,000 higher during fiscal 1997 compared to
fiscal 1996 due to the opening of the Bank's third branch location. These
amounts were partially offset by a decrease in professional fees of $83,000 or
30.5% due to a reduction in consulting fees related to one-time projects.
Federal Income Tax Expense. Federal income tax expense decreased by $143,000
or 23.0% in fiscal 1997 from fiscal 1996, due to a decline in pretax income.
Comparison of Year Ended June 30, 1996 and Year Ended June 30, 1995
Net Income. The Company's net income increased by $492,000 or 68.7% in fiscal
1996 from fiscal 1995. The increase in fiscal 1996 was primarily due to a
$973,000 increase in net interest income, a $480,000 increase in gain on the
sale of loans and a $358,000 increase on the sale of securities. These factors
were partially offset by a $1.1 million or 47.5% increase in total other
expenses.
Net Interest Income. The $973,000 or 30.5% increase in net interest income in
fiscal 1996 was primarily due to a $3.3 million or 3.4% increase in the average
loan portfolio and a $14.2 million or 306.6% increase in the average
mortgage-backed securities (including collateralized mortgage obligation)
portfolio. These amounts were partially offset by a $12.5 million or 12.7%
increase in average interest-bearing liabilities and a decline in the average
interest rate spread from 2.21% in fiscal 1995 to 2.15% in fiscal 1996. The
average spread declined as a result of the increases in interest rates during
the second half of fiscal 1996 which caused deposits to reprice faster than
adjustable-rate assets.
Interest Income. Total interest income increased by $2.2 million or 28.5% in
fiscal 1996 compared to fiscal 1995. The increase was primarily due to an
increase in the average mortgage-backed securities portfolio (including
collateralized mortgage obligations) of $14.2 million or 306.6% resulting in a
$929,000 or 294.0% increase in interest income (before giving effect to a slight
decrease in the average yield). In addition, the average loan portfolio
increased $3.3 million or 3.4% resulting in a $242,000 or 3.5% increase in
interest on loans (before giving effect to an increase in the average yield).
The increase in the average mortgage-backed securities
11
<PAGE>
portfolio was due to the purchase of adjustable-rate mortgage-backed securities
and collateralized mortgage obligations which were funded by variable-rate FHLB
advances. The increase in the average loan portfolio was primarily due to the
total loan originations exceeding total loans sold and repaid during fiscal
1996. Loan originations also were supplemented by the purchase of $1.9 million
of one- to four-family residential loans. The interest on loans also increased
due to the average yield increasing from 7.09% in fiscal 1995 to 7.87% in fiscal
1996 resulting in a $778,000 or 11.3% increase in interest on loans (before
giving effect to the increase in the average balance) as adjustable-rate loans
repriced higher to reflect the higher prevailing market interest rates during
fiscal 1996 as well as the growth in the commercial and consumer loan
portfolios.
Interest on securities increased by $153,000 or 43.0% in fiscal 1996 over
fiscal 1995 as the average balance increased by $2.0 million due to additional
purchases of securities during the fiscal year with part of the proceeds of the
common stock offering. The higher interest income also was attributable to an
increase in the average yield from 5.93% in fiscal 1995 to 6.37% in fiscal 1996.
Dividends on FHLB stock increased by $55,000 or 84.6% due an increase in the
average yield from 6.81% in fiscal 1995 to 8.14% in fiscal 1996 as well as an
increase in the average balance of $521,000 or 54.6%. Interest on
interest-bearing deposits increased by $97,000 or 42.4% in fiscal 1996 primarily
due to higher average balances from an increase in loan refinances and deposit
growth.
Interest Expense. Total interest expense increased by $1.3 million or 27.2%
in fiscal 1996 compared to fiscal 1995, primarily due to an increase in average
FHLB advances and higher average rates paid on both deposits and FHLB advances.
The average rate paid on deposits increased from 4.66% in fiscal 1995 to 5.22%
in fiscal 1996. The increase in the average rate paid is due to an increase in
the prevailing market interest rates compared to the prior fiscal year.
Interest on FHLB advances increased $728,000 in fiscal 1996 from fiscal 1995,
as the average balance increased $11.5 million and the average rate paid
increased to 5.96% in fiscal 1996 from 5.55% in fiscal 1995. The increases in
FHLB advances have primarily been used to fund increased loan originations for
the Bank's loan portfolio as well as to purchase adjustable-rate mortgage-backed
securities and collateralized mortgage obligations.
Provision for Loan Losses. The provision for loan losses increased by $39,500
or 192.7% in fiscal 1996 compared to fiscal 1995. The allowance for loan losses
totalled $166,000, which represented .16% of the total loan portfolio at June
30, 1996. However, the allowance for loan losses represented 386.0% of total
nonperforming loans at such date. Because of the stability of the loan
portfolio's credit quality, management budgets a provision for the entire year,
and, on a quarterly basis, reviews this amount to determine if any change in the
amount of the provision is necessary. For the second half of fiscal 1996,
management determined that an increase in the amount of the quarterly provision
was necessary to provide general reserves for the growth in the commercial and
consumer loan portfolios. Management of the Company believes that the allowance
is adequate to cover losses that are probable and reasonably estimable based on
past loss experience, general economic conditions, information about specific
borrower situations, and other factors and estimates which are subject to change
over time.
Total Other Income. Total other income increased by $932,000 or 345.2% in
fiscal 1996 from fiscal 1995, primarily due to a $480,000 increase in gain on
the sale of loans and a $366,000 increase in gain on the sale of securities. The
increase in the gain on the sale of loans is due to an increase in sold loans
from $14.4 million in fiscal 1995 to $45.8 million in fiscal 1996. Total loans
serviced for FHLMC increased by $4.9 million or 20.6% from fiscal 1995 to fiscal
1996. The Bank sold the majority of its loans held for sale servicing released
to private investors. The increase in the gain on the sale of securities is
primarily the result of trading gains on its equity securities portfolio. This
portfolio is comprised of equity investments in financial institutions. The
unrealized loss recognized on securities classified as trading was $5,813 at
June 30, 1996.
12
<PAGE>
Total Other Expenses. Total other expenses increased by $1.1 million or 47.5%
in fiscal 1996 from fiscal 1995, primarily due to increases of $626,000 or 52.1%
in compensation and benefits, $120,000 or 78.9% in professional fees and
$190,000 or 135.7% in occupancy and furniture, fixtures and equipment expenses.
The higher compensation expense was primarily due to hiring individuals to
support the growth in the mortgage banking, consumer and commercial loans
departments as well as hiring individuals to staff the new branch location. In
addition, the Employee Stock Ownership Plan and Management Recognition Plans
expenses were $164,000 and $99,000 for fiscal 1996, respectively, compared to
$37,000 and none for fiscal 1995, respectively. The increase in professional
fees was primarily due to additional consulting, legal and audit fees and the
outsourcing of the internal audit and certain human resources functions. The
increase in occupancy and furniture, fixtures and equipment expense is primarily
due to the opening of the new main office building/branch during fiscal 1996.
Federal Income Tax Expense. Federal income tax expense increased by $256,000
or 69.9% in fiscal 1996 from fiscal 1995, due to a 69.2% increase in pretax
income.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings institution maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. At June 30, 1997,
the Bank's liquidity ratio was 9.0% or $5.5 million in excess of the minimum OTS
requirement.
Cash was generated by the Bank's operating activities during fiscal 1997,
primarily as the result of net income and the proceeds from the sale of loans
held for sale exceeded the amount of new loan originations and purchased for
resale. During fiscal 1996 and 1995, net cash was utilized by the Bank's
operating activities since loans originated and purchase for resale exceeded the
proceeds received on loans held for sale. These amounts were partially offset by
net income during each period.
The primary investing activities of the Company are the origination of loans
and the purchase of investment and mortgage-backed securities (including
collateralized mortgage obligations), which are primarily funded by deposits,
FHLB advances, the proceeds from repayments and prepayments on existing loans
and the maturity or sale of investment and mortgage-backed securities. Net cash
was utilized by investing activities in fiscal 1997 as loan originations and
purchases exceeded loan repayments and purchases of securities exceeded the
proceeds from the sale or maturity of securities. Net cash was provided by
investing activities in fiscal 1996 primarily because loan repayments exceeded
loan originations, the maturity of interest-bearing time deposits and principal
payments on mortgage-backed securities. Investing activities used net cash in
fiscal 1995 primarily because loan originations exceeded loan repayments. In
addition, in fiscal 1995, the amount of investment and mortgage-backed
securities purchased exceeded the amount sold by $22.7 million. These purchases
were primarily funded by a combination of proceeds from the initial public
offering and FHLB advances. Also in fiscal 1995, property and equipment
expenditures totaled $2.7 million as a result of the construction of the new
corporate headquarters and the remodeling of its branch facility.
The primary financing activity consists of deposits, which increased in
fiscal 1997 and 1996 and decreased in fiscal 1995. The decrease in fiscal 1995
was primarily due to depositors utilizing their deposits at the Bank to purchase
common stock of the Company in the initial public offering. Financing activities
also include FHLB advances, which increased in fiscal 1997 and 1995 in order to
fund loan growth and security purchases. FHLB advances decreased in fiscal 1996
as deposit growth reduced the need for higher costing wholesale funds.
13
<PAGE>
At June 30, 1997, the Company had outstanding commitments to originate or
purchase $2.8 million of loans. In addition, the Company had unused lines of
credit totaling $6.2 million. At the same date, the total amount of certificates
of deposit which were scheduled to mature in the following twelve months was
$55.0 million. The Company believes that it has adequate resources to fund all
of its commitments and that it can adjust the rate on certificates of deposit to
retain deposits to the extent desired. If the Company requires funds beyond its
internal funding capabilities, advances from the FHLB of Indianapolis are
available as an additional source of funds.
The Bank is required to maintain regulatory capital sufficient to meet
tangible, core and risk-based capital ratios of 1.5%, 3.0% and 8.0%,
respectively. At June 30, 1997, the Bank exceeded each of its capital
requirements, with tangible, core and risk-based capital ratios of 12.2%, 12.2%
and 23.4%, respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which generally require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation. Unlike most industrial
companies, virtually all of the Company's assets and liabilities are monetary in
nature. As a result, interest rates generally have a more significant impact on
the Company's performance than does the effect of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates.
Recent Accounting and Regulatory Standards
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
provides authoritative guidance as to the accounting and financial reporting for
transfers and servicing of financial assets and extinguishment of liabilities.
Example transactions covered by SFAS No. 125 include asset securitization,
repurchase agreements, wash sales, loan participations, transfers of loans with
recourse and servicing of loans. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The Statement also requires measuring instruments that
have a substantial prepayment risk at fair value, much like debt instruments
classified as available for sale or trading. While SFAS No. 125 supersedes SFAS
No. 122, "Accounting for Mortgage Servicing Rights," it only marginally modifies
the accounting and disclosure requirements of SFAS No. 122. SFAS No. 125, as
amended by SFAS No. 127, is expected to have no material impact on the Company's
consolidated financial condition or results of operations.
In March 1997, the FASB issued Statement No. 128, "Earnings Per Share," which
is effective for financial statements beginning with year end 1997. SFAS No. 128
simplifies the calculation of earnings per share by replacing primary EPS with
basic EPS. It also requires dual presentation of basic EPS and diluted EPS for
entities with complex capital structures. Basic EPS includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in earnings, such as stock
options, warrants or other common stock equivalents. The Company expects SFAS
No. 128 to have little impact on its earnings per share calculations in future
years, other than changing terminology from primary EPS to basic EPS. All prior
period data will be restated to conform with the new presentation.
14
<PAGE>
Report of Independent Auditors
CROWE CHIZEK
Shareholders and Board of Directors
Bank West Financial Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Bank West
Financial Corporation (the "Company") as of June 30, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank West
Financial Corporation as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 15, 1997
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,722,734 $ 1,571,662
Interest-bearing deposits in financial institutions 1,950,522 5,122,427
- -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 3,673,256 6,694,089
Interest-bearing time deposits 99,000 298,000
Trading securities 2,921,251 708,438
Securities available for sale (Note 3) 25,550,974 22,779,280
Securities held to maturity (fair value:
1997 - $4,001,875; 1996 - $2,006,000) (Note 3) 4,003,575 2,004,288
Loans held for sale (Note 4) 2,231,151 4,297,092
Loans, net (Note 5) 111,530,092 95,737,191
Federal Home Loan Bank stock 1,550,000 1,475,000
Premises and equipment - net (Note 6) 3,128,158 3,106,972
Accrued interest receivable 762,990 632,043
Mortgage servicing rights (Note 4) 148,569 142,697
Other assets 76,175 107,216
- -----------------------------------------------------------------------------------------------------
$155,675,191 $137,982,306
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 7) $102,862,152 $ 91,028,072
Federal Home Loan Bank borrowings (Note 8) 29,000,000 19,000,000
Accrued interest payable 202,217 156,946
Advanced payments by borrowers for taxes and insurance 491,710 459,391
Deferred federal income tax (Note 9) 287,635 225,760
Other liabilities 239,168 301,691
- -----------------------------------------------------------------------------------------------------
Total liabilities 133,082,882 111,171,860
<PAGE>
<CAPTION>
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
<S> <C> <C>
Commitments and Contingencies (Note 10)
Shareholders' equity (Notes 9, 12 and 13)
Preferred stock, 5,000,000 shares
authorized, none issued Common stock,
$.01 par value; 10,000,000 shares authorized;
1,753,475 and 2,199,575 issued at June 30, 1997
and 1996 (Note 2) 17,535 21,996
Additional paid-in capital 11,432,798 16,542,107
Retained earnings, substantially restricted (Notes 9 and 13) 12,647,112 12,231,242
Net unrealized gain (loss) on securities available for sale,
net of tax of ($6,548) in 1997 and $106,834 in 1996 12,710 (207,387)
Management Recognition Plan (unearned shares) (Note 12) (513,398) (643,464)
Employee Stock Ownership Plan (unallocated shares)
(Note 12) (1,004,448) (1,134,048)
- -----------------------------------------------------------------------------------------------------
22,592,309 26,810,446
- -----------------------------------------------------------------------------------------------------
$155,675,191 $137,982,306
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended June 30, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Interest and dividend income
Loans $ 8,206,364 $7,901,948 $6,882,198
Securities 1,907,129 1,739,792 671,728
Other interest-earning deposits 199,210 325,796 229,097
Dividends on Federal Home Loan Bank stock 115,838 120,467 65,156
- --------------------------------------------------------------------------------------------------------------
10,428,541 10,088,003 7,848,179
Interest expense
Deposits 4,924,144 4,605,347 4,065,586
FHLB advances 1,224,959 1,324,732 597,578
- --------------------------------------------------------------------------------------------------------------
6,149,103 5,930,079 4,663,164
- --------------------------------------------------------------------------------------------------------------
Net interest income 4,279,438 4,157,924 3,185,015
Provision for loan losses (Note 5) 60,000 60,000 20,500
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,219,438 4,097,924 3,164,515
Other income
Net gain on sales of loans (Note 4) 498,666 617,286 136,747
Fees and service charges 317,286 200,330 104,580
Net gain on trading securities 731,156 366,465 --
Net gain (loss) on sales of securities
available for sale (285) 10,529 18,999
Other income 7,050 7,402 9,849
- --------------------------------------------------------------------------------------------------------------
1,553,873 1,202,012 270,175
Other expenses
Compensation and benefits (Notes 11 and 12) 2,234,337 1,827,177 1,200,931
Federal deposit insurance expense 121,246 196,397 205,209
FDIC special assessment (Note 7) 550,556
Professional fees 188,561 272,163 152,098
Data processing expense 177,878 172,596 113,157
Occupancy expense 266,457 206,058 76,878
Furniture, fixtures and equipment expense 137,249 124,366 63,317
Advertising 119,993 87,770 104,497
Provision to adjust loans held for sale
to lower of cost or market -- 22,039 --
Other expense 575,481 560,482 436,113
- --------------------------------------------------------------------------------------------------------------
4,371,758 3,469,048 2,352,200
- --------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Consolidated Statements of Income
Years ended June 30, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Income before federal income tax expense 1,401,553 1,830,888 1,082,490
Federal income tax expense (Note 9) 478,724 622,400 366,478
- --------------------------------------------------------------------------------------------------------------
Net income $ 922,829 $1,208,488 $ 716,012
==============================================================================================================
Earnings per common and common equivalent
share subsequent to conversion (Note 1) $ .52 $ .57 $ .10
==============================================================================================================
Dividends per common share $ .28 .28 N/A
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 1997, 1996 and 1995
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994 $10,910,124 $(66,529) $10,843,595
Net income for the year
ended June 30, 1995 716,012 716,012
Sale of 2,314,375 shares of
common stock, net of
conversion costs
(Note 2, 12 and 14) $23,144 $17,807,694 $(1,296,048) 16,534,790
Shares released under
Employee Stock
Ownership Plan (Note 12) 5,063 32,400 37,463
Change in net unrealized
gain (loss) on securities
available for sale, net of
tax of $20,210 39,234 39,234
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 23,144 17,812,757 11,626,136 (27,295) (1,263,648) 28,171,094
Net income for the year
ended June 30, 1996 1,208,488 1,208,488
Issuance of 92,575 shares of
common stock for
Management Recognition
Plan (MRP) (Note 12) 926 741,658 $(742,584)
Shares earned under MRP 99,120 99,120
Cash dividends of
$.28 per share (603,382) (603,382)
Repurchase of 207,375 shares
of stock (2,074) (2,046,987) (2,049,061)
Shares committed to be
released under Employee
Stock Ownership Plan
(Note 12) 34,679 129,600 164,279
Change in net unrealized
gain (loss) on securities available
for sale, net of tax of $92,775 (180,092) (180,092)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Years ended June 30, 1997, 1996 and 1995
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $21,996 $16,542,107 $12,231,242 $(207,387) $(643,464) $(1,134,048) $26,810,446
Net income for the year
ended June 30, 1997 922,829 922,829
Net grant of 1,742 shares
of common stock for MRP
(Note 12) 19,852 (19,852)
Shares earned under MRP
149,918 149,918
Cash dividends of
$.28 per share (506,959) (506,959)
Repurchase of 446,100 shares
of stock (Note 14) (4,461) (5,189,405) (5,193,866)
Shares committed to be
released under Employee
Stock Ownership Plan
(Note 12) 60,244 129,600 189,844
Change in net unrealized
gain (loss) on securities
available for sale, net of
tax of $113,383 220,097 220,097
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $17,535 $11,432,798 $12,647,112 $ 12,710 $(513,398) $(1,004,448) $22,592,309
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 922,829 $ 1,208,488 $ 716,012
Adjustments to reconcile net income to
net cash from operating activities
Purchase of trading securities (5,428,775) (2,224,537) --
Proceeds from sales of trading securities 3,947,118 1,882,564 --
Origination and purchase of mortgage
loans for sale (30,350,557) (48,488,782) (16,997,866)
Proceeds from sales of mortgage loans 32,915,164 45,798,332 14,382,754
Net (gain) loss on sales of:
Loans (498,666) (617,286) (136,747)
Securities (730,871) (376,994) (18,999)
Real estate owned (210) (4,806) --
Depreciation 192,495 179,742 62,718
Amortization of premium, net 13,848 103,072 17,154
ESOP expense 189,844 164,279 37,463
MRP expense 149,918 99,120 --
Loss on disposal of fixed assets -- 2,662 --
Provision for loan losses 60,000 60,000 20,500
Provision to adjust loans held for sale
to lower of cost or market -- 22,039 --
Change in:
Deferred loan fees (77,301) (47,292) (64,652)
Other assets and accrued interest receivable (85,866) (15,373) (532,741)
Other liabilities and accrued interest payable (36,442) (144,282) 563,259
- --------------------------------------------------------------------------------------------------------------
Net cash from operating activities 1,182,528 (2,399,054) (1,951,145)
Cash flows from investing activities
Purchase of FHLB stock (75,000) -- (635,200)
Net (increase) decrease in interest-bearing
time deposits 199,000 989,000 (1,287,000)
Loan originations, net of repayments (13,664,118) 3,696,997 (248,962)
Loans purchased for portfolio (2,156,750) (1,921,400) (3,016,261)
Purchase of securities available for sale (14,725,895) (21,217,480) (9,728,635)
Proceeds from sales of securities
available for sale 10,731,577 14,077,014 1,671,263
Purchase of securities held to maturity (3,002,813) -- (14,610,995)
Proceeds from maturities, calls and principal
payments of securities available for sale 1,545,498 8,874,974 160,528
Proceeds from maturities, calls and principal
payments of securities held to maturity 1,000,000 2,877,708 277,415
Property and equipment expenditures (213,681) (202,205) (2,721,038)
Proceeds from sale of real estate owned 25,566 50,181 --
Proceeds from sale of real estate -- -- 84,510
- --------------------------------------------------------------------------------------------------------------
Net cash from investing activities (20,336,616) 7,224,789 (30,054,375)
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 1997, 1996 and 1995
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $11,834,080 $ 5,847,822 $(4,779,731)
Repayment of FHLB borrowings (11,000,000) (11,922,256) --
Proceeds from FHLB borrowings 21,000,000 6,000,000 19,922,256
Repurchase of common stock (5,193,866) (2,049,061) --
Dividends paid on common stock (506,959) (603,382) --
Issuance of common stock -- -- 16,534,790
- --------------------------------------------------------------------------------------------------------------
Net cash from financing activities 16,133,255 (2,726,877) 31,677,315
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,020,833) 2,098,858 (328,205)
Cash and cash equivalents at beginning of period 6,694,089 4,595,231 4,923,436
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,673,256 $ 6,694,089 $ 4,595,231
==============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $6,103,832 $5,954,870 $ 4,595,797
Income taxes 456,050 520,000 322,500
Supplemental disclosure of noncash investing activities:
Transfer of loans from held for sale
to held to maturity -- 1,756,663 1,287,879
Transfer from loans to real estate owned 45,268 45,375 --
</TABLE>
During November of 1995, securities with a carrying value of $15,008,666 and
a fair value of $14,964,245 were transferred from securities held to maturity to
securities available for sale (Note 3).
See accompanying notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Bank West Financial Corporation (the "Company") was
organized as a thrift holding company to be the sole shareholder of Bank West,
FSB (the "Bank"), a federally chartered savings bank. The consolidated financial
statements include the accounts of the Company and the Bank. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Bank's primary services include accepting deposits and making mortgage and
installment loans in Kent County and Eastern Ottawa County, Michigan. The Bank
also engages in mortgage banking activities consisting of selling originated and
purchased loans into the secondary market. The Bank has formed a wholly-owned
service company for the future purpose of involvement with insurance activities
permitted by federal and state regulations. At June 30, 1997, the service
company was inactive and had no assets or liabilities. During fiscal 1996, the
Company began trading equity securities to a limited extent.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The primary estimates incorporated
into the Company's consolidated financial statements which are susceptible to
change in the near term include the allowance for loan losses, the determination
and carrying value of securities available for sale, trading securities,
mortgage servicing rights, loans held for sale and impaired loans, and the
determination of other-than-temporary reductions in the fair value of
securities.
Concentrations of Credit Risk: The Bank grants mortgage loans to customers
primarily in Kent County, Michigan. No significant number of the Bank's
customers are employed at any one specific entity or in any one specific
industry. The Bank grants primarily one-to four-family residential real estate
loans. Substantially all loans are secured by specific items of collateral,
primarily single family residences.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and other investments with original maturities of three months or
less. Net cash flows are reported for customer loan transactions, deposit
transactions, and deposits made with other financial institutions.
Trading Securities: Securities that are bought and held principally for
resale in the near term (thus held for only a short period of time) are
classified as trading securities and recorded at their fair values. Realized and
unrealized gains and losses on trading securities are included immediately in
other income.
Securities: Securities which the Bank has the positive intent and ability to
hold to maturity are classified as held to maturity and carried at amortized
cost. Securities not classified as held to maturity or trading, as discussed
above, are classified as available for sale. Securities classified as available
for sale are reported at their fair value and the related unrealized holding
gain or loss is reported, net of related income tax effects, as a separate
component of shareholders' equity, until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
Premiums and discounts on securities are recognized in interest income using
the level yield method over the period to maturity.
Loans Held for Sale: Mortgage loans originated for sale in the secondary
market are carried at the lower of cost or estimated market value on an
individual loan basis. Net unrealized losses are recognized in a valuation
allowance by charges to income. Gains on sales of loans are recognized when
proceeds from the loan sales are received by the Bank.
22
<PAGE>
Loans: Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and costs, and charge-offs. Interest income
on loans is accrued over the term of the loans based upon the principal
outstanding. Interest income is not reported when full loan repayment is in
doubt, typically when payments are past due 90 days or more. Payments received
on such loans are reported as principal reductions.
Loan fees, net of certain direct loan origination costs, are deferred. The
net amount deferred is reported as part of loans and is recognized as interest
income over the term of the loan using the level yield method.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for possible loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values and
other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off against the allowance by
management when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates.
Mortgage Loan Servicing Rights: The Company purchases and originates mortgage
loans for sale to the secondary market, and sells the loans with servicing
retained and released. Effective July 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights
(SFAS No. 122). The Statement requires capitalizing the rights to service
originated mortgage loans. Prior to SFAS No. 122, only purchased mortgage
servicing rights were required to be capitalized. The total cost of mortgage
loans purchased or originated with the intent to sell is allocated between the
loan servicing right and the mortgage loan without servicing, based on their
relative fair values. The capitalized cost of loan servicing rights is amortized
in proportion to, and over the period of, estimated net future servicing
revenue.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the underlying
serviced loans, such as loan type, term, and note rate. Impairment represents
the excess of cost of an individual mortgage servicing rights stratum over its
fair value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on quoted market prices.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time. Changes
in these underlying assumptions could cause the fair value of loan servicing
rights, and the related valuation allowance, to change significantly in the
future.
Premises and Equipment: The Company's premises and equipment are stated at
cost less accumulated depreciation. Premises and related components are
depreciated using the straight-line method with useful lives ranging from 31 to
50 years. Furniture and equipment are depreciated using the straight-line method
with useful
23
<PAGE>
lives ranging from five to ten years. Maintenance and repairs are charged to
expense and improvements are capitalized. These assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable.
Real Estate Owned: Real estate owned is carried at the lower of cost (fair
value at date of foreclosure) or fair value minus estimated costs to sell.
Adjustments to fair value at the date of acquisition are charged to the
allowance for loan losses. Allowances are established for subsequent losses, if
any, with corresponding charges to operations.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax return plus changes in the deferred taxes computed based on
the expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities, using enacted tax
rates.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with AICPA Statement of Position 93-6. The
cost of shares issued to the ESOP but not yet allocated to participants is
presented as a reduction of shareholders' equity. Compensation expense is
recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to paid in capital. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings while dividends on unallocated ESOP shares
are reflected as a reduction of debt and accrued interest.
Management Recognition Plan (MRP): The MRP is a stock award plan accounted
for under APB Opinion 25 with the measurement of total compensation cost based
upon the fair value of the shares on the date of grant. MRP awards vest in five
equal annual installments from the date of grant, subject to the continuous
employment of the recipients as defined under such plans. Compensation expense
for the MRPs is recognized on a prorata basis over the vesting period of the
awards. The unamortized unearned compensation value of the MRPs is shown as a
reduction of shareholders' equity.
Stock Option Plan (SOP): Expense for employee compensation under SOPs is
based on APB Opinion 25, with expense reported only if options are granted below
the market price at the grant date. As shown in Note 12, pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
Statement of Financial Accounting Standard No. 123 were used for stock-based
compensation.
Preferred Stock: The Company is authorized to issue 5,000,000 shares of
preferred stock. Such stock may be issued with such preferences and designations
as the Board of Directors may determine. The Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength of the holders of
the Common Stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
Fair Values of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in Note 16. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance-sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
24
<PAGE>
Earnings Per Share: Earnings per share is based on the weighted average
number of outstanding common shares and dilutive common stock equivalents during
the year. ESOP shares are considered outstanding for earnings per share
calculations as they are committed to be released; unallocated shares are not
considered outstanding. The weighted average number of shares outstanding was
1,773,242 and 2,104,921 for the years ended June 30, 1997 and 1996. The weighted
average number of shares outstanding for the 1995 period subsequent to
conversion was 2,154,394.
Issued But Not Yet Adopted Accounting Standards: In June 1996, the Financial
Accounting Standards Board (FASB) issued Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 125). The Standard provides that, following a transfer of financial
assets, an entity is to recognize the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when control
has been surrendered, and derecognize liabilities when extinguished. The
Statement is effective for transactions occurring after June 30, 1997.
Management does not expect the Statement to have a material impact on the
consolidated financial condition or results of operations of the Company.
In March 1997, the FASB issued Statement No. 128, Earnings Per Share,
revising the accounting requirements for calculating earnings per share. The
Statement will require the reporting of basic earnings per share calculated
solely on average common shares outstanding. In addition, the Statement requires
the reporting of diluted earnings per share to reflect the potential dilution of
stock options and other potentially dilutive shares. For reporting dates
beginning December 31, 1997, all prior calculations will be restated to meet the
new presentation requirements. The Company's earnings per common and common
equivalent share amounts, as reported for 1996 and prior years, are expected to
be comparable in amount to the calculations of basic earnings per share for such
years. As the Company has not had significant dilution from its common stock
equivalents, basic earnings per share amounts reported will not be significantly
higher than diluted earnings per share amounts for corresponding years.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On October 24, 1994, the Board of Directors of the Bank, subject to
regulatory approval and approval by the members of the Bank, unanimously adopted
a Plan of Conversion to convert from a federally chartered mutual savings bank
to a federally chartered stock savings bank with the concurrent formation of the
Company as the Bank's holding company. The conversion was consummated on March
30, 1995 by amending the Bank's federal charter and the sale of the holding
company's common stock in an amount equal to the pro forma market value of the
Bank after giving effect to the conversion. A subscription offering of the
shares of the Company's common stock was offered initially to the Bank's
depositors, to tax-qualified employee plans and then to other members and
directors, officers and employees of the Bank. Proceeds of $16,533,717 were
received from the sale of 2,314,375 common shares, after deduction of conversion
costs of $694,235 and the issuance of 162,006 shares for the ESOP in exchange
for a note receivable from the ESOP. Upon closing of the stock offering, the
Company purchased 100% of the common shares of the Bank. Bank West, FSB is now a
wholly-owned subsidiary of the Company. The conversion was an internal
reorganization with historical balances carried forward without adjustment.
25
<PAGE>
NOTE 3 - SECURITIES
The amortized cost and estimated market values of securities at June 30, are
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
1997
U.S. agencies $ 2,998,182 -- $ (21,544) $ 2,976,638
Mortgage-backed securities 1,579,891 $ 4,016 (1,212) 1,582,695
Collateralized mortgage obligations 20,953,643 88,217 (50,219) 20,991,641
- --------------------------------------------------------------------------------------------------------------
$25,531,716 $92,233 $ (72,975) $25,550,974
==============================================================================================================
1996
U.S. agencies $ 4,997,678 $ 7,500 $ (60,110) $ 4,945,068
Corporate bonds 496,870 -- (4,271) 492,599
Mortgage-backed securities 2,330,061 3,524 (26,089) 2,307,496
Collateralized mortgage obligations 15,268,892 302 (235,077) 15,034,117
- --------------------------------------------------------------------------------------------------------------
$23,093,501 $11,326 $(325,547) $22,779,280
==============================================================================================================
Held to Maturity
1997
U.S. agencies $ 1,000,762 $ 1,113 -- $ 1,001,875
Collateralized mortgage obligations 3,002,813 -- $ (2,813) 3,000,000
- --------------------------------------------------------------------------------------------------------------
$ 4,003,575 $ 1,113 $ (2,813) $ 4,001,875
==============================================================================================================
1996
U.S. agencies $ 2,004,288 3,998 $ (2,286) $ 2,006,000
==============================================================================================================
</TABLE>
<PAGE>
The scheduled maturities of securities available for sale and securities held
to maturity at June 30, 1997 are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
-- Available for Sale -- -- Held to Maturity --
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year -- -- $1,000,762 $1,001,875
Due after one year through
five years $ 2,998,182 $ 2,976,638 -- --
Mortgage-backed securities
and collateralized mortgage obligations 22,533,534 22,574,336 3,002,813 3,000,000
- -------------------------------------------------------------------------------------------------------------------
$25,531,716 $25,550,974 $4,003,575 $4,001,875
===================================================================================================================
</TABLE>
26
<PAGE>
Proceeds from sales of securities amounted to approximately $14,679,000,
$15,969,000, and $1,671,000 for the years ended June 30, 1997, 1996 and 1995,
respectively, including approximately $3,947,000 and $1,883,000 relative to
trading securities in fiscal 1997 and 1996.
Gains (losses) on securities, reflected in the consolidated statements of
income, were as follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains on sales of:
Securities available for sale $ 17,075 $ 27,965 $18,999
Trading securities 602,570 372,278 --
- ---------------------------------------------------------------------------------------------
619,645 400,243 18,999
Gross realized (losses) on sales of:
Securities available for sale (17,360) (17,436) --
Trading securities (1,977) -- --
- ---------------------------------------------------------------------------------------------
(19,337) (17,436) --
- ---------------------------------------------------------------------------------------------
Net realized gains 600,308 382,807 18,999
Net unrealized gain (loss) on trading securities 130,563 (5,813) --
- ---------------------------------------------------------------------------------------------
$730,871 $376,994 $18,999
=============================================================================================
</TABLE>
In accordance with the FASB Special Report, A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities, securities held to maturity with a carrying value of $15,008,666,
fair value of $14,964,245, unrealized gain of $8,485 and unrealized loss of
$52,906 were transferred to the available for sale classification on November
20, 1995. The transfer decreased shareholders' equity by $29,318, which is net
of the related deferred tax asset of $15,103. The reclassification was made to
provide greater flexibility in managing liquidity and interest rate risk.
<PAGE>
NOTE 4 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Bank's secondary market mortgage activities,
which consist solely of one-to four-family real estate loans:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans held for sale - beginning of period $ 4,297,092 $ 2,746,019 $ 1,282,039
Activity during the periods:
Loans originated and purchased for sale 30,350,557 48,488,782 16,997,866
Proceeds from sale of mortgage loans (32,915,164) (45,798,332) (14,382,754)
Transfer of loans from held for sale to
held to maturity -- (1,756,663) (1,287,879)
Gain on sale of loans 498,666 617,286 136,747
- ----------------------------------------------------------------------------------------------------
Loans held for sale - end of period $ 2,231,151 $ 4,297,092 $ 2,746,019
====================================================================================================
</TABLE>
27
<PAGE>
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of these loans at June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loan portfolios serviced for
FHLMC $26,980,056 $28,590,578 $23,699,436
=============================================================================================
Loans servicing fee income $ 70,661 $ 66,725 $ 47,451
=============================================================================================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $116,813 and $135,011 at June 30, 1997 and 1996, respectively.
Following is the activity for mortgage servicing rights for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at July 1 $142,697 $ 68,196
Additions 16,372 124,501
Amortization (10,500) (50,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30 $148,569 $142,697
===========================================================================================================================
</TABLE>
<PAGE>
NOTE 5 - LOANS
Loans are classified as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
One-to four-family residential - fixed rate $ 18,595,586 $ 20,351,715
One-to four-family residential - balloon 12,493,524 12,841,337
One-to four-family residential - adjustable 49,743,799 47,544,192
Construction 21,500,849 14,073,497
Commercial mortgages 2,764,314 1,193,464
Home equity lines of credit 6,370,698 2,214,227
Second mortgages 4,312,760 1,927,282
- ---------------------------------------------------------------------------------------------
Total mortgage loans 115,781,530 100,145,714
Consumer loans 1,081,391 622,353
Commercial non-mortgage 2,032,190 1,010,076
- ---------------------------------------------------------------------------------------------
Total 118,895,111 101,778,143
Less:
Loans in process 7,169,073 5,827,705
Net deferred fees (costs) (29,916) 47,385
Allowance for loan losses 225,862 165,862
- ---------------------------------------------------------------------------------------------
$111,530,092 $ 95,737,191
=============================================================================================
</TABLE>
28
<PAGE>
An analysis of the allowance for loan losses for the years ended June 30 is
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $165,862 $108,000 $ 87,500
Provision charged to operations 60,000 60,000 20,500
Charge-offs -- (2,138) --
- ---------------------------------------------------------------------------------------------
Ending balance $225,862 $165,862 $108,000
=============================================================================================
</TABLE>
During the years ended June 30, 1997 and 1996, the Company had no loans which
were impaired as defined under the provisions of SFAS Nos. 114 and 118.
Certain directors and executive officers of the Company and the Bank
(including family members, affiliates, and companies in which they are principal
owners) had loans outstanding with the Bank in the ordinary course of business.
A summary of the aggregate loans outstanding which exceeded $60,000 to these
individuals follows:
<TABLE>
<CAPTION>
Year ending
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 841,851 $ 935,104
New loans -- 86,537
Payments (200,379) (161,029)
Officers transferred out -- (18,761)
- ---------------------------------------------------------------------------------------------
Balance at end of year $ 641,472 $ 841,851
=============================================================================================
</TABLE>
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment is as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 529,300 $ 529,300
Bank building and improvements 2,361,987 2,301,045
Furniture and equipment 967,652 814,944
- ---------------------------------------------------------------------------------------------
3,858,939 3,645,289
Accumulated depreciation (730,781) (538,317)
- ---------------------------------------------------------------------------------------------
$3,128,158 $3,106,972
=============================================================================================
</TABLE>
29
<PAGE>
NOTE 7 - DEPOSITS
Deposits at June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
Amount % Amount %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $3,965,790 3.86% $ 2,338,248 2.57%
Now accounts and MMDAs 3,848,395 3.74 3,703,359 4.07
Passbook and statement savings 17,387,602 16.90 16,571,616 18.20
Certificates of deposit 77,660,365 75.50 68,414,849 75.16
- --------------------------------------------------------------------------------------------------------------
$102,862,152 100.00% $91,028,072 100.00%
==============================================================================================================
</TABLE>
At June 30, 1997, the scheduled maturities of all certificates of deposit are
as follows by fiscal year-end:
1998 $54,997,764
1999 16,187,047
2000 3,119,261
2001 1,525,691
2002 1,695,426
Thereafter 135,176
-----------
$77,660,365
===========
As of June 30, 1997 and 1996, the Bank had deposit accounts with balances of
$100,000 or more of $14,120,000 and $11,914,000. Related party deposits were
$974,000 and $796,000 at June 30, 1997 and 1996, respectively.
On September 30, 1996, as part of the omnibus appropriations package signed
by President Clinton, the government mandated a special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The
one-time, special SAIF assessment amounted to $.657 for every $100 of
SAIF-insured deposits as of March 31, 1995. The FDIC notified the Bank that the
Bank's special assessment was $551,000, which after taxes reduced the Company's
net income by $364,000 or $.21 per share for the year ended June 30, 1997. The
Bank's deposit premiums, which were $.23 for every $100 of assessable deposits
in 1996, were reduced to $.064 for every $100 of assessable deposits beginning
January 1, 1997. Based on the Bank's deposits at June 30, 1997, the premium
reduction should result in a pre-tax cost savings of approximately $171,000 per
year for the Bank, or approximately $.06 per share after taxes.
30
<PAGE>
NOTE 8 - FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank of Indianapolis, collateralized by
mortgage loans and securities under a blanket collateral agreement, consist of
the following at June 30:
<TABLE>
<CAPTION>
Rate at
Date Due June 30, 1997 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single-maturity fixed rate advance
September 3, 1996 -- $ 1,000,000
December 16, 1996 -- 1,000,000
Adjustable rate advance
August 5, 1996 - reprices quarterly -- 4,000,000
August 4, 1997 - reprices quarterly 5.78% $ 3,000,000 --
September 22, 1997 - reprices quarterly 5.75 1,000,000 --
October 27, 1997 - reprices daily 6.05 1,000,000 --
October 30, 1997 - reprices monthly 5.81 2,000,000 2,000,000
November 3, 1997 - reprices daily 6.05 1,000,000 --
December 15, 1997 - reprices quarterly 5.78 1,000,000 --
December 18, 1997 - reprices quarterly 5.75 1,000,000 --
December 22, 1997 - reprices daily 6.05 3,000,000 --
December 24, 1997 - reprices quarterly 5.75 2,000,000 --
March 27, 1998 - reprices quarterly 5.75 2,000,000 --
April 30, 1998 - reprices quarterly 5.82 1,000,000 --
October 30, 1998 - reprices monthly 5.81 4,000,000 4,000,000
October 30, 1999 - reprices monthly 5.81 5,000,000 5,000,000
August 26, 2001 - reprices monthly 5.88 2,000,000 2,000,000
- -------------------------------------------------------------------------------------------------------------
$29,000,000 $19,000,000
=============================================================================================================
</TABLE>
Maturities of borrowings outstanding at June 30, 1997 are as follows for the
next 5 years:
1998 $18,000,000
1999 4,000,000
2000 5,000,000
2001 0
2002 2,000,000
-----------
$29,000,000
===========
Prepayment of certain remaining advances is permitted only upon the Company's
termination of its FHLB membership, while others are subject to prepayment
penalties under the provisions and conditions of the credit policy of the FHLB.
31
<PAGE>
NOTE 9 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended June 30, 1997,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $530,231 $496,158 $358,085
Deferred income tax expense (benefit) (51,507) 126,242 8,393
- ---------------------------------------------------------------------------------------------
$478,724 $622,400 $366,478
=============================================================================================
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan fees $ 20,120 $ 7,021
Unrealized loss on securities available for sale -- 106,834
Accrued expenses 16,116 17,211
Management Recognition Plan 34,200 33,701
Loans marked-to-market 27,736 --
Other 3,067 621
- ----------------------------------------------------------------------------------------------
101,239 165,388
Deferred tax liabilities
Bad debt allowance 188,779 209,164
FHLB stock dividend 49,116 49,116
Loans marked-to-market -- 12,674
Fixed assets 93,917 71,677
Mortgage servicing rights 50,514 48,517
Unrealized gain on securities available for sale 6,548 --
- ----------------------------------------------------------------------------------------------
388,874 391,148
- ----------------------------------------------------------------------------------------------
Net deferred tax liability $(287,635) $(225,760)
==============================================================================================
</TABLE>
No valuation allowance was provided on deferred tax assets.
<PAGE>
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Years ended
---------------- June 30, -------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Tax expense at statutory rate $476,528 $622,502 $368,047
Tax exempt interest -- (639) (2,360)
Stock compensation plans 3,150 2,669 --
Other (954) (2132) 791
- -----------------------------------------------------------------------------------------------
$478,724 $622,400 $366,478
===============================================================================================
Effective rate 34% 34% 33%
</TABLE>
32
<PAGE>
Differences in the deduction for bad debts for tax and financial statement
purposes after 1988 are included in deferred taxes. For years prior to 1988, the
Bank had determined taxable income after deducting a provision for bad debts in
excess of such provisions recorded in the financial statements. Accordingly,
retained earnings at June 30, 1997 and 1996 includes approximately $3,364,000 on
which no provision for federal income taxes has been made. The amount of
unrecorded deferred taxes is $1,144,000. If this portion of retained earnings is
used for any purpose other than to absorb bad debts, the amount used will be
added to future taxable income.
The Bank files consolidated federal income tax returns on a fiscal year
basis. Prior to July 1, 1997, if certain conditions were met in determining
taxable income, the Bank was allowed a special bad debt deduction based on a
percentage of taxable income. Tax legislation passed in August 1996 now requires
the Bank to deduct a provision for bad debts for tax purposes based on actual
loss experience and recapture the excess bad debt reserve accumulated in tax
years after 1987. The related amount of deferred tax liability which must be
recaptured is approximately $265,572 and is payable over a six-year period
beginning no later than the year ending June 30, 1999.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit and loans in process. The Company's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument is represented
by the contractual amount of those instruments. The Company follows the same
credit policy to make such commitments as is followed for those loans recorded
in the financial statements.
The contract amounts of these financial instruments are as follows at June
30:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to make loans $3,201,000 $6,690,000
Unused lines of credit 6,207,777 3,987,000
Loans in process 7,169,074 5,828,000
</TABLE>
Approximately 33% and 77% of commitments to make loans and to fund loans in
process were made at fixed rates as of June 30, 1997 and 1996. Rate ranges for
these fixed rate commitments were 7.625% to 12.25% and 7.0% to 10.75% as of June
30, 1997 and 1996. Lines of credit are issued at current market rates.
The Company does not anticipate any losses as a result of these commitments.
Collateral obtained upon exercise of the commitment is determined using the
Bank's credit evaluation of the borrower, and may include real estate, business
assets and other items. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future cash commitments.
The Company and the Bank are subject to certain legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial position of the
Company.
The Company has entered into employment agreements with three of its
officers. Under the terms of those agreements, certain events leading to
separation from the Company could result in cash payments aggregating
approximately $686,000.
33
<PAGE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company participates in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan. Substantially all employees are
eligible for participation in the Plan. The benefits are based on a percentage
of the participant's career average salary for each year of service. An employee
becomes fully vested upon completion of five years of qualifying service. The
plan is currently overfunded and did not require contributions or charges
against income for the years ended June 30, 1997, 1996 and 1995. Specific plan
assets and accumulated benefit information for the Bank's portion of the Fund is
not available. Under the Employee Retirement Income Security Act (ERISA), a
contributor to a multi-employer pension plan may be liable in the event of
complete or partial withdrawal for the benefit payments guaranteed under ERISA.
Since the plan is overfunded, no liability for contributions is necessary.
Effective December 31, 1997, the Company will withdraw from the defined benefit
pension plan.
The Company established a qualified 401(k) plan effective January 1, 1996,
covering substantially all employees. Employees who are 18 years and older and
who have completed 1,000 hours of service in a 12 consecutive-month period are
eligible. Employees may elect to contribute to the plan from 1% to 15% of their
salary subject to statutory limitations. The Company makes matching
contributions equal to 25% of the first 3% of employee contributions. Although
not required, the Company also has the option to make an additional, nonelective
contribution to the plan. Beginning after 2 years of service, employees become
vested in the Company's contributions 20% per year, with 100% vesting occurring
after 6 years of service. The Company's contribution for fiscal 1997 and 1996
was approximately $5,200 and $3,000, respectively.
NOTE 12 - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction described in Note 2, the Company
established an employee stock ownership plan ("ESOP") for the benefit of
substantially all employees. The ESOP borrowed $1,296,048 from the Company and
used those funds to acquire 162,006 shares of the Company's stock at $8 per
share.
Shares issued to the ESOP are committed to be released based on the number of
unallocated shares held immediately before release for the current plan year
multiplied by a fraction. The numerator of the fraction is the amount of
quarterly principal and interest paid. The denominator of the fraction is the
sum of the numerator plus the principal and interest to be paid for all future
periods. The loan is secured by shares purchased with the loan proceeds and will
be repaid by the ESOP with funds from the Company's contributions to the ESOP
and earnings on ESOP assets. Principal and interest payments are scheduled to
occur in quarterly amounts of $45,326 over a ten-year period. An employee
becomes fully vested upon completion of seven years of qualifying services. Upon
withdrawal from the plan, participants are entitled to a distribution in cash or
Company stock, or both.
34
<PAGE>
During 1997 and 1996, 16,200 shares of stock with an average fair value of
$11.72 per share in 1997 and $10.14 per share in 1996 were committed to be
released. ESOP compensation expense for the years ended June 30, 1997 and 1996
were $189,844 and $164,279. Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated to participants 36,450 20,250
Distributions (863)
Unallocated 125,556 141,756
- ---------------------------------------------------------------------------------------------------------------------------
Total ESOP shares 161,143 162,006
===========================================================================================================================
Fair value of unallocated shares $1,695,006 $1,488,438
===========================================================================================================================
</TABLE>
Employee and director Stock Option Plans (SOPs) and officer and director
Management Recognition Plans (MRPs) were authorized by the shareholders at the
October 25, 1995 annual meeting. The MRPs are restricted stock award plans. The
employee SOP and the officers' MRP are administered by a committee of directors
of the Company, while grants under the directors' SOP and the directors' MRP are
pursuant to formulas set forth in the plans. MRP shares are granted at the
closing market price of the Company's stock on the date of grant and vest in
five equal annual installments from the date of grant. SOP options are granted
at the average of the high and low market prices of the Company's stock on the
date of grant and vest in five equal annual installments and expire ten years
from the date of grant.
<PAGE>
<TABLE>
<CAPTION>
Directors' SOP Employees' SOP Directors' MRP Employees' MRP
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Grant Date Grant Date
Options Price Options Price Shares Fair Value Shares Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total options/shares available 69,431 162,006 27,771 64,804
Activity:
Grant 10/25/95 52,073 $10.44 24,992 $10.00
Grant 10/26/95 49,250 $10.00
Grant 11/1/95 24,000 $ 9.94
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1996 52,073 10.44 24,000 9.94 24,992 10.00 49,250 10.00
Grant 7/8/96 14,300 11.00
Grant 10/25/96 17,353 10.88 2,779 10.88
Grant 12/20/96 58,900 10.75
Forfeitures (4,100) 10.62 (1,037) 10.00
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1997 69,426 10.55 93,100 10.59 27,771 10.09 48,213 10.00
==============================================================================================================
Options/shares exercisable
(vested) 10,414 4,800 4,998 9,850
==============================================================================================================
Options/shares available for
future grant 5 68,906 0 16,591
==============================================================================================================
</TABLE>
35
<PAGE>
During the years ended June 30, 1997 and 1996, $149,918 and $99,120 was
charged to compensation expense for the MRPs.
SFAS No. 123, which became effective for the fiscal year ended June 30, 1997,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock options granted during fiscal 1997 and 1996. No compensation cost was
actually recognized for stock options for fiscal 1997 and 1996.
<TABLE>
<CAPTION>
-- Years ending June 30, --
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net income as reported $922,829 $1,208,488
Pro forma net income 892,662 1,194,049
Earnings per share as reported .52 .57
Pro forma earnings per share .50 .57
Weighted-average grant-date fair value per option 1.44 1.38
</TABLE>
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
The fair value of options granted is estimated using the following
weighted-average information: risk-free interest rate of 6% in 1997 and 5.75% in
1996, expected life of 5 years, expected volatility of stock price of 6.3%, and
expected dividends of 3% per year in 1997 and 2.49% per year in 1996.
At June 30, 1997, options outstanding were as follows:
Number of options 162,526
Range of exercise price $9.94 - $11.00
Weighted-average exercise price $10.56
Weighted-average remaining option life 8.9 years
For options now exercisable: number 15,214
Weighted-average exercise price $10.28
36
<PAGE>
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS
ON RETAINED EARNINGS
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can trigger regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to Risk-
Weighted Assets Tier 1 Capital
- -----------------------------------------------------------------------------------------------------
Total Tier 1 to Adjusted Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
<PAGE>
At year end, actual capital levels (dollars in millions) and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum Required
to be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk-
weighted assets) $18.7 23.4% $6.4 8.0% $8.0 10.0%
Tier 1 (core) capital (to risk-
weighted assets) 18.4 23.1 3.2 4.0 4.8 6.0
Tier 1 (core) capital (to adjusted
total assets) 18.4 12.2 4.5 3.0 7.6 5.0
Tangible capital (to adjusted
total assets) 18.4 12.2 2.3 1.5 N/A
1996
Total capital (to risk weighted assets) $20.3 31.4% $5.2 8.0% $6.5 10.0%
Tier 1 (core) capital (to risk weighted
total assets) 20.2 31.1 2.6 4.0 3.9 6.0
Tier 1 (core) capital (to adjusted
total assets) 20.2 15.4 3.9 3.0 6.5 5.0
Tangible capital (to adjusted
total assets) 20.2 15.4 2.0 1.5 N/A
</TABLE>
At June 30, 1997 and 1996, the Bank was categorized as well capitalized.
37
<PAGE>
The Qualified Thrift Lender (QTL) test requires 65% of assets to be
maintained in housing-related finance and other specified areas. If the QTL test
is not met, limits are placed on growth, branching, new investments, FHLB
advances, and dividends, or the institution must convert to a commercial bank
charter. Management believes that the QTL test has been met.
Under OTS regulations, limitations have been imposed on all "capital
distributions" by savings institutions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS. For example, a thrift which is given
one of the two highest examination ratings and has "capital" equal to its fully
phased-in regulatory capital requirements (a "tier 1 institution") could, after
prior notice but without the prior approval of the OTS, make capital
distributions in any year that would reduce by up to one-half the amount of its
capital which exceeds its most stringent capital requirement as of the beginning
of the calendar year plus net income to date for the six months ended June 30,
1997. Other thrifts would be subject to more stringent procedural and
substantive requirements, the most restrictive being prior OTS approval of any
capital distribution. The Bank is a tier one institution.
The Bank has established a liquidation account with an initial balance of
$11,150,000, which is equal to its total net worth as of the date of the latest
balance sheet appearing in the final conversion prospectus. The liquidation
account is maintained for the benefit of eligible depositors who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases in deposit accounts will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. The Bank may
not pay dividends that would reduce shareholders' equity below the required
liquidation account balance.
Under the most restrictive of the dividend limitations described above, at
June 30, 1997, approximately $6,611,000 was available to the Bank for the
payment of dividends to the holding company.
NOTE 14 - STOCK REPURCHASE PROGRAMS
During fiscal 1997, the Company repurchased 446,100 shares of its common
stock after receiving regulatory approval to repurchase 505,100 shares. The
shares were repurchased at an average price of $11.64 and remain available for
general corporate purposes, including issuance in connection with stock-based
compensation plans.
38
<PAGE>
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION
Condensed financial information of Bank West Financial Corporation is as
follows at June 30:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 70,523 $ 2,222,329
Interest-bearing time deposits 99,000 198,000
Trading securities 2,921,251 708,438
Securities available for sale -- 2,473,199
Loan receivable from Employee
Stock Ownership Plan 1,077,382 1,178,792
Investment in subsidiary bank 18,451,967 19,978,259
Accrued interest receivable 1,122 19,733
Other assets 5,540 35,629
- ---------------------------------------------------------------------------------------------------------
Total assets $22,626,785 $26,814,379
=========================================================================================================
LIABILITIES
Other liabilities $ 34,476 $ 3,933
SHAREHOLDERS' EQUITY 22,592,309 26,810,446
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,626,785 $26,814,379
=========================================================================================================
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME,
for the years:
March 30, 1995
-------- June 30, -------- through
1997 1996 June 30, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Securities $ 39,415 $ 249,350 $ 97,074
Loan to Employee Stock Ownership Plan 79,892 86,691 22,681
Other interest-bearing deposits 53,732 164,328 42,358
Dividends from subsidiary bank 2,500,000 -- --
Other dividends 16,040 3,772 --
- -----------------------------------------------------------------------------------------------------------
2,689,079 504,141 162,113
Interest expense 11,794 -- --
- -----------------------------------------------------------------------------------------------------------
Net interest income 2,677,285 504,141 162,113
Other income
Net gain on trading securities 731,156 366,465 --
Net gain (loss) on sales of securities
available for sale (14,995) (7,725) 18,922
- -----------------------------------------------------------------------------------------------------------
716,161 358,740 18,922
Operating expenses 88,468 90,521 10,635
- -----------------------------------------------------------------------------------------------------------
Income before federal income taxes and
equity in undistributed earnings of
subsidiary bank 3,304,978 772,360 170,400
Federal income tax expense 273,700 262,500 57,936
- -----------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiary bank 3,031,278 509,860 112,464
Equity in undistributed (excess distributed)
earnings of subsidiary Bank (2,108,449) 698,628 96,442
- -----------------------------------------------------------------------------------------------------------
Net income $ 922,829 $1,208,488 $208,906
===========================================================================================================
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS,
for the years:
March 30, 1995
-------- June 30, -------- through
1997 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 922,829 $ 1,208,488 $ 208,906
Adjustments to reconcile net income to
cash provided by operations
Equity in undistributed (excess distributed)
earnings of subsidiary Bank 2,108,449 (698,628) (96,442)
Purchase of trading securities (5,428,775) (2,224,537) --
Proceeds from sale of trading securities 3,947,118 1,882,564 --
Gain on sales of securities (716,161) (358,740) (18,922)
Net accretion of securities -- (1,411) (390)
Change in
Interest receivable 18,611 64,357 (84,090)
Other assets 30,089 21,884 (57,513)
Other liabilities 22,495 (55,739) 72,757
- -------------------------------------------------------------------------------------------------------------
Net cash from operating
activities 904,655 (161,762) 24,306
Cash flows from investing activities
Purchases of securities available for sale -- (2,000,000) (6,527,180)
Proceeds from sales of securities available
for sale 2,481,875 1,091,200 1,169,700
Proceeds from maturities and calls of
securities available for sale -- 3,782,408 --
Principal reduction on ESOP note receivable 101,410 94,611 22,645
Contribution to subsidiary Bank (37,921) (42,527) --
Net (increase) decrease in interest-bearing
time deposits 99,000 1,089,000 (1,287,000)
Investment in subsidiary Bank -- -- (8,915,419)
- -------------------------------------------------------------------------------------------------------------
Net cash from investing activities 2,644,364 4,014,692 (15,537,254)
Cash flows from financing activities
Proceeds from issuance of common stock,
net of conversion costs -- -- 16,534,790
Proceeds of loan from subsidiary Bank 1,300,000 -- --
Repayment of loan to subsidiary Bank (1,300,000) -- --
Dividends paid on common stock (506,959) (603,382) --
Repurchase of common stock (5,193,866) (2,049,061) --
- -------------------------------------------------------------------------------------------------------------
Net cash from financing activities (5,700,825) (2,652,443) 16,534,790
- -------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (2,151,806) 1,200,487 1,021,842
Cash and cash equivalents at beginning
of period 2,222,329 1,021,842 --
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 70,523 $ 2,222,329 $ 1,021,842
=============================================================================================================
</TABLE>
41
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and cash equivalents, Federal Home Loan Bank stock, demand, savings and
money market deposits, accrued interest, the allowance for loan losses, and
variable rate loans or deposits that reprice frequently and fully. Securities
fair values are based on quoted market prices or, if no quotes are available, on
the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, the fair value is estimated by discounted cash
flow analysis using current market rates for the estimated life and credit risk.
Fair value of loans held for sale is based on market estimates. The fair value
of Federal Home Loan Bank advances is based on currently available rates for
similar financing. The fair value of off-balance-sheet items is based on the
fees or cost that would currently be charged to enter into or terminate such
arrangements. The fair value of off-balance-sheet items was not material for
this presentation.
The estimated fair values of the Company's financial instruments (in
thousands) are as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,673 $ 3,673 $ 6,694 $ 6,694
Interest-bearing time deposits 99 99 298 298
Securities 32,476 32,474 25,492 25,494
Loans, net 111,530 113,366 95,737 96,186
Loans held for sale 2,231 2,265 4,297 4,346
Mortgage servicing rights 149 149 143 143
Federal Home Loan Bank stock 1,550 1,550 1,475 1,475
Accrued interest receivable 763 763 632 632
Financial liabilities
Deposits 102,862 102,733 91,028 90,941
Federal Home Loan Bank borrowings 29,000 29,000 19,000 19,000
Accrued interest payable 202 202 157 157
Advance payments by borrowers
for taxes and insurance 492 492 459 459
</TABLE>
42
<PAGE>
Your Partners in Bank West Financial Corporation
DIRECTORS
George A. Jackoboice, Chairman of the Board;
President of Monarch Hydraulics, Inc.
Hydraulics, Inc.
Carl A. Rossi, Treasurer; President of
Kentwater Land Co.
Paul W. Sydloski, President, Chief Executive Officer
Jacob Haisma, Owner of Jacob Haisma Builders, Inc.
Thomas D. DeYoung, Owner and President
of DeYoung &Associates
Robert J. Stephan, Vice Chairman of the Board;
President, Chief Executive Officer of
SecureOne Benefit Administrators, Inc.
Richard L. Bishop, President of Jurgens &
Holtvluwer Men's Store, Inc.
John H. Zwarensteyn, President, Chief Executive Officer
and owner of Gemini Corporation
EXECUTIVE OFFICERS
Paul W. Sydloski, President,
Chief Executive Officer
Kevin A. Twardy, Vice President,
Chief Financial Officer
James A. Koessel, Vice President,
Chief Lending Officer
Laurie S.Adams, Vice President,
Director of RetailBanking
<PAGE>
LEGAL COUNSEL
Elias, Matz, Tiernan and Herrick L.L.P.
Suite 1200
734 15th Street, N.W.
Washington, D.C. 20005
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016
INDEPENDENT AUDITORS
Crowe, Chizek & Company
400 Riverfront Plaza Building
55 Campau, N.W.
Grand Rapids, Michigan 49502
43
<PAGE>
CORPORATE HEADQUARTERS 2185 Three Mile Rd., N.W.
Grand Rapids, Michgian 49544-1451
STOCK INFORMATION
Bank West Financial Corporation is traded on the NASDAQ National Market under
the symbol of "BWFC". Total shares outstanding as of June 30, 1997 were
1,753,475. The high and low bid quotations for the common stock as reported on
the NASDAQ, as well as dividends declared per share, were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
- -----------------------------------------------------------
<S> <C> <C> <C>
September 30, 1995 $10.250 $ 8.750 $.07
December 31, 1995 11.000 9.625 .07
March 31, 1996 10.500 9.625 .07
June 30, 1996 11.125 8.875 .07
September 30, 1996 12.750 10.500 .07
December 31, 1996 11.500 10.250 .07
March 31, 1997 12.125 10.500 .07
June 30, 1997 14.250 11.125 .07
</TABLE>
The information set forth in the table above was provided by The NASDAQStock
Market. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. As of
September 15, 1997, the Company had approximately 660 shareholders of record and
1,753,475 shares of common stock outstanding.
INVESTOR INFORMATION
A copy of Bank West Financial Corporation's Annual Report on Form 10-K and a
list of the exhibits thereto, as filed with the Securities and Exchange
Commission, may be obtained without charge upon written request to Kevin A.
Twardy, Chief Financial Officer, Bank West Financial Corporation, 2185 Three
Mile Road, N.W., Grand Rapids, MI 49544, or by calling (616) 785-3400.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to the 1995 Key Employee Stock Compensation
Program and the 1995 Directors' Stock Option Plan of Bank West Financial
Corporation of our report dated August 15, 1997, with respect to the
consolidated financial statements of Bank West Financial Corporation
incorporated by reference in the Annual Report on Form 10-K for the year ended
June 30, 1997.
/s/CROWE CHIZEK AND COMPANY LLP
CROWE CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,722,734
<INT-BEARING-DEPOSITS> 1,950,522
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 2,921,251
<INVESTMENTS-HELD-FOR-SALE> 25,550,974
<INVESTMENTS-CARRYING> 4,003,575
<INVESTMENTS-MARKET> 4,001,875
<LOANS> 111,530,092
<ALLOWANCE> 225,862
<TOTAL-ASSETS> 155,675,191
<DEPOSITS> 102,862,152
<SHORT-TERM> 18,000,000
<LIABILITIES-OTHER> 1,220,730
<LONG-TERM> 11,000,000
0
0
<COMMON> 17,535
<OTHER-SE> 22,574,774
<TOTAL-LIABILITIES-AND-EQUITY> 155,675,191
<INTEREST-LOAN> 8,206,364
<INTEREST-INVEST> 1,907,129
<INTEREST-OTHER> 315,048
<INTEREST-TOTAL> 10,428,541
<INTEREST-DEPOSIT> 4,924,144
<INTEREST-EXPENSE> 6,149,103
<INTEREST-INCOME-NET> 4,279,438
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 730,871
<EXPENSE-OTHER> 4,371,758
<INCOME-PRETAX> 1,401,553
<INCOME-PRE-EXTRAORDINARY> 1,401,553
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 922,829
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 7.61
<LOANS-NON> 417,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 165,862
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 225,862
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 225,862
</TABLE>
