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, 1998
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
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(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
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(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 $11.00 per share closing price of the Registrant's common stock
as of September 21, 1998, the aggregate market value of the 1,919,804 shares of
the Registrant's common stock deemed to be held by non-affiliates of the
Registrant was $21.1 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 21, 1998: 2,623,629
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, 1998 are incorporated
into Part II, Items 5 through 8 of this Form 10-K; and (2) portions of the
definitive proxy statement for the 1998 Annual Meeting of Stockholders are
incorporated into Part III, Items 10 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 ("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 Michigan-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, and in December 1997 the Bank
converted to a Michigan-chartered bank.
Bank West conducts business from three offices located in Grand Rapids,
Michigan. At June 30, 1998, the Company had $181.5 million of total assets,
$158.2 million of total liabilities, including $120.0 million of deposits, and
$23.3 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. At June 30, 1998, the Bank's ratio of
Tier 1 capital to average total assets was 11.3%, its ratio of Tier 1 capital to
risk-weighted assets was 20.6% and its ratio of total capital to risk-weighted
assets was 20.9%. See "Regulation - The Bank - Regulatory Capital Requirements."
Beginning in fiscal 1995, the Bank expanded its loan products by
offering commercial loans and various types of consumer loans. At June 30, 1998,
there were $29.4 million in loans receivable outstanding for these loan products
compared to $16.5 million and $7.0 million outstanding for such loan products at
June 30, 1997 and 1996, respectively. Of the $29.4 million at June 30, 1998,
$18.0 million consisted of home equity lines of credit and second mortgages. The
Bank expects its commercial and consumer loan products will improve its net
interest margin and make the Bank more competitive in the marketplace.
<PAGE>
The Company's total nonperforming assets, which consist of $841,000 of
non-accruing loans 90 days or more delinquent and $192,000 of net real estate
owned, totalled $1,033,000 or .87% of the net loan portfolio at June 30, 1998.
At the end of each of the last five fiscal years, the Company's total
nonperforming assets did not exceed fiscal 1998 levels. At June 30, 1998, the
Company's allowance for loan losses amounted to $290,000, representing .21% of
the total loan portfolio and .34% of total nonperforming loans at such date. See
"Asset Quality."
The Bank is subject to examination and comprehensive regulation by the
Commissioner of the Financial Institutions Bureau of the State of Michigan
("Commissioner" or "Financial Institutions Bureau"), 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 also is subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("Federal Reserve Board" or "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 river. 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. Grand Rapids is part of the Grand Rapids
Metropolitan Statistical Area with a population of 1,024,000 people as of 1997,
a 48.8% increase from the 1990 census. Per capita income has increased 10.3%
from $18,000 in 1990 to $19,851 in 1997. 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. Major employers in the area include Meijer, Inc., Steelcase, General
Motors Corp., Amway Corporation and Spectrum Health.
<PAGE>
Lending Activities
Loan Portfolio Composition. At June 30, 1998, the Company's total loan
portfolio, including loans held for sale but before net items, amounted to
$135.4 million. The net loan portfolio, excluding loans held for sale, amounted
to $118.9 million at June 30, 1998, representing approximately 65.5% of the
Company's $181.5 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, 1998, one-
to four-family residential loans amounted to $80.6 million or 59.5% of the total
loan portfolio, including loans held for sale. To a lesser extent, the Bank
originates construction and land development loans, home equity lines of credit,
second mortgages, commercial and consumer loans. Construction and land
development loans amounted to $25.4 million or 18.8% of the Bank's total loan
portfolio, home equity lines of credit amounted to $9.9 million or 7.3% of the
total loan portfolio, and second mortgages amounted to $8.1 million or 6.0%, of
the total loan portfolio, including loans held for sale. At June 30, 1998,
commercial mortgages amounted to $6.5 million or 4.8%, commercial non-mortgages
amounted to $3.3 million or 2.4%, and consumer loans amounted to $1.7 million or
1.2%, of the total loan portfolio, including loans held for sale.
<PAGE>
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,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- ------- ----- ------- ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:(1)
One- to four-family residential $80,554 59.5% $83,065 68.6% $85,034 80.2% $92,673 91.7% $87,177 91.1%
Construction and land development 25,407 18.8 21,560 17.8 14,074 13.3 6,146 6.1 7,412 7.8
Commercial mortgages 6,485 4.8 2,764 2.3 1,194 1.1 90 .1 159 .2
Home equity lines of credit 9,877 7.3 6,371 5.2 2,214 2.1 1453 1.4 545 .5
Second mortgages 8,148 6.0 4,253 3.5 1,927 1.8 683 0.7 363 .4
Consumer loans 1,666 1.2 1,081 .9 622 0.6 30 -- -- --
Commercial non-mortgage 3,253 2.4 2,032 1.7 1,010 0.9 -- -- -- --
-------- ----- -------- ----- ------- ----- ------- ----- ------ -----
Total loans 135,390 100.0% 121,126 100.0% 106,075 100.0% 101,075 100.0% 95,656 100.0%
===== ===== ===== ===== =====
Less:
Loans held for sale 8,157 2,231 4,297 2,746 1,282
Loans in process 8,248 7,169 5,828 2,290 2,888
Deferred fees and discounts (211) (30) 47 95 159
Allowance for loan losses 290 226 166 108 88
-------- -------- ------- --------
Net loans $118,906 $111,530 $95,737 $95,836 $91,239
======= ======= ====== ======== ======
</TABLE>
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(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, 1998. 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 Construction
Four-Family and Land Commercial Home Second
Residential Development Mortgages Equity Mortgages
----------- ----------- --------- ------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due after June 30, 1998 in:
One year or less $ 675 $ 14,346 $ 2,226 $ 12 $ 422
After one year through two years 374 99 433 -- 8
After two years through three years 12,027 3,902 707 375 57
After three years through five years 2,789 410 3,119 960 1,341
After five years through ten years 12,366 4,422 -- 8,530 2,825
After ten years through fifteen years 10,616 -- -- -- 2,771
After fifteen years 41,707 2,228 -- -- 724
-------- -------- -------- -------- --------
Total(1) $ 80,554 $ 25,407 $ 6,485 $ 9,877 $ 8,148
======== ======== ======== ======== ========
<CAPTION>
Commercial
Consumer Non-Mortgage Total
-------- ------------ -----
<S> <C> <C> <C>
Amounts due after June 30, 1998 in:
One year or less $ 59 $ 2,076 $ 19,816
After one year through two years 112 127 1,153
After two years through three years 380 368 17,816
After three years through five years 1,110 682 10,411
After five years through ten years 5 -- 28,148
After ten years through fifteen years -- -- 13,387
After fifteen years -- -- 44,659
-------- -------- --------
Total(1) $ 1,666 $ 3,253 $135,390
======== ======== ========
</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, 1998, 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 $47,310 $32,569 $ 79,879
Construction and land development 10,135 926 11,061
Commercial mortgages 2,294 1,965 4,259
Home equity -- 9,865 9,865
Second mortgages 7,726 -- 7,726
Consumer 1,607 -- 1,607
Commercial non-mortgage 522 655 1,177
------- ------- --------
Total $69,594 $45,980 $115,574
======= ======= ========
</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
$275,000. If the loan is to be held in the portfolio and exceeds $275,000 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.
<PAGE>
The Bank has entered into agreements with the Federal Home Loan Mortgage
Corporation ("FHLMC") and several private investors. The Bank sells loans with
servicing retained to FHLMC on a mandatory commitment basis. Each private
investor has agreed to purchase loans, together with servicing thereof, from the
Bank on a loan-by-loan best efforts basis, provided that the investor 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 that 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, 1998, 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
first and second mortgage 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 such loan meets its underwriting standards and, for first
mortgages, 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, then 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 $33.1 million of loans in the year ended June 30, 1998. Of
the loans purchased in fiscal 1998, $14.8 million consisted of fixed-rate, one-
to four-family residential loans, $448,000 consisted of mortgage loans which
provide for periodic interest rate adjustments ("ARMs"), $5.5 million consisted
of balloon mortgages, $8.9 million consisted of construction loans, part of
which were included in loans in process at June 30, 1998, $2.8 million consisted
of fixed-rate second mortgages and $617,000 consisted of variable-rate home
equity loans. Most of the one- to four-family loans purchased by the Bank were
for resale, whereas the purchased construction, home equity and second mortgage
loans were for portfolio.
The Bank sold $45.0 million, $32.9 million and $45.8 million of loans in
fiscal 1998, 1997 and 1996, respectively, representing 39.1%, 42.5% and 66.2%,
respectively, of total loans originated and purchased in such periods. Loan
originations and purchases were at record levels in fiscal 1998, as greater
emphasis was placed on originating residential construction, commercial and
various types of consumer loans for portfolio instead of concentrating primarily
on residential mortgage banking activities. In addition, lower prevailing market
interest rates during fiscal 1998 compared to the prior fiscal year increased
the dollar amount of refinances. Total loan originations and purchases were
$115.0 million in fiscal 1998 compared to $77.4 million and $69.2 million in
fiscal 1997 and 1996, respectively.
At June 30, 1998, Bank West was servicing $33.2 million of loans for the
FHLMC.
<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,
------------------------------------
1998 1997 1996
--------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
One- to four-family residential:
Adjustable-rate $ 1,054 $ 9,290 $ 6,201
Fixed-rate 44,655 14,890 26,524
Construction:
Adjustable-rate 9,565 14,758 7,693
Fixed-rate 8,737 1,470 4,078
Commercial mortgages 5,433 2,002 1,212
Consumer loans 2,078 1,006 768
Home equity loans 3,383 5,565 1,039
Second mortgages 5,043 4,194 1,645
Commercial non-mortgage 1,919 2,315 1,139
--------- ------- --------
Total loan originations 81,867 55,490 50,299
Loans purchased:
Second mortgages 2,776 -- --
Home equity loans 617 -- --
One- to four-family residential 29,717 21,892 18,919
--------- ------- --------
Total loans originated
and purchased 114,977 77,382 69,218
--------- ------- --------
Sales and loan principal repayments:
Carrying value of loans sold 44,320 32,416 45,181
Loan principal repayments 56,393 29,915 19,037
--------- ------- --------
Total loans sold and
principal repayments 100,713 62,331 64,218
--------- ------- --------
Increase (decrease) due to other
items, net (1) (6,888) 742 (5,099)
--------- ------- --------
Net increase (decrease) in
loan portfolio, net $ 7,376 $15,793 $ (99)
========= ======= ========
</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 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 loan-to-value ("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 Michigan-chartered savings institutions, such as Bank West, are
permitted 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, 1998, Bank West was well within each of the above lending limits.
<PAGE>
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, 1998, $80.6 million or
59.5% 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 LTV 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 LTV 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% LTV 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, 1998, one- to four-family residential ARMs represented $32.6 million or
24.1% 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-rate 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,
7 and 10 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 1998 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.
<PAGE>
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 interest rates prevailing in
recent periods, the market demand for adjustable-rate loans has decreased as
consumer preference for fixed-rate loans has increased. As a result, for fiscal
1998, ARMs represented only 2.3% of total one- to four-family residential loan
originations as compared to 38.4% and 18.9% for fiscal 1997 and 1996,
respectively. To offset ARM prepayments, the Bank originated various types of
balloon mortgages for portfolio.
Construction and Land Development Loans. The Bank originates and purchases
loans to finance the construction of one- to four-family dwellings. It also
originates loans for acquisition and development of unimproved property to be
used for residential purposes. 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 1998, 1997 and
1996, construction and land development loans amounted to $25.4 million, $21.6
million and $14.1 million, respectively, or 18.8%, 17.8% and 13.3% of the total
loan portfolio (including loans held for sale), respectively. The Bank purchased
$8.9 million of construction loans in fiscal 1998, a portion of which were
included in loans in process at June 30, 1998. The Bank expects additional
growth in its construction loan portfolio in fiscal 1999.
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.
<PAGE>
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 up to prime plus 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, 1998, $9.9 million or 7.3% of the Bank's total loan
portfolio, including loans held for sale but before net items, consisted of home
equity loans. During fiscal 1998, the Bank purchased $617,000 of home equity
lines of credit from various correspondent financial institutions. The Bank had
unused commitments of $7.1million of home equity lines of credit at June 30,
1998. Management expects additional growth in its home equity lines of credit in
fiscal 1999.
Second Mortgages. At June 30, 1998, $8.1 million or 6.0% 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. During fiscal 1998, the Bank purchased $2.8 million
of second mortgages from various correspondent financial institutions.
Management expects additional growth in its second mortgage loan portfolio in
fiscal 1999.
Commercial Lending. Bank West's commercial mortgage and commercial
non-mortgage loans amounted to $6.5 million and $3.3 million, respectively,
representing 4.8% and 2.4% of the total loan portfolio, including loans held for
sale but before net items at June 30, 1998. The origination of commercial
mortgages significantly increased to $5.4 million in fiscal 1998 from $2.0
million in fiscal 1997, as the Bank placed greater emphasis on these loans.
Management expects additional growth both in commercial mortgage and
non-mortgage loans in fiscal 1999.
Commercial real estate lending and commercial non-mortgage lending are
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 rental or
business properties or for the operation of businesses. In addition, the payment
experience on loans secured by income-producing properties is typically
dependent on the success of the operation of the related project and thus is
typically affected by adverse conditions in the real estate market and in the
economy. The Bank generally attempts to mitigate the risks associated with
commercial lending by, among other things, lending primarily in its market area
and using low LTV ratios in the underwriting process.
Consumer Lending. At June 30, 1998, Bank West's consumer loan portfolio
amounted to $1.6 million or 1.2% of the total loan portfolio, including loans
held for sale but before net items. The consumer loan portfolio consists of
automobile, boat, home improvement and unsecured loans. The origination of
consumer loans increased to $2.1 million in fiscal 1998 from $1.0 million in
fiscal 1997, as the Bank placed greater emphasis on these loans. Management
expects additional growth in its consumer loan portfolio during fiscal 1999.
<PAGE>
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of its depreciated value or improper repair and maintenance of the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower. The Bank believes that the generally
higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to increase rate sensitivity, shorten the average maturity of its loan portfolio
and provide a full range of services to its customers.
Loan Fees and Servicing Income. In addition to interest earned on loans,
Bank West receives income through the servicing of loans sold 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, 1998,
Bank West had approximately $211,000 of net loan costs which had been deferred
and are being recognized as income over the lives of the related loans.
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1998, 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, 1998
-----------------------------------------------------------------------------------
30-59 60-89 90 or More Days
Days Overdue 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 $1,135 .84% $ -- --% $ 682 .50%
Second mortgages 88 .06 -- -- 127 .09
Consumer loans 34 .03 -- -- -- --
Commercial loans 245 .18 -- -- 32 .03
</TABLE>
<PAGE>
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. In most cases defaults are
cured promptly. 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, 1998 and at the
end of each of the prior four fiscal years, Bank West had no loans to facilitate
real estate owned.
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, 1998, the Bank had $841,000 of loans on non-accrual
status.
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 and real estate owned.
At such dates, there were no troubled debt restructurings.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total nonperforming assets:
Non-accruing loans 90 days
or more delinquent $ 841 $417 $ 43 $ 145 $ 35
Real estate owned 192 20 -- -- --
------ ---- ----- ----- ------
Total $1,033 $437 $ 43 $ 145 $ 35
====== ==== ===== ===== ======
Total nonperforming loans as
a percentage of loans, net .71% .37% .04% .15% .04%
====== ==== ===== ===== ======
Total nonperforming assets as
a percentage of total assets .57% .28% .03% .10% .03%
====== ==== ===== ===== ======
</TABLE>
<PAGE>
The $1.0 million nonperforming assets at June 30, 1998 consisted of
primarily one- to four-family residential loans and construction mortgage loans.
The increase in nonperforming assets at June 30, 1998 was attributable to spec
construction mortgage loans. However, due to the Bank's low LTV ratio required
for each of these loans, no portion of the allowance for loan losses was
allocated to any specific loans at June 30, 1998.
The Bank's total classified assets at June 30, 1998 amounted to $1.0
million, which was classified as substandard.
At June 30, 1998, 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, 1998, Bank West's allowance for loan
losses amounted to $290,000 or .21% 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 and land
development loans, home equity lines of credit, second mortgage loans,
commercial mortgage and non-mortgage 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.
<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
Year Ended June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding(1) $135,390 $121,126 $106,075 $101,075 $95,656
======== ======== ======== ======== =======
Allowance for loan losses,
beginning of period $ 226 $ 166 $ 108 $ 88 $ 63
Provision for loan losses 81 60 60 20 25
Charge-offs, net of recoveries(2) 17 2 -- -- --
-------- -------- -------- -------- -------
Allowance for loan losses,
end of period $ 290 $ 226 $ 166 $ 108 $ 88
======== ======== ======== ======== =======
Allowance for loan losses
as a percent of total loans
outstanding .21 % .19% .16% .11% .09%
======== ======== ======== ======== =======
One- to four-family residential
loans as a percent of total
loans outstanding
59.5% 68.6% 80.2% 91.7% 91.1%
======== ======== ======== ======== =======
</TABLE>
- ---------------------------
(1) Includes loans held for sale.
(2) Of the $17,000 in charge-offs in fiscal 1998, $13,000 related to
construction loans and $4,000 related to consumer loans. The $2,000 in
charge-offs in fiscal 1997 related to residential loans. There were no
recoveries in fiscal 1998 and 1997.
<PAGE>
The following table presents the allocation of the allowance for loan losses
by type of loan at each of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1998 1997
----------------------------------------------
Loan Loan
Category Category
Amount as a % Amount as a %
of of Total of of Total
Allowance Loans Allowance Loans
--------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 38 59.5% $ 43 80.2%
Construction and land development 19 18.8 16 13.3
Commercial(1) 110 7.2 48 2.0
Consumer(2) 89 14.5 44 4.5
Unallocated 34 -- 75 --
---- ----- ---- -----
Total $290 100.0% $226 100.0%
==== ===== ==== =====
</TABLE>
(1) Includes commercial mortgages and commercial non-mortgage loans.
(2) Includes home equity lines of credit, second mortgages and other consumer
loans.
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 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 1998, 1997 and 1996, the Company purchased $ 28.3 million,
$15.7 million and $13.7 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
<PAGE>
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, 1998, the Company's mortgage-backed securities classified as
available for sale had a market value of $807,000 (gross of $10,000 in
unrealized losses), while CMOs classified as available for sale had a market
value of $24.6 million (gross of $20,000 in net unrealized gains). The book
value and market value of CMOs classified as held to maturity at June 30, 1998
totalled $11.1 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 2 to the Consolidated Financial Statements in the 1998 Annual Report to
Stockholders, filed as Exhibit 13.1 hereto (the "1998 Annual Report").
Mortgage-backed securities and CMOs 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 and CMO securities portfolio at each of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed and related securities:
Mortgage-backed securities $ 807 $ 1,583 $ 2,308
Collateralized mortgage obligations 35,700 23,995 15,034
------- ------- -------
Total mortgage-backed securities $36,507 $25,578 $17,342
======= ======= =======
</TABLE>
Information regarding the contractual maturities and weighted average yield
of the Company's mortgage-backed securities portfolio at June 30, 1998 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, 1998 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 $ -- $ -- $ -- $ 807 $ 807
Collateralized mortgage
obligations -- -- -- 35,700 35,700
----- ----- ----- ------- -------
Total $ -- $ -- $ -- $36,507 $36,507
===== ===== ===== ======= =======
Weighted average yield --% --% --% 6.68% 6.68%
</TABLE>
<PAGE>
The following table sets forth the purchases, sales and principal repayments
of the Company's mortgage-backed securities and CMOs during the periods
indicated.
<TABLE>
<CAPTION>
At or For the
Year Ended June 30,
---------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities
and CMOs at beginning of period $ 25,578 $ 17, 342 $ 18,355
Purchases 28,348 15,729 14,721
Repayment (787) (545) (2,970)
Sales and calls (16,576) (7,247) (12,485)
Gain on sales 55 12 17
Amortization of premiums, net (80) (11) (90)
Change in net unrealized gain (loss)
on securities available for sale (31) 298 (206)
-------- -------- --------
Mortgage-backed securities
and CMOs at end of period $ 36,507 $ 25,578 $ 17,342
======== ======== ========
Weighted average yield at
end of period 6.68% 7.09% 6.52%
======== ======== ========
</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.
Securities (excluding FHLB stock, mortgage-backed securities and CMO's)
totalled $6.7 million or 3.7% of total assets at June 30, 1998. Such securities
consist of U.S. government agency and equity securities. At June 30, 1998, all
of the securities are classified as available for sale.
On May 31, 1998, the Company reclassified equity securities with a carrying
and fair value of $1.2 million from the trading classification to the available
for sale classification to reflect management's intent to realize the long-term
potential underlying such securities rather than to benefit from short-term
changes in market values. The recent downturn in the U.S. equity markets,
especially in small cap stocks, has had a negative impact on the Company's
remaining equity investments. As a result, management determined that an
other-than-temporary market decline in the market value of certain equity
securities occurred totaling $260,000 as of June 30, 1998 based on market prices
at that date. Over time, management believes the market price of the Company's
remaining equity investments will reach estimated values based on underlying
fundamentals. At June 30, 1998, the Company had no remaining trading securities.
<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,
---------------------------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- -----------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agency securities $ 3,995 $3,992 $3,999 $3,979 $6,949 $6,951
Corporate bonds -- -- - -- 493 493
Equity securities 3,011 3,011 - -- -- --
FHLB stock 2,100 2,100 1,550 1,550 1,475 1,475
------ ------- ------ ----- ------ ------
Total $ 9,106 $ 9,103 $5,549 $5,529 $8,917 $8,919
======== ====== ===== ===== ===== =====
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
Amounts at June 30, 1998 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)
<S> <C> <C> <C> <C> <C> <C>
Bonds and other debt securities:
U.S. Government agency $ -- -- % $3,992 6.28% $ -- -- %
securities
Equity securities(1)
FHLB stock(1)
</TABLE>
- ---------------------------
(1) As a member of the FHLB of Indianapolis, the Company is required to
maintain its investment in FHLB stock which has no stated maturity. The
average yield on the FHLB stock was 8.0% in fiscal 1998. Also, the
Company's equity securities have no stated maturity.
At June 30, 1998, the Company did not have securities in any one issuer
which exceeded 10% of the Company's stockholders' equity.
<PAGE>
Interest-Bearing Deposits
At June 30, 1998, the Company had interest-bearing deposits in financial
institutions of $1.8 million, as compared to $2.0 million at June 30, 1997 and
1996, respectively. The $200,000 decrease in interest-bearing deposits from June
30, 1998 to June 30, 1998 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 $9.1 million or
7.6% of total deposits at June 30, 1998. 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.
The large variety of deposit accounts offered by Bank West has increased
Bank West's ability to retain deposits and has 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,
-----------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Amount % Amount % Amount %
-------- ----- -------- ----- ------- -----
(Dollars in Thousands)
Certificate accounts:
<S> <C> <C> <C> <C> <C> <C>
2.00% - 3.99% $ -- --% $ -- --% $ -- --%
4.00% - 5.99% 61,575 51.3 45,409 44.2 51,043 56.1
6.00% - 7.99% 27,601 23.0 32,230 31.3 17,351 19.1
8.00% - 9.99% 23 -- 21 -- 21 --
-------- ----- -------- ----- ------- -----
Total certificate accounts 89,199 74.3 77,660 75.5 68,415 75.2
-------- ----- -------- ----- ------- -----
Transaction accounts:
Passbook and statement savings 19,335 16.1 17,388 16.9 16,572 18.2
Money market accounts 572 .5 786 .8 1,031 1.1
NOW and noninterest-bearing accounts 10,873 9.1 7,028 6.8 5,010 5.5
-------- ----- -------- ----- ------- -----
Total transaction accounts 30,780 25.7 25,202 24.5 22,613 24.8
-------- ----- -------- ----- ------- -----
Total deposits $119,979 100.0% $102,862 100.0% $91,028 100.0%
======== ===== ======== ===== ======= =====
</TABLE>
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,
-----------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------- ---------------------
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 $ 18,808 3.61% $17,247 3.61% $16,930 3.64%
Money market accounts
and NOW accounts 7,013 1.65 6,260 1.69 4,711 2.21
Certificates of deposit 83,032 5.79 73,465 5.71 66,532 5.84
-------- ----- ------- ----- ------ ----
Total $108,853 5.15% $96,972 5.08% $88,173 5.22%
======== ===== ======= ===== ======= ====
</TABLE>
<PAGE>
The following table sets forth the savings flows of Bank West during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
Increase before
interest credited(1) $11,546 $ 6,945 $1,234
Interest credited 5,571 4,889 4,614
------- ------- ------
Net increase in deposits $17,117 $11,834 $5,848
======= ======= ======
</TABLE>
- -----------------
(1) Information provided is net because information necessary to present the
gross amounts of deposits and withdrawals is not readily available.
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.
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, 1998.
Quarter Ending: Amounts
- --------------- -------
(In Thousands)
September 30, 1998 $ 5,683
December 31, 1998 2,330
March 31, 1999 2,095
June 30, 1999 2,248
After June 30, 1999 4,827
-------
Total certificates of deposit with
balances of $100,000 or more $17,183
=======
<PAGE>
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, 1998, Bank West had $37 million of advances from the FHLB
of Indianapolis, $22 million of which represent putable advances which gives the
FHLB the option to convert the advance to an adjustable-rate beginning one, two
or five years after the purchase date, depending on the advance, and quarterly
thereafter. In addition, $10 million of adjustable-rate advances mature during
fiscal 1999 and $5 million of adjustable-rate advances mature in fiscal 2000.
See Note 7 to the Consolidated Financial Statements in the 1998 Annual Report
for additional information. During fiscal 1998 and 1997, the Bank utilized
additional FHLB advances to fund loans and securities growth as well as mortgage
banking activities. During fiscal 1996, the Bank reduced advances by $5.9
million with excess liquidity generated from deposit growth.
The following table sets forth certain information regarding borrowings at
or for the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $35,803 $22,433 $22,236
Maximum amount outstanding
at any month-end during
the period $38,000 $29,000 $22,500
Balance outstanding at end
of period $37,000 $29,000 $19,000
Average interest rate
during the period 5.61% 5.46% 5.96%
Weighted average interest rate
at end of period 5.48% 5.84% 5.52%
</TABLE>
Subsidiaries
At June 30, 1998, the Bank had one wholly-owned subsidiary, Sunrise
Mortgage Corporation, which was formed in December 1997. Sunrise Mortgage
Corporation originates and purchases non-conforming mortgage loans, including
sub-prime mortgage loans for resale. All of the loans originated and purchased
have a commitment to sell in place to an investor other than Bank West on a
servicing released basis.
Competition
Bank West faces significant competition both in attracting deposits and
in making loans. Some of the Bank's major competitors include Bank One, Comerica
Bank, Michigan National Bank, Old Kent Bank, Huntington Bank, and National City.
Its most direct competition for deposits historically has come from commercial
banks, credit unions and other savings institutions located in
<PAGE>
its primary market area, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, Bank
West faces 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 61 full-time employees and 10
part-time employees at June 30, 1998. 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 following is a summary of certain statutes and regulations
affecting the Company and the Bank. This summary is qualified in its entirety by
such statutes and regulations. A change in applicable laws or regulations may
have a material effect on the Company, the Bank and the business of the Company
and the Bank.
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Federal
Reserve Board, the FDIC, the Commissioner, the Internal Revenue Service, and
state taxing authorities. The effect of such statutes, regulations and policies
can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions and their holding companies regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, lending activities and practices, the nature and amount
of collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank and the public, rather than
shareholders of the Bank or the Company.
<PAGE>
Federal law and regulations establish supervisory standards applicable
to the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
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 Office
of Thrift Supervision ("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 qualified
thrift lender ("QTL") test set forth in HOLA, 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. At June 30,
1998, the Bank satisfied the QTL 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, 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.
<PAGE>
Legislation has been recently introduced into the U.S. Congress which
would subject all unitary holding companies to the same restrictions on
activities as are currently applied to multiple holding companies. If such
legislation is enacted in its current form, the ability of the Company to engage
in certain activities that are currently permitted to the Company may be
restricted. The Company, however, does not believe that it will be required to
discontinue any current activity. In addition, such legislation would preclude
companies that are engaged in activities not permitted to multiple savings and
loan holding companies from acquiring control of the Company. No prediction can
be made at this time as to whether such legislation will be enacted or whether
it will be enacted in its current form.
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. Savings institutions also are subject to the restrictions of 12 U.S.C.
ss.1972, which prohibits (i) a depository institution from extending credit, or
offering any other services or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not to
obtain services of a competitor of the institution, subject to certain
<PAGE>
exceptions, and (ii) extensions of credit to executive officers, directors and
greater than 10% stockholders of a depository institution by any other
institution that has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features. At June 30, 1998, 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. As a Michigan-chartered state savings bank with deposits
insured by the SAIF, Bank West is subject to extensive regulation by the
Financial Institutions Bureau and the FDIC. The lending activities and other
investments of the Bank must comply with various federal and state regulatory
requirements. The Financial Institutions Bureau periodically examines the Bank
for compliance with various regulatory requirements. The FDIC also has the
authority to conduct special examinations of SAIF members. The Bank must file
reports with the Financial Institutions Bureau and the FDIC describing its
activities and financial condition. Bank West also is subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). This supervision and regulation is intended
primarily for the protection of depositors.
<PAGE>
Regulatory Capital Requirements. The FDIC has established the following
minimum capital standards for state-chartered, FDIC-insured non-member banks,
such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with minimum
requirements of 4% to 5% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists
principally of shareholders' equity. These capital requirements are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual institutions. For
example, FDIC regulations provide that higher capital may be required to take
adequate account of, among other things, interest rate risk and the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<TABLE>
<CAPTION>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
As of June 30, 1998, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category. See Note 13 to the Consolidated
Financial Statements in the 1998 Annual Report.
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
<PAGE>
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan-chartered state savings bank may not declare or pay a dividend unless
the bank will have a surplus amounting to at least 20% of its capital after the
payment of the dividend. If the Bank has a surplus less than the amount of its
capital, it may not declare or pay any dividend until an amount equal to at
least 10% of net profits for the preceding one-half year (in the case of
quarterly or semi-annual dividends) or full-year (in the case of annual
dividends) has been transferred to surplus. A Michigan state bank may, with the
approval of the Commissioner, by vote of shareholders owning two-thirds of the
stock eligible to vote, increase its capital stock by a declaration of a stock
dividend, provided that after the increase the bank's surplus equals at least
20% of its capital stock, as increased. The Bank may not declare or pay any
dividend until the cumulative dividends on preferred stock (should any such
stock be issued and outstanding) have been paid in full.
Federal law generally prohibits a depository institution from making
any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. The FDIC may prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, the FDIC may prohibit the payment of dividends by the Bank,
if such payment is determined, by reason of the financial condition of the Bank,
to be an unsafe and unsound banking practice.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines to promote the safety and soundness of federally insured
depository institutions. These guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the guidelines prescribe
the goals to be achieved in each area, and each institution will be responsible
for establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
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
<PAGE>
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 borrowings 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
borrowings was $74 million at June 30, 1998. At June 30, 1998, the Bank had $
37.0 million of FHLB advances and a $2.0 million line of credit. See Note 7 to
the Consolidated Financial Statements in the 1998 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, 1998, Bank West had $ 2.1
million 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.
Deposit Insurance. 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 Commissioner 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 as discussed above under "- Regulatory
Capital Requirements." 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.
<PAGE>
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 $0.14 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.
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.
Restrictions on Certain Activities. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.
<PAGE>
State-chartered banks are also prohibited from engaging as principal in any type
of activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks may not engage as principal in any
type of activity that is not permissible for a subsidiary of a national bank
unless in either case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and the bank is, and
continues to be, in compliance with applicable capital standard.
The FDIC has adopted regulations to clarify the foregoing restrictions
on activities of FDIC-insured, state-chartered banks and their subsidiaries.
Under the regulations, the term activity refers to the authorized conduct of
business by an insured state bank and includes acquiring or retaining any
investment other than an equity investment. A bank or subsidiary is considered
acting as principal when conducted other than as an agent for a customer, as
trustee, or in a brokerage, custodial, advisory or administrative capacity. An
activity permissible for a national bank includes an activity expressly
authorized for national banks by statute or recognized as permissible in
regulations, official circulars or bulletins or in any order or written
interpretation issued by the Office of the Comptroller of the Currency ("OCC").
In its regulations, the FDIC indicated that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly engage in any
insurance underwriting activity other than to the extent such activities are
permissible for a national bank or a national bank subsidiary or except for
certain other limited forms of insurance underwriting permitted under the
regulations. Under the regulations, the FDIC permits state banks that meet
applicable minimum capital requirements to engage as principal in certain
activities that are not permissible to national banks including guaranteeing
obligations of others, activities which the Federal Reserve Board has found by
regulation or order to be closely related to banking and certain securities
activities conducted through subsidiaries.
Uniform Lending Standards. Federal regulations require banks to adopt
and maintain written policies establishing appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. A bank's real estate lending policy must reflect
consideration of the guidelines that have been adopted by the banking agencies.
The Bank does not believe that such guidelines materially affect its lending
activities.
Limits on 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 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, 1998, the 15% limit for the Bank was $1.5 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.
Consumer Protection Laws. The Bank's business includes making a variety
of types of loans to individuals. In making these loans, the Bank is subject to
state usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
<PAGE>
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under state and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Commissioner Assessments. Michigan banks are required to pay
supervisory fees to the Commissioner to fund the operations of the Commissioner.
The amount of supervisory fees paid by a bank is based upon the bank's total
assets, as reported to the Commissioner.
Branching Authority. Michigan banks, such as the Bank, have the
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals (including the
approval of the Commissioner and the FDIC).
Effective June 1, 1997, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") allows banks to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by IBBEA only if specifically authorized by state law. The legislation allowed
individual states to "opt-out" of interstate branching authority by enacting
appropriate legislation prior to June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and
non-U.S. banks to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval of the
Commissioner, (i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
<PAGE>
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 begin in fiscal 1999, provided the Bank meets certain residential
lending requirements. No recapture took place in fiscal 1998 because the Bank
met its residential loan requirement under the Code. 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, 1998, 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.
<PAGE>
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, 1998, Bank West had no NOL
carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are currently 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,
1995 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, 1998, 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, 1998.
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
------------------- ------------ -------- --------
(In Thousands)
2185 Three Mile Road N.W.
Grand Rapids, MI 49544 Owned $ 2,364 $39,223
910 Bridge Street
Grand Rapids, MI 49504 Owned 661 74,761
6740 Cascade Road S.E.
Grand Rapids, MI 49546 Leased 140 5,995
------- -------
Total $ 3,165 $ 119,979
======= =========
Item 3. Legal Proceedings.
On July 1, 1998, Kristine Cowles filed a complaint against the Bank in
the Circuit Court for the County of Kent, State of Michigan. The complaint
alleges that the Bank has been engaged in the unauthorized practice of law as
the result of charging a fee for preparing loan documents. The complaint seeks
class action certification, restitution of all fees paid for the last six years,
interest, attorney fees and other costs. Management believes after consultation
with legal counsel that the complaint is wholly without merit, and intends to
vigorously defend against this suit and has filed a motion for summary judgement
and dismissal. A hearing has been scheduled for mid-October 1998.
The Company and the Bank are also subject to certain other legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position of the Company.
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 the inside back cover page of the Company's 1998
Annual Report.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page
2 of the 1998 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 1998 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable since the Company qualifies as a small business issuer.
See Item 305(e) of Regulation S-K.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
15 to 43 of the 1998 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from pages
3, 4, 7 and 11 of the definitive proxy statement of the Company for the Annual
Meeting of Stockholders to be held on October 28, 1998, which will be filed
within 120 days of June 30, 1998 ("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, 1998 and 1997
Consolidated Statements of Income for the Years Ended
June 30, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years
ended June 30, 1998, 1997 and 1996
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.
(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 1998 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
<PAGE>
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-87620) filed with the SEC on
December 21, 1994, as subsequently amended.
(**) Incorporated herein by reference from the Company's Form 10-Q filed
with the SEC on November 14, 1997.
(***) Incorporated herein by reference from the Company's Annual Report on
Form 10-K filed with the SEC on September 28, 1995.
(****) Incorporated herein by reference from the Company's Annual Report on
Form 10-K filed 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, 1998.
(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 22, 1998 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 22, 1998
- --------------------------
Paul W. Sydloski
President, Chief Executive
Officer and Director
/s/ George A. Jackoboice September 22, 1998
- --------------------------
George A. Jackoboice
Chairman of the Board and
Director
/s/ Richard L. Bishop September 22, 1998
- --------------------------
Richard L. Bishop
Director
<PAGE>
/s/ Thomas D. DeYoung September 22, 1998
- --------------------------
Thomas D. DeYoung
Director
/s/ Jacob Haisma September 22, 1998
Jacob Haisma
Director
/s/ Harry E. Mika September 22, 1998
- --------------------------
Harry E. Mika
Director
/s/ Carl A. Rossi September 22, 1998
- --------------------------
Carl A. Rossi
Director
/s/ Robert J. Stephan September 22, 1998
- --------------------------
Robert J. Stephan
Director
/s/ John H. Zwarensteyn September 22, 1998
- --------------------------
John H. Zwarensteyn
Director
/s/ Kevin A. Twardy September 22, 1998
- --------------------------
Kevin A. Twardy
Chief Financial Officer
(also principal accounting
officer)
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 Shareholders is scheduled for Wednesday, October 28,
1998 at 10:00 a.m., at the Grand Rapids Elks Lodge, located at 2715 Leonard
Street, N.W., Grand Rapids, Michigan.
[GRAPHIC-LOGO FOR BANK WEST FINANCIAL CORPORATION]
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
In this report to our shareholders I will attempt to clarify where we have
been, where we are and where we are going.
Since March of 1995 we have been attempting to change this organization from
a traditional savings and loan to a full service community bank which would
offer new products and services for our customers and provide for the greatest
possible return to our shareholders. Our plan calls for a highly skilled and
dedicated staff with a strong emphasis on customer service. To accomplish this,
we formed a five-year strategic plan utilizing a building block strategy which
has been implemented. The strategy calls for a shift from total dependence on
single-family loans to one of diversification which is reflected by consumer and
commercial loan growth, with balances of approximately $19.7 million and $9.7
million, respectively, at June 30, 1998. Our current strategy also produced a
30% increase in total assets since 1995, which currently stand at approximately
$181 million.
The confidence exhibited by our customers and our stockholders is reflected
in our growth in assets and our improving franchise value. That confidence is
much appreciated and the appreciation is manifested in the fact that at every
level of the company we are committed to generating and maintaining long-term
relationships. We are also committed to providing profitability by offering
premier services and programs and at the same time managing our resources in the
most efficient manner possible.
On the deposit side, our concentration has shifted from dependence on
certificates of deposits to more reasonably priced funds. Since 1995, checking
account balances have increased from $4.1 million to $11.4 million, and total
deposits increased from $85.2 million to $120 million.
In the past year total assets increased nearly 17%, loan volume increased 49%
and our deposit base increased 17%. The profitability generated from the record
loan production volume has been offset by the fact that nearly 50% of the loans
we produced in the last fiscal year were refinances. Pre-payment penalties are
now part of the adjustable loan instrument (ARM) and should help us control
future refinancing of these loans.
In the next year our primary goal will be to improve the value of our
franchise through market expansion and full utilization of the products we now
offer, relying on our building block strategy. We intend to concentrate on cost
control and improve our significant ratios by attaining the goals we have set.
We have completed the majority of human resource additions which were necessary
to support the continued growth of the franchise.
One significant event which will have an impact on all businesses is the
coming of the new millennium. Making sure that the Bank is Year 2000 (Y2K)
compliant is an assignment no financial institution can ignore. Adherence to
regulatory requirements, internal training and testing, external testing and a
customer information program are all elements of Bank West's Y2K program.
Our directors, management and staff want to thank you for your continuing
confidence. We will always remain mindful of our mission to enhance shareholder
value and to provide quality service that will meet your expectations. With this
in mind, we look forward to fiscal year 1999.
Sincerely,
/s/Paul W. Sydloski
-------------------
Paul W. Sydloski
President/CEO
1
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
(Dollars in thousands except per share data)
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net interest income $ 4,937 $ 4,279 $ 4,158 $ 3,185 $ 2,861
Provision for loan losses 81 60 60 21 25
Other income 1,012 1,554 1,202 270 226
One-time special SAIF assessment -- 551 -- -- --
Other expenses 4,585 3,821 3,469 2,352 2,045
Income taxes 453 478 622 366 337
Net income 830 923 1,208 716 680
Balance Sheet Data
Total assets $181,469 $155,675 $137,982 $139,648 $106,594
Cash and cash equivalents 4,206 3,673 6,694 4,595 4,923
Securities 6,745 3,978 7,422 11,405 4,029
Mortgage collateralized securities 36,507 25,578 17,341 18,335 3,440
Loans, net 118,906 111,530 95,737 95,836 91,329
Loans held for sale 8,157 2,231 4,297 2,746 1,282
Deposits 119,979 102,862 91,028 85,180 89,960
FHLB advances 37,000 29,000 19,000 24,922 5,000
Equity 23,275 22,592 26,810 28,171 10,844
Per Share Data(1)
Basic earnings per share(2) $ .35 $ .36 $ .39 $ .07 --
Diluted earnings per share(2) .33 .36 .39 .07 --
Dividends per share .22 .19 .19 -- --
Book value per share 8.87 8.59 8.13 8.11 --
Ratios
Average yield on interest-earning assets 7.74% 7.61% 7.52% 6.97% 6.55%
Average rate on interest-bearing liabilities 5.26 5.15 5.37 4.76 4.12
Average interest spread 2.48 2.46 2.15 2.21 2.43
Net interest margin 3.04 3.12 3.10 2.83 2.86
Return on average assets(3) .49 .64 .87 .62 .67
Return on average equity(3) 3.58 3.89 4.38 4.34 6.38
Efficiency ratio 76.34 74.89 68.56 69.56 63.85
Dividend pay-out ratio 64.96 54.94 49.93 -- --
Average equity to average assets 13.60 16.42 19.77 14.46 10.57
Non-performing loans as a % of loans, net .71 .37 .04 .15 .04
</TABLE>
<PAGE>
(1) All per share data has been adjusted for stock splits.
(2) Earnings per share for the year ended June 30, 1995 was computed by dividing
net income subsequent to the conversion on March 30, 1995 by the weighted
average number of shares outstanding subsequent to March 30, 1995.
(3) When excluding the impact of the government mandated one-time Savings
Association Insurance Fund assessment of $364,000,net of tax, or $0.14 per
share, Return on Average Assets (ROA) equalled .89% and Return on Average Equity
(ROE) equalled 5.43% for fiscal 1997.
2
<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") consolidated financial
condition and results of operations as well as provide additional information on
the Company's asset/liability management strategies, sources of liquidity and
capital resources. Management's Discussion and Analysis should be read in
conjunction with the consolidated financial statements contained herein. This
discussion provides information about the consolidated financial condition and
results of operations of the Company and its wholly owned subsidiary, Bank West
("Bank").
This Annual Report includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "project,"
"expect," "intend" or similar expressions. These statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary from
current expectations include, but are not limited to, the following: changes in
economic conditions (both generally and more specifically in the markets in
which Bank West operates); changes in interest rates, deposit flows, loan
demand, real estate values and competition; changes in accounting principles,
policies or guidelines and in government legislation and regulation (which
change from time to time and over which Bank West has no control); and other
risks detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
General
Bank West Financial Corporation is the holding company for Bank West.
Effective December 29, 1997, Bank West completed its conversion to a Michigan
chartered savings bank. Substantially all of the Company's assets are currently
held in, and its operations are conducted through, its sole subsidiary Bank
West. The Company's business consists primarily of attracting deposits from the
general public and using such deposits, together with Federal Home Loan Bank
("FHLB") advances, to make loans for the purchase and construction of
residential properties. To a lesser extent, the Company also makes commercial
loans and consumer loans.
The Company's operations and profitability are subject to changes in interest
rates, applicable regulations and general economic conditions, as well as other
factors beyond the Company's control. The profitability of Bank West depends
primarily on its net interest income, which is the difference between interest
and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits and FHLB
borrowings. Net interest income is dependent upon the level of interest rates
and the extent to which such rates are changing. The Company's profitability
also is dependent on the level of its other income, including gains on sale of
loans in connection with its mortgage banking activities and fees and service
charges.
<PAGE>
During December 1997, the Bank formed Sunrise Mortgage Corporation, a
wholly-owned subsidiary engaged to originate and purchase non-conforming
mortgage loans including sub-prime mortgage loans for resale. All of the loans
originated and purchased have a commitment to sell in place to an investor on a
servicing released basis. Sunrise Mortgage Corporation is expected to break-even
in twelve to eighteen months.
The Company's net income was $830,000, $923,000 and $1,208,000 for fiscal
1998, 1997 and 1996, respectively. Fiscal 1998 net income was positively
impacted by an increase in net interest income through continued capital
leveraging efforts. This increase was offset by a decrease in gains on
securities and higher general and administrative expenses. See "Results of
Operations for the Year Ended June 30, 1998 Compared to the Year Ended June 30,
1997" section for additional information. Fiscal 1997 net income was negatively
impacted by a $364,000, net of tax, or $0.14 per share government mandated
special assessment to recapitalize the Savings Association
3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). See Note 6 to consolidated financial statements for
additional information.
Changes in Financial Condition
Assets. Total assets increased by $25.8 million or 16.6% from June 30, 1997
to June 30, 1998. The increase is primarily due to a $10.8 million or 33.2%
increase in securities as additional adjustable-rate collateralized mortgage
obligations were purchased to partially offset the decline in one-to four-family
adjustable-rate loans. In addition, loans increased by $7.4 million or 6.6% as
greater emphasis was placed on originating commercial and consumer loans for
portfolio instead of concentrating primarily on residential mortgage banking
activities. The additional emphasis on adding the aforementioned loan types to
portfolio during fiscal 1998 was in an effort to diversify the Bank's loan
portfolio from its traditional first residential mortgage business and to react
to increased competitiveness in the residential mortgage banking business. Total
commercial and consumer loans increased as a percent of total loans from 14.0%
at the end of fiscal 1997 to 23.1% at the end of fiscal 1998. Management expects
continued growth in the commercial and consumer loan portfolios during fiscal
1999.
The Bank's mortgage banking activities consist of selling newly originated
and purchased loans into the secondary market. Total loans sold amounted to
$45.0 million, $32.9 million and $45.8 million in fiscal 1998, 1997 and 1996,
respectively. Loans held for sale amounted to $8.2 million, $2.2 million and
$4.3 million at June 30, 1998, 1997 and 1996, respectively. The dollar amount of
loans sold and loans held for sale increased in fiscal 1998 due to higher
refinancing volume as a result of lower prevailing market interest rates
compared to the prior fiscal year as well as increased loan origination
personnel. The majority of loans originated and purchased for resale have been
30-year fixed-rate loans.
Mortgage-backed securities and collateralized mortgage obligations increased
from $25.6 million at June 30, 1997 to $36.5 million at June 30, 1998. During
fiscal 1998, the Bank purchased additional adjustable-rate collateralized
mortgage obligations which is consistent with the Bank's strategy of increasing
the ratio of interest-sensitive assets to interest-sensitive liabilities.
Collateralized mortgage obligations also were purchased to partially offset the
decline in one-to four-family adjustable-rate mortgage loans. The collateralized
mortgage obligations earn interest based on either the prime or the London
Interbank Offered Rate ("LIBOR") indexes and reprice monthly. These securities
were generally purchased with relatively low weighted average collateral rates
as compared to current market rates in an effort to minimize prepayment risk.
Other securities classified as available for sale or held to maturity,
primarily consisting of U.S. agency securities and equity securities, increased
from $4.0 million at June 30, 1997 to $6.7 million at June 30, 1998. The
increase is primarily due to the purchase of equity securities. In addition, on
May 31, 1998, the Company reclassified securities with a carrying and fair value
of $1.2 million from the trading classification to the available for sale
classification, to reflect management's intent to realize the long-term
potential underlying such securities rather than to benefit from short-term
changes in market values. The recent downturn in the U.S. equity markets,
especially in small cap stocks, has had a negative impact on the Company's
remaining equity investments. As a result, management determined than an
<PAGE>
other-than-temporary decline in the market value of certain equity securities
occurred totaling $260,000 as of June 30, 1998. Over time, management believes
the market price of the Company's remaining equity investments will reach
estimated values based on underlying fundamentals. At June 30, 1998, the Company
had no remaining trading securities.
Liabilities. Deposits increased $17.1 million or 16.6% from June 30, 1997 to
June 30, 1998. The increase in total deposits was primarily attributable to
growth in certificates of deposit of $11.5 million, or 14.9%, and growth in
non-interest bearing deposits of $3.0 million or 76.8%. Certificates of deposit
accounted for approxi-
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
mately 74% of total deposits at June 30, 1998 and approximately 76% of total
deposits at June 30, 1997. At June 30, 1998, $65.4 million or 73.4% of total
certificates of deposit mature in one year or less, and $17.2 million or 19.3%
of the total certificates of deposit had balances of $100,000 or more. The
increase in deposits was achieved primarily through continued development of new
and existing commercial and retail account relationships. In addition, the Bank
has attracted and retained certificates of deposit including out-of-state jumbo
accounts by offering competitive interest rates.
Because the growth in deposits has not matched the growth in assets in recent
years, the Bank began utilizing FHLB advances. During fiscal 1998, the Bank
increased FHLB advances by $8.0 million. The proceeds of these advances, as well
as deposit growth discussed above, were primarily used to fund loan and
securities growth as well as mortgage banking activities.
Shareholders' Equity. Shareholders' equity amounted to $23.3 million or 12.8%
of total assets at June 30, 1998 compared to $22.6 million or 14.5% of total
assets at June 30, 1997. The Company's trend of profitability continued in
fiscal 1998 with the Company earning $830,000. The primary change in total
shareholders' equity relates to net income offset by dividends and stock
repurchases.
The cost of shares issued to the Company's Employee Stock Ownership Plan
("ESOP") but not yet allocated to participants totaling $875,000 at June 30,
1998 is presented in the consolidated balance sheet as a reduction of
shareholders' equity. The unearned compensation value of the Company's MRPs at
June 30, 1998 totaling $361,000 also is shown as a reduction of shareholders'
equity.
The Company's securities classified as available for sale are carried at
market value, with unrealized gains or losses reported as a separate component
of shareholders' equity, net of federal income taxes. At June 30, 1998, the net
unrealized gain was $5,000, while at June 30, 1997, the net unrealized gain was
$13,000.
Results of Operations for the Year Ended June 30, 1998, Compared to the Year
Ended June 30, 1997
Net Income. Net income for fiscal 1998 was $830,000 or $.35 per basic share,
compared to $923,000 or $.36 per basic share for fiscal 1997. The Company's net
income decreased by $93,000 or 10.1% in fiscal 1998 from fiscal 1997. The
results of operations for fiscal 1997 include a one-time assessment of $364,000,
net of taxes, or $.14 per share relating to legislation signed into law on
September 30, 1996 to recapitalize the SAIF. Net income for fiscal 1997 without
the SAIF assessment would have been $1.3 million or $.50 per share. On a SAIF
adjusted basis, net income decreased $457,000 or 35.5% for the year ended June
30, 1998 compared to June 30, 1997. The decrease was primarily due to a
reduction of other income of $542,000 as a result of less successful equity
securities trading activities by $531,000 a write-down of available for sale
equity securities of $260,000 relating to an other-than-temporary market decline
and an increase in other expenses (excluding the one-time SAIF assessment) of
$764,000, primarily due to an increase in compensation and benefits. These
decreases were partially offset by growth in net interest income and in gain on
sale of loans of $658,000 and $163,000, respectively.
<PAGE>
Net income for fiscal 1998 represents a return on average equity ("ROE") of
3.58%, a decrease from 3.89% for fiscal 1997, and a return on average assets
("ROA") of .49%, a decrease from .64% for fiscal 1997.
Net Interest Income. The Company's net income is largely dependent upon net
interest income. Net interest income is the difference between the average yield
earned on loans, securities and other earning assets, and the average rate paid
on deposits and FHLB advances. Net interest income is affected by changes in
volume and composition of earning assets and interest-bearing liabilities,
market rates of interest, the level of nonperforming assets, demand for loans
and other market forces.
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Net interest income increased $658,000 for the year ended June 30, 1998 as
compared to the year ended June 30, 1997. The increase in net interest income
was primarily attributable to a $17.5 million or 17.0% increase in the average
loan portfolio (including loans held for sale) and a $9.1 million or 39.7%
increase in the average mortgage collateralized securities portfolio. The
Company's average interest spread improved slightly from 2.46% to 2.48%, with
improvements in yield on total interest-earning assets substantially offset by
an increase in the cost of interest-bearing liabilities.
The yield on total interest-earning assets improved from 7.61% for fiscal
1997 to 7.74% for fiscal 1998. The yield improved primarily due to the growth in
the commercial and consumer loan portfolios, which in total represent 23.1% of
total loans at the end of fiscal 1998 compared to 14% of total loans at the end
of fiscal 1997. Management expects the continued growth in the commercial and
consumer loan portfolios during fiscal 1999 will positively impact the yield on
loans.
The cost of interest-bearing liabilities increased from 5.15% for fiscal 1997
to 5.26% for fiscal 1998. The cost of interest-bearing liabilities increased
primarily due to an increase in FHLB advances as a percent of total
interest-bearing liabilities and, to a lesser extent, a shift in mix from lower
costing demand deposit and savings accounts to higher costing money market and
certificate accounts.
Net interest margin decreased from 3.12% for fiscal 1997 to 3.04% for fiscal
1998. The reduction in net interest margin was primarily attributable to the
Company becoming more leveraged through internal growth. This increase in
leverage is reflected in the ratio of average interest-earning assets to average
interest-bearing liabilities, which declined to 1.12x for the year ended June
30,1998 compared to 1.15x for the same period in 1997.
The future trend of the Company's net interest income and net interest margin
may be impacted by the level of loan originations, purchases, repayments,
refinances, and sales, and a resulting change in the Company's composition of
interest-earning assets. The relatively flat yield curve during the second half
of the fiscal year resulted in a shift in borrower preference to fixed-rate
mortgage loans. This resulted in borrowers converting adjustable-rate mortgage
loans to 30-year fixed-rate loans, which are generally sold in the secondary
market. A continued high level of refinances and conversions of adjustable-rate
mortgages to fixed-rate mortgages could have a negative impact on future net
interest income. Additional factors that may affect the Company's net interest
income are changes in interest rates, slope of the yield curve, asset growth,
maturity and repricing activity and competition.
6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Average Balances, Interest Rates and Yields. The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin. All average balances are based on month end
balances.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30, Year Ended June 30,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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) $120,844 $9,795 8.11% $103,324 $8,206 7.94% $100,350 $7,902 7.87%
Securities 4,461 326 7.31 5,540 387 6.99 7,987 509 6.37
Mortgage-backed securities(3) 32,208 2,120 6.58 23,061 1,520 6.59 18,790 1,231 6.55
Interest-bearing deposits 2,738 152 5.55 3,633 199 5.48 5,476 326 5.95
FHLB stock 1,958 156 7.97 1,483 116 7.81 1,475 120 8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 162,209 12,549 7.74 137,041 10,428 7.61 134,078 10,088 7.52
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 8,522 7,419 5,410
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $170,731 $144,460 $139,488
====================================================================================================================================
Interest-bearing liabilities:
Savings, checking and MMDA's $25,821 794 3.08 $23,507 729 3.10 $21,641 721 3.33
Certificates of deposit 83,032 4,808 5.79 73,465 4,195 5.71 66,532 3,884 5.84
FHLB advances 35,803 2,010 5.61 22,433 1,225 5.46 22,236 1,325 5.96
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 144,656 7,612 5.26 119,405 6,149 5.15 110,409 5,930 5.37
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 2,853 1,340 1,504
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 147,509 120,745 111,913
Stockholders' equity 23,222 23,715 27,575
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $170,731 $144,460 $139,488
====================================================================================================================================
Net interest income; average
interest rate spread $ 4,937 2.48% $4,279 2.46% $4,158 2.15%
====================================================================================================================================
Net interest margin(4) 3.04% 3.12% 3.10%
====================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 1.12x 1.15x 1.21x
====================================================================================================================================
</TABLE>
<PAGE>
(1) At June 30, 1998, the weighted average yields earned and rates paid were as
follows: loans receivable, 7.92%; securities, 6.28%; mortgage-backed securities,
6.68%; interest-bearing deposits, 5.50%; FHLB stock, 8.00%; total
interest-earning assets, 7.60%; savings, checking and MMDA's, 3.26%;
certificates of deposits, 5.74%; FHLB advances, 5.48%; total interest-bearing
liabilities, 5.24%; and interest spread, 2.36%.
(2) Includes nonaccrual loans and loans held for sale during the respective
periods. Calculated net of deferred fees and discounts and loans in process.
(3) Includes collateralized mortgage obligations.
(4) Net interest margin equals net interest income divided by average
interest-earning assets.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (change in rate multiplied by prior year volume), and (ii)
changes in volume (change in volume multiplied by prior year rate). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1998 June 30, 1997
vs. vs.
Year Ended Year Ended
June 30, 1997 June 30, 1996
- ------------------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
- ------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
- ------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $178 $1,411 $1,589 $ 70 $ 234 $ 304
Securities 17 (78) (61) 46 (168) (122)
Mortgage-backed securities (2) 602 600 8 281 289
Interest-bearing deposits 3 (50) (47) (24) (103) (127)
FHLB stock 2 38 40 (5) 1 (4)
- ------------------------------------------------------------------------------------------------------------
Total interest income 198 1,923 2,121 95 245 340
- ------------------------------------------------------------------------------------------------------------
Interest expense:
Savings, checking and MMDA's (5) 70 65 (52) 60 8
Certificates of deposit 60 553 613 (87) 398 311
FHLB advances 35 750 785 (112) 12 (100)
- ------------------------------------------------------------------------------------------------------------
Total interest expense 90 1,373 1,463 (251) 470 219
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $108 $ 550 $ 658 $ 346 $(225) $ 121
============================================================================================================
</TABLE>
Provision for Loan Losses. The provision for loan losses increased by $21,000
or 35% when comparing fiscal 1998 and 1997. The provision for loan losses is a
result of management's periodic analysis of the allowance for loan losses.
<PAGE>
The allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations, and other factors and estimates which are subject to change over
time.
Management believes that the allowance is adequate to provide for potential
losses; however, there can be no assurance the related allowance may not have to
be increased in the future. Management expects the
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
provision for loan losses to increase in the next fiscal year to keep pace with
the growth in the loan portfolio and to prepare for the higher risk of loss
associated with management's intention to increase the commercial and consumer
loan portfolios.
The Company's ratio of nonperforming assets, consisting of loans 90 days or
more delinquent and foreclosed assets, to total assets was .57% as of June 30,
1998 compared to .28% as of June 30, 1997. The allowance for loan losses as a
percentage of total loans at June 30, 1998 increased to .21% compared to .19% at
June 30, 1997. The allowance for loan losses equalled 34.5% of nonperforming
loans at June 30, 1998. Nonperforming loans consisted primarily of one- to
four-family properties. The ratio of net charge-offs to average loans
outstanding was .01% for fiscal 1998 compared to none for fiscal 1997.
Total Other Income. Total other income decreased by $542,000 or 34.9% in
fiscal 1998 from fiscal 1997, primarily due to a $531,000 or 72.6% decrease in
the net gains on trading equity securities and a $201,000 increase in net loss
on securities available for sale. This amount was partially offset by a $163,000
or 32.7% increase in gain on sale of loans. The decrease in net gain on trading
equity securities was primarily due to the Company's decision to stop trading
equity securities in light of recent stock market volatility. The increase in
net loss in securities available for sale was due to an other-than-temporary
decline in certain equity securities resulting in a write-down of $260,000. The
increase in gain on sale of loans is a result of higher refinancing volume from
lower prevailing market interest rates compared to the prior fiscal year. The
Company expects that the formation of Sunrise Mortgage Corporation and continued
expansion of its retail and wholesale mortgage banking business will increase
core mortgage banking volume in fiscal 1999 compared to fiscal 1998.
Total Other Expenses. Total other expenses increased by $213,000 or 4.9% in
fiscal 1998 from fiscal 1997. The increase was primarily due to higher
compensation and benefits expense of $576,000 or 25.8%, and higher professional
fees of $74,000 or 39.2%. In addition, fiscal 1997 total other expenses include
a one-time assessment of $551,000 relating to legislation signed into law on
September 30, 1996 to recapitalize the SAIF. On a SAIF adjusted basis, total
other expenses increased $764,000 or 20.0% for the year ended June 30, 1998
compared to June 30, 1997.
The increase in compensation and benefits is due in part to a greater number
of full-time equivalent employees to support the growth in the mortgage banking,
consumer and commercial loan departments, and a $157,000 increase in ESOP
expense attributable to the higher market price of the Company's stock in fiscal
1998 compared to fiscal 1997. The Bank has completed the majority of personnel
additions necessary to support continued growth in its lending areas and
branches. Management expects that additional loan and deposit growth given the
current staffing level should result in an improvement to the Bank's efficiency
ratio for fiscal 1999. Professional fees increased due to higher consulting fees
and out-sourcing the human resources function.
Federal Income Tax Expense. Federal income tax expense decreased by $26,000
or 5.4% in fiscal 1998 from fiscal 1997, due to a decrease in pretax income.
<PAGE>
Results of Operations for the Year Ended June 30, 1997, Compared to the Year
Ended June 30, 1996
Net Income. The Company's net income decreased by $285,000 or 23.6% in fiscal
1997 from fiscal 1996. The decrease in fiscal 1997 was primarily due to a
$364,000 or $0.14 per share government mandated special assessment to
recapitalize the SAIF, which is administered by the FDIC. In addition, other
expenses (excluding the SAIFassessment) increased by $351,000. These amounts
were partially offset by increases in net interest income and other income of
$121,000 and $352,000, respectively.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Net Interest Income. The $121,000 or 2.9% increase in net interest income in
fiscal 1997 was primarily due to a $3.0 million or 3.0% increase in the average
loan portfolio and a $4.3 million or 22.7% increase in the average mortgage
collaterized securities portfolio. In addition, the Company's average interest
spread increased from 2.15% to 2.46%. The average interest spread increased as a
result of an increase in the average yield on interest-earning assets, primarily
loans, as well as a decline in the average cost of interest-bearing liabilities
both in deposits and FHLB advances. These amounts were partially offset by a
$9.0 million or 8.1% increase in average interest-bearing liabilities.
Interest Income. Total interest income increased by $340,000 or 3.4% in
fiscal 1997 compared to fiscal 1996. The increase was primarily due to a $3.0
million or 3.0% increase in the average loan portfolio and a $4.3 million or
22.7% increase in the average mortgage collateralized securities portfolio. The
interest on loans also increased due to the average yield increasing from 7.87%
in fiscal 1996 to 7.94% in fiscal 1997 resulting in a $70,000 or .9% increase in
interest on loans (before giving effect to the increase in the average balance)
as adjustable-rate loans repriced higher to reflect the higher prevailing market
interest rates during fiscal 1997 as well as the growth in the commercial and
consumer loan portfolios. These amounts were partially offset by a decline in
interest on securities and other interest-earning deposits of $122,000 and
$127,000, respectively, as the proceeds from sold or called securities and other
available liquidity were utilized to fund loans instead of being invested in
securities.
Interest Expense. Total interest expense increased by $219,000 or 3.7% in
fiscal 1997 compared to fiscal 1996, primarily due to an increase in the average
deposit balance of $8.8 million. This amount was partially offset by a decrease
in the average cost of deposits from 5.22% in fiscal 1996 to 5.08% in fiscal
1997.
Interest on FHLB advances decreased $100,000 in fiscal 1997 from fiscal 1996,
as the average rate paid decreased to 5.46% in fiscal 1997 from 5.96% in fiscal
1996. FHLB advances have primarily been used in addition to deposits to fund
loan originations for the Bank's loan portfolio as well as to purchase
adjustable-rate collateralized mortgage obligations.
Provision for Loan Losses. The provision for loan losses did not change when
comparing fiscal 1996 to fiscal 1997. The allowance for loan losses totalled
$226,000, which represented .19% of the total loan portfolio and 54.2% of
nonperforming loans at June 30, 1997. The nonperforming loans at June 30, 1997
were comprised of one- to four-family mortgage loans.
Total Other Income. Total other income increased by $352,000 or 29.3% in
fiscal 1997 from fiscal 1996, primarily due to a $365,000 improvement in the
results of trading equity securities and a $117,000 increase in fees and service
charges. These amounts were partially offset by a $118,000 decrease in gain on
sale of loans. The equity securities trading portfolio was comprised of equity
investments in financial institutions. The unrealized gain recognized on
securities classified as trading was $131,000 at June 30, 1997.
Gain on the sale of loans decreased by $118,000 or 19.1% due to a decline in
loans sold of $12.9 million as a result of lower refinancing volume from higher
prevailing market interest rates compared to the prior fiscal year as well as
increased market competition. However, the decline in gain on the sale of loans
<PAGE>
was offset by an increase in fee and service charge income of $117,000 or 58.4%
which was primarily related to new loan programs both at the retail level and
with correspondent financial institutions. In an effort to offset the financial
statement impact of lower mortgage banking volume, management placed greater
emphasis on originating commercial and consumer loans for portfolio.
Total Other Expenses. Total other expenses increased by $903,000 or 26.0% in
fiscal 1997 from fiscal 1996, primarily due to a government mandated special
assessment to recapitalize the SAIF, which is administered by the FDIC. The FDIC
notified the Bank that the Bank's special assessment was $551,000 on a pretax
basis.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Compensation and benefits increased by $407,000 or 22.3%, which was primarily
due to hiring individuals to support the growth in the mortgage banking,
consumer and commercial loan departments. In addition, the Employee Stock
Ownership Plan and Management Recognition Plans expenses were higher by $26,000
and $51,000 for fiscal 1997, respectively, compared to fiscal 1996. Also,
occupancy expense was $60,000 higher during fiscal 1997 compared to fiscal 1996
due to the opening of the Bank's third branch location. These amounts were
partially offset by a decrease in professional fees of $83,000 or 30.5% due to a
reduction in consulting fees related to one-time projects.
Federal Income Tax Expense. Federal income tax expense decreased by $143,000
or 23.0% in fiscal 1997 from fiscal 1996, due to a decline in pretax income.
Market Risk
Derivative financial instruments include futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company currently does not enter into futures, swaps or
options. However, the Company is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates. Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party up to a
stipulated amount and with specified terms and conditions. Commitments to extend
credit and standby letters of credit are not recorded as an asset or liability
by the Bank until the instrument is exercised.
The Bank's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. See "Asset and Liability Management" section for
additional information. Interest rate risk is the potential for economic losses
due to future interest rate changes. These economic losses can be reflected as a
loss of future net interest income and/or a loss of current fair market values.
Management realizes that certain risks are inherent and the goal is to identify
and minimize the risks. The Bank has no market risk sensitivity instruments held
for trading purposes.
Asset and Liability Management
Consistent net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap," provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates.
<PAGE>
The Bank attempts to manage its interest rate risk by maintaining a high
percentage of its assets in adjustable-rate mortgage loans ("ARMs"), other
adjustable-rate loans and mortgage collateralized securities. The interest rate
on its ARMs, however, adjusts no more frequently than once a year, with the
amount of the change subject to annual limitations, whereas the interest rates
on most deposits can change more frequently and are not subject to annual
limitations. Significant effort has been made to reduce the duration and average
life of the Bank's interest-earning assets. During fiscal 1998, the Bank's ratio
of interest-sensitive assets to interest-sensitive liabilities increased
primarily due to purchasing additional adjustable-rate collateralized mortgage
obligations. These efforts were partially offset by a decline in the ARM
portfolio by $17.1 million or 34.5% resulting from borrowers refinancing
primarily to fixed-rate loans in the current low interest rate environment.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Another way the Bank has managed interest rate risk is by selling most of the
newly originated or purchased, fixed-rate mortgages with terms of fifteen years
or greater, while originating adjustable-rate loans and balloon mortgage loans
for retention in the loan portfolio. In addition, the Bank continues to
emphasize consumer, home equity and commercial loans which are shorter term in
nature than the mortgage portfolio. At June 30, 1998, the Bank's adjustable-rate
and balloon mortgage loans amounted to $57.0 million or 31.4% of total assets.
Although the Bank experienced a high level of ARM prepayments during fiscal
1998, it is anticipated that the Bank will retain a sufficient amount of newly
originated balloons and other loan types to offset loan prepayments and
repayments in the next fiscal year.
With its funding sources, management has attempted to reduce the impact of
interest rate changes by emphasizing non-interest bearing products, and term
advances from the FHLB.
Management presently measures the Bank's interest rate risk by computing
estimated changes in net interest income ("NII") and the net portfolio value
("NPV") of equity in the event of a range of assumed changes in market interest
rates. The Bank's exposure to interest rates is reviewed quarterly by senior
management and the Board of Directors. Exposure to interest rate risk is
measured with the use of interest rate sensitivity analysis to determine the
change in NPV in the event of hypothetical changes in interest rates. If
estimated changes to NPV and net interest income are not within the limits
established by the Board, the Board may direct management to adjust the Bank's
asset and liability mix to bring interest rate risk within Board approved
limits.
Net Portfolio Value is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market sensitive instruments in the event
of sudden and sustained 1% to 4% increases and decreases in market interest
rates. The following table presents the Bank's projected change in NPV and NII
for the various rate shock levels at June 30, 1998:
<TABLE>
<CAPTION>
Net Portfolio Value Net Interest Income
- ------------------------------------------------------------------------------------------------
Change in Interest $ Amount % Change $ Amount % Change
Rate (Basis Points) of NPV in NPV of NII in NII
- ------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $17,428 (14.98)% $6,488 24.38%
+300 18,356 (10.46) 6,291 20.61
+200 19,129 (6.68) 5,992 14.88
+100 19,771 (3.55) 5,625 7.84
Static 20,499 -- 5,216 --
(100) 19,546 (4.65) 4,703 (9.84)
(200) 17,857 (12.89) 4,110 (21.21)
(300) 16,506 (19.48) 3,539 (32.16)
(400) 15,211 (25.80) 2,996 (42.57)
</TABLE>
<PAGE>
As illustrated in the table, a decrease in interest rates will result in
larger net decreases in the Bank's NPV as compared to an increase in interest
rates. This occurs principally because, when rates decline, the Bank does not
experience a significant rise in market value for its loans because borrowers
prepay at relatively high rates. Also when rates decline, the yield on the
Bank's adjustable-rate loans and collateralized mortgage obligations would
reprice downward faster than the average cost of funds on its deposits and FHLB
advances.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react differently to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. In addition, certain
assets, such as adjustable-rate mortgage loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, expected rates of prepayments on
loans, decay rates of deposits and early withdrawals from certificates could
likely deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Bank has no regulatory mandated minimum liquidity requirements. The Bank
maintains a level of liquidity consistent with management's assessment of
expected loan demand, proceeds from loan sales, deposit flows and yields
available on interest-earning deposits and investment securities. When overnight
deposits fall below management's targeted level, management generally borrows
FHLB advances instead of selling securities.
The Bank's principal sources of liquidity are deposits, principal and
interest payments on loans, proceeds from loan sales, maturities of securities,
sales of securities available for sale and FHLB advances. While scheduled loan
repayments and maturing securities are relatively predictable, deposit flows and
loan prepayments are more influenced by interest rates, general economic
conditions and competition.
The Bank routinely borrows FHLB advances when overnight deposits are drawn to
low levels. These borrowings are made pursuant to the blanket collateral
agreement with the FHLB. At June 30, 1998, the Bank has approximately $35
million of excess borrowing capacity under the blanket collateral agreement with
the FHLB.
The Company (excluding the Bank) also has a need for, and sources of,
liquidity. Dividends from the Bank and interest income and gains on investments
are its primary sources. The Company also has modest operating costs and has
paid a regular quarterly cash dividend.
The Bank is subject to three capital to asset requirements in accordance with
banking regulations. Bank West's capital ratios are well in excess of minimum
capital requirements specified by federal banking regulations. See Note 13 to
consolidated financial statements for more information on the Bank's capital
requirements.
Year 2000
Management and a committee of the Board of Directors have developed a formal
action plan which outlines the Bank's process for preparing itself for Year 2000
issues. The Bank's core data processing software is provided by an outside
vendor. The outside vendor projects the software they provide will be Year 2000
<PAGE>
compliant, including testing, during the fourth quarter of 1998. The Bank
anticipates testing the software and integration with other third party software
during the fourth quarter of 1998. Management also anticipates testing its
remaining systems for Year 2000 compliance during the fourth quarter of 1998 and
first quarter of 1999.
Management presently anticipates that the costs of addressing the Year 2000
will approximate $200,000 to $250,000. These costs will be primarily for the
replacement of depreciable assets. The costs associated with Year 2000 readiness
are based on management's best estimates. There can be no guarantee that these
estimates will be achieved and actual results that might cause differences
include, but are not limited to, the ability of other
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
- --------------------------------------------------------------------------------
companies on which the Company's systems rely to modify or convert their systems
to be Year 2000 compliant, the ability to locate and correct all relevant
computer codes, and similar uncertainties. As testing continues and more
progress is made, management will continuously be assessing the estimated Year
2000 costs. As of June 30, 1998, the Bank has not incurred any direct costs
relating to Year 2000 readiness, except for staff personnel time.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which generally require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation. Unlike most industrial
companies, virtually all of the Company's assets and liabilities are monetary in
nature. As a result, interest rates generally have a more significant impact on
the Company's performance than does the effect of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates.
Impact of New Accounting Standards
Information pertaining to this topic appears at the conclusion of Note 1 to
the consolidated financial statements, which are included as part of this
report.
14
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
[GRAPHIC-LOGO FOR CROWE CHIZEK]
Shareholders and Board of Directors
Bank West Financial Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Bank West
Financial Corporation (the "Company") as of June 30, 1998 and 1997 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank West
Financial Corporation as of June 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 21, 1998, except for Note 2,
for which the date is September 18, 1998
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
June 30, 1998 and 1997
- --------------------------------------------------------------------------------------------------
1998 1997
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 2,408,476 $ 1,722,734
Interestbearing deposits in financial institutions 1,797,063 1,950,522
------------- -------------
Total cash and cash equivalents 4,205,539 3,673,256
Interest-bearing time deposits -- 99,000
Trading securities -- 2,921,251
Securities available for sale 32,167,697 25,550,974
Securities held to maturity (fair value:
1998 - $11,079,178; 1997 - $4,001,875) 11,084,361 4,003,575
Loans held for sale 8,156,572 2,231,151
Loans, net 118,905,611 111,530,092
Federal Home Loan Bank (FHLB) stock 2,100,000 1,550,000
Premises and equipment - net 3,164,905 3,128,158
Accrued interest receivable 879,082 762,990
Mortgage servicing rights 280,869 148,569
Real estate owned 192,080 19,912
Other assets 332,136 56,263
------------- -------------
$ 181,468,852 $ 155,675,191
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 119,979,379 $ 102,862,152
FHLB borrowings 37,000,000 29,000,000
Accrued interest payable 253,037 202,217
Advanced payments by borrowers for taxes and insurance 512,538 491,710
Deferred federal income tax 335,182 287,635
Other liabilities 114,029 239,168
------------- -------------
Total liabilities 158,194,165 133,082,882
Commitments and contingencies
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 10,000,000 shares authorized;
2,623,629 and 1,753,475 issued at June 30, 1998 and 1997 26,237 17,535
Additional paid-in capital 11,551,136 11,432,798
Retained earnings, substantially restricted 12,928,028 12,647,112
Net unrealized gain on securities available for sale,
net of tax of ($2,644) in 1998 and ($6,548) in 1997 5,132 12,710
Management Recognition Plan (unearned shares) (360,998) (513,398)
Employee Stock Ownership Plan (unallocated shares) (874,848) (1,004,448)
------------- -------------
23,274,687 22,592,309
------------- -------------
$ 181,468,852 $ 155,675,191
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Interest and dividend income
Loans $ 9,795,291 $ 8,206,364 $ 7,901,948
Securities 2,446,042 1,907,129 1,739,792
Other interest-earning deposits 152,152 199,210 325,796
Dividends on FHLB stock 155,825 115,838 120,467
- -------------------------------------------------------------------------------------------------------------
12,549,310 10,428,541 10,088,003
Interest expense
Deposits 5,601,870 4,924,144 4,605,347
FHLB borrowings 2,010,465 1,224,959 1,324,732
- -------------------------------------------------------------------------------------------------------------
7,612,335 6,149,103 5,930,079
- -------------------------------------------------------------------------------------------------------------
Net interest income 4,936,975 4,279,438 4,157,924
Provision for loan losses 81,000 60,000 60,000
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,855,975 4,219,438 4,097,924
Other income
Net gain on sales of loans 662,203 498,666 617,286
Fees and service charges 340,967 317,286 200,330
Net gain on trading securities 200,148 731,156 366,465
Net gain (loss) on securities
available for sale (201,890) (285) 10,529
Other income 10,911 7,050 7,402
- -------------------------------------------------------------------------------------------------------------
1,012,339 1,553,873 1,202,012
Other expenses
Compensation and benefits 2,809,557 2,234,337 1,827,177
Federal deposit insurance expense 64,306 121,246 196,397
FDIC special assessment -- 550,556 --
Professional fees 263,374 188,561 272,163
Data processing expense 197,487 177,878 172,596
Occupancy expense 301,185 266,457 206,058
Furniture, fixtures and equipment expense 153,899 137,249 124,366
Advertising 111,351 119,993 87,770
Provision to adjust loans held for sale
to lower of cost or market -- -- 22,039
Other expense 683,532 575,481 560,482
- -------------------------------------------------------------------------------------------------------------
4,584,691 4,371,758 3,469,048
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income before federal income tax expense 1,283,623 1,401,553 1,830,888
Federal income tax expense 453,255 478,724 622,400
- -------------------------------------------------------------------------------------------------------------
Net income $ 830,368 $ 922,829 $ 1,208,488
=============================================================================================================
Basic earnings per share $ .35 $ .36 $ .39
=============================================================================================================
Diluted earnings per share $ .33 $ .36 $ .39
=============================================================================================================
Dividends per share $ .22 $ .19 $ .19
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 $23,144 $17,812,757 $11,626,136 $(27,295) $(1,263,648) $28,171,094
Net income for the year
ended June 30, 1996 1,208,488 1,208,488
Issuance of 92,575 shares
of common stock for
Management Recognition
Plan (MRP) 926 741,658 $(742,584)
Shares earned under MRP 99,120 99,120
Cash dividends of
$.19 per share (603,382) (603,382)
Repurchase of 207,375
shares of stock (2,074) (2,046,987) (2,049,061)
Shares committed to
be released under
Employee Stock
Ownership Plan 34,679 129,600 164,279
Change in net unrealized
gain (loss) on securities
available for sale, net
of tax of $92,775 (180,092) (180,092)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 21,996 16,542,107 12,231,242 (207,387) (643,464) (1,134,048) 26,810,446
Net income for the year
ended June 30, 1997 922,829 922,829
Net grant of 1,742 shares of
common stock for MRP 19,852 (19,852)
Shares earned under MRP 149,918 149,918
Cash dividends of
$.19 per share (506,959) (506,959)
Repurchase of 446,100 shares
of stock (4,461) (5,189,405) (5,193,866)
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Years ended June 30, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
Additional on Securities Unearned Unallocated Total
Common Paid-in Retained Available for MRP ESOP Shareholders'
Stock Capital Earnings Sale (Net of Tax) Shares Shares Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares committed to be
released under Employee
Stock Ownership Plan $ 60,244 $ 129,600 $ 189,844
Change in net unrealized
gain (loss) on securities
available for sale, net
of tax of $113,383 $220,097 220,097
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $17,535 11,432,798 $12,647,112 12,710 $(513,398) (1,004,448) 22,592,309
Net income for the year
ended June 30, 1998 830,368 830,368
Shares earned under MRP 152,400 152,400
Cash dividends of
$.22 per share (539,433) (539,433)
Issuance of 876,654 shares
of common stock for
three-for-two stock split,
net of cash paid on
fractional shares 8,767 (10,019) (1,252)
Repurchase of 7,500 shares
of stock (75) (105,863) (105,938)
Shares committed to be
released under Employee
Stock Ownership Plan 216,928 129,600 346,528
Shares issued upon exercise
of stock options 10 7,273 7,283
Change in net unrealized
gain (loss) on securities
available for sale, net of
tax benefit of $3,904 (7,578) (7,578)
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $26,237 $11,551,136 $12,928,028 $ 5,132 $(360,998) $(874,848) $23,274,687
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 830,368 $ 922,829 $ 1,208,488
Adjustments to reconcile net income to
net cash from operating activities
Purchase of trading securities (2,530,635) (5,428,775) (2,224,537)
Proceeds from sales of trading securities 4,486,385 3,947,118 1,882,564
Origination and purchase of mortgage
loans for sale (50,245,577) (30,350,557) (48,488,782)
Proceeds from sales of mortgage loans 44,982,359 32,915,164 45,798,332
Net (gain) loss on sales of:
Loans (662,203) (498,666) (617,286)
Securities 1,742 (730,871) (376,994)
Real estate owned (2,241) (210) (4,806)
Depreciation 213,787 192,495 179,742
Amortization of premium, net 79,741 13,848 103,072
ESOP expense 346,528 189,844 164,279
MRP expense 152,400 149,918 99,120
Loss on disposal of fixed assets -- -- 2,662
Provision for loan losses 81,000 60,000 60,000
Provision to adjust loans held for sale
to lower of cost or market -- -- 22,039
Change in:
Deferred loan fees (180,698) (77,301) (47,292)
Other assets and accrued interest receivable (541,027) (85,866) (15,373)
Other liabilities and accrued interest payable (2,039) (36,442) (144,282)
- --------------------------------------------------------------------------------------------------------------
Net cash from operating activities (2,990,110) 1,182,528 (2,399,054)
Cash flows from investing activities
Purchase of FHLB stock (550,000) (75,000) --
Net decrease in interest-bearing time deposits 99,000 199,000 989,000
Loan originations, net of repayments (4,296,879) (13,664,118) 3,696,997
Loans purchased for portfolio (3,295,025) (2,156,750) (1,921,400)
Purchase of securities available for sale (24,143,884) (14,725,895) (21,217,480)
Proceeds from sales of securities available for sale 15,634,260 10,731,577 14,077,014
Purchase of securities held to maturity (11,102,747) (3,002,813) --
Proceeds from maturities, calls and principal
payments of securities available for sale 2,786,772 1,545,498 8,874,974
Proceeds from maturities, calls and principal
payments of securities held to maturity 4,000,625 1,000,000 2,877,708
Property and equipment expenditures (250,534) (213,681) (202,205)
Proceeds from sale of real estate owned 162,918 25,566 50,181
- --------------------------------------------------------------------------------------------------------------
Net cash from investing activities (20,955,494) (20,336,616) 7,224,789
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
Years ended June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net increase in deposits $ 17,117,227 $ 11,834,080 $ 5,847,822
Repayment of FHLB borrowings (43,000,000) (11,000,000) (11,922,256)
Proceeds from FHLB borrowings 51,000,000 21,000,000 6,000,000
Repurchase of common stock (105,938) (5,193,866) (2,049,061)
Issuance of shares upon exercise of
stock options 7,283 -- --
Dividends paid on common stock (540,685) (506,959) (603,382)
- --------------------------------------------------------------------------------------------------------------
Net cash from financing activities 24,477,887 16,133,255 (2,726,877)
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 532,283 (3,020,833) 2,098,858
Cash and cash equivalents at beginning of period 3,673,256 6,694,089 4,595,231
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,205,539 $ 3,673,256 $ 6,694,089
==============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 7,561,515 $ 6,103,832 $ 5,954,870
Income taxes 768,119 456,050 520,000
Supplemental disclosure of noncash investing activities:
Transfer of loans from held for sale
to held to maturity -- -- 1,756,663
Transfer from loans to real estate owned 316,083 45,268 45,375
</TABLE>
During May of 1998, securities with a carrying value and fair value of
$1,165,649 were transferred from trading securities to securities available for
sale.
During November of 1995, securities with a carrying value of $15,008,666 and
a fair value of $14,964,245 were transferred from securities held to maturity to
securities available for sale.
See accompanying notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Bank West Financial Corporation (the "Company") was
organized as a thrift holding company for Bank West (the "Bank"), a
state-chartered stock savings bank. The consolidated financial statements
include the accounts of the Company and the Bank. All significant intercompany
transactions and balances have been eliminated in consolidation. The Bank's
primary services include accepting deposits and making mortgage and installment
loans in Kent County and Eastern Ottawa County, Michigan. The Bank also engages
in mortgage banking activities consisting of selling originated and purchased
loans into the secondary market. The Bank has formed a wholly-owned mortgage
company for the purpose of selling non-conforming originated and purchased loans
into the secondary market.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The primary estimates incorporated
into the Company's consolidated financial statements which are susceptible to
change in the near term include the allowance for loan losses, the
classification and carrying value of securities, mortgage servicing rights, and
loans held for sale and the fair value of stock options and other financial
instruments.
Concentrations of Credit Risk: The Bank grants mortgage loans to customers
primarily in Kent County and Eastern Ottawa County, Michigan. No significant
number of the Bank's customers are employed at any one specific entity or in any
one specific industry. The Bank grants primarily one-to four-family residential
real estate loans. Substantially all loans are secured by specific items of
collateral, primarily single-family residences.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and other investments with original maturities of three months or
less. Net cash flows are reported for customer loan transactions, deposit
transactions, and deposits made with other financial institutions.
Trading Securities: Securities that are bought and held principally for
resale in the near term (thus held for only a short period of time) are
classified as trading securities and recorded at their fair values. Realized and
unrealized gains and losses on trading securities are included immediately in
other income.
Securities: Securities which the Company has the positive intent and ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. Securities, other than trading securities, that might be sold prior to
maturity are classified as available for sale. Securities classified as
available for sale are reported at their fair value and the related unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of shareholders' equity, until realized. Securities are
written down to fair value when a decline in fair value is not temporary.
<PAGE>
Gains and losses on the sale of securities available for sale are determined
using the specific identification method. Premiums and discounts on securities
are recognized in interest income using the level yield method over the period
to maturity.
Loans Held for Sale: Mortgage loans originated and purchased for sale in the
secondary market are carried at the lower of cost or estimated market value on
an individual loan basis. Net unrealized losses are recognized in a valuation
allowance by charges to income. Gains on sales of loans are recognized when
proceeds from the loan sales are received by the Bank.
22
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and costs, and charge-offs. Interest income
on loans is accrued over the term of the loans based upon the principal
outstanding. Interest income is not reported when full loan repayment is in
doubt, typically when payments are past due 90 days or more. Payments received
on such loans are reported as principal reductions.
Loan fees, net of certain direct loan origination costs, are deferred. The
net amount deferred is reported as part of loans and is recognized as interest
income over the term of the loan using the level yield method.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position and collateral values and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur. A loan is charged-off against the allowance by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Mortgage Loan Servicing Rights: Servicing rights represent both purchased
rights and the allocated value of servicing rights retained on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and related components are depreciated using
the straight-line method with useful lives ranging from 31 to 40 years.
Furniture and equipment are depreciated using the straight-line method with
useful lives ranging from three to ten years. Maintenance and repairs are
charged to expense and improvements are capitalized. These assets are reviewed
for impairment when events indicate the carrying amount may not be recoverable.
<PAGE>
Real Estate Owned: Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the
date of acquisition, establishing a new cost basis. Any reduction to fair value
from the carrying value of the related loan at the time of acquisition is
accounted for as a loan loss and charged against the allowance for loan losses.
After acquisition, the property is carried at the lower of cost or fair value,
less estimated costs to sell. A valuation allowance is recorded through a charge
to income for the amount of selling costs. Valuations are periodically performed
by management and valuation allowances are adjusted through a charge to income
for changes in fair value or estimated selling costs. Costs relating to
improvement of property are capitalized, whereas costs and revenues relating to
the holding of property are expensed.
23
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is based on the amount of taxes due on the
Company's tax return plus changes in the deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP
but not yet allocated to participants is presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the market price
of the shares as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to additional paid-in
capital. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings while dividends on unallocated ESOP shares are reflected as a
reduction of debt and accrued interest.
Management Recognition Plan (MRP): The MRP is a stock award plan for which
the measurement of total compensation cost is based upon the fair value of the
shares on the date of grant. MRP awards vest in five equal annual installments
from the date of grant, subject to the continuous employment of the recipients
as defined under such plans. Compensation expense for the MRPs is recognized on
a prorata basis over the vesting period of the awards. The unearned compensation
value of the MRPs is shown as a reduction of shareholders' equity.
Stock Option Plan (SOP): Expense for employee compensation under SOPs is
recognized only if options are granted below the market price at the grant date.
As shown in a separate note, pro forma disclosures of net income and earnings
per share are provided as if the fair value method were used for stock-based
compensation.
Preferred Stock: The Company is authorized to issue 5,000,000 shares of
preferred stock. Such stock may be issued with such preferences and designations
as the Board of Directors may determine. The Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength of the holders of
the Common Stock and may have the effect of impeding an unfriendly takeover or
attempted change in control.
Fair Values of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance-sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
Earnings and Dividends Per Share: The accounting standard for computing
earnings per share was revised for fiscal 1998, and all earnings per share data
previously reported have been restated to follow the new standard. Basic
earnings per share is based on weighted average common shares outstanding. ESOP
<PAGE>
shares are considered outstanding as they are committed to be released; unearned
shares are not considered outstanding. MRP shares are considered outstanding as
they vest. Diluted earnings per share further assumes issuance of dilutive
potential common shares relating to outstanding stock options and unvested MRP
shares. All earnings and dividends per share amounts have been retroactively
adjusted for a three-for-two stock split paid in December, 1997.
Issued But Not Yet Adopted Accounting Standards: Statement of Financial
Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, was issued by the FASB in
1996. It revised the accounting for transfers of financial assets, such as loans
and securities, and for distinguishing between sales and secured borrowings. It
was effective for some transactions in fiscal 1997 and will be effective for
others in fiscal 1998. The effect on the consolidated financial statements was
not material.
24
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A new accounting standard, SFAS No. 130, Reporting Comprehensive Income, has
been issued which will require future reporting of comprehensive income
beginning with the quarter ended September 30, 1998. Comprehensive income is net
income plus changes in the unrealized gain (loss) on securities available for
sale, net of tax.
A new accounting standard, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, will require future reporting of additional
information related to material business segments beginning with the year ended
June 30, 1999. The Company is in the process of determining whether the new
standard would result in the identification of additional reportable business
segments.
A new accounting standard, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, will require all derivatives to be
recognized at fair value as either assets or liabilities in the Consolidated
Balance Sheets beginning with the quarter ended September 30, 1999. Changes in
the fair value of derivatives not designated as hedging instruments are to be
recognized currently in earnings. Gains or losses on derivatives designated as
hedging instruments are either to be recognized currently in earnings or are to
be recognized as a component of other comprehensive income, depending on the
intended use of the derivatives and the resulting designations. The Company does
not believe adoption of this new standard will have a material impact on its
consolidated financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
<PAGE>
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities at June 30, are
as follows:
<TABLE>
<CAPTION>
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
U.S. agencies $ 3,995,488 -- $ (3,613) $ 3,991,875
Mortgage-backed securities 817,236 -- (9,916) 807,320
Collateralized mortgage obligations 24,596,237 $230,029 (210,089) 24,616,177
Equity securities 2,750,960 61,250 (59,885) 2,752,325
- --------------------------------------------------------------------------------------------------------------
$32,159,921 $291,279 $ (283,503) $32,167,697
==============================================================================================================
1997
U.S. agencies $ 2,998,182 -- $ (21,544) $2,976,638
Mortgage-backed securities 1,579,891 $ 4,016 (1,212) 1,582,695
Collateralized mortgage obligations 20,953,643 88,217 (50,219) 20,991,641
- --------------------------------------------------------------------------------------------------------------
$25,531,716 $ 92,233 $ (72,975) $25,550,974
==============================================================================================================
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Held to Maturity Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Collateralized mortgage obligations $11,084,361 $42,498 $(47,681) $11,079,178
=============================================================================================================
1997
U.S. agencies $ 1,000,762 $ 1,113 -- $ 1,001,875
Collateralized mortgage obligations 3,002,813 -- $ (2,813) 3,000,000
- -------------------------------------------------------------------------------------------------------------
$ 4,003,575 $ 1,113 $ (2,813) $ 4,001,875
=============================================================================================================
</TABLE>
The scheduled maturities of securities available for sale and securities held
to maturity at June 30, 1998 are shown below. Securities not due at a single
maturity date are shown separately. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
-- Available for Sale -- -- Held to Maturity --
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after one year through
five years $ 3,995,488 $ 3,991,875 -- --
Mortgage-backed securities
and collateralized mortgage
obligations 25,413,473 25,423,497 $11,084,361 $11,079,178
Equity securities 2,750,960 2,752,325
- --------------------------------------------------------------------------------------------------------------
$32,159,921 $32,167,967 $11,084,361 $11,079,178
==============================================================================================================
</TABLE>
Proceeds from sales of securities amounted to approximately $20,121,000,
$14,679,000 and $15,969,000 for the years ended June 30, 1998, 1997 and 1996,
respectively, including approximately $4,486,000, $3,947,000, and $1,883,000
relative to trading securities for the years ended June 30, 1998, 1997 and 1996.
Gains (losses) on securities, reflected in the consolidated statements of
income, were as follows for the years ended June 30:
26
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains on sales of:
Securities available for sale $ 59,447 $ 17,075 $ 27,965
Trading securities 667,238 602,570 372,278
- ---------------------------------------------------------------------------------------------
726,685 619,645 400,243
Gross realized losses on sales of:
Securities available for sale (1,059) (17,360) (17,436)
Trading securities -- (1,977) --
- ---------------------------------------------------------------------------------------------
(1,059) (19,337) (17,436)
- ---------------------------------------------------------------------------------------------
Net realized gains 725,626 600,308 382,807
Net unrealized gain (loss) on trading securities (467,070) 130,563 (5,813)
Other-than-temporary market decline of
available for sale securities (260,278) -- --
- ---------------------------------------------------------------------------------------------
$ (1,742) $730,871 $376,994
=============================================================================================
</TABLE>
During May of 1998, securities with a carrying value and fair value of
$1,165,649 were transferred from trading securities to securities available for
sale to reflect management's intent to realize the long-term potential
underlying such securities rather than to benefit from short-term changes in
market values.
As of September 18, 1998, the fair value of certain equity securities
included in the available for sale classification have declined by $269,000 from
June 30, 1998.
<PAGE>
NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES
The following summarizes the Bank's secondary market mortgage activities,
which consist solely of one-to four-family real estate loans:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans held for sale - beginning of period $ 2,231,151 $ 4,297,092 $ 2,746,019
Activity during the periods:
Loans originated and purchased for sale 50,245,577 30,350,557 48,488,782
Proceeds from sale of mortgage loans (44,982,359) (32,915,164) (45,798,332)
Transfer of loans from held for sale to
held to maturity -- -- (1,756,663)
Gain on sale of loans 662,203 498,666 617,286
- ---------------------------------------------------------------------------------------------
Loans held for sale - end of period $ 8,156,572 $ 2,231,151 $ 4,297,092
=============================================================================================
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loan portfolios serviced for
FHLMC $33,201,177 $26,980,056 $28,590,578
=============================================================================================
Loan servicing fee income $ 78,433 $ 70,661 $ 66,725
=============================================================================================
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECONDARY MARKET MORTGAGE ACTIVITIES (Continued)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $192,262 and $116,813 at June 30, 1998 and 1997.
Following is the activity for mortgage servicing rights for the years ended
June 30:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at July 1 $148,569 $142,697 $ 68,196
Additions 190,800 16,372 124,501
Amortization (58,500) (10,500) (50,000)
- ---------------------------------------------------------------------------------------------
Balance at June 30 $280,869 $148,569 $142,697
=============================================================================================
</TABLE>
NOTE 4 - LOANS
Loans are classified as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
One-to four-family residential - fixed rate $ 15,383,013 $ 18,595,586
One-to four-family residential - balloon 24,413,846 12,493,524
One-to four-family residential - adjustable 32,599,924 49,743,799
Construction 24,730,805 21,500,849
Commercial mortgages 6,485,449 2,764,314
Home equity lines of credit 9,877,359 6,370,698
Second mortgages 8,148,412 4,252,996
Land development 675,498 59,764
- ---------------------------------------------------------------------------------------------
Total mortgage loans 122,314,306 115,781,530
Consumer loans 1,665,606 1,081,391
Commercial non-mortgage 3,253,091 2,032,190
- ---------------------------------------------------------------------------------------------
Total 127,233,003 118,895,111
Less:
Loans in process 8,248,310 7,169,073
Net deferred fees (costs) (210,614) (29,916)
Allowance for loan losses 289,696 225,862
- ---------------------------------------------------------------------------------------------
$118,905,611 $111,530,092
=============================================================================================
</TABLE>
<PAGE>
An analysis of the allowance for loan losses for the years ended June 30 is
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $225,862 $165,862 $108,000
Provision charged to operations 81,000 60,000 60,000
Charge-offs, net of recoveries (17,166) -- (2,138)
- ----------------------------------------------------------------------------------------------
Ending balance $289,696 $225,862 $165,862
==============================================================================================
</TABLE>
28
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
During the years ended June 30, 1998, 1997 and 1996, the Company had no loans
which were considered impaired.
Certain directors and executive officers of the Company and the Bank
(including family members, affiliates, and companies in which they are principal
owners) had loans outstanding with the Bank in the ordinary course of business.
The amounts were not material for the years ended June 30, 1998 and 1997.
NOTE 5 - PREMISES AND EQUIPMENT - NET
A summary of premises and equipment is as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 529,300 $ 529,300
Bank building and improvements 2,399,476 2,361,987
Furniture and equipment 1,180,697 967,652
- --------------------------------------------------------------------------------------------
4,109,473 3,858,939
Accumulated depreciation (944,568) (730,781)
- --------------------------------------------------------------------------------------------
$3,164,905 $3,128,158
============================================================================================
</TABLE>
NOTE 6 - DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------
Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 7,010,473 5.84% $ 3,965,790 3.86%
Now accounts and MMDAs 4,434,858 3.70 3,848,395 3.74
Passbook and statement savings 19,334,577 16.11 17,387,602 16.90
Certificates of deposit 89,199,471 74.35 77,660,365 75.50
- -----------------------------------------------------------------------------------------------------------
$119,979,379 100.00% $102,862,152 100.00%
===========================================================================================================
</TABLE>
<PAGE>
At June 30, 1998, the scheduled maturities of all certificates of deposit are
as follows by fiscal year-end:
<TABLE>
<CAPTION>
<S> <C>
1999 $65,436,775
2000 17,718,016
2001 1,944,699
2002 1,953,959
2003 2,096,984
Thereafter 49,038
- --------------------------------------------------------------------------------
$89,199,471
================================================================================
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
As of June 30, 1998 and 1997, the Bank had time deposit accounts with
balances of $100,000 or more of $17,183,000 and $14,120,000. Related party
deposits were $2,095,000 and $974,000 at June 30, 1998 and 1997.
On September 30, 1996, as part of the omnibus appropriations package signed
by President Clinton, the government mandated a special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The
one-time, special SAIF assessment amounted to $.657 for every $100 of
SAIF-insured deposits as of March 31, 1995. The FDIC notified the Bank that the
Bank's special assessment was $551,000 which, after taxes, reduced the Company's
net income by $364,000 or $.14 per share for the year ended June 30, 1997. The
Bank's deposit premiums, which were $.23 for every $100 of assessable deposits
in 1996, were reduced to $.064 for every $100 of assessable deposits beginning
January 1, 1997.
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank (FHLB) of Indianapolis,
collateralized by mortgage loans and securities under a blanket collateral
agreement, consist of the following at June 30:
<TABLE>
<CAPTION>
Rate at
Date Due June 30, 1998 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Putable advances:
January 29, 2003 5.23% $10,000,000 --
January 16, 2008 5.33 10,000,000 --
April 30, 2008 5.23 2,000,000 --
Adjustable rate advances:
August 4, 1997 - reprices quarterly -- $ 3,000,000
September 22, 1997 - reprices quarterly -- 1,000,000
October 27, 1997 - reprices daily -- 1,000,000
October 30, 1997 - reprices monthly -- 2,000,000
November 3, 1997 - reprices daily -- 1,000,000
December 15, 1997 - reprices quarterly -- 1,000,000
December 18, 1997 - reprices quarterly -- 1,000,000
December 22, 1997 - reprices daily -- 3,000,000
December 24, 1997 - reprices quarterly -- 2,000,000
March 27, 1998 - reprices quarterly -- 2,000,000
April 30, 1998 - reprices quarterly -- 1,000,000
September 14, 1998 - reprices daily 5.75 1,000,000 --
September 16, 1998 - reprices daily 5.75 1,000,000 --
October 13, 1998 - reprices daily 5.75 1,000,000 --
October 30, 1998 - reprices monthly 5.81 4,000,000 4,000,000
November 16, 1998 - reprices daily 5.75 1,000,000 --
December 28, 1998 - reprices daily 5.75 1,000,000 --
April 30, 1999 - reprices quarterly 5.69 1,000,000 --
October 30, 1999 - reprices monthly 5.81 5,000,000 5,000,000
August 26, 2001 - reprices monthly -- 2,000,000
- -------------------------------------------------------------------------------------------------------------
$37,000,000 $29,000,000
=============================================================================================================
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued)
For the putable advances, the FHLB has the option to convert the advance to
an adjustable rate beginning one, two or five years after the purchase date,
depending on the advance, and quarterly thereafter.
Maturities of borrowings outstanding at June 30, 1998 are as follows for the
next 5 years:
1999 $10,000,000
2000 5,000,000
2001 --
2002 --
2003 10,000,000
Thereafter 12,000,000
- --------------------------------------------------------------------------------
$37,000,000
================================================================================
Prepayment of certain remaining advances is permitted only upon the Bank's
termination of its FHLB membership, while others are subject to prepayment
penalties under the provisions and conditions of the credit policy of the FHLB.
The Bank did not incur prepayment penalties for the years ended June 30, 1998
and 1997.
NOTE 8 - FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended June 30 consists
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $401,804 $530,231 $496,158
Deferred income tax expense (benefit) 51,451 (51,507) 126,242
- ---------------------------------------------------------------------------------------------
$453,255 $478,724 $622,400
=============================================================================================
</TABLE>
<PAGE>
Deferred tax assets and liabilities at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan fees -- $ 20,120
Accrued expenses $ 15,300 16,116
Management Recognition Plan 34,054 34,200
Loans marked-to-market 89,422 27,736
Other 31,084 3,067
- ---------------------------------------------------------------------------------------------
169,860 101,239
Deferred tax liabilities
Loan fees 81,172 --
Bad debt allowance 162,555 188,779
FHLB stock dividend 49,116 49,116
Fixed assets 114,060 93,917
Mortgage servicing rights 95,495 50,514
Unrealized gain on securities available for sale 2,644 6,548
- ---------------------------------------------------------------------------------------------
505,042 388,874
- ---------------------------------------------------------------------------------------------
Net deferred tax liability $(335,182) $(287,635)
=============================================================================================
</TABLE>
31
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL INCOME TAXES (Continued)
No valuation allowance was provided on deferred tax assets.
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Years ended
---------------- June 30, ------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Tax expense at statutory rate $436,432 $476,528 $622,502
Tax exempt interest -- -- (639)
Stock compensation plans 16,982 3,150 2,669
Other (159) (954) (2,132)
- ---------------------------------------------------------------------------------------------
$453,255 $478,724 $622,400
=============================================================================================
Effective rate 35% 34% 34%
</TABLE>
Differences in the deduction for bad debts for tax and financial statement
purposes after 1988 are included in deferred taxes. For years prior to 1988, the
Bank had determined taxable income after deducting a provision for bad debts in
excess of such provisions recorded in the financial statements. Accordingly,
retained earnings at June 30, 1998 and 1997 includes approximately $3,364,000 on
which no provision for federal income taxes has been made. The amount of
unrecorded deferred taxes is $1,144,000. If this portion of retained earnings is
used for any purpose other than to absorb bad debts, the amount used will be
added to future taxable income.
The Company files consolidated federal income tax returns on a fiscal year
basis. Prior to July 1, 1997, if certain conditions were met in determining
taxable income, the Bank was allowed a special bad debt deduction based on a
percentage of taxable income. Tax legislation passed in August 1996 now requires
the Bank to deduct a provision for bad debts for tax purposes based on actual
loss experience and recapture the excess bad debt reserve accumulated in tax
years after 1987. The related amount of deferred tax liability which must be
recaptured is approximately $265,572 and is payable over a six-year period
beginning no later than the year ending June 30, 1999.
<PAGE>
NOTE 9 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended June 30
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488
- -------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .35 $ .36 $ .39
=============================================================================================================
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted earnings per share
Net income available to common shareholders $ 830,368 $ 922,829 $1,208,488
- --------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,370,243 2,572,335 3,096,934
Add: dilutive effects of assumed exercise of
stock options and unvested MRP's
Stock options 107,670 10,827 269
MRP shares 10,413 -- --
- --------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive
potential common shares outstanding 2,488,326 2,583,162 3,097,203
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .33 $ .36 $ .39
==============================================================================================================
</TABLE>
Stock options for 26,026 and 78,113 shares of common stock were not
considered in the computation of diluted earnings per share for the years ended
June 30, 1997 and 1996, respectively, as they were antidilutive. All share and
per share amounts have been retroactively adjusted for stock splits.
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit, loans in process and letters of credit. The Company's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument is represented by the contractual amount of those instruments. The
Company follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements.
The contract amounts of these financial instruments are as follows at June
30:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to make loans $7,035,000 $3,201,000
Unused lines of credit 11,172,000 6,208,000
Loans in process 8,248,000 7,169,000
Letters of credit 278,000 --
</TABLE>
<PAGE>
Approximately 61% and 33% of commitments to make loans and to fund loans in
process were made at fixed rates as of June 30, 1998 and 1997. Rate ranges for
these fixed rate commitments were 7.0% to 9.125% and 7.625% to 12.25% as of June
30, 1998 and 1997. Lines of credit are issued at current market rates.
The Company does not anticipate any losses as a result of these commitments.
Collateral obtained upon exercise of the commitment is determined using the
Bank's credit evaluation of the borrower, and may include real estate, business
assets and other items. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future cash commitments.
33
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
The Company is a defendant in a lawsuit. The complaint alleges that the
Company has been engaged in the unauthorized practice of law as the result of
charging a fee for preparing loan documents. The complaint seeks class action
certification, restitution of all fees paid for the last six years, interest,
attorney fees and other costs. Management believes after consultation with legal
counsel, that the complaint is wholly without merit, and intends to vigorously
defend against this suit and has filed a motion for summary judgment and
dismissal.
The Company and the Bank are also subject to certain other legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position of the Company.
The Company has entered into employment agreements with four of its officers.
Under the terms of those agreements, certain events leading to separation from
the Company could result in cash payments aggregating up to approximately
$728,000 if termination occurred in calendar 1999.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company participates in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan. Substantially all employees are
eligible for participation in the Plan. The benefits are based on a percentage
of the participant's career average salary for each year of service. An employee
becomes fully vested upon completion of five years of qualifying service. The
plan is currently overfunded and did not require contributions or charges
against income for the years ended June 30, 1998, 1997 and 1996. Specific plan
assets and accumulated benefit information for the Company's portion of the Fund
is not available. Under the Employee Retirement Income Security Act (ERISA), a
contributor to a multi-employer pension plan may be liable in the event of
complete or partial withdrawal for the benefit payments guaranteed under ERISA.
Since the plan is overfunded, no liability for contributions is necessary.
The Company maintains a qualified 401(k) plan covering substantially all
employees. Employees who are 18 years and older and who have completed 1,000
hours of service in a 12 consecutive-month period are eligible. Employees may
elect to contribute to the plan from 1% to 15% of their salary subject to
statutory limitations. The Company makes matching contributions equal to 25% of
the first 3% of employee contributions. Although not required, the Company also
has the option to make an additional, nonelective contribution to the plan.
Beginning after 2 years of service, employees become vested in the Company's
contributions at the rate of 20% per year, with 100% vesting occurring after 6
years of service. The Company's contribution for fiscal 1998, 1997 and 1996 was
approximately $9,600, $5,200 and $3,000, respectively.
<PAGE>
NOTE 12 - STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan (ESOP)
An ESOP was established for the benefit of substantially all employees. The
ESOP borrowed $1,296,048 from the Company and used those funds to acquire
243,009 shares of the Company's stock at $5.33 per share.
Shares issued to the ESOP are committed to be released based on the number of
unallocated shares held immediately before release for the current plan year
multiplied by a fraction. The numerator of the fraction is the amount of
quarterly principal and interest paid. The denominator of the fraction is the
sum of the numerator plus the principal and interest to be paid for all future
periods. The loan is secured by shares purchased with the loan
34
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
proceeds and will be repaid by the ESOP with funds from the Company's
contributions to the ESOP and earnings on ESOP assets. Principal and interest
payments are scheduled to occur in quarterly amounts of $45,326 over a ten-year
period. The balance of the loan was $968,684 at June 30, 1998. An employee
becomes fully vested upon completion of seven years of qualifying service. Upon
withdrawal from the plan, participants are entitled to a distribution in cash or
Company stock, or both.
During 1998, 1997 and 1996, 24,300 shares of stock with an average fair value
of $14.26 per share in 1998, $7.81 per share in 1997 and $6.76 per share in 1996
were committed to be released. Distributions of 4,802 and 1,295 shares were made
to participants during the years ended June 30, 1998 and 1997. ESOP compensation
expense for the years ended June 30, 1998, 1997 and 1996 was $346,528, $189,844,
and $164,279. Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Allocated to participants 72,878 53,380
Unallocated 164,034 188,334
- ------------------------------------------------------------------------------
Total ESOP shares 236,912 241,714
- ------------------------------------------------------------------------------
Fair value of unallocated shares $2,316,980 $1,695,006
==============================================================================
</TABLE>
All share and per share amounts have been retroactively adjusted for stock
splits.
Stock Option Plan (SOP) and Management Recognition Plan (MRP)
Employee and director Stock Option Plans (SOPs) and officer and director
Management Recognition Plans (MRPs) were authorized by the shareholders at the
October 25, 1995 annual meeting. The MRPs are restricted stock award plans. The
employee SOP and the officers' MRP are administered by a committee of directors
of the Company, while grants under the directors' SOP and the directors' MRP are
pursuant to formulas set forth in the plans. MRP shares are granted at the
closing market price of the Company's stock on the date of grant and vest in
five equal annual installments from the date of grant. SOP options are granted
at the average of the high and low market prices of the Company's stock on the
date of grant and vest in five equal annual installments and expire ten years
from the date of grant.
35
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
<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 104,146 243,009 41,657 97,206
Balance outstanding
July 1, 1995
Grant 10/25/95 78,113 $ 6.96 37,488 $6.67
Grant 10/26/95 73,875 $6.67
Grant 11/1/95 36,000 $6.63
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1996 78,113 6.96 36,000 6.63 37,488 6.67 73,875 6.67
Granted 7/8/96 21,450 7.33
Granted 10/25/96 26,026 7.25 4,169 7.25
Granted 12/20/96 88,350 7.17
Forfeited (6,150) 7.08 (1,555) 6.67
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1997 104,139 7.03 139,650 7.06 41,657 6.73 72,320 6.67
Granted 9/2/97 69,000 11.375
Exercised (1,000) 7.28
Forfeited (3,150) 7.36
- --------------------------------------------------------------------------------------------------------------
Balance outstanding
June 30, 1998 104,139 7.03 204,500 8.51 41,657 6.73 72,320 6.67
==============================================================================================================
Options/shares exercisable
(vested) 36,450 34,450 15,827 28,928
==============================================================================================================
Options/shares available for
future grant 7 37,509 0 24,886
==============================================================================================================
</TABLE>
During the years ended June 30, 1998, 1997 and 1996, $152,400, $149,918, and
$99,120 was charged to compensation expense for the MRPs.
The following pro forma information presents net income and earnings per
share had the fair value method of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123) been used to measure compensation cost for stock options
granted during fiscal 1998, 1997 and 1996. No compensation cost was actually
recognized for stock options for the years ended June 30, 1998, 1997 and 1996.
36
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Contiued)
<TABLE>
<CAPTION>
Years ending
---------------- June 30, ----------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 830,368 $922,829 $1,208,488
Pro forma net income 716,649 885,286 1,175,228
Basic earnings per share as reported .35 .36 .39
Pro forma basic earnings per share .30 .33 .38
Diluted earnings per share as reported .33 .36 .39
Pro forma diluted earnings per share .29 .33 .38
Weighted-average grant-date fair value per option 2.07 .96 .92
</TABLE>
In future years, the pro forma effect of not applying SFAS No. 123 is
expected to increase as additional options are granted.
The fair value of options granted during the years ended June 30, 1998, 1997
and 1996, respectively, is estimated using the following weighted-average
information: risk-free interest rate of 6.22%, 6%, and 5.75%, expected life of 5
years, expected monthly volatility of stock price of 7.1%, 6.3% and 6.3%, and
expected dividends of 1.90%, 3% and 2.49% per year.
At June 30, 1998, options outstanding were as follows:
Number of options 308,639
Range of exercise price $6.63 - $11.375
Weighted-average exercise price $8.00
Weighted-average remaining option life 8.13 years
For options now exercisable: number 70,900
Weighted-average exercise price $6.98
All share and per share amounts have been retroactively adjusted for stock
splits.
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Effective December 29, 1997, Bank West, the Company's wholly-owned
subsidiary, completed its conversion to a Michigan chartered savings bank. As a
state chartered savings bank, Bank West's primary regulatory agencies are the
Financial Institutions Bureau of the State of Michigan and the Federal Deposit
Insurance Corporation.
<PAGE>
The Bank is subject to regulatory capital requirements administered by these
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
37
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<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>
As a result of the Bank's charter change, the June 30, 1998 and 1997
regulatory capital levels are based upon the Federal Deposit Insurance
Corporation and Office of Thrift Supervision guidelines, respectively.
At year end, actual capital levels (dollars in millions) and minimum required
levels were:
<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>
1998
Total capital (to risk weighted assets) $20.1 20.9% $7.7 8.0% $ 9.6 10.0%
Tier 1 capital (to risk weighted assets) 19.8 20.6 3.9 4.0 5.8 6.0
Tier 1 capital (to average total assets) 19.8 11.3 7.0 4.0 8.8 5.0
1997
Total capital (to risk weighted assets) $18.7 23.4% $6.4 8.0% $ 8.0 10.0%
Tier 1 (core) capital (to risk weighted
assets) 18.4 23.1 3.2 4.0 4.8 6.0
Tier 1 (core) capital (to adjusted total
assets) 18.4 12.2 4.5 3.0 7.6 5.0
Tangible capital (to adjusted total
assets) 18.4 12.2 2.3 1.5 N/A
</TABLE>
<PAGE>
At June 30, 1998 and 1997, the Bank was categorized as well capitalized.
During fiscal 1997, the Bank made a capital distribution to the Company in
the amount of $2,500,000. This distribution was made primarily to allow the
Company to make stock repurchase transactions discussed in Note 14.
38
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
At the time of conversion to a stock association, the Bank established a
liquidation account with an initial balance of $11,150,000, which is equal to
its total net worth as of the date of the latest balance sheet appearing in the
final conversion prospectus. The liquidation account is maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the conversion. The liquidation account is reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends a bank can pay to its holding company. Under the most
restrictive of these dividend limitations, at June 30, 1998, approximately
$10,963,000 was available to the Bank for the payment of dividends to the
holding company without prior regulatory approval.
NOTE 14 - STOCK REPURCHASE PROGRAMS
During fiscal 1998, the Company repurchased 7,500 shares of its common stock
after receiving approval from its federal regulator to repurchase up to 5%, or
133,500 shares of the Company's common stock. The shares were repurchased at an
average price of $14.125 and remain available for general corporate purposes,
including issuance in connection with stock-based compensation plans.
39
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Bank West Financial Corporation is as
follows at June 30:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 284,085 $ 70,523
Interest-bearing time deposits -- 99,000
Trading securities -- 2,921,251
Securities available for sale 2,752,325 --
Federal income tax receivable 149,171 --
Loan receivable from Employee
Stock Ownership Plan 968,684 1,077,382
Investment in subsidiary bank 19,857,357 18,451,967
Accrued interest receivable 894 1,122
Other assets 12,670 5,540
- ---------------------------------------------------------------------------------------------
Total assets $24,025,186 $22,626,785
=============================================================================================
LIABILITIES
Note payable to subsidiary $ 750,000 --
Deferred taxes 464 --
Other liabilities 35 $ 34,476
SHAREHOLDERS' EQUITY 23,274,687 22,592,309
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $24,025,186 $22,626,785
=============================================================================================
</TABLE>
40
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME,
for the years:
------------------ June 30, --------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Securities $ 150,447 $ 55,455 $ 253,122
Loan to Employee Stock Ownership Plan 72,605 79,892 86,691
Other interest-bearing deposits 18,595 53,732 164,328
Dividends from subsidiary bank -- 2,500,000 --
- --------------------------------------------------------------------------------------------------------
241,647 2,689,079 504,141
Interest expense 99,850 11,794 --
- --------------------------------------------------------------------------------------------------------
Net interest income 141,797 2,677,285 504,141
Other income
Net gain on trading securities 200,148 731,156 366,465
Net gain (loss) on securities
available for sale (259,730) (14,995) (7,725)
- --------------------------------------------------------------------------------------------------------
(59,582) 716,161 358,740
Operating expenses 152,108 88,468 90,521
- --------------------------------------------------------------------------------------------------------
Income before federal income taxes and
equity in undistributed earnings of
subsidiary bank (69,893) 3,304,978 772,360
Federal income tax expense (benefit) (23,745) 273,700 262,500
- --------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiary bank (46,148) 3,031,278 509,860
Equity in undistributed (excess distributed)
earnings of subsidiary Bank 876,516 (2,108,449) 698,628
- --------------------------------------------------------------------------------------------------------
Net income $ 830,368 $ 922,829 $1,208,488
========================================================================================================
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASHFLOWS,
for the years:
-------------------- June 30, --------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 830,368 $ 922,829 $ 1,208,488
Adjustments to reconcile net income to
cash provided by operations
Equity in undistributed (excess distributed)
earnings of subsidiary Bank (876,516) 2,108,449 (698,628)
Purchase of trading securities (2,530,635) (5,428,775) (2,224,537)
Proceeds from sale of trading securities 4,486,385 3,947,118 1,882,564
(Gain) loss on securities 59,582 (716,161) (358,740)
Net accretion of securities -- -- (1,411)
Change in
Accrued interest receivable 228 18,611 64,357
Other assets (156,302) 30,089 21,884
Other liabilities (34,441) 22,495 (55,739)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 1,778,669 904,655 (161,762)
Cash flows from investing activities
Purchases of securities available for sale (1,904,438) -- (2,000,000)
Proceeds from sales of securities available
for sale 59,399 2,481,875 1,091,200
Proceeds from maturities and calls of
securities available for sale -- -- 3,782,408
Principal reduction on ESOP note receivable 108,698 101,410 94,611
Contribution to subsidiary Bank (38,426) (37,921) (42,527)
Net (increase) decrease in interest-bearing
time deposits 99,000 99,000 1,089,000
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,675,767) 2,644,364 4,014,692
Cash flows from financing activities
Proceeds of loan from subsidiary Bank 2,450,000 1,300,000 --
Repayment of loan to subsidiary Bank (1,700,000) (1,300,000) --
Dividends paid on common stock (540,685) (506,959) (603,382)
Repurchase of common stock (105,938) (5,193,866) (2,049,061)
Issuance of shares upon exercise of
stock options 7,283 -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net cash from financing activities 110,660 (5,700,825) (2,652,443)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 213,562 (2,151,806) 1,200,487
Cash and cash equivalents at beginning
of period 70,523 2,222,329 1,021,842
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 284,085 $ 70,523 $ 2,222,329
==========================================================================================================
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Supplemental disclosure of cash flow information:
During May of 1998, securities with a carrying value and fair value of
$1,165,649 were transferred from trading securities to securities available for
sale.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and cash equivalents, Federal Home Loan Bank stock, demand, savings and
money market deposits, accrued interest, the allowance for loan losses, and
variable rate loans or deposits that reprice frequently and fully. Securities
fair values are based on quoted market prices or, if no quotes are available, on
the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, the fair value is estimated by discounted cash
flow analysis using current market rates for the estimated life and credit risk.
Fair value of loans held for sale is based on market estimates. The fair value
of Federal Home Loan Bank borrowings is based on currently available rates for
similar financing. The fair value of off-balance-sheet items is based on the
fees or costs that would currently be charged to enter into or terminate such
arrangements. The fair value of off-balance-sheet items was not material for
this presentation.
The estimated fair values of the Company's financial instruments (in
thousands) are as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $4,206 $4,206 $3,673 $3,673
Interest-bearing time deposits -- -- 99 99
Securities 43,252 43,247 32,476 32,474
Loans, net 118,906 119,380 111,530 113,366
Loans held for sale 8,157 8,298 2,231 2,265
Mortgage servicing rights 281 281 149 149
Federal Home Loan Bank stock 2,100 2,100 1,550 1,550
Accrued interest receivable 879 879 763 763
Financial liabilities
Deposits 119,979 120,229 102,862 102,733
Federal Home Loan Bank borrowings 37,000 36,802 29,000 29,000
Accrued interest payable 253 253 202 202
Advance payments by borrowers
for taxes and insurance 513 513 492 492
</TABLE>
43
<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
Harry E. Mika, Retired, formerly Director and Senior
Vice President of Ameribank in Muskegon,
Michigan from 1989 to 1996.
LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
Suite 1200
734 15th Street, N.W.
Washington, D.C. 20005
<PAGE>
EXECUTIVE OFFICERS
Paul W. Sydloski, President,
Chief Executive Officer
Kevin A. Twardy, Vice President,
Chief Financial Officer
James A. Koessel, Vice President,
Chief Lending Officer
Laurie S.Adams, Vice President,
Director of RetailBanking
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
400 Riverfront Plaza Building
55 Campau, N.W.
Grand Rapids, Michigan 49502
44
<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, 1998 were
2,623,629. As of September 26, 1998, the Company had approximately 631
shareholders of record. The high and low bid quotations for the common stock as
reported on the Nasdaq, as well as dividends declared per share, were as
follows:
Quarter Ended High Low Dividends
- --------------------------------------------------------------------------------
September 30, 1996 $ 8.500 $ 7.000 $.04
December 31, 1996 7.667 6.833 .05
March 31, 1997 8.083 7.000 .05
June 30, 1997 9.500 7.417 .05
September 30, 1997 12.667 9.000 .05
December 31, 1997 17.625 12.583 .05
March 31, 1998 16.250 12.750 .06
June 30, 1998 14.750 13.500 .06
The information set forth in the table above was provided by The Nasdaq Stock
Market. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
All per share amounts have been adjusted for stock splits.
INVESTOR INFORMATION
A copy of Bank West Financial Corporation's Annual Report on Form 10-K and a
list of the exhibits thereto, as filed with the Securities and Exchange
Commission, may be obtained without charge upon written request to Kevin A.
Twardy, Chief Financial Officer, Bank West Financial Corporation, 2185 Three
Mile Road, N.W., Grand Rapids, MI 49544, or by calling (616) 785-3400.
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 21, 1998, except for Note 2 for which the
date is September 18, 1998, 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, 1998.
/s/CROWE CHIZEK AND COMPANY LLP
-------------------------------
CROWE CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,408,476
<INT-BEARING-DEPOSITS> 1,797,063
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,167,697
<INVESTMENTS-CARRYING> 11,084,361
<INVESTMENTS-MARKET> 11,079,178
<LOANS> 118,905,611
<ALLOWANCE> 289,696
<TOTAL-ASSETS> 181,468,852
<DEPOSITS> 119,979,379
<SHORT-TERM> 10,000,000
<LIABILITIES-OTHER> 1,214,786
<LONG-TERM> 27,000,000
0
0
<COMMON> 26,237
<OTHER-SE> 23,248,450
<TOTAL-LIABILITIES-AND-EQUITY> 181,468,852
<INTEREST-LOAN> 9,795,291
<INTEREST-INVEST> 2,446,042
<INTEREST-OTHER> 307,977
<INTEREST-TOTAL> 12,549,310
<INTEREST-DEPOSIT> 5,601,870
<INTEREST-EXPENSE> 7,612,335
<INTEREST-INCOME-NET> 4,936,975
<LOAN-LOSSES> 81,000
<SECURITIES-GAINS> (1,742)
<EXPENSE-OTHER> 4,584,691
<INCOME-PRETAX> 1,283,623
<INCOME-PRE-EXTRAORDINARY> 1,283,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830,368
<EPS-PRIMARY> .35
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.74
<LOANS-NON> 841,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 225,862
<CHARGE-OFFS> 17,166
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 289,696
<ALLOWANCE-DOMESTIC> 255,696
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 34,000
</TABLE>
