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SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File No. 0-23817
NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2900888
-------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Liberty and Second Streets, Warren, Pennsylvania 16365
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(Address of Principal Executive Offices) Zip Code
(814) 726-2140
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
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. [ ].
As of June 30, 2000, there were issued and outstanding 12,136,594 shares of
the Registrant's Common Stock, not including 35,224,175 shares held by Northwest
Bancorp, M.H.C., the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on June 30, 2000, as
reported by the Nasdaq National Market, was approximately $83.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the November 2000 Annual Meeting of Stockholders (Part
III).
PART I
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ITEM 1. BUSINESS
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General
Northwest Bancorp, Inc.
Northwest Bancorp, Inc. (the "Company") is a Pennsylvania corporation that
was formed to become the stock holding company of Northwest Savings Bank (the
"Bank") in a transaction (the "Two-Tier Reorganization") that was approved by
the Bank's stockholders on December 10, 1997, and completed on February 17,
1998. In the Two-Tier Reorganization, each share of the Bank's common stock was
converted into and became a share of common stock of the Company, par value
$0.10 per share (the "Common Stock"), and the Bank became a wholly- owned
subsidiary of the Company. Northwest Bancorp, MHC (the "Mutual Holding
Company"), which owned a majority of the Bank's outstanding shares of common
stock immediately prior to completion of the Two-Tier Reorganization, became the
owner of the same percentage of the outstanding shares of Common Stock of the
Company immediately following the completion of the Two-Tier Reorganization. As
of June 30, 2000, the sole activity of the Company was the ownership of all of
the issued and outstanding common stock of the Bank and of Jamestown Savings
Bank ("Jamestown"). Jamestown was formed in November of 1995 as a de novo New
York-chartered savings bank headquartered in Jamestown, New York.
As of June 30, 2000, the Company, through the Bank and Jamestown, operated
106 community banking offices throughout its market area in northwest, southwest
and central Pennsylvania, southwestern New York, and eastern Ohio. The Company,
through the Bank and its wholly owned subsidiaries, also operates 42 consumer
lending offices throughout Pennsylvania and one consumer lending office in New
York. The Company has focused its lending activities primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to four-
family residences. The Company, directly or through its subsidiaries, also
emphasizes the origination of consumer loans, including home equity, second
mortgage, education and other consumer loans. To a lesser extent, the Company
also originates multifamily residential and commercial real estate loans and
commercial business loans.
The Company's principal sources of funds are deposits, borrowed funds and
the principal and interest payments on loans and marketable securities. The
principal source of income is interest received from loans and marketable
securities. The Company's principal expenses are the interest paid on deposits
and the cost of employee compensation and benefits.
The Company's principal executive office is located at Liberty and Second
Streets, Warren, Pennsylvania, and its telephone number at that address is
(814)726-2140.
Northwest Savings Bank
The Bank is a Pennsylvania-chartered stock savings bank headquartered in
Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through a subsidiary, consumer finance services. The Bank's mutual savings
bank predecessor was founded in 1896. The Bank in its current stock form was
established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure. At the time of the Reorganization, the Bank issued a majority of its
to-be outstanding shares of common stock to the Mutual Holding Company (which
was formed in connection with the Reorganization) and a minority of its to-be
outstanding shares to stockholders other than the Mutual Holding Company.
The Bank's principal executive office is located at Liberty and Second
Streets, Warren, Pennsylvania, and its telephone number at that address is
(814)726-2140.
2
Jamestown Savings Bank
Jamestown began operations on November 9, 1995 as a de novo New York
state-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of 761,866
shares of common stock, 400,000 shares, 52.5% of which were purchased by the
Mutual Holding Company. The Mutual Holding Company continued to accumulate
additional ownership in Jamestown and in February 1998 sold its entire ownership
position consisting of 490,050 shares to the Company. On July 8, 1998 the
Company conducted a tender offer for the remaining shares of Jamestown, and
acquired 100% of the outstanding shares of Jamestown as of July 31, 1998.
As of June 30, 2000, Jamestown had four offices in Southwestern New York.
Market Area
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Company is headquartered in Warren,
Pennsylvania which is located in the northwestern region of Pennsylvania, and
the Company has its highest concentration of deposits and loans in the portion
of its office network located in northwestern Pennsylvania. Over the past eight
years the Company has expanded, primarily through acquisitions, into the
southwestern and central regions of Pennsylvania. As of June 30, 2000, the
Company operated in Pennsylvania 98 community banking offices, 42 consumer
finance offices, located in the following counties: Allegheny, Armstrong,
Bedford, Berks, Blair, Butler, Cambria, Centre, Clarion, Clearfield, Clinton,
Crawford, Cumberland, Dauphin, Elk, Erie, Fayette, Forest, Huntingdon, Indiana,
Jefferson, Lancaster, Lawrence, Lebanon, Luzerne, Lycoming, McKean, Mercer,
Mifflin, Schuylkill, Venango, Warren, Washington, Westmoreland and York. In
addition, the Company operated community banking offices in Ashtabula County,
Ohio, Geauga County, Ohio and Lake County, Ohio. Through Jamestown, the Company
operated three community banking offices in Chautauqua County, New York and one
community banking office in Cattaraugus County, New York. The Company, through
the Bank and its subsidiaries, also operates one consumer finance office in
southwestern New York.
Lending Activities
General. Historically, the principal lending activity of the Company has
been the origination, for retention in its portfolio, of fixed-rate and, to a
lesser extent, adjustable-rate mortgage loans collateralized by one- to four-
family residential real estate located in its market area. To a lesser extent,
the Company also originates loans collateralized by multifamily residential and
commercial real estate, construction loans, commercial business loans and
consumer loans.
In an effort to manage interest rate risk, the Company has sought to make
its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The Company also purchases mortgage-backed securities
that generally have adjustable interest rates. Because the Company also
originates a substantial amount of long-term fixed-rate mortgage loans
collateralized by one- to four-family residential real estate, when possible,
such loans are originated and underwritten according to standards that allow the
Company to sell them in the secondary mortgage market for purposes of managing
interest-rate risk and liquidity. The Company currently sells in the secondary
market a limited amount of fixed-rate residential mortgage loans with maturities
of more than 15 years, and retains all adjustable-rate mortgage loans and
fixed-rate residential mortgage loans with maturities of 15 years or less. The
Company is primarily a portfolio lender and at any one time the Company holds
only a nominal amount of loans identified as available-for-sale. The Company
retains servicing on the mortgage loans it sells and realizes monthly service
fee income. The Company retains in its portfolio all consumer loans, multifamily
residential and commercial real estate loans, and commercial business loans that
it originates.
3
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
At June 30,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate:
One- to four-family (1) $ 1,836,154 70.9% $ 1,718,002 73.8% $ 1,368,736 69.4% $ 1,096,315 68.8% $ 1,008,288 70.8%
Multifamily and
commercial ......... 192,897 7.5% 152,466 6.6 128,831 6.5 100,912 6.3 97,612 6.8
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total real estate
loans ............ 2,029,051 78.4% 1,870,468 80.4 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Consumer:
Home equity and home
improvement ........ 44,848 1.7% 39,067 1.7 33,963 1.7 37,607 2.4 38,146 2.7
Education loans ....... 70,619 2.7% 64,341 2.8 59,791 3.0 53,542 3.3 47,842 3.4
Loans on savings
accounts ........... 8,052 0.3% 6,263 0.3 6,898 0.4 7,176 0.5 6,543 0.5
Other (2) ............. 387,423 15.0% 305,812 13.1 252,443 12.8 212,472 13.3 159,532 11.2
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total consumer loans
(3) .............. 510,942 19.7% 415,483 17.9 353,095 17.9 310,797 19.5 252,063 17.7
Commercial business ..... 49,992 1.9% 40,039 1.7 123,188 6.2 86,087 5.4 67,045 4.7
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total loans
receivable, gross 2,589,985 100.0% 2,325,990 100.0% 1,973,850 100.0% 1,594,111 100.0% 1,425,008 100.0%
===== ===== ===== ===== =====
Deferred loan fees ...... (1,829) (923) (1,357) (2,384) (3,495)
Undisbursed loan proceeds (25,266) (23,056) (49,435) (41,618) (33,428)
Allowance for loan losses
(real estate loans) ... (11,334) (10,619) (8,103) (6,898) (9,133)
Allowance for loan losses
(other loans) ......... (6,926) (6,154) (7,666) (6,713) (3,997)
----------- ----------- ----------- ----------- -----------
Total loans
receivable, net .. $ 2,544,630 $ 2,285,238 $ 1,907,289 $ 1,536,498 $ 1,374,955
=========== =========== =========== =========== ===========
- ---------------------------------------
(1) Includes $56.8 million of loans originated and held by the Bank's
subsidiaries at June 30, 2000.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $75.4 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 2000.
Fixed- and Adjustable-Rate Loans. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed
and adjustable-rate loans at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- ----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
Adjustable............... $ 108,628 4.2% $ 99,029 4.3% $ 55,493 2.8% $ 78,568 4.9% $ 94,426 6.6%
Fixed.................... 1,920,423 74.2 1,771,439 76.1 1,442,074 73.1 1,118,659 70.2 1,011,474 71.0
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans. 2,029,051 78.4 1,870,468 80.4 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Other loans:
Adjustable............... 151,177 5.8 132,873 5.7 117,100 5.9 117,301 7.4 114,943 8.1
Fixed.................... 409,757 15.8 322,649 13.9 359,183 18.2 279,583 17.5 204,165 14.3
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans....... 560,934 21.6 455,522 19.6 476,283 24.1 396,884 24.9 319,108 22.4
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$2,589,985 100.0% $2,325,990 100.0% $1,973,850 100.0% $1,594,111 100.0% $1,425,008 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
4
Loan Maturity and Repricing Schedule. The following table sets forth the
maturity or period of repricing of the Company's loan portfolio at June 30,
2000. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest rates are next
scheduled to adjust rather than in which they contractually mature, and fixed-
rate loans are included in the period in which the final contractual repayment
is due.
Beyond
Within 1-2 2-3 3-5 5
1 Year Years Years Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential ......... $ 121,520 $ 77,842 $ 84,113 $ 171,500 $1,381,179 $1,836,154
Multifamily and commercial .............. 43,149 17,354 23,111 39,024 70,259 192,897
Consumer loans ........................... 192,782 65,184 53,522 122,650 76,804 510,942
Commercial business loans ................ 26,708 7,073 4,003 8,354 3,854 49,992
---------- ---------- ---------- ---------- ---------- ----------
Total loans .......................... $ 384,159 $ 167,453 $ 164,749 $ 341,528 $1,532,096 $2,589,985
========== ========== ========== ========== ========== ==========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
June 30, 2000, the dollar amount of all fixed-rate and adjustable-rate loans due
after June 30, 2001. Adjustable- and floating-rate loans are included in the
period in which they are contractually due.
Fixed Adjustable Total
---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential .......................... $1,703,968 $ 37,475 $1,741,443
Multifamily and commercial ............................... 109,236 69,128 178,364
Consumer ................................................... 318,133 22,583 340,716
Commercial ................................................. 21,222 106,853 128,075
---------- ---------- ----------
Total .................................................... $2,152,559 $ 236,039 $2,388,598
========== ========== ==========
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area.
The Company currently offers one- to four-family residential mortgage loans
with terms typically ranging from 10 to 30 years, with either adjustable or
fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate sensitivity position and loan
products offered by the Company's competitors. Therefore, even when management's
strategy is to increase the originations of adjustable-rate mortgage loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
5
The Company currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one, three and five years, based on changes
in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totalled $38.3 million,
or 1.5% of the Company's gross loan portfolio at June 30, 2000.
The primary purpose of offering adjustable-rate mortgage loans is to make
the Company's loan portfolio more interest rate sensitive. However, as the
interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans may not offer the Company as predictable cash flows
as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed-rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are generally performed by
the Company's in-house appraisal staff. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2000, the Company's portfolio of loans serviced by others totaled $2.0 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $1.836 billion of one- to four-family residential
real estate loans are $13.3 million, or 0.51% of the Company's total loan
portfolio, of construction loans and land loans. The Company offers fixed- and
adjustable-rate residential construction loans primarily for the construction of
owner-occupied one- to four- family residences in the Company's market area to
builders or to owners who have a contract for construction. Construction loans
are generally structured to become permanent loans, and are originated with
terms of up to 30 years with an allowance of up to one year for construction.
During the construction phase the loans have a fixed interest rate and convert
into either a fixed-rate or an adjustable-rate mortgage loan at the end of the
construction period. Advances are made as construction is completed. In
addition, the Company originates loans within its market area that are secured
by individual unimproved or improved lots. Land loans are currently offered with
fixed- rates for terms of up to 10 years. The maximum loan-to-value ratio for
the Company's land loans is 75% of the appraised value, and the maximum
loan-to-value ratio for the Company's construction loans is 95% of the lower of
cost or appraised value.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
6
Multifamily Residential and Commercial Real Estate Loans. The Company's
multifamily residential real estate loans are secured by multifamily residences,
such as rental properties. The Company's commercial real estate loans are
secured by nonresidential properties such as hotels, church property, and retail
establishments. At June 30, 2000, a significant portion of the Company's
multifamily residential and commercial real estate loans were secured by
properties located within the Company's market area. The Company's largest
multifamily residential real estate loan relationship at June 30, 2000, had a
principal balance of $4.6 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. The Company's largest commercial real
estate loan at June 30, 2000, had a principal balance of $6.9 million and was
collateralized by land and real estate in St. George, Utah. Multifamily
residential and commercial real estate loans are offered with both adjustable
interest rates and fixed interest rates. The terms of each multifamily
residential and commercial real estate loan are negotiated on a case-by- case
basis. The Company generally makes multifamily residential and commercial real
estate loans up to 75% of the appraised value of the property collateralizing
the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
Consumer Loans. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
automobile loans, sales finance loans, unsecured personal loans, credit card
loans, and loans secured by deposit accounts. Consumer loans are offered with
maturities generally of less than ten years. The Company's home equity lines of
credit are secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2000, the
disbursed portion of home equity lines of credit totalled $44.8 million, or
8.8%, of consumer loans, with $84.1 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
Commercial Business Loans. The Company currently offers commercial business
loans to existing customers to finance various activities in the Company's
market area, some of which are secured in part by additional real estate
collateral.
The largest commercial business loan had a principal balance of $3.7
million, and was secured by convenience stores and marketable securities.
7
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and walk-in customers. All of the Company's loan originators are salaried
employees, and the Company does not pay commissions in connection with loan
originations. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an in-house appraiser or an appraiser approved by the Company
appraises the real estate intended to secure the proposed loan. A loan processor
in the Company's loan department checks the loan application file for accuracy
and completeness, and verifies the information provided. The Company has a
formal loan policy which assigns lending limits to the Company's various loan
officers. Also, the Company has a Senior Loan Committee which meets as needed to
review and verify that the assigned lending limits are being followed and to
monitor the Company's lending policies and the Company's loan activity. The
Senior Loan Committee also has lending authority as designated in the Company's
loan policy which is approved by the Board of Directors. Loans exceeding the
limits established for the Senior Loan Committee must be approved by the
Executive Committee of the Board of Directors or by the entire Board of
Directors. The Company's policy is to make no loans either individually or in
the aggregate to one entity in excess of $7.5 million. Fire and casualty
insurance is required at the time the loan is made and throughout the term of
the loan, and upon request of the Company, flood insurance may be required.
After the loan is approved, a loan commitment letter is promptly issued to the
borrower. At June 30, 2000, the Company had commitments to originate $29.9
million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations of loans for the periods indicated.
Years Ended June 30,
-------------------------------------------
2000 1999 1998
----------- ------------ -----------
(In Thousands)
Loans receivable, gross, at beginning of period ..................... $ 2,325,990 $ 1,973,850 $ 1,594,111
Originations ........................................................ 629,104 881,861 802,145
Principal repayments ................................................ (408,837) (512,069) (425,325)
Loan purchases including acquisitions ............................... 46,933 22,558 28,925
Loan sales .......................................................... (1,580) (36,832) (23,167)
Transfer to REO ..................................................... (1,625) (3,378) (2,839)
----------- ----------- -----------
Loans receivable, gross, at end of period ....................... $ 2,589,985 $ 2,325,990 $ 1,973,850
=========== =========== ===========
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives loan origination fees. To the extent that
loans are originated or acquired for the Company's portfolio,
8
Statement of Financial Accounting Standards No. 91 requires that the Company
defer loan origination fees and costs and amortize such amounts as an adjustment
of yield over the life of the loan by use of the level yield method. Fees
deferred under SFAS 91 are recognized into income immediately upon prepayment or
the sale of the related loan. At June 30, 2000 the Company had $1.8 million of
net deferred loan origination fees. Loan origination fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments made
and purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges, credit card fees, and income from REO
operations. The Company recognized fees and service charges of $7.0 million,
$4.5 million and $3.3 million, for the fiscal years ended June 30, 2000, 1999
and 1998, respectively.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). At June 30, 2000, the largest
aggregate amount loaned by the Company to one borrower totaled $6.9 million and
was secured by land and real estate. The Company's second largest lending
relationship totaled $5.1 million and was secured by a personal care facility in
McKean County, Pennsylvania. The Company's third largest lending relationship
totaled $4.6 million and was secured by residential real estate in Allegheny
County, Pennsylvania. The Company's fourth largest lending relationship was for
$4.2 million and was secured by a personal care facility in Erie County,
Pennsylvania. The Company's fifth largest lending relationship totaled $4.1
million and was secured by a real estate and business personal property.
Delinquencies and Classified Assets
Collection Procedures. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
Nonperforming Assets. Loans are reviewed on a regular basis and are placed
on a nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as Real Estate Owned ("REO") until such
time as it is sold. When real estate is acquired through foreclosure or by deed
in lieu of foreclosure, it is recorded at its fair value, less estimated costs
of disposal. If the value of the property is less than the loan, less any
related specific loan loss reserve allocations, the difference is charged
against the allowance for loan losses. Any subsequent write-down of REO is
charged against earnings.
9
Loans Past Due and Nonperforming Assets. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. Effective November 1998, a loan is
considered past due if less than 90% of a contractually-due payment has been
paid. As a result of this change, the Company recorded a significant increase in
the amount of loans which were 90 days or more past due as of June 30, 1999.
When a loan is delinquent 90 days or more, the Company fully reserves all
accrued interest thereon and ceases to accrue interest thereafter. For all the
dates indicated, the Company did not have any material restructured loans within
the meaning of SFAS 15.
At June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ --------- -------- -------- -------
Number Balance
------ -------
(Dollars in Thousands)
Loans past due 30 days to 59 days:
One- to four-family residential loans ............... 59 $ 2,030 $ 3,632 $ 4,842 $ 3,224 $ 3,031
Multifamily and commercial loans .................... 9 806 320 79 -- 423
Consumer loans ...................................... 584 2,108 3,491 3,632 2,477 2,178
Commercial business loans ........................... 6 535 -- 458 183 240
------- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days ............ 658 $ 5,479 $ 7,443 $ 9,011 $ 5,884 $ 5,872
------- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans ............... 60 2,205 $ 4,895 $ 2,386 $ 1,491 $ 1,153
Multifamily and commercial loans .................... 3 152 314 219 -- 21
Consumer loans ...................................... 213 777 957 954 908 1,143
Commercial business loans ........................... 2 47 -- 841 180 148
------- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days ............ 278 $ 3,181 $ 6,166 $ 4,400 $ 2,579 $ 2,465
------- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans ............... 120 $ 5,753 $ 8,623 $ 6,013 $ 6,229 $ 4,913
Multifamily and commercial loans .................... 11 1,923 2,141 390 2,585 2,704
Consumer loans ...................................... 691 2,459 2,202 1,631 1,161 772
Commercial business loans ........................... 3 125 3,150 578 455 1,092
------- ------- ------- ------- ------- -------
Total loans past due 90 days or more ............... 825 $10,260 $16,116 $ 8,612 $10,430 $ 9,481
------- ------- ------- ------- ------- -------
Total loans 30 days or more past due .................. 1,761 $18,920 $29,725 $22,023 $18,893 $17,818
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1) .............. $10,260 $16,116 $ 8,612 $10,430 $ 9,481
Total REO ............................................. 39 2,144 3,383 3,506 4,549 5,771
------- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO .......... 864 $12,404 $19,499 $12,118 $14,979 $15,252
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable ................................ .40% .71% .45% .68% .69%
Total loans 90 days or more past due
and REO to total assets ............................. .36% .63% .47% .72% .81%
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
At June 30, 2000, gross interest income of approximately $1.2 million would
have been recorded on loans accounted for on a nonaccrual basis if the loans had
been current throughout the period. No interest income on nonaccrual loans was
included in income during such period.
Classification of Assets. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the
10
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" so that their continuance as assets without the establishment of
a specific loss reserve is not warranted. Assets that do not expose the savings
institution to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. At June 30, 2000, the Company had 10
loans, with an aggregate principal balance of $10.2 million, designated as
special mention.
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to establish general valuation allowances or "loss
reserves" in an amount deemed prudent by management. General valuation
represents loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a savings bank
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings bank's determination as to
the classification of its assets and the amount of its valuation allowance is
subject to review by its regulatory agencies, which can order the establishment
of additional general or specific loss allowances. The Company regularly reviews
its asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. The Company's largest classified assets
are also the Company's largest nonperforming assets and are discussed above.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At June 30,
------------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
Substandard assets ........................ $21,448 $30,852 $20,138
Doubtful assets ........................... 35 99 --
Loss assets ............................... 20 20 --
------- ------- -------
Total classified assets ................ $21,503 $30,971 $20,138
======= ======= =======
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and current economic conditions. Such evaluation,
which includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters, the estimated net realizable
value or the fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an appropriate loan loss allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuation of
foreclosed real estate. Such agencies may require the Company to recognize
additions to the allowance based on their judgment about information available
to them at the time of their examination. The Company will continue to monitor
and modify the level of its allowance for loan losses in order to maintain it at
a level which management considers appropriate to provide for probable loan
losses.
11
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
Years Ended June 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -----------
(In Thousands)
Net loans receivable .................................... $ 2,544,630 $ 2,285,238 $ 1,907,289 $ 1,536,498 $ 1,374,955
Average loans outstanding ............................... 2,436,260 2,128,480 1,690,412 1,449,807 1,243,758
Allowance for loan losses balance at beginning of period 16,773 15,769 13,611 13,130 11,833
Provision for loan losses ............................... 4,149 3,629 4,072 2,491 1,502
Charge-offs:
Real estate loans: .................................... (289) (514) (132) (383) (141)
Consumer loans ........................................ (2,987) (3,049) (2,384) (2,004) (1,192)
Commercial loans ...................................... -- (101) -- (150) --
----------- ----------- ----------- ----------- -----------
Total charge-offs .................................... (3,276) (3,664) (2,516) (2,537) (1,333)
----------- ----------- ----------- ----------- -----------
Recoveries:
Real estate loans ..................................... 75 367 -- 10 176
Consumer loans ........................................ 481 470 393 363 250
Commercial loans ...................................... 33 61 -- 1 2
----------- ----------- ----------- ----------- -----------
Total recoveries ..................................... 589 898 393 374 428
Acquired through acquisition ............................ 25 141 209 153 700
----------- ----------- ----------- ----------- -----------
Allowance for loan losses balance at end of period .... $ 18,260 $ 16,773 $ 15,769 $ 13,611 $ 13,130
=========== =========== =========== =========== ===========
Allowance for loan losses as a percentage of net
loans receivable ...................................... 0.72% 0.73% 0.83% 0.89% 0.95%
Net loans charged-off as a percentage of average
loans outstanding ..................................... 0.13% 0.17% 0.15% 0.17% 0.11%
Allowance for loan losses as a percentage of
nonperforming loans ................................... 177.97% 104.08% 183.10% 130.50% 138.49%
Allowance for loan losses as a percentage
of nonperforming loans and REO ........................ 147.21% 86.02% 130.13% 90.87% 86.09%
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated.
At June 30,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- ----------------- ----------------- -----------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
------- --------- ------ -------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
Balance at end of period
applicable to:
Real estate loans .............. $11,334 78.4% $10,619 80.4% $ 8,103 75.9% $ 6,898 75.1% $ 9,133 77.6%
Consumer loans ................. 5,976 19.7 5,318 17.9 4,957 17.9 4,499 19.5 3,009 17.7
Commercial business loans ...... 950 1.9 836 1.7 2,709 6.2 2,214 5.4 988 4.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for
loan losses .................... $18,260 100.0% $16,773 100.0% $15,769 100.0% $13,611 100.0% $13,130 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------------------------------------
(1) Represents percentage of loans in each category to total loans.
Investment Activities
The Company's investment portfolio comprises mortgage-backed securities,
investment securities, and cash and cash equivalents. In recent years, the
Company generally has increased both the percentage of its assets held in its
investment securities portfolio, and the percentage of assets held in the
mortgage-backed securities portfolio. This increase in investment securities and
mortgage-backed securities resulted from the Company leveraging its capital by
borrowing funds and investing the proceeds in marketable securities in order to
improve net interest
12
income. In addition, any excess funds resulting from the acquisition of branch
offices, and the related deposits, from other financial institutions is invested
by the Company. Also, the Company maintains a high percentage of its assets in
marketable securities and cash equivalents to assist in asset/liability
management.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Company's loan origination and
other activities.
Purchases, Sales, and Repayments of Investment and Mortgage-Backed
Securities. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
Years Ended June 30,
-------------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
Mortgage-backed securities balance at beginning of period (1) ............. $ 348,257 $ 305,764 $ 291,597
Purchases ................................................................. 96,320 118,514 62,366
Sales ..................................................................... -- (772) (27,618)
Securities acquired by business combination ............................... -- 351 5,391
Increase (decrease) in market value of securities available for sale ...... (5,308) 128 840
Principal payments and amortization of premiums and discounts ............. (19,092) (75,728) (26,812)
--------- --------- ---------
Mortgage-backed securities balance at end of period (1) ................... $ 420,177 $ 348,257 $ 305,764
========= ========= =========
Investment securities balance at beginning of period (2) .................. $ 240,230 $ 204,213 $ 122,103
Purchases ................................................................. 26,108 108,474 141,094
Sales ..................................................................... (29,934) (26,544) (46,471)
Securities acquired by business combination ............................... -- 2,771 17,076
Increase (decrease) in market value of securities available for sale ...... (6,075) (2,095) 2,901
Maturities and amortization of premiums and discounts ..................... (24,767) (46,589) (32,490)
--------- --------- ---------
Investment securities balance at end of period (2) ........................ $ 205,562 $ 240,230 $ 204,213
========= ========= =========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
13
Amortized Cost and Market Value of Investment and Mortgage-Backed
Securities. The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities
portfolio and mortgage-backed securities portfolio at the dates indicated.
At June 30,
--------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- --------
(In Thousands)
Mortgage-backed securities held to maturity:
Fixed-rate pass through certificates ..................... $ 1,298 $ 1,311 $ 731 $ 772 $ 5,663 $ 5,745
Variable-rate pass through certificates .................. 5,967 5,967 7,212 7,307 9,936 10,059
Fixed-rate collateralized mortgage obligations ("CMOs") .. -- -- -- -- 4,578 4,571
Variable-rate CMOs ....................................... 132,901 128,197 127,614 126,603 90,064 88,520
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity ...... 140,166 135,475 135,557 134,682 110,241 108,895
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates ..................... $ 84,487 $ 82,772 $ 53,898 $ 52,814 $ 5,396 $ 5,391
Variable-rate pass through certificates .................. 30,670 29,862 9,342 9,326 11,523 11,579
Fixed-rate collateralized mortgage obligations ("CMOs") .. 8 8 17 17 37 35
Variable-rate CMOs ....................................... 169,459 167,369 148,748 150,543 178,000 178,518
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale .... 284,624 280,011 212,005 212,700 194,956 195,523
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ....................... $424,790 $415,486 $347,562 $347,382 $305,197 $304,418
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency ............................... $ 35,993 $ 34,588 $ 56,692 $ 56,614 $ 51,358 $ 51,982
Municipal securities ..................................... 31,848 27,850 31,842 30,422 3,811 3,947
Corporate debt issues .................................... 29,749 24,451 29,773 28,633 27,852 27,993
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity ........... $ 97,590 $ 86,889 $118,307 $115,669 $ 83,021 $ 83,922
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ............................... $ 50,970 $ 50,593 $ 65,597 $ 65,232 $ 75,826 $ 76,995
Municipal securities ..................................... 55,810 51,387 51,440 50,830 37,307 38,289
Corporate debt issues .................................... 985 949 985 955 985 985
Equity securities ........................................ 3,441 5,043 2,155 4,906 2,229 4,923
-------- -------- -------- -------- -------- --------
Total investment securities available for sale ......... $111,206 $107,972 $120,177 $121,923 $116,347 $121,192
======== ======== ======== ======== ======== ========
Issuers of Mortgage-Backed Securities. The following table sets forth
information regarding the issuers and the carrying value of the Company's
mortgage-backed securities held to maturity and mortgage-backed securities
available for sale.
At June 30,
----------------------------
2000 1999 1998
--------- -------- --------
(In Thousands)
Mortgage-backed securities:
FNMA ................................... $149,780 $128,256 $143,992
GNMA ................................... 103,537 57,881 12,457
FHLMC .................................. 146,309 141,017 138,962
Other (non-agency) ..................... 20,551 21,103 10,353
-------- -------- --------
Total mortgage-backed securities ..... $420,177 $348,257 $305,764
======== ======== ========
14
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Company's investment securities and
mortgage-backed securities portfolios at June 30, 2000. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
At June 30, 2000
----------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
--------------------- ----------------------- -----------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- --------- ---------- --------- ---------- --------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Government and agency obligations ........ $ 6,006 6.70% $ -- --% $ 9,987 6.73%
Municipal securities .......................... -- -- -- -- 100 5.25
Corporate debt issues ......................... -- -- -- -- 250 9.00
-------- ------- -------- ------- -------- ------
Total investment securities held to maturity . 6,006 6.70% -- --% 10,337 6.77%
Investment securities available for sale:
U.S. Government and agency obligations ........ 25,506 6.77% 21,973 6.24% 3,491 6.51%
Equity securities ............................. -- -- -- -- -- --
Municipal securities .......................... -- -- 795 5.15 697 5.01
Corporate debt issues ......................... -- -- -- -- -- --
-------- ------- -------- ------- -------- ------
Total investment securities available for sale 25,506 6.77% 22,768 6.21% 4,188 6.26%
Mortgage-backed securities held to maturity:
Pass-through certificates ..................... 5,967 7.12% -- --% -- --%
CMOs .......................................... 132,901 6.64 -- -- -- --
-------- ------- -------- ------- -------- ------
Total mortgage-backed securities held
to maturity ................................. 138,868 6.66% -- --% -- --%
Mortgage-backed securities available for sale:
Pass through certificates ..................... 30,670 5.52% 150 5.90% 6,842 6.96%
CMOs .......................................... 169,459 7.13 -- -- 8 10.16
-------- ------- -------- ------- -------- ------
Total mortgage-backed securities available
for sale ..................................... 200,129 6.88% 150 5.90% 6,850 6.96%
-------- ------- -------- ------- -------- ------
Total investment securities and mortgage-backed
securities .................................. $370,509 6.79% $ 22,918 6.21% $ 21,375 6.73%
======== ======= ======== ======= ======== ======
At June 30, 2000
--------------------------------------------------------------------------
More than Ten Years Total
--------------------------- ----------------------------------------
Annualized Annualized
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ---------- --------- -------- ----------
Investment securities held to maturity:
U.S. Government and agency obligations .......... $ 20,000 7.20% $ 35,993 $ 34,588 6.99%
Municipal securities ............................ 31,748 4.81 31,848 27,850 4.81
Corporate debt issues ........................... 29,499 8.14 29,749 24,451 8.14
-------- ------- -------- -------- ------
Total investment securities held to maturity ... 81,247 6.61% 97,590 86,889 6.63%
Investment securities available for sale:
U.S. Government and agency obligations .......... -- --% 50,970 50,593 6.52%
Equity securities ............................... 3,441 4.85 3,441 5,043 4.85
Municipal securities ............................ 54,318 5.20 55,810 51,387 5.20
Corporate debt issues ........................... 985 7.59 985 949 7.59
-------- ------- -------- -------- ------
Total investment securities available for sale . 58,744 5.22% 111,206 107,972 5.82%
Mortgage-backed securities held to maturity:
Pass-through certificates ....................... 1,298 8.08% 7,265 7,278 7.29%
CMOs ............................................ -- -- 132,901 128,197 6.64
-------- ------- -------- -------- ------
Total mortgage-backed securities held
to maturity ................................... 1,298 8.08% 140,166 135,475 6.67%
Mortgage-backed securities available for sale:
Pass through certificates ....................... 77,495 7.08% 115,157 112,634 6.66%
CMOs ............................................ -- -- 169,467 167,377 7.13
-------- ------- -------- -------- ------
Total mortgage-backed securities available
for sale ....................................... 77,495 7.08% 284,624 280,011 6.94%
-------- ------- -------- -------- ------
Total investment securities and mortgage-backed
securities .................................... $218,784 6.41% $633,586 $610,347 6.64%
======== ======= ======== ======== ======
15
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities, operations and, if needed,
borrowings from the FHLB. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including checking accounts, passbook savings accounts,
money market deposit accounts, term certificate accounts and individual
retirement accounts. While the Company accepts deposits of $100,000 or more, it
does not offer substantial premium rates for such deposits. Deposit account
terms vary according to the minimum balance required, the period of time during
which the funds must remain on deposit, and the interest rate, among other
factors. The Company regularly evaluates its internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers, nor does it
solicit funds outside its market area.
The following table sets forth the savings activities of the Company for
the periods indicated.
Years Ended June 30,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In Thousands)
Balance at beginning of period ................ $2,463,711 $2,022,503 $1,640,815
Net savings activity .......................... 18,222 90,938 17,278
Net checking activity ......................... 43,240 26,186 79,691
Deposits acquired ............................. 270,810 249,987 220,243
---------- ---------- ----------
Net increase before interest credited ...... 332,272 367,111 317,212
Interest credited ............................. 90,526 74,097 64,476
---------- ---------- ----------
Net increase in deposits ................... 422,798 441,208 381,688
---------- ---------- ----------
Balance at end of period ................. $2,886,509 $2,463,711 $2,022,503
========== ========== ==========
The following table sets forth the dollar amount of savings deposits in the
various types of savings accounts/offered by the Company between the dates
indicated.
At June 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- --------------------------------- --------------------------------
Balance Percent(1) Rate(2) Balance Percent(1) Rate(2) Balance Percent(1) Rate(2)
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
(Dollars in thousands)
Savings accounts ........... $ 432,908 15.00% 3.22% $ 409,029 16.60% 3.24% $ 340,377 16.83% 3.30%
Checking accounts .......... 470,183 16.29 0.93 389,148 15.80 1.38 315,755 15.61 1.61
Money market accounts 183,257 6.35 3.63 164,484 6.68 3.73 114,187 5.65 3.68
Certificates of deposit:
Maturing within 1 year 1,042,401 36.11 5.24 992,723 40.29 5.22 771,665 38.15 5.57
Maturing 1 to 3 years 660,620 22.89 6.22 417,367 16.94 5.11 404,175 19.98 5.90
Maturing more than
3 years ................. 97,140 3.36 5.93 90,960 3.69 5.65 76,344 3.78 6.00
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total certificates ...... 1,800,161 62.36 5.64 1,501,050 60.92 5.22 1,252,184 61.91 5.70
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total deposits ............. $2,886,509 100.0% 4.38% $2,463,711 100.0% 4.18% $2,022,503 100.0% 4.55%
========== ========== ======= ========== ========== ======= ========== ========== =======
- ---------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
16
Time Deposit Rates. The following table sets forth the time deposits in the
Company classified by rates as of the dates indicated:
At June 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Rate (In Thousands)
----
2.00 - 2.99% .................... $ -- $ -- $ 88
3.00 - 3.99% .................... 4,485 4,016 2,956
4.00 - 4.99% .................... 322,494 552,807 121,533
5.00 - 5.99% .................... 911,908 815,790 760,738
6.00 - 6.99% .................... 546,796 120,294 312,693
7.00 - 7.99% .................... 14,417 7,083 47,959
8.00% or greater ................ 61 1,060 6,217
---------- ---------- ----------
Total ....................... $1,800,161 $1,501,050 $1,252,184
========== ========== ==========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 2000.
Amount Due
----------------------------------------------------------------------
Less Than 1-2 2-3 After 3
One Year Years Years Years Total
---------- ---------- ---------- ---------- ----------
Rate (In Thousands)
----
3.00 - 3.99% ......................... $ 3,985 $ 14 $ 15 $ 471 $ 4,485
4.00 - 4.99% ......................... 302,870 15,472 728 3,424 322,494
5.00 - 5.99% ......................... 701,697 101,491 61,805 46,915 911,908
6.00 - 6.99% ......................... 33,238 397,719 69,547 46,292 546,796
7.00 - 7.99% ......................... 550 8,801 5,028 38 14,417
8.00% or greater ..................... 61 -- -- -- 61
---------- ---------- ---------- ---------- ----------
Total ................................ $1,042,401 $ 523,497 $ 137,123 $ 97,140 $1,800,161
========== ========== ========== ========== ==========
Large Certificates of Deposit Maturities. The following table indicates the
amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 2000.
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
Three months or less................................. $ 62,167
Three through six months............................. 39,295
Six through twelve months............................ 39,495
Over twelve months................................... 100,526
-----------
Total.............................................. $ 241,483
===========
Borrowings
Savings deposits are the primary source of funds for the Company's lending
and investment activities and for its general business purposes. The Company
also relies upon borrowings from the FHLB to supplement its supply of lendable
funds and to meet deposit withdrawal requirements. Borrowings from the FHLB
typically are collateralized by the Bank's stock in the FHLB and a portion of
the Bank's first mortgage loans.
17
The FHLB functions as a central reserve bank providing credit for the Bank
and other member financial institutions. As a member, the Bank is required to
own capital stock in the FHLB and is authorized to apply for borrowings on the
security of such stock and certain of its first mortgage loans and other assets
(principally, securities that are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been met.
Borrowings are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of borrowings are based either on a fixed percentage
of a member institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. All FHLB borrowings have fixed interest rates
and original maturities of between one day and twenty years.
During the Year Ended June 30,
----------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
FHLB Pittsburgh borrowings:
Average balance outstanding .............................................. $264,130 $279,410 $144,798
Maximum outstanding at end of any month during period .................... 411,370 359,135 237,161
Balance outstanding at end of period ..................................... 201,602 317,387 232,161
Weighted average interest rate during period ............................. 5.53% 5.28% 5.20%
Weighted average interest rate at end of period .......................... 5.90% 5.59% 5.86%
Reverse repurchase agreements:
Average balance outstanding .............................................. $ 27,627 $ 29,525 $ 41,220
Maximum outstanding at end of any month during period .................... 35,215 43,932 50,028
Balance outstanding at end of period ..................................... 31,463 23,905 50,028
Weighted average interest rate during period ............................. 5.50% 5.20% 5.31%
Weighted average interest rate at end of period .......................... 6.38% 4.91% 5.48%
Other borrowings:
Average balance outstanding .............................................. $ 8,100 $ 7,995 $ 8,264
Maximum outstanding at end of any month during period .................... 10,054 8,682 9,056
Balance outstanding at end of period ..................................... 6,876 7,623 7,517
Weighted average interest rate during period ............................. 6.55% 6.74% 5.36%
Weighted average interest rate at end of period .......................... 6.55% 6.62% 6.84%
Total borrowings:
Average balance outstanding ............................................ $299,857 $316,930 $194,282
Maximum outstanding at end of any month during period .................. 447,281 388,471 289,706
Balance outstanding at end of period ................................... 239,941 348,915 289,706
Weighted average interest rate during period ........................... 5.55% 5.30% 5.23%
Weighted average interest rate at end of period ........................ 5.98% 5.56% 5.82%
Competition
The Company's market area in Pennsylvania, southwestern New York and
eastern Ohio has a large concentration of financial institutions, some of which
are significantly larger and have greater financial resources than the Company,
and all of which are competitors of the Company to varying degrees. As a result,
the Company encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes offices of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
18
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Subsidiary Activities
Northwest Bancorp Inc., through Northwest Savings Bank, has four wholly
owned subsidiaries, Great Northwest Corporation, Northwest Financial Services,
Inc., Northwest Consumer Discount Company, Inc., and Northwest Capital Group,
Inc. Jamestown has no subsidiaries. Great Northwest's sole activity is holding
equity investments in government-assisted low-income housing projects in various
locations in the Company's market area. At June 30, 2000, the Bank had an equity
investment in Great Northwest of $2.7 million. For the fiscal year ended June
30, 2000, Great Northwest had net income of $609,000 generated primarily from
federal low-income housing tax credits.
Northwest Financial Services' principal activity is the investment in land
acquired by foreclosure and the ownership of the common stock of several
financial institutions. In addition, Northwest Financial Services also holds an
equity investment in one government assisted low-income housing project and owns
100% of the stock in Rid-Fed, Inc. At June 30, 2000, the Bank had an equity
investment in Northwest Financial Services of $5.4 million, and for the fiscal
year ended June 30, 2000, Northwest Financial Services had net income of
$236,000.
Northwest Consumer Discount Company operates 42 consumer finance offices
throughout Pennsylvania and operates one consumer finance office in New York
State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 2000, the Bank had an equity investment in Northwest
Consumer Discount Company of $12.5 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2000 was $1.6
million. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreation vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Northwest Capital Group's principal activity is the development and sale of
a timeshare project in Honolulu, Hawaii which was acquired by deed in lieu of
foreclosure in 1997. At June 30, 2000 the Bank had an equity investment of
$26,000 in Northwest Capital Group and for the fiscal year ended June 30, 2000
Northwest Capital Group reported no net income.
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial Services,
has as its sole activity a commercial real estate loan to Northwest Capital
Group which was made to finance the sale of real estate from Rid-Fed to
Northwest Capital. At June 30, 2000 Northwest Financial Services had an equity
investment of $1.0 million in Rid-Fed, Inc. and for the fiscal year ended June
30, 2000 Rid-Fed, Inc. had a net loss of $2,600.
Northwest Finance Company, Inc. is a wholly owned subsidiary of Northwest
Consumer Discount Company. Northwest Finance Company operates a consumer finance
office in Jamestown, New York. As of June 30, 2000, Northwest Consumer Discount
Company's equity investment in Northwest Finance Company was $(89,000). For the
year ended June 30, 2000, Northwest Finance Company had a net loss of $2,000.
Federal regulations require SAIF-insured institutions to provide 30 days
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings association,
or is inconsistent with the purposes of federal banking law. Upon the making of
such a determination, the FDIC may order
19
the savings association to divest the subsidiary or take other actions.
Personnel
As of June 30, 2000, the Company and its wholly owned subsidiaries had
1,033 full-time and 261 part-time employees. None of the Company's employees is
represented by a collective bargaining group. The Company believes its
relationship with its employees to be good.
REGULATION
General
The Bank is a Pennsylvania-chartered savings bank and its deposit accounts
are insured up to applicable limits by the FDIC under the SAIF. The Bank is
subject to extensive regulation by the Department of Banking of the Commonwealth
of Pennsylvania (the "Department"), as its chartering agency, and by the FDIC,
as the deposit insurer. The Bank must file reports with the Department and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions including, but
not limited to, mergers with or acquisitions of other savings institutions.
There are periodic examinations by the Department and the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the FDIC
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and with their examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department or the FDIC could have a material adverse
impact on the Company, the Mutual Holding Company, the Bank and their
operations. The Company and the Mutual Holding Company, as a mutual savings bank
holding company, are required to file certain reports with, and otherwise comply
with the rules and regulations of the FRB. Certain of the regulatory
requirements applicable to the Bank, the Company and the Mutual Holding Company
are referred to below or elsewhere herein.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the "Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees, and depositors,
as well as corporate powers, savings and investment operations and other aspects
of the Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws as well as other state,
federal and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the current
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney, or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
20
Interstate Banking
Prior to 1994 a bank holding company located in one state was prohibited
from acquiring a bank or all of its assets located in another state unless the
acquisition was specifically authorized by a reciprocal interstate banking
statute, such as the statute adopted in Pennsylvania in 1990, specifically
permitting interstate acquisitions. Similarly, interstate branching was
prohibited for national banks and state-chartered member banks, although some
states, not including Pennsylvania, had passed laws permitting limited
interstate branching by non-Federal Reserve member state banks. The Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits an
adequately capitalized, adequately managed bank holding company to acquire a
bank in another state, whether or not the state permits the acquisition, subject
to certain deposit concentration caps and the FRB's approval. A state may not
impose discriminatory requirements on acquisitions by out-of-state holding
companies. In addition, under the Riegle-Neal Act, a bank may expand interstate
by merging with a bank in another state and also may consolidate the acquired
bank into new branch offices of the acquiring bank, unless the other state
affirmatively opts out of the legislation before that date. The Riegle-Neal Act
also permits de novo interstate branching, but only if a state affirmatively
opted in by appropriate legislature. Once a state opted into interstate
branching, it could not opt out at a later date. The Riegle-Neal Act also allows
foreign banks to branch by merger or de novo branch to the same extent as banks
from the foreign bank's home state. In 1995, the Pennsylvania Legislature
amended the Banking Code to opt in to all of the provisions of the Riegle-Neal
Act, including interstate bank mergers and de novo interstate branching.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and 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 risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from 0% to .27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In addition, interest payments on FICO bonds issued in the late 1980's by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation are paid jointly by Bank Insurance Fund ("BIF")
insured institutions and SAIF-insured institutions. Beginning January 1, 2000,
the FICO interest payments are paid pro rata by banks and thrifts based on
approximately 2.1 basis point of deposits.
21
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
During fiscal 2000, the Company recaptured into taxable income approximately
$1.3 million of the post-1987 bad debt reserves. At June 30, 2000, the Company
had a balance of approximately $5.3 million of bad debt reserves in retained
income that is subject to recapture equally over the next four years under this
legislation.
Capital Requirements
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the FDIC. Such actions could include
a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on an association's operations, termination of
federal deposit insurance, and the appointment of a conservator or receiver.
Certain actions are required by law. The FDIC's capital regulation provides that
such actions, through enforcement proceedings or otherwise, could require one or
more of a variety of corrective actions.
The Bank is also subject to more stringent Department capital guidelines.
Although not adopted in regulation form, the Department utilizes capital
standards of 6% leverage capital and 10% risk-based capital. The components of
leverage and risk-based capital are substantially the same as those defined by
the FDIC.
Loans-to-One Borrower Limitation
Under federal regulations, with certain limited exceptions, a Pennsylvania
chartered savings bank may lend to a single or related group of borrowers on an
"unsecured" basis an amount equal to 15% of its unimpaired capital and surplus.
An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate.
Prompt Corrective Action
Under federal regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution to
comply with supervisory actions as if it were in the next lower category (except
that the FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of June 30, 2000, the Bank was a
"well-capitalized institution" for this purpose.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
22
generally may not, directly or indirectly, acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary; (ii) investing as a
limited partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation, or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets; (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees', and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions; and (iv) acquiring
or retaining the voting shares of a depository institution if certain
requirements are met.
Holding Company Regulation
Under the Bank Holding Company Act of 1956 (the "BHCA"), a bank holding
company must obtain FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or FRB regulation or order, have been identified as activities
closely related to the business of banking or managing or controlling banks. The
list of activities permitted by the FRB includes, among other things, operating
a savings association, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an insurance
agent for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, traveler's checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.
The Company and the Mutual Holding Company are also subject to capital
adequacy guidelines for bank holding companies (on a consolidated basis) which
are substantially similar to those of the FDIC for the Bank.
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that the holding company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Conditions to Certain Regulatory Approvals
The Bank's Reorganization. The FRB approved the Bank's reorganization into
the Mutual Holding Company structure and the mutual holding company's
acquisition of the majority of the Bank's common stock subject to the following
conditions, which apply to the Company as a result of the Two-Tier
Reorganization:
1. The Mutual Holding Company agrees that it will make prior application
to the FRB for approval to waive any dividends declared on the capital
stock of the Company and that the FRB shall have the authority to
approve or deny any dividend waiver request in its discretion. Such
application will be made on an annual basis with respect to any year
in which the Mutual Holding Company intends to waive such dividends;
23
2. If a waiver is granted, dividends waived by the Mutual Holding Company
will not be available for payment to minority shareholders (i.e.,
shareholders other than the Mutual Holding Company), and will be
excluded from the capital accounts of the Company for purposes of
calculating any dividend payments to minority shareholders;
3. If a waiver is granted, the Company will, so long as the Mutual
Holding Company remains a Mutual Holding Company, establish a
restricted capital account in the cumulative amount of any dividends
waived by the Mutual Holding Company for the benefit of the mutual
members of the Mutual Holding Company. The restricted capital account
would be senior to the claims of minority stockholders of the Company
and would not decrease notwithstanding changes in depositors of the
Company. This restricted capital account would be added to any
liquidation account in the Company established in connection with a
conversion of the Mutual Holding Company to stock form and would not
be available for distribution to minority shareholders. The
liquidation account and restricted capital account would be maintained
in accordance with the policy, rules and regulations of the Office of
Thrift Supervision, notwithstanding any sale, merger, or conversion of
the Mutual Holding Company;
4. In any conversion of the Mutual Holding Company from mutual to stock
form, the Mutual Holding Company will comply with the rules and
regulations of the Office of Thrift Supervision, as if the Company and
the Mutual Holding Company were a savings association and a savings
and loan Mutual Holding Company, respectively, except that such rules
shall be administered by the FRB; and
5. In the event that the FRB adopts regulations regarding dividend
waivers by mutual holding companies, the Mutual Holding Company will
comply with the applicable requirements of such regulations.
The Two-Tier Reorganization. The activities of the Company and the Mutual
Holding Company are also restricted pursuant the conditions imposed by the FRB
and FDIC as part of their approval of the Two-Tier Reorganization. Such
conditions include restrictions on the sale of Common Stock by the Mutual
Holding Company, the conversion of the Mutual Holding Company to the stock form
of ownership, and the pledging of Common Stock in support of any borrowing by
the Company or the Bank.
Miscellaneous
In addition to requiring a new system of risk-based insurance assessments
and a system of prompt corrective action with respect to undercapitalized banks,
as discussed above, the FDIC requires federal banking regulators to adopt
regulations in a number of areas to ensure bank safety and soundness, including
internal controls, credit underwriting, asset growth, management compensation,
ratios of classified assets to capital, and earnings. The FDICIA also contains
provisions which are intended to enhance independent auditing requirements,
restrict the activities of state-chartered insured banks, amend various consumer
banking laws, limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve Board's discount window, require regulators to perform annual
on-site bank examinations, and set standards for real estate lending.
Federal Securities Laws
Shares of the Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
Regulatory Enforcement Authority
Federal law provides federal banking regulators with substantial
enforcement powers. This enforcement
24
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders, and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Dividends
The Company's ability to pay dividends depends, to a large extent, upon the
Bank's ability to pay dividends to the Company. The Banking Code of the
Commonwealth of Pennsylvania states, in part, that dividends may be declared and
paid by the Bank only out of accumulated net earnings and may not be declared or
paid unless surplus (retained earnings) is at least equal to capital. The Bank
has not declared or paid any dividends which caused the Bank's retained earnings
to be reduced below the amount required. Finally, dividends may not be declared
or paid if the Bank is in default in payment of any assessment due to the FDIC.
At June 30, 2000, the Bank's retained earnings exceeded required capital by
$70.5 million and the Bank was not in default of any assessment due the FDIC.
The foregoing references to laws and regulations are brief summaries
thereof which do not purport to be complete and which are qualified in their
entirety by reference to such laws and regulations.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, the Company files a
consolidated federal income tax return with its wholly owned subsidiaries on a
fiscal year basis. The applicable federal income tax expense or benefit is
properly allocated to each subsidiary based upon taxable income or loss
calculated on a separate company basis. The Mutual Holding Company is not
permitted to file a consolidated federal income tax return with the Company, and
must pay Federal income tax on 20% of the dividends received from the Company.
Because the Mutual Holding Company has nominal assets other than the stock of
the Company, it does not have material federal income tax liability other than
the tax due on the dividends received from the Company.
In April 1992, the FASB issued SFAS 109. The Company currently is
accounting for income taxes in accordance with SFAS 109. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws. SFAS 109 was implemented by
the Bank effective July 1, 1993.
The statute of limitations is open for potential examinations by the
Internal Revenue Service for the tax years ended June 30, 1996 through June 30,
2000.
State Taxation. The Company is subject to the Corporate Net Income Tax and
the Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends received
from the Bank qualify for a 100% dividends received deduction and are not
subject to Corporate Net Income Tax. In addition, the Company's investments in
its subsidiaries qualify as exempt intangible assets and greatly reduce the
amount of Capital Stock Tax assessed.
The Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Bank's financial net income determined
in accordance with generally accepted accounting principles with certain
adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction.
The subsidiaries of the Bank are subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania and other
applicable taxes in the states where they conduct business.
25
ITEM 2. PROPERTIES
The Company conducts its business through its main office located in
Warren, Pennsylvania, 97 other full-service offices throughout its market area
in northwest, southwest and central Pennsylvania, four offices in southwestern
New York, and four offices in eastern Ohio. The Company and its wholly owned
subsidiaries also operate 42 consumer finance offices located throughout
Pennsylvania and one consumer lending office in New York. At June 30, 2000, the
Company's premises and equipment had an aggregate net book value of
approximately $40.9 million. The Company believes that its current facilities
are adequate to meet the present and immediately foreseeable needs of the
Company and Holding Company.
Listed below is the location of each of the Company's community banking
offices.
PENNSYLVANIA
Bellefonte, Centre Co. Erie (10), Erie Co.
-- 117 North Allegheny Street -- 2256 West 8th Street
-- K-Mart Plaza West
Bradford (3), McKean Co. 2863 West 26th Street
-- Bradford Mall -- K-Mart Plaza East
-- 33 Main Street 4423 Buffalo Road
-- 85 West Washington Street -- Millcreek Mall
-- 3805 Peach Street
Bridgeville, Allegheny Co. -- 5624 Peach Street
-- 431 Washington Avenue -- 401 State Street
-- 121 West 26th Street
Butler, Butler Co. -- K-Mart Plaza South
-- 151 Pittsburgh Road 1328 East Grandview Blvd.
-- 1945 Douglas Parkway
Canonsburg, Washington Co.
-- 148 West Pike Street Franklin, Venango Co.
-- 1301 Liberty Street
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue Fredericktown, Washington Co.
-- Front Street
Clarion (2), Clarion Co.
-- 601 Main Street Gibsonia, Allegheny Co.
-- 97 West Main Street -- The Village of St. Barnabus
5850 Meridian Road
Clearfield, Clearfield Co.
-- 1200 Old Town Road Greenville, Mercer Co.
-- Walmart, 43 Williamson Road
Columbia, Lancaster Co.
-- 350 Locust Street Hanover, York Co.
-- 1 Center Square
Corry, Erie Co.
-- 150 North Center Street Harborcreek, Erie Co.
-- 4270 East Lake Road
Cranberry, Venango Co.
-- Cranberry Mall Hershey, Dauphin Co.
-- 10 West Chocolate Avenue
Elizabethtown, Lancaster Co.
-- 2296 South Market Street Johnsonburg, Elk Co.
-- 553 Market Street
26
Johnstown(2), Cambria Co. New Bethlehem, Clarion Co.
-- 225 Franklin Street -- 301 Broad Street
-- 475 Theatre Drive
New Holland, Lancaster Co.
Kane, McKean Co. -- 201 West Main Street
-- 56 Fraley Street
North East, Erie Co.
Kittanning (2), Armstrong Co. -- 35 East Main Street
-- Franklin Village Mall
-- 165 Butler Road Oil City (3), Venango Co.
-- One East First Street
Lake City, Erie Co. -- 301 Seneca Street
-- 2102 Rice Avenue -- 259 Seneca Street
Lancaster(3), Lancaster County Palmyra, Lebanon Co.
-- 24 West Orange Street -- 1048 East Main Street
-- 922 Columbia Avenue
-- 1195 Manheim Pike Pleasantville, Venango Co.
-- 102 East State Street
Lebanon (2), Lebanon Co.
-- 770 Cumberland Street Pottsville, Schuylkill Co.
-- 547 South 10th Street -- 104 North Centre Street
Lewistown, Mifflin County Ridgway, Elk Co.
-- 51 West Market Street -- Main & Mill Streets
Lititz, Lancaster Co. Rimersburg, Clarion Co.
-- 744 South Broad Street -- 211 North Main Street
Lock Haven, Clinton Co. Sarver, Butler Co.
-- 104 East Main Street -- 737 South Pike Road
Loyalsock, Lycoming Co. Schaefferstown, Lebanon Co.
-- 815 Westminster Drive -- Dutch-Way Shopping Mall
Route 501 North
Marianna, Washington Co.
-- 1784 Main Street Sheffield, Warren Co.
-- 101 South Main Street
Marienville, Forest Co.
-- Walnut & West Spruce Street Sligo, Clarion Co.
-- 1613 Bald Eagle Street
McDonald, Washington Co.
-- 101 East Lincoln Avenue Smethport, McKean Co.
-- 428 Main Street
Meadville (3), Crawford Co.
-- 932 Diamond Park Smithfield, Huntington Co.
-- 1073 Park Avenue -- Fairgrounds Road
-- 880 Park Avenue
Springboro, Crawford Co.
Mount Joy, Lancaster Co. -- 105 South Main Street
-- 24 East Main Street
Myerstown, Lebanon Co.
-- 1 West Main Avenue
27
St. Marys (2), Elk Co. Wrightsville, York Co.
-- 201 Brusselles Street -- 120 North 4th Street
-- St. Mary's Plaza
824 Million Dollar Highway York (2), York Co.
-- Queensgate Shopping Center
State College (3), Centre Co. -- Stonybrook Plaza
-- 201 West Beaver Avenue 3649 East Market Street
-- 611 University Drive
-- 1524 West College Avenue
Sykesville, Jefferson Co.
-- Main and Park Street
Tidioute, Warren Co.
-- 5 Buckingham Street
Tionesta, Forest Co.
-- 221 Elm Street
Titusville, Crawford Co.
-- Spring & Franklin Street
Union City (2), Erie Co.
-- 22 North Main Street
-- 4 Perry Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Volant, Lawrence Co.
-- Main Street
Wampum, Lawrence Co.
-- 342 Main Street
Warren (3), Warren Co.
-- Warren Mall
1666 Market Street Ext.
-- 125 Ludlow Street
-- Liberty Street at Second Avenue
Washington, Washington Co.
-- Walmart, 30 Trinity Point Drive
Wattsburg, Erie Co.
-- 14457 Main Street
Weedville, Elk Co.
-- Bennetts Valley, Rt. 555
Westmont, Cambria Co.
-- Lyter and Entrance Drive
28
NEW YORK
Jamestown (2) Chautauqua Co. NY Olean, Cattaraugus Co. NY
-- 23 West Third Street -- 2513 West State Street
-- 768 Foote Avenue
Lakewood, Chautauqua Co. NY
-- 311 East Fairmount Avenue
OHIO
Chardon, Geauga Co. OH Madison, Lake Co. OH
-- 325 Center Street -- 1903 Hubbard Road
Geneva, Ashtabula Co. OH Painesville, Lake Co. OH
-- 30 East Main Street -- 70 Richmond Street
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and its subsidiaries are subject to various legal actions
arising in the normal course of business. In the opinion of management, the
resolution of these legal actions is not expected to have a material adverse
effect on the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
During the fourth quarter of the fiscal year covered by this report, the
Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
MARKET FOR COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NWSB." As of June 30, 2000, the Company had 12 registered market
makers, 4,230 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
47,360,769 shares outstanding. As of such date, the Mutual Holding Company held
35,224,175 shares of common stock and stockholders other than the Mutual Holding
Company held 12,136,594 shares. The following table sets forth market price and
dividend information for the Company's common stock. Information is presented
for each quarter of the previous two fiscal years.
Fiscal Year Ended Cash Dividends
June 30, 2000 High Low Declared
------------- ---- --- --------
First quarter $10.125 $ 7.875 $ 0.04
Second quarter 8.750 6.938 0.04
Third quarter 8.250 6.688 0.04
Fourth quarter 8.188 6.125 0.04
29
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
------------- ---- --- --------
First quarter $14.500 $ 8.625 $ 0.04
Second quarter 12.250 8.500 0.04
Third quarter 11.000 8.250 0.04
Fourth quarter 10.313 8.125 0.04
Payment of dividends on the Common Stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
Although mutual holding companies frequently waive dividends declared by
their majority-owned savings institution subsidiaries, the Holding Company has
not waived dividends paid by the Company. The Holding Company has made certain
commitments to the Federal Reserve Board ("FRB") that restrict its ability to
waive dividends and that require it to obtain prior FRB approval of any waiver
of dividends.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Selected Financial and Other Data
Set forth below are selected consolidated financial and other data of the
Company. For additional information about the Company, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
At June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
Selected Consolidated Financial Condition Data: (In Thousands)
Total assets .................................. $3,407,292 $3,078,832 $2,562,584 $2,091,363 $1,877,925
Investment securities held-to-maturity ........ 97,590 118,307 83,021 43,419 54,086
Investment securities available-for-sale ...... 107,972 121,923 121,192 76,684 51,961
Mortgage-backed securities held-to-maturity ... 140,166 135,557 110,241 110,561 101,932
Mortgage-backed securities available-for-sale . 280,011 212,700 195,523 181,036 189,514
Loans receivable net:
Real estate ................................ 1,990,622 1,835,870 1,449,428 1,156,160 1,066,887
Consumer ................................... 504,966 410,165 348,096 306,228 249,051
Commercial ................................. 49,042 39,203 109,765 74,110 59,017
Total loans receivable, net .............. 2,544,630 2,285,238 1,907,289 1,536,498 1,374,955
Deposits ...................................... 2,886,509 2,463,711 2,022,503 1,640,815 1,450,047
Advances from FHLB and other borrowed funds ... 239,941 348,915 289,706 223,458 211,761
Shareholders' equity .......................... 247,888 233,657 217,879 198,494 190,651
Years Ended June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
Selected Consolidated Operating Data: (In Thousands)
Total interest income ........................ $ 239,724 $ 206,593 $ 175,762 $ 154,227 $ 135,759
Total interest expense ....................... 132,099 114,911 95,203 81,424 68,637
---------- ---------- ---------- ---------- ----------
Net interest income ....................... 107,625 91,682 80,559 72,803 67,122
Provision for loan losses .................... 4,149 3,629 4,072 2,491 1,502
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ........................... 103,476 88,053 76,487 70,312 65,620
---------- ---------- ---------- ---------- ----------
Noninterest income ........................... 11,271 6,010 7,947 6,027 3,496
Noninterest expense .......................... 73,634 63,110 50,318 54,203 40,827
---------- ---------- ---------- ---------- ----------
Income before income tax expense ............. 41,113 30,953 34,116 22,136 28,289
Income tax expense ........................... 13,910 10,914 12,995 8,472 10,803
---------- ---------- ---------- ---------- ----------
Minority interest in net loss of subsidiary .. -- 3 201 -- --
Net income .............................. $ 27,203 $ 20,042 $ 21,322 $ 13,664 $ 17,486
========== ========== ========== ========== ==========
Basic earnings per share ..................... $ 0.58 $ 0.42 $ 0.46 $ 0.30 $ 0.38
Diluted earnings per share ................... $ 0.57 $ 0.42 $ 0.45 $ 0.30 $ 0.38
30
At or for the Year Ended June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
Key Financial Ratios and Other Data:
Return on average assets (net income divided
by average total assets)(1) ............... 0.83% 0.71% 0.94% 0.70% 1.05%
Return on average equity (net income divided by
average equity)(1) ........................ 11.39 8.86 10.29 7.12 9.48
Average capital to average assets ............ 7.29 8.01 9.14 9.84 11.03
Capital to total assets ...................... 7.28 7.59 8.50 9.49 10.15
Net interest rate spread (average yield on
interest-earning assets less average cost
of interest-bearing liabilities) .......... 3.26 3.20 3.34 3.53 3.72
Net interest margin (net interest
income as a percentage of average
interest-earning assets) .................. 3.54 3.49 3.72 3.87 4.15
Noninterest expense to average assets ........ 2.25 2.23 2.22 2.78 2.44
Net interest income to noninterest expense(1). 1.46x 1.45x 1.60x 1.34x 1.64x
Nonperforming loans to net loans receivable .. 0.40 0.71 0.45 0.68 0.69
Nonperforming assets to total assets ......... 0.36 0.63 0.47 0.72 0.81
Allowance for loan losses to nonperforming
loans ..................................... 177.97 104.08 183.10 130.50 138.49
Allowance for loan losses to net loans
receivable ................................ 0.72 0.73 0.83 0.89 0.95
Average interest-bearing assets to average
interest-bearing liabilities .............. 1.07x 1.07x 1.09x 1.10x 1.11x
Number of:
Full-service offices ...................... 106 94 71 57 54
Consumer finance offices .................. 43 36 34 30 29
Mortgage loan production offices .......... -- -- 5 7 8
- -------------------------
(1) For the year ended June 30, 1997, return on average assets, return on
average equity, and net interest income to noninterest expense would have
been .96%, 9.80%, and 1.58x without the one-time charge of $8.6 million (or
$5.1 million, after adjusted for taxes) to recapitalize the Savings
Association Insurance Fund. See "Management's Discussion and Analysis--
Deposit Insurance Premiums."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document contains forward-
looking statements. The forward looking statements contained in the following
sections are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed. Readers should not place undue reliance on
these forward-looking statements, as they reflect management's analysis as of
the date of this report. The Company has no obligation to update or revise these
forward-looking statements to reflect events or circumstances that occur after
the date of this report. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including quarterly reports on Form 10-Q and
current reports filed on Form 8-K.
Financial Condition
General. Total assets increased by $328.5 million, or 10.7%, to $3.407
billion at June 30, 2000 from $3.079 billion at June 30, 1999. This increase was
funded primarily by a $422.8 million increase in deposits and net income of
$27.2 million. Total assets increased by $516.2 million, or 20.1%, to $3.079
billion at June 30, 1999 from $2.563 billion at June 30, 1998. This increase was
funded primarily by a $441.2 million increase in deposits, a $59.2 million
increase in borrowed funds and net income of $20.0 million. The additional funds
received in both fiscal years 2000 and 1999 were used to increase loans
receivable and marketable securities.
Interest-earning deposits in other financial institutions. Interest-earning
deposits in other financial institutions decreased by $467,000, or 5.2%, to $8.5
million at June 30, 2000 from $8.9 million at June 30, 1999. Interest-earning
deposits in other financial institutions increased by $800,000, or 9.8%, to $8.9
million at June 30,
31
1999 from $8.1 million at June 30, 1998. The balances in these accounts
fluctuate daily based on the net cash flow from the Company's other activities.
Investment securities. Investment securities decreased by $34.6 million, or
14.4%, to $205.6 million at June 30, 2000 from $240.2 million at June 30, 1999.
This decrease was primarily a result of a decision by the Company to change its
portfolio mix by purchasing variable rate mortgage-backed securities with the
funds received from the maturity of investment securities. Investment securities
increased by $36.0 million, or 17.6%, to $240.2 million at June 30, 1999 from
$204.2 million at June 30, 1998. This increase was primarily due to the
investment of funds received from internal deposit growth and branch
acquisitions.
Mortgage-backed securities. Mortgage-backed securities increased by $71.9
million, or 20.6%, to $420.2 million at June 30, 2000 from $348.3 million at
June 30, 1999. In addition to the change in the investment portfolio mix
mentioned above, the Company utilized the funds received from both internal
deposit growth and branch acquisitions to purchase additional mortgage-backed
securities. Mortgage-backed securities increased by $42.5 million, or 13.9%, to
$348.3 million at June 30, 1999 from $305.8 million at June 30, 1998. This net
increase resulted from the purchase of approximately $118.5 million of mortgage-
backed securities during the fiscal year, utilizing the funds received from both
internal deposit growth and branch acquisitions. Partially offsetting these
purchases was the receipt of principal payments in the amount of approximately
$76.0 million.
Loans receivable. Net loans receivable increased by $259.4 million, or
11.4%, to $2.545 billion at June 30, 2000 from $2.285 billion at June 30, 1999.
This increase resulted primarily from growth across the Company's market area as
well as the purchase of approximately $47.0 million of loans in September 1999
as part of the acquisition of eight retail offices. Net loans receivable
increased by $377.9 million, or 19.8%, to $2.285 billion at June 30, 1999 from
$1.907 billion at June 30, 1998. This increase also resulted primarily from
continued strong loan demand throughout the Company's market. In addition, the
acquisition of Corry Savings Bank ("Corry") in October, 1998 contributed net
loans of approximately $22.0 million.
Deposits. Deposits increased by $422.8 million, or 17.2%, to $2.887 billion
at June 30, 2000 from $2.464 billion at June 30, 1999. This increase was
primarily due to the purchase of eight retail offices with deposits of $270.8
million along with normal internal deposit growth from both existing offices and
newly opened offices. Deposits increased by $441.2 million, or 21.8%, to $2.464
billion at June 30, 1999 from $2.023 billion at June 30, 1998. This increase was
primarily due to the acquisition of 11 retail offices with deposits of $225.5
million. In addition, the acquisition of Corry provided deposits of
approximately $25.0 million. Normal deposit growth in existing offices as well
as the successful integration and growth of new offices accounted for the
remaining increase of $190.7 million.
Borrowings. Borrowings decreased by $109.0 million, or 31.2%, to $239.9
million at June 30, 2000 from $348.9 million at June 30, 1999, as the Company
utilized a portion of the aforementioned deposit growth to reduce borrowings.
Borrowings increased by $59.2 million, or 20.4%, to $348.9 million at June 30,
1999 from $289.7 million at June 30, 1998, as additional funds were borrowed to
fund asset growth in an effort to increase net interest income.
Shareholders' equity. Shareholders' equity increased by $14.2 million, or
6.1%, to $247.9 million at June 30, 2000 from $233.7 million at June 30, 1999.
This increase was primarily due to net income of $27.2 million which was
partially offset by common stock dividends of $7.6 million. In addition, the
Company recorded a net unrealized loss on securities available for sale of $7.1
million as a result of the decrease in market value of fixed-rate securities
during a period of rising interest rates. Shareholders' equity increased by
$15.8 million, or 7.3%, to $233.7 million at June 30, 1999 from $217.9 million
at June 30, 1998. This increase was primarily due to net income of $20.0 million
which was partially offset by common stock dividends in the amount of $7.6
million. The remaining net increase was comprised of the sale of common stock
relating to the Corry acquisition and the release of additional common shares by
the Company's employee stock benefit plans partially offset by a decrease in the
unrealized gain on investment securities available for sale.
32
Results of Operations
General. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans, mortgage-
backed securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits and borrowed
funds. Net interest income is a function of the Company's interest rate spread,
which is the difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to
interest-bearing liabilities. The Company's earnings also are affected by its
level of service charges, and gains on sale of assets, as well as its level of
general administrative and other expenses, including employee compensation and
benefits, occupancy and equipment costs, and deposit insurance premiums.
Net income. Net income totaled $27.2 million, $20.0 million and $21.3
million for fiscal years ended June 30, 2000, 1999, and 1998, respectively. The
$7.2 million, or 36.0%, increase in net income for the fiscal year ended June
30, 2000 as compared to the fiscal year ended June 30, 1999 resulted primarily
from a $15.9 million increase in net interest income and a $5.3 million increase
in noninterest income. Partially offsetting these increases was additional
noninterest expense of $10.5 million and an increase in the provision for loan
losses of $520,000. The $1.3 million, or 6.1%, decrease in net income for the
fiscal year ended June 30, 1999 as compared to the fiscal year ended June 30,
1998 resulted primarily from a $12.8 million increase in noninterest expense and
a $1.9 million decrease in noninterest income. Partially offsetting these
decreases in net income was an $11.1 million increase in net interest income and
a $443,000 decrease in the provision for loan losses.
Interest income. Interest income increased by $33.9 million, or 16.3%, on a
taxable equivalent basis, to $242.0 million for the fiscal year ended June 30,
2000 from $208.1 million for the fiscal year ended June 30, 1999. This increase
in interest income was primarily attributable to a $432.7 million, or 16.2%,
increase in average interest-earning assets to $3.104 billion from $2.671
billion. Also contributing to this increase in interest income was an increase
in the taxable equivalent yield on average interest-earning assets to 7.80% from
7.79%. The increase in average interest-earning assets was primarily due to the
investment of funds received from the acquisition of offices over the last 12
months with average deposits of approximately $350.0 million combined with the
continued internal growth of the Company's existing franchise. The increase in
the overall yield on interest-earning assets resulted primarily from an increase
in the yield on variable rate mortgage-backed securities due to an increase in
market interest rates. Interest income increased by $31.7 million, or 18.0%, on
a taxable equivalent basis, to $208.1 million for the fiscal year ended June 30,
1999 from $176.4 million for the fiscal year ended June 30, 1998. The increase
in interest income was primarily attributable to a $490.3 million, or 22.5%,
increase in average interest- earning assets to $2.671 billion from $2.181
billion. Partially offsetting this increase was a decrease in the taxable
equivalent yield on average interest-earning assets to 7.79% from 8.09%. The
increase in the average interest- earning assets was primarily due to the
investment of funds received from the acquisition of offices with deposits of
approximately $250.0 million combined with the strong internal growth of the
Company's existing franchise. The decrease in the overall yield on interest-
earning assets resulted primarily from the substantial growth of such assets
during a period of historically low interest rates.
Interest income on loans receivable increased by $22.2 million, or 12.7%,
to $196.6 million for the year ended June 30, 2000 from $174.4 million for the
year ended June 30, 1999. This increase primarily resulted from a $307.8
million, or 14.5%, increase in average loans receivable to $2.436 billion from
$2.128 billion. Partially offsetting this increase was a decrease in the yield
on average loans to 8.07% from 8.19%. The increase in average loans receivable
primarily resulted from strong loan demand throughout the Company's market area
as well as the purchase of approximately $47.0 million of loans in September,
1999 as part of the acquisition of eight retail offices. Despite an overall
increase in market rates in general, the average yield on loans declined as the
weighted average rate on a substantial number of loans refinanced in the prior
year continued to impact the average rate on the overall loan portfolio.
Interest income on loans receivable increased by $30.0 million, or 20.8%, to
$174.4 million for the year ended June 30, 1999 from $144.4 million for the year
ended June 30, 1998. This increase primarily resulted from a $438.1 million, or
25.9%, increase in average loans receivable to $2.128 billion for the year ended
June 30, 1999 compared to $1.690 billion for the year ended June 30, 1998.
Partially offsetting this increase was a decrease
33
in the yield on average loans to 8.19% from 8.54%. The increase in average loans
receivable primarily resulted from strong loan demand throughout the Company's
market areas and the acquisition of Corry, which contributed net loans of
approximately $22.0 million. The decrease in the yield on average loans
receivable resulted primarily from a large percentage of the Company's loan
portfolio being refinanced or restructured in an effort by borrowers to reduce
their interest rates. Also contributing to this decline was the substantial
growth of the portfolio during a period of relatively low interest rates.
Interest income on mortgage-backed securities increased by $9.6 million, or
54.5%, to $27.2 million for the year ended June 30, 2000 from $17.6 million for
the year ended June 30, 1999. This increase resulted primarily from a $108.8
million, or 35.6%, increase in average mortgage-backed securities to $414.5
million from $305.7 million, combined with an increase in the average yield to
6.57% from 5.77%. The increase in average balance was primarily due to the
investment of the funds received from branch acquisitions. The average yield on
mortgage-backed securities, most of which are variable rate, increased in
response to an increase in market interest rates for short-term securities.
Interest income on mortgage-backed securities decreased by $1.9 million, or
9.7%, to $17.6 million for the year ended June 30, 1999 from $19.5 million for
the year ended June 30, 1998. This decrease resulted primarily from a decrease
in the average yield to 5.77% for the year ended June 30, 1999 from 6.49% for
the year ended June 30, 1998. Partially offsetting this decrease in average
yield was an increase in the average balance of mortgage-backed securities of
$4.3 million, or 1.4%, to $305.7 million for the year ended June 30, 1999 from
$301.4 million for the year ended June 30, 1998. The decrease in average yield
was a result of a large percentage of the portfolio having variable interest
rates which repriced at lower market rates. The slight increase in the average
balance of mortgage-backed securities was a result of the purchase of
approximately $118.5 million of new securities during the fiscal year which were
partially offset by principal payments of approximately $75.7 million.
Interest income on investment securities increased by $2.1 million, or
15.2%, on a taxable equivalent basis, to $15.9 million for the year ended June
30, 2000 from $13.8 million for the year ended June 30, 1999. This increase
resulted primarily from a $23.3 million, or 11.9%, increase in the average
balance of investment securities to $219.1 million from $195.8 million, combined
with an increase in the average taxable equivalent yield to 7.24% from 7.05%.
The increase in the average balance was primarily due to the investment of a
portion of the Company's deposit growth. The increase in the average taxable
equivalent yield resulted primarily from the maturity or sale of approximately
$45.0 million of U.S. Treasury securities with an average yield of only 6.31%,
the proceeds of which were invested in higher yielding securities. Interest
income on investment securities increased by $2.9 million, or 26.6%, on a
taxable equivalent basis, to $13.8 million for the year ended June 30, 1999 from
$10.9 million for the year ended June 30, 1998. This increase resulted primarily
from a $37.2 million, or 23.4%, increase in the average balance of investment
securities to $195.8 million for the year ended June 30, 1999 from $158.6
million for the year ended June 30, 1998. Also contributing to the increase in
interest income on investment securities was an increase in the average taxable
equivalent yield to 7.05% from 6.89%. The increase in average balance was
primarily due to the investment of a percentage of the Company's deposit and
borrowing growth. The increase in average taxable equivalent yield resulted
primarily from the purchase of approximately $35.0 million of tax exempt
municipal securities during the second half of the fiscal year that have a
higher taxable equivalent yield than other securities in the Company's
investment portfolio.
Interest income on interest-earning deposits decreased by $143,000, or
14.0%, to $880,000 for the year ended June 30, 2000 from $1.0 million for the
year ended June 30, 1999. This decrease resulted primarily from an $11.2
million, or 45.3%, decrease in average interest-earning deposits to $13.5
million from $24.7 million. Partially offsetting this decrease in average
balance was an increase in the average yield on interest-earning deposits to
6.54% from 4.15%. The decrease in average balance was primarily due to improved
efficiencies by the Company in managing its cash in other institutions. The
increase in average yield is primarily due to the increase in market interest
rates in general. Interest income on interest-earning deposits increased by
$348,000, or 51.6%, to $1.0 million for the year ended June 30, 1999 from
$675,000 for the year ended June 30, 1998. This increase resulted primarily from
a $6.7 million, or 37.2%, increase in average interest-earning deposits to $24.7
million for the year ended June 30, 1999 from $18.0 million for the year ended
June 30, 1998. Also contributing to the increase in interest income on interest-
earning deposits was an increase in the average yield to 4.15% from 3.75%. The
increase
34
in average balance was primarily due to an increase in the float on checks
issued due to the significant loan origination volume during the year. The
volatility in average yield is largely influenced by the timing as to when the
Company begins to earn interest on its daily deposits and the float experienced
on checks issued.
Interest expense. Interest expense increased by $17.2 million, or 15.0%, to
$132.1 million for the year ended June 30, 2000 from $114.9 million for the year
ended June 30, 1999. This increase resulted primarily from a $406.3 million, or
16.2%, increase in average interest-bearing liabilities to $2.909 billion for
the year ended June 30, 2000 from $2.503 billion for the year ended June 30,
1999. Partially offsetting the increase in average balance of interest-bearing
liabilities was a decrease in the average cost of funds to 4.54% from 4.59%. The
increase in average interest-bearing liabilities resulted primarily from the
increase in deposits from the aforementioned acquisitions over the last 12
months with average deposits of approximately $350.0 million combined with
internal growth throughout the Company's market areas. Partially offsetting this
increase in deposits was a decrease of $17.0 million, or 5.4%, in average
borrowed funds to $299.9 million for the year ended June 30, 2000 from $316.9
million for the year ended June 30, 1999. This change in mix between deposits
and borrowed funds resulted from the Company utilizing a portion of the funds
received from acquisitions to repay borrowed funds. The decrease in the average
cost of funds resulted primarily from a decrease in the average interest rate
paid on the Company's checking accounts to 1.36% from 1.69% in response to
competitive forces in its market. In addition, lower interest rates for
certificates of deposit issued in the prior year carried over and caused the
average rate paid to decline to 5.41% from 5.49%. Partially offsetting the
decrease in interest expense due to lower average interest rates on deposits was
an increase in the average interest rate on borrowed funds to 5.55% for the year
ended June 30, 2000 from 5.30% for the year ended June 30, 1999. This increase
in the interest rate on borrowed funds was directly related to the increase in
the rate for overnight borrowings which reprice immediately with changes in
short term interest rates. Interest expense increased $19.7 million, or 20.7%,
to $114.9 million for the year ended June 30, 1999 from $95.2 million for the
year ended June 30, 1998. This increase resulted primarily from a $498.8
million, or 24.9%, increase in average interest-bearing liabilities to $2.503
billion for the year ended June 30, 1999 from $2.004 billion for the year ended
June 30, 1998. Partially offsetting the increase in average balance of interest-
bearing liabilities was a decrease in the average cost of funds to 4.59% from
4.75%. The increase in average interest-bearing liabilities resulted primarily
from the increase in deposits as a result of acquisitions with deposits of
approximately $250.0 million combined with the strong deposit growth from new
office openings. Also contributing to the increase in interest expense was a
$122.6 million, or 63.1%, increase in average borrowed funds to $316.9 million
for the year ended June 30, 1999 from $194.3 million for the year ended June 30,
1998. Levels of borrowings have fluctuated significantly over the past two years
as the Company has used these borrowings to fund, in advance, the purchase of
investment securities and the origination of loans in anticipation of the
receipt of deposits from various branch acquisitions. The decrease in the
average cost of funds resulted primarily from a decrease in market rates in
general which effectively lowered the interest rates paid for deposit accounts.
Net interest income. Net interest income increased by $16.7 million, or
17.9%, on a taxable equivalent basis, to $109.9 million for the year ended June
30, 2000 from $93.2 million for the year ended June 30, 1999. This increase
resulted primarily from a $432.7 million, or 16.2%, increase in average
interest-earning assets and an increase in the Company's net interest spread to
3.26% for the year ended June 30, 2000 from 3.20% for the year ended June 30,
1999, the effect of which was partially offset by a $406.3 million, or 16.2%,
increase in average interest-bearing liabilities. Net interest income increased
by $12.0 million, or 14.8%, on a taxable equivalent basis, to $93.2 million for
the year ended June 30, 1999 from $81.2 million for the year ended June 30,
1998. This increase resulted primarily from a $490.3 million, or 22.5%, increase
in average interest-earning assets, the effect of which was partially offset by
a $498.8 million, or 24.9%, increase in average interest-bearing liabilities and
a decrease in the Company's net interest spread to 3.20% for the year ended June
30, 1999 from 3.34% for the year ended June 30, 1998.
Provision for Loan Losses. The Company establishes valuation allowances for
probable losses inherent in the Company's loan portfolio. In providing such
allowances, management of the Company considers, among other factors, economic
trends within its market area, concentrations of credit risk and trends
affecting the valuation of collateral for the Company's loans. The Company
provided $4.1 million, $3.6 million and $4.1 million in loan loss provisions for
the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
35
The allowance for loan losses is based on management's estimate of the fair
value of collateral, the Company's actual loss experience, as well as standards
applied by the State Department of Banking and the FDIC. The Company provides
both general valuation allowances and specific valuation allowances with respect
to its loan portfolio. General valuation allowances are included, subject to
limitation, in the Company's regulatory capital for purposes of computing the
Company's regulatory risk-based capital. The Company regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate valuation allowances.
Noninterest income. Noninterest income increased by $5.3 million, or 88.3%,
to $11.3 million for the year ended June 30, 2000 from $6.0 million for the year
ended June 30, 1999. This increase was primarily the result of additional loan
and deposit fee income of approximately $1.5 million due to growth in loans and
deposits as well as an increase in fees associated with overdraft charges. In
addition, income from the sale of insurance to the Company's loan customers
increased by approximately $600,000, debit card transaction fee income increased
by $485,000 and surcharges for foreign ATM transactions contributed
approximately $400,000 to the increase in noninterest income. Also, the current
fiscal year contained a net gain on the sale of marketable securities, loans and
real estate owned of $944,000 compared to a net loss in the prior fiscal year of
$1.0 million from the sale of such assets. Noninterest income decreased by $1.9
million, or 24.1%, to $6.0 million for the year ended June 30, 1999 from $7.9
million for the year ended June 30, 1998. This decrease resulted primarily from
a decrease of $2.6 million in the gain on sale of assets. More specifically, the
Company recorded a net loss of $686,000 in the current year on the sale of
investment securities compared to a net gain on such sales in the previous year
of $1.5 million. The loss incurred in the year ended June 30, 1999 related to a
decrease in the market value of investment securities held in a trading
portfolio. Excluding the effect of these asset sales, noninterest income
increased approximately $700,000, or 11.3%, to $7.0 million for the year ended
June 30, 1999 from $6.3 million for the year ended June 30, 1998. This increase
was primarily due to additional fee income attributable to the substantial
growth in the Company's deposit and loan portfolio.
Noninterest expense. Noninterest expense increased by $10.5 million, or
16.6%, to $73.6 million for the year ended June 30, 2000 from $63.1 million for
the year ended June 30, 1999. This increase resulted primarily from expected
increases associated with a 14% increase in the Company's network of community
banking and finance company offices. Partially mitigating these growth related
increases was a one-time occurrence of expenses in the prior year, primarily
consisting of additional compensation expense relating to the Company's
conversion to a new core application data processing system. As a result of the
Company's growth along with normal inflationary increases in costs, all expenses
categories, except FDIC premium expense, increased for the year ended June 30,
2000 compared to the year ended June 30, 1999. Compensation and employee benefit
expense increased by $3.0 million, or 8.6%, to $38.0 million; premises and
occupancy costs increased by $2.0 million, or 28.2%, to $9.1 million; and other
expenses increased by $3.3 million, or 20.1%, to $19.7 million. In addition, as
a result of recording an intangible asset of approximately $21.0 million
relating to the acquisition of eight offices with deposits over the last 12
months, the expense for the amortization of intangibles increased by $2.3
million, or 65.7%, to $5.8 million for the year ended June 30, 2000 from $3.5
million for the year ended June 30, 1999. FDIC premium expense decreased by
$238,000, or 21.0%, to $894,000 for the year ended June 30, 2000 from $1.1
million for the year ended June 30, 1999 as a result of the last of a series of
incremental decreases to the FDIC insurance rate. The premium was reduced on
January 1, 2000 to $.21 from $.58 for every $1,000 in deposits. Noninterest
expense increased by $12.8 million, or 25.4%, to $63.1 million for the year
ended June 30, 1999 from $50.3 million for the year ended June 30, 1998. This
increase resulted primarily from expected increases associated with the
substantial growth of the Company's retail network during the fiscal year along
with substantial investments in data processing and technology. The Company
opened or acquired 23 full service banking facilities during the year ended June
30, 1999 which represented a 32.3% increase in the Company's branch office
network. In addition, the Company undertook a major conversion to a new
mainframe core application data processing system in November, 1998. This
conversion was completed to enable the Company to become more competitive into
the next century and to accomplish most of the Company's Year 2000 initiatives.
The Company has identified approximately $1.5 million in one-time expenses
associated with this conversion, most of which was due to additional
compensation and travel. As a result of the substantial growth in offices, the
computer conversion and normal inflationary increases in costs, all expense
categories increased in the fiscal year ended June 30, 1999 compared with the
fiscal year ended June 30,
36
1998. Compensation and employee benefit expense increased by $6.7 million, or
23.7%, to $35.0 million; premises and occupancy costs increased by $1.2 million,
or 20.3%, to $7.1 million; and other expenses increased by $3.2 million, or
22.4%, to $17.5 million. In addition, as a result of recording intangibles of
approximately $21.0 million relating to the acquisitions of Jamestown, Corry and
11 retail offices with deposits, the expense for the amortization of intangibles
increased by $1.7 million, or 94.4%, to $3.5 million for the year ended June 30,
1999 from $1.8 million for the year ended June 30, 1998.
Income taxes. Income tax expense increased by $3.0 million, or 27.5%, to
$13.9 million for the year ended June 30, 2000 from $10.9 million for the year
ended June 30, 1999. This increase was primarily due to an increase in net
income before tax which was partially offset by a decrease in the effective tax
rate to 33.8% for the year ended June 30, 2000 from 35.3% for the year ended
June 30, 1999. This decrease in effective tax rate was due to an increase in the
Company's portfolio of tax free assets. Income tax expense decreased by $2.1
million, or 16.2%, to $10.9 million for the year ended June 30, 1999 from $13.0
million for the year ended June 30, 1998. This decrease was primarily due to a
decrease in net income before tax as well as a decrease in the effective tax
rate to 35.3% for the year ended June 30, 1999 from 38.1% for the year ended
June 30, 1998. The decrease in the effective tax rate was also due to an
increase in the Company's portfolio of tax free assets.
Deposit Insurance Premiums. The deposits of the Company are presently
insured by SAIF, which along with the Bank Insurance Fund (the "BIF"), is one of
the two insurance funds administered by the FDIC. In September 1996, Congress
enacted legislation to recapitalize the SAIF by a one-time assessment on all
SAIF-insured deposits held as of March 31, 1995. The assessment was 65.7 basis
points of deposits, payable on November 30, 1996. For the Company, the
assessment amounted to $8.6 million (or $5.1 million when adjusted for taxes),
based on the Company's SAIF-insured deposits, including the March 31, 1995
deposits of all SAIF insured institutions acquired by Northwest after March 31,
1995, of $1.304 billion. In addition, pursuant to the legislation, interest
payments on FICO bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation are
now paid jointly by BIF-insured institutions and SAIF-insured institutions.
Beginning January 1, 2000, the FICO interest payments are paid pro-rata by banks
and thrifts based on approximately 2.1 basis points of deposits.
37
Average Balance Sheet. The following table sets forth certain
information relating to the Company's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from monthly averages.
Years Ended June 30
2000 1999 1998
------------------------------- ------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- --------- --------- --------- --------- --------- --------- --------- -------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)(2) ........ $2,436,260 196,596 8.07% $2,128,480 174,393 8.19% $1,690,412 144,354 8.54%
Mortgage-backed securities (3) . 414,548 27,236 6.57 305,676 17,649 5.77 301,374 19,547 6.49
Investment securities(3)(4)(5) . 219,073 15,861 7.24 195,788 13,806 7.05 158,558 10,927 6.89
FHLB stock ..................... 20,578 1,420 6.90 16,551 1,195 7.22 12,544 870 6.94
Interest-earning deposits ...... 13,450 880 6.54 24,669 1,023 4.15 18,010 675 3.75
---------- ---------- ---------- -------- ---------- --------
Total interest-earning assets .. 3,103,909 241,993 7.80 2,671,164 208,066 7.79 2,180,898 176,373 8.09
Noninterest-earning assets ....... 171,675 154,601 85,538
---------- ---------- ----------
Total assets .................. $3,275,584 $2,825,765 $2,266,436
========== ========== ==========
Interest-bearing liabilities:
Savings accounts ........... $ 418,871 13,650 3.26 $ 359,137 11,819 3.29 $ 302,381 10,227 3.38
NOW accounts ................... 335,775 4,559 1.36 296,786 5,001 1.69 239,863 4,469 1.86
Money market demand accounts ... 185,261 6,855 3.70 136,810 4,830 3.53 96,558 3,395 3.52
Certificate accounts ........... 1,669,375 90,386 5.41 1,393,199 76,457 5.49 1,171,009 66,955 5.72
Borrowed funds(6) .............. 299,857 16,649 5.55 316,930 16,804 5.30 194,282 10,157 5.23
---------- ---------- ---------- -------- ---------- --------
Total interest-bearing
liabilities .................. 2,909,139 132,099 4.54 2,502,862 114,911 4.59 2,004,093 95,203 4.75
Noninterest-bearing liabilities .. 127,596 96,315 54,537
---------- ---------- ----------
Total liabilities .............. 3,036,735 2,599,177 2,058,630
Minority interest in subsidiary .. -- 294 623
Shareholders' equity ............. 238,849 226,294 207,183
---------- ---------- ----------
Total liabilities and equity ... $3,275,584 $2,825,765 $2,266,436
========== ========== ==========
Net interest income .............. $ 109,894 $ 93,155 $ 81,170
========== ========== =========
Net interest rate spread(7) ...... 3.26% 3.20% 3.34%
==== ==== ====
Net interest-earning assets ...... $ 194,770 $ 168,302 $ 176,805
========== ========== ==========
Net interest margin(8) ........... 3.54% 3.49% 3.72%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities ............ 1.07x 1.07x 1.09x
========== ========== ==========
- -----------------------------------------
(1) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(2) Interest income includes accretion/amortization of deferred loan
fees/expenses.
(3) Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(4) Interest income on tax-free investment securities is presented on a taxable
equivalent basis.
(5) Average balances include FNMA and FHLMC stock.
(6) Average balances include FHLB advances, securities sold under agreements to
repurchase and other borrowings.
(7) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(8) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
38
Rate/Volume Analysis. Net interest income can also be analyzed in terms of
the impact of changes in interest rates on interest-earning assets and interest-
bearing liabilities and changes in the volume or amount of these assets and
liabilities. The following table represents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (change
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume), (iii) changes in rate-volume
(changes in rate multiplied by changes in volume), and (iv) the net change.
Years Ended June 30,
-------------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-------------------------------------------- -------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
-------------------------------- Total ------------------------------- Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
-------- -------- -------- -------- -------- -------- -------- --------
(In Thousands)
Interest-earning assets:
Loans receivable ................... $ (2,633) $ 25,217 $ (381) 22,203 $ (5,853) $ 37,409 $ (1,517) 30,039
Mortgage-backed securities ......... 2,434 6,286 867 9,587 (2,146) 279 (31) (1,898)
Investment securities .............. 369 1,642 44 2,055 254 2,565 60 2,879
FHLB stock ......................... (53) 291 (13) 225 36 278 11 325
Interest-earning deposits .......... 591 (465) (269) (143) 71 250 27 348
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets .... 708 32,971 248 33,927 (7,638) 40,781 (1,450) 31,693
Interest-bearing liabilities:
Savings accounts ................... (116) 1,966 (19) 1,831 (276) 1,920 (52) 1,592
NOW accounts ....................... (971) 657 (128) (442) (427) 1,060 (101) 532
Money market demand accounts ....... 232 1,711 82 2,025 14 1,415 6 1,435
Certificate accounts ............... (1,024) 15,156 (203) 13,929 (2,691) 12,704 (511) 9,502
Borrowed funds ..................... 793 (906) (42) (155) 144 6,412 91 6,647
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities (1,086) 18,584 (310) 17,188 (3,236) 23,511 (567) 19,708
Net change in net interest income $ 1,794 $ 14,387 $ 558 16,739 $ (4,402) $ 17,270 $ (883) 11,985
======== ======== ======== ======== ======== ======== ======== ========
Asset and Liability Management-Interest Rate Sensitivity Analysis. The
matching of assets and liabilities may be analyzed by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Similarly, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by increasing the interest rate
sensitivity of its interest-earning assets. The Company (i) emphasizes the
origination of short-term, fixed-rate consumer loans, and at June 30, 2000, such
loans constituted $396.0 million, or 15.4%, of the Company's total loan
portfolio; (ii) emphasizes the origination of one- to four-family residential
mortgage loans with terms of 15 years or less, and purchases shorter term or
adjustable-rate investment securities and mortgage-backed securities; and (iii)
originates adjustable-rate mortgage loans, adjustable-rate consumer loans, and
adjustable-rate commercial loans, which at June 30, 2000, totalled $259.8
million or 10.1% of the Company's total loan portfolio. Of the Company's $3.207
billion of interest-earning assets at June 30, 2000, $613.7 million, or 19.1%,
consisted of assets with adjustable rates of interest. The Company also attempts
to reduce interest rate risk by lengthening the maturities of its interest-
bearing
39
liabilities by using FHLB advances as a source of long-term fixed-rate funds,
and by promoting longer term certificates of deposit.
At June 30, 2000, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $155.5 million, representing a cumulative negative one-year
gap ratio of 4.71%. The Company has a Risk Management Committee comprised of
certain members of the Board of Directors which is responsible for reviewing the
Company's asset and liability management policies. The Committee meets quarterly
and, as part of their risk management assessment, reviews interest rate risks
and trends, the Company's interest sensitivity position and the liquidity and
market value of the Company's investment portfolio.
The following table sets forth, on an amortized cost basis, the amounts of
interest-earning assets and interest-bearing liabilities outstanding at June
30, 2000, which are expected to reprice or mature, based upon certain
assumptions, in each of the future time periods shown. Except as stated below,
the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the term of
repricing or the contractual term of the asset or liability. Management believes
that these assumptions approximate the standards used in the savings industry
and considers them appropriate and reasonable. For information regarding the
contractual maturities of the Company's loans, investments and deposits, see
"Business of the Company--Lending Activities," "--Investment Activities" and
"--Sources of Funds."
Amounts Maturing or Repricing
-----------------------------------------------------------------------------------
Within 1-3 3-5 5-10 10-20 Over 20
1 Year Years Years Years Years Years Total
----------- --------- --------- --------- --------- --------- -----------
(Dollars in Thousands)
Rate-sensitive assets:
Interest-earning deposits ............. $ 8,461 $ -- $ -- $ -- $ -- $ -- $ 8,461
Mortgage-backed securities:
Fixed ................................ 14,770 21,269 13,612 16,956 7,243 -- 73,850
Variable ............................. 350,940 -- -- -- -- -- 350,940
Investment securities ................. 35,655 21,365 -- 41,410 110,366 -- 208,796
Real estate loans:
Adjustable-rate ...................... 30,551 7,749 -- -- -- -- 38,300
Fixed-rate ........................... 251,436 430,350 359,421 511,184 137,705 82,492 1,772,588
Home equity lines of credit ........... 44,848 -- -- -- -- -- 44,848
Education loans ....................... 70,619 -- -- -- -- -- 70,619
Other consumer loans .................. 277,678 117,792 5 -- -- -- 395,475
Commercial loans ...................... 105,799 84,700 49,335 3,055 -- -- 242,889
----------- --------- --------- --------- --------- --------- -----------
Total rate-sensitive assets ......... $ 1,190,757 $ 663,225 $ 422,373 $ 572,605 $ 255,314 $ 82,492 $ 3,206,766
=========== ========= ========= ========= ========= ========= ===========
Rate-sensitive liabilities:
Fixed maturity deposits ............... $ 1,042,401 $ 660,620 $ 83,830 $ 13,310 $ -- $ -- $ 1,800,161
Money market deposit accounts ......... 61,085 61,086 61,086 -- -- -- 183,257
Savings accounts ...................... 107,782 82,930 82,930 -- 159,266 -- 432,908
Checking accounts ..................... 42,383 -- -- -- -- 427,800 470,183
FHLB advances ......................... 58,000 42,200 25,150 76,252 -- -- 201,602
Other borrowings ...................... 34,590 2,555 1,194 -- -- -- 38,339
----------- --------- --------- --------- --------- --------- -----------
Total rate-sensitive liabilities .... $ 1,346,241 $ 849,391 $ 254,190 $ 89,562 $ 159,266 $ 427,800 $ 3,126,450
=========== ========= ========= ========= ========= ========= ===========
Interest sensitivity gap per period ..... $ (155,484) $(166,166) $ 168,183 $ 483,043 $ 96,048 $(345,308) $ 80,316
=========== ========= ========= ========= ========= ========= ===========
Cumulative interest sensitivity gap ..... $ (155,484) $(321,650) $(153,467) $ 329,576 $ 425,624 $ 80,316 $ 80,316
=========== ========= ========= ========= ========= ========= ===========
Cumulative interest sensitivity gap as a
percentage of total assets ............ (4.71)% (9.74)% (4.65)% 9.98% 12.89% 2.43% 2.43%
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities ........................... 88.45% 85.35% 93.74% 112.98 115.77% 102.57% 102.57%
When assessing the interest rate sensitivity of the company, analysis of
historical trends indicates that loans will prepay at various speeds (or annual
rates) depending on the variance between the weighted average portfolio rates
and the current market rates. In preparing the table above, it has been assumed
market rates will remain constant at current levels and as a result, the
Company's loans will be affected as follows: (i) adjustable-rate mortgage loans
will prepay at an annual rate of 20%; (ii) fixed-rate mortgage loans will prepay
at an annual rate of 10% to 15%; (iii) commercial loans will prepay at an annual
rate of 15%; (iv) consumer loans held by the Bank will
40
prepay at an annual rate of 25%; and (v) consumer loans held by Northwest
Consumer will prepay at an annual rate of 60% to 65%. In regards to the
Company's deposits, it has been assumed that (i) fixed maturity deposits will
not be withdrawn prior to maturity; (ii) money market accounts will gradually
reprice over the next five years; and (iii) savings accounts and checking
accounts will reprice either when the rates on such accounts reprice as interest
rate levels change, or when deposit holders withdraw funds from such accounts
and select other types of deposit accounts, such as certificate accounts, which
may have higher interest rates. For purposes of this analysis, management has
estimated, based on historical trends, that only $40 million of the Company's
checking accounts and $104 million of the Company's savings accounts are
interest sensitive and will reprice in one year or less, and that the remainder
will reprice over longer time periods.
The above assumptions utilized by management are annual percentages based
on remaining balances and should not be regarded as indicative of the actual
prepayments and withdrawals that may be experienced by the Company. Moreover,
certain shortcomings are inherent in the analysis presented by the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as some adjustable-
rate loans, have features that restrict changes in interest rates on a short-
term basis and over the life of the asset. Moreover, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table.
In an effort to assess the market risk, the Company utilizes a simulation
model to determine the effect of immediate incremental increases or decreases in
interest rates on net interest income and the market value of the Company's
equity. Certain assumptions are made regarding loan prepayments and decay rates
of passbook and NOW accounts. Because it is difficult to accurately project the
market reaction of depositors and borrowers, the effects of actual changes in
interest on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming interest
rate risk:
. Net interest margin simulation. Given a parallel shift of 2%
in interest rates, the estimated net interest margin may not
change by more than 30% within a one-year period.
. Market value of equity simulation. The market value of the
Company's equity is the net present value of the Company's
assets and liabilities. Given a parallel shift of 2% in
interest rates, equity may not decrease by more than 50% of
total shareholder' equity.
The following table illustrates the simulated impact of a 1% or 2%
upward or downward movement in interest rates on net interest income, return on
average equity, earnings per share and market value of equity. This analysis was
prepared assuming that interest-earning asset levels at June 30, 2000 remain
constant. The impact of the rate movements was computed by simulating the effect
of an immediate and sustained shift in interest rates over a twelve-month period
from the June 30, 2000 levels.
Movements in interest rates from
June 30, 2000 rates
---------------------------------------------------
Increase Decrease
------------------------- -----------------------
1% 2% 1% 2%
----------- ----------- ---------- ----------
Simulated impact over the next 12 months compared with June 30, 2000:
Percentage increase/(decrease) in net income ........................... (6.11)% (13.82)% 2.60% 3.63%
Increase/(decrease) in return on average equity ........................ (0.76)% (1.72)% 0.32% 0.45%
Increase/(decrease) in earnings per share .............................. $ (0.04) $ (0.09) $ 0.02 $ 0.02
Percentage increase/(decrease) in market value of equity ............... (20.92)% (47.77)% 12.91% 14.94%
41
Regulatory Capital Requirements. The Company is subject to minimum capital
standards which are similar to those applicable to the Bank. The FDIC has
promulgated regulations and adopted a statement of policy regarding the capital
adequacy of state-chartered banks. The FDIC's capital regulations establish a
minimum 3.0% Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier I leverage ratio for such other banks
to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks are
those that the FDIC determines are not anticipating or experiencing significant
growth and have well diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity, good earnings and, in
general, which are considered a strong banking organization, rated composite 1
under the Uniform Financial Institutions Rating System. Leverage or core capital
is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit card relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2000, the
Company exceeded each of its capital requirements.
A bank which has less than the minimum leverage capital requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional director for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner, and could be subject
to a cease-and-desist order from the FDIC. The FDIC's regulation also provides
that any insured depository institution with a ratio of Tier I capital to total
assets that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition pursuant to Section 8(a) of the FDIA and is subject to potential
termination of deposit insurance. However, such an institution will not be
subject to an enforcement proceeding thereunder solely on account of its capital
ratios if it has entered into and is in compliance with a written agreement with
the FDIC to increase its Tier I leverage capital ratio to such level as the FDIC
deems appropriate and to take such other action as may be necessary for the
institution to be operated in a safe and sound manner. The FDIC capital
regulation also provides, among other things, for the issuance by the FDIC or
its designee(s) of a capital directive, which is a final order issued to a bank
that fails to maintain minimum capital to restore its capital to the minimum
leverage capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.
42
The following table summarizes the Company's total stockholders' equity,
regulatory capital, total risk-based assets including off-balance sheet items,
leverage and risk-based regulatory ratios at June 30, 2000 and June 30, 1999.
June 30, 2000 June 30, 1999
------------------ ----------------
Total shareholders' equity or GAAP capital ............................. $ 247,888 $ 233,657
Add (less): unrealized loss (gain) on securities available-for-sale .... 5,104 (1,978)
Less: nonqualifying intangible assets .................................. (54,575) (41,643)
Leverage capital ....................................................... 198,417 190,036
Plus: Tier 2 capital (1) ............................................... 18,981 18,011
----------- -----------
Total risk-based capital ............................................... $ 217,398 $ 208,047
=========== ===========
Quarterly average total assets for leverage ratio ...................... $ 3,348,498 $ 3,015,829
=========== ===========
Net risk-weighted assets including off-balance sheet items ............. $ 1,853,486 $ 1,642,302
=========== ===========
Leverage capital ratio ................................................. 5.93% 6.30%
Minimum requirement (2) ................................................ 3.00 to 5.00% 3.00 to 5.00%
Risk-based capital ratio ............................................... 11.73% 12.67%
Minimum requirement .................................................... 8.00% 8.00%
- -----------------------------
(1) Tier 2 capital consists of the allowance for loan losses, which is limited
to 1.25% of total risk-weighted assets as detailed under regulations of the
FDIC, and 45% of pre-tax net unrealized gains on equity securities
available-for-sale with readily determinable fair values.
(2) The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3.00%, and all
other institutions will be required to maintain an additional cushion of
100 to 200 basis points.
The Company is also subject to Pennsylvania Department of Banking
("Department") capital guidelines. Although not adopted in regulation form, the
Department utilizes capital standards of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
Liquidity and Capital Resources. The Company is required to maintain a
sufficient level of liquid assets, as determined by management and defined and
reviewed for adequacy by the FDIC during their regular examinations. The FDIC,
however, does not prescribe by regulation a minimum amount or percentage of
liquid assets. The FDIC allows any marketable security, whose sale would not
impair the capital adequacy of the Company, to be eligible for liquidity. The
Company's liquidity is quantified through the use of a standard liquidity ratio
of liquid assets to short-term borrowings plus deposits. Using this formula, the
Company's liquidity ratio was 23.2% as of June 30, 2000. The Company adjusts its
liquidity levels in order to meet funding needs of deposit outflows, repayment
of borrowings and loan commitments. The Company also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Company's primary sources of funds are the amortization and repayment
of loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rate levels, economic conditions, and
competition. The Company manages the pricing of its deposits to maintain a
desired deposit balance. In addition, the Company invests excess funds in
short-term interest-earning and other assets, which provide liquidity to meet
lending requirements. Short-term interest-earning deposits with the FHLB of
Pittsburgh amounted to $8.5 million at June 30, 2000. Other assets qualifying
for liquidity outstanding at June 30, 2000, amounted to $692.7 million. For
additional information about cash flows from the Company's operating, financing,
and investing activities, see Statements of Cash Flows included in the
Consolidated Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
43
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 2000, the Company had $201.6 million in advances
from the FHLB. The Company borrows from the FHLB to reduce interest rate risk
and to provide liquidity when necessary.
At June 30, 2000, the Company's customers had $84.1 million of unused lines
of credit available. This amount does not include the unfunded portion of loans
in process. Certificates of deposit scheduled to mature in less than one year at
June 30, 2000, totaled $1.042 billion. Based on prior experience, management
believes that a significant portion of such deposits will remain with the
Company.
The major sources of the Company's cash flows are the areas of loans,
marketable securities, deposits and borrowed funds.
Deposits are the Company's primary source of externally generated funds.
The level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-term
and long-term interest rates in the economy, as well as higher alternative
yields that investors may obtain on competing investments such as money market
mutual funds. Financial institutions, such as the Company, are also subject to
deposit outflows. The Company's net deposits excluding interest credits and
acquisitions, increased by $61.5 million, $117.1 million and $97.0 million for
the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Similarly, the amount of principal repayments on loans and the amount of
new loan originations is heavily influenced by the general level of interest
rates in the economy. Funds received from principal payments on loans for the
fiscal years ended in June 30, 2000, 1999 and 1998 were $408.8 million, $512.1
million and $425.3 million, respectively. Loan originations for the years ended
June 30, 2000, 1999 and 1998 were $629.1 million, $881.9 million and $802.1
million, respectively. The Company also sells a portion of the loans it
originates and the cash flows from such sales for the fiscal years ended June
30, 2000, 1999 and 1998 were $1.1 million, $7.4 million and $30.1 million,
respectively.
The Company also experiences significant cash flows from its portfolio of
marketable securities as principal payments are received on mortgage-backed
securities and investment securities, which generally are of short duration,
mature. During recent years, the Company has utilized cash to increase its
portfolio of marketable securities. Cash flow from the repayment of principal
and the maturity of marketable securities for the fiscal years ended June 30,
2000, 1999 and 1998 were $44.4 million, $122.5 million and $59.6 million,
respectively. During the fiscal years ended June 30, 2000, 1999 and 1998, the
bank utilized cash to purchase marketable securities in the amount of $122.4
million, $195.1 million and $167.4 million, respectively.
The Company utilizes borrowings as a source of liquidity, when necessary,
and as a source of funds for long term investment when market conditions permit.
The net cash flow from the receipt and repayment of borrowings was a net
decrease of $109.0 million for the fiscal year ended June 30, 2000 and net
increases of $59.2 million and $66.2 million for the fiscal years ended June 30,
1999 and 1998, respectively.
Other activity with respect to cash flow was the payment of cash dividends
on common stock in the amount of $7.6 million, $7.6 million and $7.5 million for
the fiscal years ended June 30 2000, 1999 and 1998, respectively.
Impact of Inflation and Changing Prices. The Consolidated Financial
Statements of the Company and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
44
Year 2000
To date the Company has experienced no Y2K related problems. Software
applications and data processing systems continue to be monitored for any
problems that may arise.
The total cost to the Company for Y2K readiness was approximately $3.0
million. Approximately $1.5 million of these costs were expenses recorded in the
prior fiscal year during the quarters ended December 31, 1998 and March 31, 1999
primarily related to payroll and other employee related expenses. The remaining
costs, most of which relate to the core application processing system installed
in November 1998, have been capitalized and are being expensed in accordance
with the Company's depreciation policy.
The implementation of the new data processing system not only accomplished
the Company's Y2K objectives but also positioned the Company for future
technological changes and an advanced product line. The Company completed its
Y2K objectives almost entirely with existing in-house personnel who have either
resumed their original duties or have been assigned to additional initiatives.
The Company also continues to monitor its relationships with material third
parties, including large deposits and loan customers, to assess their operations
relative to Y2K issues. While the Company has experienced no third party
problems to date, and does not foresee any problems which may be material in
nature, there can be no assurance as to completely eliminate the potential for
future losses.
Impact of New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position No. 98-1 ("SOP 98-1") "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use, that otherwise may have been
expensed. This statement is effective for fiscal years beginning after December
15, 1998 and restatement of prior year financial information is not permitted.
Adoption of this statement in the current fiscal year did not have a material
effect on the Company's financial position or results of operations.
In June 1998, the FASB released SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This statement was to be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This
effective date was changed, however, in June 1999, when the FASB issued SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement 133 - an Amendment of FASB Statement 133,"
which delayed the adoption of FASB Statement 133 until the first quarter of the
Company's fiscal year 2001. The Company does not expect this statement to have a
material effect on the financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an Interpretation of APB Opinion No. 25." This Interpretation
clarifies the application of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) for only certain issues. The issues addressed by this
interpretation were resolved within the framework of the intrinsic value method
prescribed by APB 25, and do not amend APB 25. Among the issues this
interpretation clarifies are (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
concompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensations awards in a business combinations.
This Interpretation is effective July 1, 2000, but certain conclusions in
this Interpretation cover specific events that occur after either December 15,
1998 or January 12, 2000. To the extent that this Interpretation covers
45
events occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not determined the impact of the adoption of the Interpretation at
this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section set forth above is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
[LETTERHEAD OF KPMG LLP]
Independent Auditor's Report
The Board of Directors
Northwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Northwest Bancorp, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended June 30,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsbility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Northwest Bancorp,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
July 20, 2000
46
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 2000 and 1999
(Amounts in thousands, excluding share data)
Assets 2000 1999
-------------- --------------
Cash and cash equivalents $ 82,305 75,325
Interest-earning deposits in other financial institutions 8,461 8,928
Marketable securities available-for-sale (amortized cost of
$395,830 and $332,182) (notes 4 and 11) 387,983 334,623
Marketable securities held-to-maturity (market value of
$222,364 and $250,351) (notes 4 and 11) 237,756 253,864
Loans receivable, net of allowance for estimated
losses of $18,260 and $16,773 (notes 5, 7 and 11) 2,544,630 2,285,238
Accrued interest receivable (note 6) 15,978 14,548
Real estate owned, net 2,144 3,383
Federal Home Loan Bank stock, at cost (notes 8 and 11) 21,269 18,157
Premises and equipment, net (note 9) 40,953 35,463
Goodwill and other intangibles 52,300 38,253
Other assets 13,513 11,050
-------------- --------------
Total assets $ 3,407,292 3,078,832
============== ==============
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 10) 2,886,509 2,463,711
Borrowed funds (note 11) 239,941 348,915
Advances by borrowers for taxes and insurance 22,557 18,954
Accrued interest payable 2,352 3,698
Other liabilities 8,045 9,897
-------------- --------------
Total liabilities 3,159,404 2,845,175
Shareholders' equity (notes 13, 15, 17 and 20):
Common stock, $.10 par value, authorized 100,000,000
shares; 47,360,769 and 47,355,073 issued and
outstanding at June 30, 2000 and 1999, respectively 4,736 4,736
Paid-in capital 70,949 70,374
Retained earnings, substantially restricted 177,371 157,745
Accumulated other comprehensive income (loss), net (5,104) 1,978
Unearned employee stock ownership plan shares -- (561)
Unearned recognition and retention plan shares (64) (615)
-------------- --------------
Total shareholders' equity 247,888 233,657
-------------- --------------
Total liabilities and shareholders' equity $ 3,407,292 3,078,832
============== ==============
See accompanying notes to consolidated financial statements.
47
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
2000 1999 1998
--------------- --------------- --------------
Interest income:
Loans receivable $ 196,596 174,393 144,354
Mortgage-backed securities 27,236 17,649 19,547
Taxable investment securities 10,608 10,669 9,999
Tax-free investment securities 4,404 2,859 1,187
Interest-earning deposits 880 1,023 675
--------------- --------------- --------------
Total interest income 239,724 206,593 175,762
Interest expense:
Deposits (note 10) 115,450 98,107 85,046
Borrowed funds 16,649 16,804 10,157
--------------- --------------- --------------
Total interest expense 132,099 114,911 95,203
--------------- --------------- --------------
Net interest income 107,625 91,682 80,559
Provision for loan losses (note 7) 4,149 3,629 4,072
--------------- --------------- --------------
Net interest income after provision
for loan losses 103,476 88,053 76,487
Noninterest income:
Loan fees and service charges 7,020 4,500 3,347
Gain (loss) on sale of marketable securities, net 397 (686) 1,500
Loss on sale of loans (74) (481) (369)
Gain on sale of real estate owned 621 150 164
Gain on sale of real estate owned for investment -- -- 339
Insurance income 2,135 1,527 1,640
Other operating income 1,172 1,000 1,326
--------------- --------------- --------------
Total noninterest income 11,271 6,010 7,947
48
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
2000 1999 1998
-------------- -------------- --------------
Noninterest expense:
Compensation and employee benefits (note 15) $ 38,028 35,005 28,326
Premises and occupancy costs 9,138 7,116 5,857
Federal insurance premiums 894 1,132 773
Data processing 2,661 2,149 1,633
Check processing 3,263 2,364 2,026
Advertising 2,048 1,809 1,283
Amortization of intangibles 5,831 3,458 1,808
Other expenses 11,771 10,077 8,612
-------------- -------------- --------------
Total noninterest expense 73,634 63,110 50,318
-------------- -------------- --------------
Income before income taxes 41,113 30,953 34,116
Provision for income taxes (note 12):
Federal 11,263 8,910 11,232
State 2,647 2,004 1,763
-------------- -------------- --------------
Total provision for income taxes 13,910 10,914 12,995
Minority interest in net loss of subsidiary -- 3 201
-------------- -------------- --------------
Net income $ 27,203 20,042 21,322
============== ============== ==============
Basic earnings per share (note 14) $ .58 .42 .46
============== ============== ==============
Diluted earnings per share (note 14) $ .57 .42 .45
============== ============== ==============
See accompanying notes to consolidated financial statements.
49
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
Accumulated
other
Common Paid-in Retained comprehensive
stock capital earnings income (loss), net
-------------- ------------ -----------------------------------------
Balance at June 30, 1997 $ 2,338 67,854 131,423 1,026
Comprehensive income:
Net income -- -- 21,322 --
Change in unrealized gain on securities,
net of tax -- -- -- 2,345
-------------- ------------ -----------------------------------------
Total comprehensive income -- -- 21,322 2,345
Adjustment resulting from two-for-one stock
split in dividend form 2,338 (2,338) -- --
Exercise of stock options 8 401 -- --
Tax benefit for excess of fair value above
cost of stock option and retention plans -- 449 -- --
ESOP shares released -- 882 -- --
RRP shares released -- -- -- --
Dividends declared -- -- (7,486) --
-------------- ------------ -----------------------------------------
Balance at June 30, 1998 4,684 67,248 145,259 3,371
Comprehensive income:
Net income -- -- 20,042 --
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- (1,393)
-------------- ------------ -----------------------------------------
Total comprehensive income -- -- 20,042 (1,393)
Stock issuance for acquisition* 48 1,145 -- --
Exercise of stock options 4 216 -- --
Tax benefit for excess of fair value above
cost of stock option and retention plans -- 214 -- --
ESOP shares released -- 1,551 -- --
RRP shares released -- -- -- --
Dividends declared -- -- (7,556) --
-------------- ------------ ---------------- -----------------------
Balance at June 30, 1999 4,736 70,374 157,745 1,978
Unearned Unearned
employee recognition
stock and Total
ownership retention shareholders'
plan shares plan shares equity
---------------- ----------------- ------------------
Balance at June 30, 1997 (2,358) (1,789) 198,494
Comprehensive income:
Net income -- -- 21,322
Change in unrealized gain on securities,
net of tax -- -- 2,345
---------------- ----------------- ------------------
Total comprehensive income -- -- 23,667
Adjustment resulting from two-for-one stock
split in dividend form -- -- --
Exercise of stock options -- -- 409
Tax benefit for excess of fair value above
cost of stock option and retention plans -- -- 449
ESOP shares released 946 -- 1,828
RRP shares released -- 518 518
Dividends declared -- -- (7,486)
---------------- ----------------- ------------------
Balance at June 30, 1998 (1,412) (1,271) 217,879
Comprehensive income:
Net income -- -- 20,042
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- (1,393)
---------------- ----------------- ------------------
Total comprehensive income -- -- 18,649
Stock issuance for acquisition* -- -- 1,193
Exercise of stock options -- -- 220
Tax benefit for excess of fair value above
cost of stock option and retention plans -- -- 214
ESOP shares released 851 -- 2,402
RRP shares released -- 656 656
Dividends declared -- -- (7,556)
---------------- ----------------- ------------------
Balance at June 30, 1999 (561) (615) 233,657
50
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
Accumulated
other
Common Paid-in Retained comprehensive
stock capital earnings income (loss), net
-------------- -------------- ---------------------------------------
Comprehensive income:
Net income $ -- -- 27,203 --
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- (7,082)
-------------- -------------- ---------------------------------------
Total comprehensive income -- -- 27,203 (7,082)
Exercise of stock options -- 20 -- --
Tax benefit for excess of fair value above
cost of stock option and retention plans -- 162 -- --
ESOP shares released -- 393 -- --
RRP shares released -- -- -- --
Dividends declared -- -- (7,577) --
-------------- -------------- ---------------- ---------------------
Balance at June 30, 2000 $ 4,736 70,949 177,371 (5,104)
============== ============== ================ =====================
Unearned Unearned
employee recognition
stock and Total
ownership retention shareholders'
plan shares plan shares equity
---------------- ----------------- ----------------
Comprehensive income:
Net income -- -- 27,203
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- (7,082)
---------------- ----------------- ----------------
Total comprehensive income -- -- 20,121
Exercise of stock options -- -- 20
Tax benefit for excess of fair value above
cost of stock option and retention plans -- -- 162
ESOP shares released 561 -- 954
RRP shares released -- 551 551
Dividends declared -- -- (7,577)
---------------- ----------------- ----------------
Balance at June 30, 2000 -- (64) 247,888
================ ================= ================
* Represents shares issued for the acquisition of Corry Savings Bank (see note
3, Business Combinations).
See accompanying notes to financial statements.
51
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
2000 1999 1998
------------ ------------- ------------
Operating activities:
Net income $ 27,203 20,042 21,322
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 4,149 3,629 4,072
Net loss (gain) on sales of assets (944) 1,017 (1,634)
Purchase of marketable securities, trading -- (31,863) (36,061)
Proceeds from sale of marketable securities,
trading 8,822 22,160 36,151
Amortization of goodwill and other intangible assets 5,831 3,458 1,808
Net depreciation, amortization and accretion 4,002 2,503 2,314
Decrease (increase) in other assets 1,080 (4,662) (2,098)
Increase (decrease) in other liabilities (3,682) 943 (3,022)
Net accretion of discounts on marketable securities (541) (255) (316)
Noncash compensation expense related to
stock benefit plans 1,145 2,244 3,200
Other -- 241 --
------------ ------------- ------------
Net cash provided by operating
activities 47,065 19,457 25,736
------------ ------------- ------------
Investing activities:
Purchase of marketable securities held-to-maturity (9,252) (106,562) (66,692)
Purchase of marketable securities available-for-sale (113,176) (88,563) (100,707)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 25,514 48,051 27,611
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 18,884 74,491 32,012
Proceeds from sales of marketable securities available-
for-sale 21,616 4,470 39,437
Loan originations (629,104) (881,861) (802,145)
Proceeds from loan maturities and principal
reductions 408,837 512,069 425,325
Proceeds from loan sales 1,137 7,365 30,094
Purchase of Federal Home Loan Bank stock (3,112) (4,511) (1,300)
Proceeds from sale of real estate owned 3,473 3,312 3,196
Sale of real estate owned for investment 534 245 162
Purchase of premises and equipment (8,282) (7,821) (4,276)
Acquisitions, net of cash received 203,319 198,627 151,935
------------ ------------- ------------
Net cash used by investing activities (79,612) (240,688) (265,348)
------------ ------------- ------------
52
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000, 1999 and 1998
(Amounts in thousands)
2000 1999 1998
-------------- -------------- --------------
Financing activities:
Increase in deposits, net $ 151,988 191,221 166,024
Proceeds from long-term borrowings 37,112 101,281 136,622
Repayments of long-term borrowings (33,607) (87,413) (70,544)
Net increase (decrease) in short-term borrowings (112,479) 43,720 168
Increase in advances by borrowers for
taxes and insurance 3,603 3,423 2,302
Cash dividends paid (7,577) (7,556) (7,486)
Stock issuance for acquisition -- 1,193 --
Proceeds from options exercised 20 220 409
-------------- -------------- --------------
Net cash provided by financing activities 39,060 246,089 227,495
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents $ 6,513 24,858 (12,117)
============== ============== ==============
Cash and cash equivalents at beginning of period 84,253 59,395 71,512
Net increase (decrease) in cash and cash equivalents 6,513 24,858 (12,117)
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 90,766 84,253 59,395
============== ============== ==============
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of
$90,526, $74,097 and $64,476, respectively) $ 133,445 114,145 97,425
============== ============== ==============
Income taxes $ 13,926 12,858 12,215
============== ============== ==============
Noncash activities:
Business acquisitions:
Fair value of assets acquired 68,643 50,457 69,992
Net cash received 203,319 198,627 148,751
Minority interest -- 1,913 (2,060)
-------------- -------------- --------------
Liabilities assumed $ 271,962 250,997 216,683
============== ============== ==============
Loan foreclosures and repossessions $ 1,625 3,378 2,839
============== ============== ==============
Sale of real estate owned financed by the Company $ 536 456 147
============== ============== ==============
See accompanying notes to consolidated financial statements.
53
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Northwest Bancorp, Inc. (the "Company") headquartered in Warren,
Pennsylvania, is a Bank Holding Company for its wholly owned
subsidiaries Northwest Savings Bank ("Northwest") and Jamestown
Savings Bank ("Jamestown"). These retail oriented financial
institutions offer traditional deposit and loan products through
their 98 banking locations in Pennsylvania, four banking locations
in southwestern New York and four banking locations in eastern
Ohio. The Company and its subsidiaries also offer consumer finance
products through 42 consumer finance offices in Pennsylvania and
one in New York. The Company maintains geographic diversification
in its real estate loan portfolio by originating loans through
correspondent originators by way of a mortgage production office
in Pittsburgh, Pennsylvania.
(b) Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other financial
institutions.
(d) Marketable Securities
The Company classifies marketable securities at the time of their
purchase as either held-to-maturity, available-for-sale or trading
securities. Securities for which management has the intent and the
Company has the ability to hold until their maturity are
classified as held-to-maturity and are carried on the Company's
books at cost, adjusted for amortization of premium and accretion
of discount on a level yield basis. If it is management's intent
at the time of purchase to hold securities for an indefinite
period of time and/or to use such securities as part of its
asset/liability management strategy, the securities are classified
as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from net earnings and
reported as accumulated other comprehensive income, a separate
component of shareholders' equity, net of tax. Securities
available-for-sale include securities which may be sold in
response to changes in interest rates, resultant prepayment risk
or other market factors. Securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading and are reported at fair value, with
unrealized gains and losses included in earnings. The cost of
securities sold is determined on a specific identification basis.
(Continued)
54
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Federal law requires a member institution of the Federal Home Loan
Bank ("FHLB") system to hold stock of its district FHLB according
to a predetermined formula. This stock is recorded at cost and may
be pledged to secure FHLB advances.
(e) Loans Receivable
Loans are stated at their unpaid principal balance net of any
deferred origination fees or costs and the allowance for estimated
loan losses. Interest income on loans is credited to income as
earned. Interest earned on loans for which no payments were
received during the month is accrued at month end. Interest
accrued on loans more than ninety days delinquent is offset by a
reserve for uncollected interest, and such loans are placed on
nonaccrual status.
The Company has identified certain residential loans which will be
sold prior to maturity. These loans are recorded at the lower of
amortized cost or market value and are not significant as of June
30, 2000 and 1999.
Loan fees and certain direct loan origination costs are deferred,
and the net deferred fee or cost is then recognized using the
level-yield method over the contractual life of the loan as an
adjustment to interest income.
(f) Real Estate Owned
Real estate owned is comprised of property acquired through
foreclosure or voluntarily conveyed by delinquent borrowers. These
assets are recorded on the date acquired at the lower of the
related loan balance or market value of the collateral, as
determined by an appraisal. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or
the current market value, less estimated disposition costs. Gains
or losses realized from the disposition of such property are
credited or charged to operations.
(g) Provision for Loan Losses
Provisions for estimated losses on the loan portfolios, other than
those specifically identified, are charged to earnings in an
amount that results in a loss allowance sufficient, in
management's judgment, to cover probable losses based on past
experience and economic conditions. Estimated losses on specific
loans are charged to the allowance for loan losses when, in the
opinion of management, a significant decline reduces the estimated
fair value of the underlying collateral to less than the loan's
current carrying value.
(Continued)
55
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Management considers a loan to be impaired when it is probable
that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Generally, all nonaccrual loans are deemed to be impaired. In
evaluating whether a loan is impaired, management considers not
only the amount that the Company expects to collect but also the
timing of collection. Generally, if a delay in payment is
insignificant (e.g., less than 30 days), a loan is not deemed to
be impaired.
When a loan is considered to be impaired, the amount of impairment
is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of the collateral if the loan is
collateral dependent. Loans are evaluated individually for
impairment. Smaller balance, homogeneous loans (e.g., primarily
consumer and residential mortgages) are evaluated collectively for
impairment. Impairment losses are included in the allowance for
loan losses. Impaired loans are charged off when management
believes that the ultimate collectibility of a loan is not likely.
Interest income on impaired loans is recognized using the cash
basis method. Such interest ultimately collected is credited to
income in the period of recovery or applied to reduce principal if
there is sufficient doubt about the collectibility of principal.
Interest on impaired loans that are contractually past due ninety
days and over is reserved.
(h) Goodwill and Other Intangibles
Goodwill and other intangible assets are amortized using the
straight-line method over the estimated benefit period of 10
years. Intangible assets are reviewed annually for possible
impairment or when events or changed circumstances may affect the
underlying basis of the asset.
(i) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is accumulated on a
straight-line basis over the estimated useful lives of the related
assets. Estimated lives range from three to thirty years.
Amortization of leasehold improvements is accumulated on a
straight-line basis over the terms of the related leases or the
useful lives of the related assets, whichever is shorter.
(j) Savings Deposits
Interest on savings deposits is accrued and charged to expense
monthly and is paid or credited in accordance with the terms of
the accounts.
(Continued)
56
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(k) Income Taxes
The Company joins with its wholly owned subsidiaries, Northwest
and Jamestown, in filing a consolidated federal income tax return.
The Company accounts for income taxes using the asset and
liability method. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the
Company's assets and liabilities based on enacted tax rates
expected to be in effect when such amounts are realized or
settled.
(l) Pension Plan
The Company has noncontributory defined benefit pension plans. The
net periodic pension cost has been calculated in accordance with
Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pension."
(m) Reclassification of Prior Years' Statements
Certain items previously reported have been reclassified to
conform with the current year's reporting format.
The number of shares and related earnings per share have been
restated to reflect a two-for-one stock split in fiscal year 1998
(see notes 13 and 14).
(n) Off-Balance-Sheet Instruments
In the normal course of business, the Company extends credit in
the form of mortgage commitments, undisbursed lines of credit and
standby letters of credit. These off-balance-sheet instruments
involve, to various degrees, elements of credit and interest rate
risk not reported in the consolidated statement of financial
condition.
(o) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(Continued)
57
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(2) Corporate Reorganization
On February 17, 1998, Northwest reorganized into a two-tier holding
company structure. Northwest formed a new, state chartered stock holding
company, Northwest Bancorp, Inc., which was 69.2% owned by Northwest
Bancorp MHC. As a result of this reorganization, Northwest Bancorp, Inc.
became the parent company of Northwest and owns 100% of Northwest's
common stock. The previous shareholders of Northwest stock received an
equivalent number of shares of the new publicly traded entity, Northwest
Bancorp, Inc. Aside from this two-tier holding company structure giving
the Company greater flexibility by maintaining the benefits of the mutual
holding company while capitalizing on the additional opportunities
available to stock holding companies, the operations remain unchanged.
(3) Business Combinations
On April 18, 2000, the Company announced its plan to purchase nine retail
office facilities in Potter and Tioga Counties in Northern Pennsylvania
from another financial institution. The agreement includes approximately
$127 million in deposits and $53 million in consumer and business loans,
along with the related fixed assets. Subject to regulatory approval, the
transaction is expected to be completed in November 2000, and will be
accounted for using the purchase method of accounting.
In September 1999, the Company purchased eight retail office facilities
located in Western Pennsylvania from another financial institution. This
acquisition included approximately $270,000,000 in deposits, $47,000,000
in consumer and business loans and the related office facilities and
equipment. The acquisition was accounted for using the purchase method of
accounting and the resulting intangible asset of approximately
$20,400,000 is being amortized over a 10-year period on a straight-line
basis.
During fiscal 1999, the Company purchased 11 retail office facilities in
northwest and central Pennsylvania from two financial institutions and
assumed deposits of approximately $225,500,000. A premium of
approximately $20,600,000 was paid for these offices and the resulting
intangible asset is being amortized over a 10-year period on a
straight-line basis.
(Continued)
58
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
On October 21, 1998, the Company also acquired Corry Savings Bank, a
Pennsylvania chartered mutual savings bank headquartered in Corry, Pennsylvania,
with assets of approximately $25,000,000 and capital of approximately
$2,500,000. In conjunction with this acquisition, 146,815 shares of the common
stock of Northwest Bancorp, Inc. were sold in a stock offering at an average
price of $8.13 per share, net of expenses, with priority given to the depositors
of Corry Savings Bank. In addition, Northwest Bancorp, MHC, the mutual holding
company for Northwest Bancorp, Inc., received 328,313 shares of the common stock
of Northwest Bancorp, Inc. in exchange for the assets and liabilities of Corry
Savings Bank. As a result of this transaction, Northwest Bancorp MHC continued
to own approximately 69.2% of the outstanding shares of Northwest Bancorp, Inc.
This acquisition was accounted for using the purchase method of accounting and
resulted in the Company recording negative goodwill of approximately $3,000,000
which is being amortized over a 10-year period on a straight-line basis.
In addition, during fiscal 1999, the Company made a tender offer and purchased
the remaining outstanding shares of Jamestown from the minority shareholders
resulting in additional goodwill of approximately $3,000,000 which is being
amortized over a 10-year period on a straight-line basis.
During fiscal 1998, the Company purchased 10 retail office facilities from two
financial institutions and assumed deposits of $166,000,000. The resulting
intangible asset of approximately $12,125,000 is being amortized over a 10-year
period on a straight-line basis. In addition, the Company purchased, from
Northwest Bancorp MHC, 64.3% of the common stock of Jamestown, which had assets
of approximately $56,000,000, for cash of $3,920,000.
(Continued)
59
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(4) Marketable Securities
Marketable securities at June 30, 2000, are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
---------------- --------------- --------------- ---------------
Held-to-maturity:
U.S. government and agencies:
Due in one year or less $ 6,006 11 -- 6,017
Due in one year - five years -- -- -- --
Due in five years - ten years 9,987 -- (365) 9,622
Due after ten years 20,000 -- (1,051) 18,949
Municipal securities:
Due in five years - ten years 100 2 -- 102
Due after ten years 31,748 -- (4,000) 27,748
Corporate debt issues:
Due in five years - ten years 250 -- -- 250
Due after ten years 29,499 -- (5,298) 24,201
Mortgage-backed securities:
Fixed rate pass-through 1,298 13 -- 1,311
Variable rate pass-through 5,967 80 (80) 5,967
Variable rate CMO 132,901 510 (5,214) 128,197
---------------- --------------- --------------- ---------------
Total mortgage-
backed securities 140,166 603 (5,294) 135,475
---------------- --------------- --------------- ---------------
Total securities
held-to-maturity $ 237,756 616 (16,008) 222,364
================ =============== =============== ===============
60
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
---------------- ---------------- ---------------- ---------------
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 25,506 71 (7) 25,570
Due in one year - five years 21,973 -- (279) 21,694
Due in five years - ten years 3,491 -- (162) 3,329
Equity securities 3,441 1,753 (151) 5,043
Municipal securities:
Due in one year - five years 795 7 (3) 799
Due in five years - ten years 697 -- (17) 680
Due after ten years 54,318 51 (4,461) 49,908
Corporate debt issues:
Due after ten years 985 -- (36) 949
Mortgage-backed securities:
Fixed rate pass-through 84,487 189 (1,904) 82,772
Variable rate pass-through 30,670 7 (815) 29,862
Fixed rate CMO 8 -- -- 8
Variable rate CMO 169,459 1,367 (3,457) 167,369
---------------- ---------------- ---------------- ---------------
Total mortgage-
backed securities 284,624 1,563 (6,176) 280,011
---------------- ---------------- ---------------- ---------------
Total securities
available-for-sale $ 395,830 3,445 (11,292) 387,983
================ ================ ================ ===============
(Continued)
61
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 1999, are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
---------------- --------------- --------------- --------------
Held-to-maturity:
U.S. government and agencies:
Due in one year or less $ 14,967 114 -- 15,081
Due in one year - five years 11,440 112 -- 11,552
Due in five years - ten years 9,985 -- (75) 9,910
Due after ten years 20,300 1 (230) 20,071
Municipal securities:
Due in five years - ten years 100 4 -- 104
Due after ten years 31,742 15 (1,439) 30,318
Corporate debt issues:
Due in five years - ten years 250 -- -- 250
Due after ten years 29,523 13 (1,153) 28,383
Mortgage-backed securities:
Fixed rate pass-through 731 41 -- 772
Variable rate pass-through 7,212 153 (58) 7,307
Variable rate CMO 127,614 1,375 (2,386) 126,603
---------------- --------------- --------------- --------------
Total mortgage-
backed securities 135,557 1,569 (2,444) 134,682
---------------- --------------- --------------- --------------
Total securities
held-to-maturity $ 253,864 1,828 (5,341) 250,351
================ =============== =============== ==============
(Continued)
62
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
---------------- ---------------- ---------------- ---------------
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 4,492 20 -- 4,512
Due in one year - five years 47,539 712 (42) 48,209
Due in five years - ten years 3,490 -- (69) 3,421
Due after ten years 10,076 4 (990) 9,090
Equity securities 2,155 2,775 (24) 4,906
Municipal securities:
Due in on year or less 80 -- -- 80
Due in one year - five years 975 17 -- 992
Due in five years - ten years 896 12 -- 908
Due after ten years 49,489 378 (1,017) 48,850
Corporate debt issues:
Due after ten years 985 -- (30) 955
Mortgage-backed securities:
Fixed rate pass-through 53,898 -- (1,084) 52,814
Variable rate pass-through 9,342 38 (54) 9,326
Fixed rate CMO 17 -- -- 17
Variable rate CMO 148,748 2,909 (1,114) 150,543
---------------- ---------------- ---------------- ---------------
Total mortgage-
backed securities 212,005 2,947 (2,252) 212,700
---------------- ---------------- ---------------- ---------------
Total securities
available-for-sale $ 332,182 6,865 (4,424) 334,623
================ ================ ================ ===============
Expected maturities for mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations.
(Continued)
63
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The following table presents information regarding the issuers and the carrying
value of the Company's mortgage-backed securities:
June 30,
----------------------------
2000 1999
----------- -----------
Mortgage-backed securities:
FNMA $ 149,780 128,256
GNMA 103,537 57,881
FHLMC 146,309 141,017
Other (nonagency) 20,551 21,103
----------- -----------
Total mortgage-backed
securities $ 420,177 348,257
============ ===========
Marketable securities having a carrying value of $140,365,000 at June 30, 2000,
were pledged under collateral agreements. During the fiscal years 2000, 1999 and
1998, the Company sold marketable securities classified as either
available-for-sale or trading for $30,438,000, $26,630,000 and $75,588,000,
respectively. The gross pretax profit on these sales was $397,000, $304,000 and
$1,500,000. In addition, during fiscal 1999, the Company experienced trading
portfolio writedowns of $990,000.
(Continued)
64
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(5) Loans Receivable
Loans receivable at June 30, 2000 and 1999, are summarized in the table
below:
2000 1999
----------------- -----------------
Real estate loans:
One- to four-family $ 1,836,154 1,718,002
Multi-family and commercial 192,897 152,466
----------------- -----------------
Total real estate loans 2,029,051 1,870,468
Consumer loans:
Automobile 72,955 58,885
Home equity and home improvement 44,848 39,067
Education 70,619 64,341
Loans on savings accounts 8,052 6,263
Other 314,468 246,927
----------------- -----------------
Total consumer loans 510,942 415,483
Commercial loans 49,992 40,039
----------------- -----------------
Total loans receivable, gross 2,589,985 2,325,990
Deferred loan fees (1,829) (923)
Allowance for loan losses (18,260) (16,773)
Undisbursed loan proceeds (real estate loans) (25,266) (23,056)
----------------- -----------------
Total loans receivable, net $ 2,544,630 2,285,238
================= =================
At June 30, 2000 and 1999, the Company serviced loans for others
approximating $63,700,000 and $71,107,000, respectively. These loans
serviced for others are not assets of the Company and are appropriately
excluded from the Company's financial statements.
At June 30, 2000, approximately 93% of the Company's net loan portfolio was
secured by properties located in Pennsylvania. The Company does not believe
it has significant concentrations of credit risk to any one group of
borrowers given its underwriting and collateral requirements.
Loans receivable at June 30, 2000, include $259,805,000 of adjustable rate
loans and $2,330,180,000 of fixed rate loans.
(Continued)
65
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Loans receivable at June 30, 1999, include $231,902,000 of adjustable rate loans
and $2,094,088,000 of fixed rate loans.
The Company's exposure to credit loss in the event of nonperformance by the
other party to off-balance-sheet financial instruments is represented by the
contract amount of the financial instrument. The Company uses the same credit
policies in making commitments for off-balance-sheet financial instruments as it
does for on-balance-sheet instruments. Financial instruments with
off-balance-sheet risk as of June 30, 2000 and 1999, are presented in the
following table:
June 30,
----------------------------
2000 1999
------------- ------------
Mortgage loan commitments $ 29,864 34,402
Undisbursed lines of credit 84,141 71,506
Standby letters of credit 3,968 3,488
------------- ------------
$ 117,973 109,396
============= ============
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 or other termination clauses and may
require payment of a fee. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary,
by the Company upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but generally may include
cash, marketable securities and property.
Outstanding mortgage loan commitments at June 30, 2000, for fixed rate loans,
are $24,751,000. The interest rates on these commitments approximate market
rates at June 30, 2000. Outstanding mortgage loan commitments at June 30, 2000,
for adjustable rate loans are $5,113,000. The fair value of these commitments
are affected by fluctuations in market rates of interest.
All of the Company's nonaccrual loans, which totaled $10,260,000 at June 30,
2000, $16,116,000 at June 30, 1999, and $8,612,000 at June 30, 1998, are
considered to be impaired loans. Average impaired loans during 2000, 1999 and
1998 were $13,886,000, $14,049,000 and $11,204,000, respectively. All of the
Company's impaired loans at June 30, 2000, were collateral dependent. Since, at
June 30, 2000 and 1999, the value of the collateral for each impaired loan
exceeded the carrying value of the impaired loan, no impairment reserve was
established. There was no interest income recognized on impaired loans during
fiscal 2000 and 1999. Interest income on impaired loans for fiscal 1998,
recognized using a cash basis method of accounting, was $230,000.
There were no commitments to lend additional funds to debtors on nonaccrual
status.
(Continued)
66
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(6) Accrued Interest Receivable
Accrued interest receivable as of June 30, 2000 and 1999, is presented in
the following table:
June 30,
---------------------------
2000 1999
------------ ------------
Investment securities $ 2,706 3,204
Mortgage-backed securities 1,905 1,362
Loans receivable 11,367 9,982
------------ ------------
$ 15,978 14,548
============ ============
(7) Allowance for Loan Losses
Changes in the allowance for losses on loans receivable for the years
ended June 30, 2000, 1999 and 1998, are presented in the following table:
2000 1999 1998
------------- -------------- --------------
Balance, beginning of fiscal year $ 16,773 15,769 13,611
Provision 4,149 3,629 4,072
Charge-offs (3,276) (3,664) (2,516)
Acquisitions 25 141 209
Recoveries 589 898 393
------------- -------------- --------------
Balance, end of fiscal year $ 18,260 16,773 15,769
============= ============== ==============
Management believes that the allowance for estimated loan losses is
appropriate as of June 30, 2000. While management uses available
information to provide for losses, future additions to the allowance may
be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
(Continued)
67
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(8) Federal Home Loan Bank Stock
The Company's banking subsidiaries are members of the Federal Home Loan
Bank system. As a member, Northwest maintains an investment in the
capital stock of the Federal Home Loan Bank of Pittsburgh, at cost, in an
amount not less than 1% of its outstanding home loans or 1/20 of its
outstanding notes payable to the Federal Home Loan Bank, whichever is
greater.
(9) Premises and Equipment
Premises and equipment at June 30, 2000 and 1999, are summarized by major
classification in the following table:
2000 1999
--------------- ---------------
Land and land improvements $ 3,336 3,282
Office buildings and improvements 35,132 31,786
Furniture, fixtures and equipment 27,372 22,140
Leasehold improvements 3,983 3,291
--------------- ---------------
Total, at cost 69,823 60,499
Less accumulated depreciation and
amortization 28,870 25,036
--------------- ---------------
Premises and equipment, net $ 40,953 35,463
=============== ===============
Depreciation and amortization expense for the years ended June 30, 2000,
1999 and 1998, was $3,840,000, $2,503,000 and $2,118,000, respectively.
(Continued)
68
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Premises used by certain of the Company's branches and offices are
occupied under formal operating lease arrangements. The leases expire on
various dates through 2013. Minimum annual rentals by fiscal year are
summarized in the following table:
2001 $ 1,569
2002 1,407
2003 1,244
2004 1,129
2005 848
Thereafter 3,408
------------
Total $ 9,605
============
Rental expense for the years ended June 30, 2000, 1999 and 1998, was
$1,962,000, $1,770,000 and $1,379,000, respectively.
(10) Savings Deposits
Savings deposit balances at June 30, 2000 and 1999, are shown in the
table below:
2000 1999
--------------- ---------------
Savings accounts $ 432,908 409,029
Interest-bearing checking accounts 355,306 302,642
Noninterest-bearing checking accounts 114,877 86,506
Money market deposit accounts 183,257 164,484
Certificates of deposit 1,800,161 1,501,050
--------------- ---------------
$ 2,886,509 2,463,711
=============== ===============
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $241,483,000 at June 30, 2000,
and $200,859,000 at June 30, 1999.
(Continued)
69
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The following table summarizes the contractual maturity of the
certificate accounts:
2000 1999
---------------- ---------------
Due within 12 months $ 1,042,401 992,723
Due between 12 and 24 months 523,497 368,137
Due between 24 and 36 months 137,123 49,230
Due between 36 and 48 months 37,712 27,164
Due between 48 and 60 months 46,118 33,200
After 60 months 13,310 30,596
---------------- ---------------
$ 1,800,161 1,501,050
================ ===============
The following table summarizes the interest expense incurred on the
respective savings deposits:
Years ended June 30,
2000 1999 1998
------------ ----------- ------------
Savings accounts $ 13,650 11,819 10,227
Interest-bearing checking accounts 4,559 5,001 4,469
Money market deposit accounts 6,855 4,830 3,395
Certificate accounts 90,386 76,457 66,955
------------ ----------- ------------
$ 115,450 98,107 85,046
============ =========== ============
(Continued)
70
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar mounts presented in tables are in thousands)
(11) Borrowed Funds
Borrowed funds at June 30, 2000 and 1999, are presented in the following
table:
2000 1999
---------------------------------------------------------
Average Average
Amount rate Amount rate
------------ ------------ ------------ ------------
Term notes payable to the FHLB
of Pittsburgh:
Due within one year $ 8,000 % 6.07 $ 2,000 % 7.18
Due between one and two years 8,000 6.15 8,000 6.07
Due between two and three years 34,200 6.04 8,000 6.15
Due between three and four years 150 4.00 34,200 6.04
Due between four and five years 25,000 6.05 150 4.00
Due between five and ten years 75,000 5.32 100,000 5.51
Due between ten and twenty years 1,252 2.74 2,037 3.39
------------ ------------
151,602 5.66 154,387 5.68
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh 50,000 6.62 163,000 5.50
ESOP note payable, variable rate
equal to prime -- -- 503 7.75
Investor notes payable, due
various dates through 2004 6,876 6.55 7,120 6.55
Securities sold under agreement to
Repurchase, due various dates
through fiscal 2001 31,463 6.38 23,905 4.91
------------ ------------
Total borrowed funds $ 239,941 $ 348,915
============ ============
Borrowings from the Federal Home Loan Bank of Pittsburgh are secured by
the Company's investment securities, mortgage-backed securities and
qualifying residential first mortgage loans. Certain of these borrowings
are subject to restrictions or penalties in the event of prepayment.
The revolving line of credit with the Federal Home Loan Bank of
Pittsburgh carries a commitment of $250,000,000 maturing on May 16, 2001.
The rate is adjusted daily by the Federal Home Loan Bank and any
borrowings on this line may be repaid at any time without penalty.
(Continued)
71
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The securities sold under agreements to repurchase are collateralized by
various securities held in safekeeping by the Federal Home Loan Bank of
Pittsburgh. The market value of such securities exceeds the value of the
securities sold under agreements to repurchase. The average amount of
agreements outstanding in fiscal years 2000 and 1999 was $27,627,000 and
$29,525,000, respectively. The maximum amount of security repurchase
agreements outstanding during fiscal years 2000 and 1999 was $35,215,000
and $43,932,000, respectively.
(12) Income Taxes
Total income tax was allocated for the years ended June 30, 2000, 1999
and 1998, as follows:
2000 1999 1998
------------- ------------ -------------
Income before income taxes $ 13,910 10,914 12,995
Shareholders' equity for unrealized gain/
(loss) on securities available-for-sale (3,951) (820) 1,423
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (162) (214) (449)
------------- ------------ -------------
$ 9,797 9,880 13,969
============= ============ =============
Income tax expense (benefit) applicable to income before taxes consists
of:
Years ended June 30,
------------------------------------------
2000 1999 1998
------------- ------------ -------------
Current $ 15,601 11,668 13,455
Deferred (1,691) (754) (460)
------------- ------------ -------------
$ 13,910 10,914 12,995
============= ============ =============
(Continued)
72
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The significant components of deferred income tax expense (benefit) are
as follows:
June 30,
------------------------------------------
2000 1999 1998
------------- ------------ -------------
Deferred income tax benefit $ (1,768) (783) (609)
NOL carryforward 77 29 149
------------- ------------ -------------
$ (1,691) (754) (460)
============= ============ =============
A reconciliation from the expected federal statutory income tax rate to
the effective rate, expressed as a percentage of pretax income, is as
follows:
Years ended June 30,
------------------------------------------
2000 1999 1998
------------- ------------ -------------
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (4.4) (4.1) (1.9)
State income tax, net of federal benefit 4.2 4.2 3.4
Valuation allowance (0.1) (0.5) 0.6
Other (0.9) 0.7 1.0
------------- ------------ -------------
Effective tax rate % 33.8 35.3 38.1
============= ============ =============
(Continued)
73
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2000 and 1999, are presented below:
2000 1999
-------------- --------------
Deferred tax assets:
Deferred fee income $ 977 1,044
Deferred compensation expense 1,015 1,028
Net operating loss carryforwards 691 768
Bad debts 4,226 2,886
Accrued postretirement benefit cost 436 400
Pension expense 511 498
Other 1,301 909
Marketable securities available-for-sale 2,744 --
-------------- --------------
11,901 7,533
Valuation allowance (606) (654)
-------------- --------------
11,295 6,879
Deferred tax liabilities:
Marketable securities available-for-sale -- 1,207
Other 275 294
-------------- --------------
275 1,501
-------------- --------------
Net deferred tax asset $ 11,020 5,378
============== ==============
The Company has recorded a full valuation allowance on the net operating
loss carryforward related to Jamestown. The Company has determined that
no valuation allowance is necessary for the remaining deferred tax assets
because it is more likely that these assets will be realized through
carryback to taxable income in prior years, future reversals of existing
temporary differences and, to a lesser extent, through future taxable
income. The Company will continue to review the criteria related to the
recognition of deferred tax assets on a quarterly basis.
Under provisions of the Internal Revenue Code, Northwest has
approximately $245,000 of net operating losses which expire in years 2005
through 2010. Jamestown has net operating losses of approximately
$1,730,000 which expire in years 2011 through 2013.
(Continued)
74
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(13) Shareholders' Equity
The Board of Directors of Northwest authorized a two-for-one common stock
split in the form of a stock dividend in October 1997. The additional
shares resulting from the split were distributed on November 14, 1997, to
shareholders of record on November 1, 1997.
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require Northwest to
maintain certain statutory reserves. Northwest and Jamestown may not pay
dividends on or repurchase any of their common stock if the effect
thereof would reduce retained earnings below the level of adequate
capitalization as defined by federal and state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the
Internal Revenue Code (the Code), to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. Bad debt deductions for income tax purposes are included in
taxable income of later years only if the bad debt reserve is used
subsequently for purposes other than to absorb bad debt losses. Because
Northwest does not intend to use the reserve for purposes other than to
absorb losses, no deferred income taxes have been provided prior to
fiscal 1987. Retained earnings at June 30, 2000, includes approximately
$28,293,000 representing such bad debt deductions for which no deferred
income taxes have been provided.
(Continued)
75
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(14) Earnings Per Share
Basic earnings per common share ("EPS") is computed by dividing net
income available to common shareholders by the weighted-average number of
common shares outstanding for the period, without considering common
stock equivalents or any dilutive items. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the Company. The computation of basic and diluted earnings per share
is shown in the table below:
Years ended June 30,
------------------------------------------
2000 1999 1998
------------- ----------- ------------
Net income applicable to common
stock $ 27,203 20,042 21,322
Weighted-average common shares
outstanding 47,305 46,998 46,405
------------- ----------- ------------
Basic earnings per share $ .58 .42 .46
============= =========== ============
Net income applicable to common
stock $ 27,203 20,042 21,322
============= =========== ============
Weighted-average common shares
outstanding 47,305 46,998 46,405
Common stock equivalents due to
effect of stock options 268 490 698
------------- ----------- ------------
Total weighted-average common
shares and equivalents $ 47,573 47,488 47,103
============= =========== ============
Diluted earnings per share $ .57 .42 .45
============= =========== ============
(Continued)
76
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(15) Employee Benefit Plans
(a) Pension Plans
The Company maintains noncontributory defined benefit pension
plans covering substantially all employees and the members of its
Board of Directors. Retirement benefits are based on certain
compensation levels, age and length of service. Contributions are
based on an actuarially determined amount to fund not only
benefits attributed to service to date but also for those expected
to be earned in the future. In addition, the Company has an
unfunded Supplemental Executive Retirement Plan (SERP) to
compensate those executive participants eligible for the Company's
defined benefit pension plan whose benefits are limited by section
415 of the Code of the Internal Revenue Service.
The Company also sponsors a retirement savings plan in which
substantially all employees participate. The Company provides a
matching contribution of 50% of each employee's contribution to a
maximum of 6% of the employee's compensation.
Total expense for all retirement plans, including defined benefit
pension plans, was approximately $2,310,000, $1,895,000 and
$1,872,000 for the years ended June 30, 2000, 1999 and 1998,
respectively. Net periodic pension cost for the Company's defined
benefit pension plans consist of the following:
Years ended June 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
Service cost $ 1,625 1,302 1,066
Interest cost 1,444 1,229 1,046
Expected return on plan assets (1,491) (1,266) (914)
Net amortization and deferral 55 80 54
------------ ------------ -----------
Net periodic pension cost $ 1,633 1,345 1,252
============ ============ ===========
(Continued)
77
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The following table sets forth, for the Company's defined benefit pension
plans, the plans' funded status and amounts recognized in the Company's
consolidated statements of financial condition at June 30, 2000 and 1999:
2000 1999
--------------- ---------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 20,784 17,709
Service cost 1,625 1,302
Interest cost 1,444 1,229
Actuarial loss 904 878
Benefits paid (350) (334)
--------------- ---------------
Benefit obligation at end of year $ 24,407 20,784
=============== ===============
Change in plan assets:
Fair value of plan assets at beginning of year 18,799 15,986
Actual return on plan assets 1,555 1,762
Employer contribution 1,450 1,385
Benefits paid (350) (334)
--------------- ---------------
Fair value of plan assets at end of year $ 21,454 18,799
=============== ===============
Funded status (2,953) (1,985)
Unrecognized transition asset (298) (338)
Unrecognized prior service cost 706 800
Unrecognized net actuarial loss 1,208 685
Adjustment to recognize minimum liability (131) (406)
--------------- ---------------
Accrued benefit cost $ (1,468) (1,244)
=============== ===============
The following table sets forth the assumptions used to develop the
preceding information for the net pension cost and benefits:
Years ended June 30,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
Discount rate % 7 7 7
Expected long-term rate of return on assets 8 8 7
Rate increase in compensation levels 4 4 4
Assets of the Company's qualified noncontributory defined benefit plan
consists primarily of equity and fixed income securities.
(Continued)
78
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(b) Postretirement Healthcare Plan
In addition to pension benefits, the Company provides postretirement
healthcare benefits for certain employees who were employed by the Company
as of October 1, 1993, and were at least 55 years of age on that date. The
Company accounts for these benefits in accordance with Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" (SFAS 106). SFAS 106 requires
the accrual method of accounting for postretirement benefits other than
pensions.
Net periodic cost for the Company's postretirement healthcare benefits
consist of the following:
Years ended June 30,
2000 1999 1998
---------- ---------- -----------
Service cost $ 32 44 41
Interest cost 72 57 44
Recognized actuarial gain -- (44) (130)
---------- ---------- -----------
Net periodic (benefit) cost $ 104 57 (45)
========== ========== ===========
The following table sets forth the funded status of the Company's
postretirement healthcare benefit plan and the amounts recognized in the
Company's consolidated statements of financial condition at June 30, 2000
and 1999:
2000 1999
------------- ------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,049 837
Service cost 32 44
Interest cost 72 57
Actuarial loss (162) 167
Benefits paid (23) (56)
------------- ------------
Benefit obligation at end of year 968 1,049
Fair value of plan assets at end of year -- --
------------- ------------
Funded status (968) (1,049)
Unrecognized net actuarial gain (144) --
------------- ------------
Accrued benefit cost $ (1,112) (1,049)
============= ============
(Continued)
79
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
Years ended June 30,
-----------------------------------
2000 1999 1998
----------- ---------- ----------
Discount rate % 7 7 7
Monthly cost of healthcare insurance
per beneficiary $ 134.26 140.00 113.94
Annual rate of increase in healthcare costs % 4 4 4
If the assumed rate of increase in healthcare costs was increased by one
percentage point to 5% from the level of 4% presented above, the service
and interest cost components of net periodic postretirement healthcare
benefit cost would increase by $8,302, in the aggregate, and the
accumulated postretirement benefit obligation for healthcare benefits would
increase by $97,059.
(c) Employee Stock Ownership Plan
The Company has established a leveraged employee stock ownership plan
(ESOP) for employees who have attained age 21 and who have completed a
12-month period of employment with the Company during which they worked at
least 1,000 hours. The Company makes annual contributions to the ESOP equal
to the ESOP's debt service less the dividends received on unearned ESOP
shares. The ESOP shares are pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral and become eligible for
allocation to employee accounts. Actual ESOP share allocations to employee
accounts are based on each employee's relative portion of the Company's
total eligible compensation recorded during the year shares are earned.
The Company accounts for its ESOP in accordance with AICPA Statement of
Position 93-6. Accordingly, the debt of the ESOP is recorded as debt and
the shares pledged as collateral are reported as unearned ESOP shares in
the Company's consolidated statement of financial condition. As shares are
earned, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings-
per-share computations. Dividends on allocated ESOP shares are recorded as
a reduction of retained earnings; dividends on unallocated ESOP shares are
paid to the trustee for debt service. ESOP compensation expense was
$909,000, $1,600,000 and $2,668,000 for the fiscal years ended June 30,
2000, 1999 and 1998, respectively.
(Continued)
80
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The ESOP shares as of June 30, 2000 and 1999, were as follows:
2000 1999
-------------- -------------
Allocated shares 1,114,278 1,007,331
Unearned shares -- 106,947
-------------- -------------
1,114,278 1,114,278
============== =============
Fair value of unearned shares at June 30 $ -- 1,069
============== =============
(d) Recognition and Retention Plan
On November 21, 1995, the Company established a Recognition and Retention
Plan for Employees and Outside Directors (RRP). The objective of the RRP is
to enable the Company to provide directors, officers and employees with a
proprietary interest in the Company as an incentive to contribute to its
success. The number of common shares issued and granted under the RRP was
552,000 (total market value of $3,243,000 at issuance date). Shares of
common stock granted pursuant to the RRP are in the form of restricted
stock and generally are payable over a five-year period at the rate of 20%
per year, commencing on the date of the award grant. Compensation expense,
in the amount of the fair market value of the common stock at the date of
the grant, will be recognized pro rata over the five years during which the
shares are payable. A recipient will be entitled to all voting and other
shareholder rights, except that the shares, while restricted, may not be
sold, pledged or otherwise disposed of and are required to be held in a
trust.
81
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(e) Stock Option Plan
On November 21, 1995, the Company adopted the 1995 Stock Option Plan. The
objective of the Stock Option Plan is to provide an additional performance
incentive to the Company's employees and outside directors. The Stock
Option Plan authorized the grant of stock options and limited stock
appreciation rights for 1,380,000 shares of the Company's common stock. On
December 20, 1995, the Company granted 242,000 nonstatutory stock options
to its outside directors at an exercise price of $5.58 per share (95% of
the Company's common stock fair market value per share at grant date) and
923,200 incentive stock options to employees at an exercise price of $5.875
per share. On March 22, 1996, the Company granted 122,800 incentive stock
options to employees at an exercise price of $5.625 per share. On December
16, 1998, the Company granted 15,086 incentive stock options to employees
at an exercise price of $9.875 per share. On October 20, 1999, the Company
granted 57,700 incentive stock options to employees at an exercise price of
$7.812 per share. On June 21, 2000, the Company granted the remaining
19,214 incentive stock options as well as 9,186 previously forfeited
options at an exercise price of $6.875 per share. These options are
exercisable for a period of ten years from the grant date with each
recipient vesting at the rate of 20% per year commencing with the grant
date.
The following table summarizes the activity in the Company's Option Plan
during the periods ending June 30:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
------------- ------------ ------------ ------------ ------------ ------------
Balance at beginning
of year 1,155,951 $ 5.86 1,185,600 $ 5.81 1,288,000 $ 5.80
Granted 86,100 7.50(a) 15,086 9.87(a) -- --
Exercised (11,480) 5.84 (39,135) 5.70 (99,520) 5.66
Forfeited (2,240) 5.68 (5,600) 5.73 (2,880) 5.63
------------- ------------ ------------
Balance at end of year 1,228,331 5.98 1,155,951 5.86 1,185,600 5.81
============= ============ ============
Exercisable at end
of year 904,925 5.84 794,683 5.82 711,360 5.81
============= ============ ============
(a) Weighted average fair value of options at grant date: $2.70 and $2.51,
respectively.
(Continued)
82
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Exercise Exercise Exercise Exercise Exercise Exercise
price price price price price price Total
$5.580 $5.625 $5.875 $6.875 $7.812 $9.875 $5.980
----------- ------------ ----------- ---------- ----------- ---------- -------------
Options outstanding:
Number of options 153,600 103,625 870,160 28,400 57,460 15,086 1,228,331
Weighted average
remaining contract
life (years) 5.50 5.75 5.50 10.00 9.25 8.50 5.84
Options exercisable:
Number of options 122,880 82,900 696,128 -- -- 3,017 904,925
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation costs for the Stock Option Plan
been determined consistent with the fair value method of SFAS 123,
"Accounting for Stock-Based Compensation," which permits entities to
expense an estimated fair value of employee stock options granted, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
2000 1999 1998
------------- ------------- -------------
Net income:
As reported $ 27,203 20,042 21,322
Pro forma 26,991 19,859 21,145
Basic earnings per share:
As reported .58 .42 .46
Pro forma .57 .42 .46
Diluted earnings per share:
As reported .57 .42 .45
Pro forma .57 .42 .45
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (1) dividend yields ranging from 1.60% to 2.76%; (2) expected
volatility of 13% to 33%; (3) risk-free interest rates ranging from 4.75%
to 6.50%; and (4) expected lives of seven years. The effects of applying
SFAS No. 123 may not be representative of the effects on reported net
income in future years.
(Continued)
83
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(16) Disclosures About Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
(SFAS 107), requires disclosure of fair value information about financial
instruments whether or not recognized in the consolidated statement of
financial condition. SFAS 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company. The carrying amounts reported in the
consolidated statement of financial condition approximate fair value for
the following financial instruments: cash on hand and interest-earning
deposits in other institutions, accrued interest receivable, accrued
interest payable, marketable securities available-for-sale and variable
rate borrowings.
The following table sets forth the carrying amount and estimated fair
value of the Company's financial instruments included in the consolidated
statement of financial condition as of June 30:
2000 1999
------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------- -------------- -------------- --------------
Financial assets:
Cash and equivalents $ 90,766 90,766 84,253 84,253
Securities available-for-sale 387,983 387,983 334,623 334,623
Securities held-to-maturity 237,756 222,364 253,864 250,351
Loans receivable 2,564,719 2,583,294 2,302,934 2,287,901
Accrued interest receivable 15,978 15,978 14,548 14,548
FHLB stock 21,269 21,269 18,157 18,157
------------- -------------- -------------- --------------
Total financial assets $ 3,318,471 3,321,654 3,008,379 2,989,833
============= ============== ============== ==============
Financial liabilities:
NOW and MMDA accounts 653,440 653,440 553,632 553,632
Savings accounts 432,908 432,908 409,029 409,029
Time deposits 1,800,161 1,816,055 1,501,050 1,503,717
Borrowed funds 239,941 237,174 348,915 352,235
Accrued interest payable 2,352 2,352 3,698 3,698
------------- -------------- -------------- --------------
Total financial liabilities $ 3,128,802 3,141,929 2,816,324 2,822,311
============= ============== ============== ==============
Fair value estimates are made at a point-in-time, based on relevant
market data and information about the instrument. The following methods
and assumptions were used in estimating the fair value of financial
instruments at June 30, 2000 and 1999.
(Continued)
84
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar mounts presented in tables are in thousands)
Marketable Securities
Estimated market values are based on quoted market prices, dealer quotes
and prices obtained from independent pricing services. Refer to note 4 of
the consolidated financial statements for the detail of type of
investment products.
Loans Receivable
Loans with comparable characteristics including collateral and repricing
structures were segregated for valuation purposes. Each loan pool was
separately valued utilizing a discounted cash flow analysis. Projected
monthly cash flows were discounted to present value using a market rate
for comparable loans. Characteristics of comparable loans included
remaining term, coupon interest and estimated prepayment speeds.
Delinquent loans were evaluated separately given the impact delinquency
has on the projected future cash flow of the loan and the approximate
discount or market rate.
Deposit Liabilities
SFAS 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits, money market and other savings
accounts, to be the amount payable on demand. Although market premiums
paid for depository institutions reflect an additional value for these
low-cost deposits, SFAS 107 prohibits adjusting fair value for any value
expected to be derived from retaining those deposits for a future period
of time or from the benefit that results from the ability to fund
interest-earning assets with these deposit liabilities. The fair value
estimates of deposit liabilities do not include the benefit that results
from the low-cost funding provided by these deposits compared to the cost
of borrowing funds in the market. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies
contractual cost currently being offered in the exiting portfolio to
current market rates being offered locally for deposits of similar
remaining maturities. The valuation adjustment for the portfolio consists
of the present value of the difference of these two cash flows,
discounted at the assumed market rate of the corresponding maturity.
Borrowed Funds
Variable rate borrowings were estimated to approximate their carrying
amounts. The fixed rate advances were valued by comparing their
contractual cost to the prevailing market cost.
(Continued)
85
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(17) Regulatory Capital Requirements
The Company and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal and state
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary -
actions by the regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices must be met. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its banking subsidiaries to maintain
minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital to average assets (as defined). At
June 30, 2000 and 1999, the Company and its banking subsidiaries exceed
all capital adequacy requirements to which they are subject.
As of March 31, 2000, the most recent notification from the FDIC
categorized Northwest and Jamestown as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized," the banks must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the banks' categories.
(Continued)
86
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
The actual, required and well capitalized levels as of June 30, 2000 and
1999, are as follows: (in thousands)
June 30, 2000
-----------------------------------------------------------------------------------
Minimum capital Well capitalized
Actual requirements requirements
--------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- ------------ ------------ ---------- ------------
Total capital (to risk
weighted assets):
Northwest Bancorp, Inc. $ 217,398 % 11.73 $ 148,279 % 8.00 $ 185,349 % 10.00
Northwest Savings Bank 204,018 11.33 144,043 8.00 180,054 10.00
Jamestown Savings Bank 7,845 14.21 4,416 8.00 5,520 10.00
Tier I capital (to risk
weighted assets):
Northwest Bancorp, Inc. 198,417 10.71 74,139 4.00 111,209 6.00
Northwest Savings Bank 185,509 10.30 72,022 4.00 108,032 6.00
Jamestown Savings Bank 7,367 13.35 2,208 4.00 3,312 6.00
Tier I capital (leverage)
(to average assets):
Northwest Bancorp, Inc. 198,417 5.93 100,455 3.00* 167,425 5.00
Northwest Savings Bank 185,509 5.71 97,403 3.00* 162,338 5.00
Jamestown Savings Bank 7,367 7.57 2,920 3.00* 4,867 5.00
(Continued)
87
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
June 30, 1999
--------------------------------------------------------------------------------
Minimum capital Well capitalized
Actual requirements requirements
-------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ----------- ----------- ----------- ----------
Total capital (to risk
weighted assets):
Northwest Bancorp, Inc. $ 208,047 % 12.67 $ 131,384 % 8.00 $ 164,230 % 10.00
Northwest Savings Bank 195,730 12.24 127,951 8.00 159,939 10.00
Jamestown Savings Bank 7,450 18.51 3,219 8.00 4,024 10.00
Tier I capital (to risk
weighted assets):
Northwest Bancorp, Inc. 190,036 11.57 65,692 4.00 98,538 6.00
Northwest Savings Bank 178,068 11.13 63,976 4.00 95,963 6.00
Jamestown Savings Bank 7,101 17.65 1,610 4.00 2,414 6.00
Tier I capital (leverage)
(to average assets):
Northwest Bancorp, Inc. 190,036 6.30 90,475 3.00* 150,791 5.00
Northwest Savings Bank 178,068 6.16 86,704 3.00* 144,507 5.00
Jamestown Savings Bank 7,101 8.91 2,390 3.00* 3,984 5.00
* The FDIC has indicated that the most highly rated institutions which
meet certain criteria will be required to maintain a ratio of 3%, and
all other institutions will be required to maintain an additional
capital cushion of 100 to 200 basis points. As of June 30, 2000, the
Company had not been advised of any additional requirements in this
regard.
(18) Contingent Liabilities
The Company and its subsidiaries are subject to a number of asserted and
unasserted claims encountered in the normal course of business.
Management believes that the aggregate liability, if any, that may result
from such potential litigation will not have a material adverse effect on
the Company's financial statements.
(Continued)
88
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(19) Selected Quarterly Financial Data (Unaudited)
Three months ended
---------------------------------------------------------
September December March June
30 31 31 30
----------- ----------- ----------- -----------
(in thousands, except per share data)
Fiscal 2000
Interest income $ 56,824 59,749 60,818 62,333
Interest expense 31,650 33,337 33,037 34,075
----------- ----------- ----------- -----------
Net interest income 25,174 26,412 27,781 28,258
Provision for loan losses 624 811 1,153 1,561
Noninterest income 2,358 2,399 2,824 3,690
Noninterest expenses 17,442 18,906 18,555 18,731
----------- ----------- ----------- -----------
Income before
income taxes 9,466 9,094 10,897 11,656
Income taxes 3,473 2,976 3,681 3,780
----------- ----------- ----------- -----------
Net income $ 5,993 6,118 7,216 7,876
=========== =========== =========== ===========
Basic earnings per share $ .13 .13 .15 .17
=========== =========== =========== ===========
Diluted earnings per share $ .13 .13 .15 .16
=========== =========== =========== ===========
(Continued)
89
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Three months ended
------------------------------------------------------
September December March June
30 31 31 30
----------- ----------- ----------- -----------
(in thousands, except per share data)
Fiscal 1999
Interest income $ 49,198 50,446 52,504 54,445
Interest expense 27,735 28,829 28,888 29,459
----------- ----------- ----------- -----------
Net interest income 21,463 21,617 23,616 24,986
Provision for loan losses 790 866 812 1,161
Noninterest income 1,776 1,392 1,295 1,547
Noninterest expenses 14,118 14,998 16,718 17,276
----------- ----------- ----------- -----------
Income before
income taxes 8,331 7,145 7,381 8,096
Income taxes 3,324 2,888 2,452 2,250
Minority interest in net loss 3 -- -- --
----------- ----------- ----------- -----------
Net income $ 5,010 4,257 4,929 5,846
=========== =========== =========== ===========
Basic earnings per share $ .11 .09 .10 .12
=========== =========== =========== ===========
Diluted earnings per share $ .11 .09 .10 .12
=========== =========== =========== ===========
(20) Components of Comprehensive Income
For the year ended June 30:
2000 1999 1998
-------------- -------------- --------------
Unrealized gain (loss) on marketable
securities available-for-sale $ (10,852) (1,857) 3,780
Tax (expense) benefit 4,047 576 (1,435)
Less reclassification adjustment for gains
included in net income, net of tax
benefit of $149 and $12, respectively 277 112 --
-------------- -------------- --------------
Net unrealized gain (loss) $ (7,082) (1,393) 2,345
============== ============== ==============
90
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(21) Northwest Bancorp, Inc. (Parent Company Only)
Statements of Financial Condition
(Amounts in thousands)
June 30,
--------------------------
Assets 2000 1999
------------ ------------
Cash and cash equivalents $ 187 140
Marketable securities available-for-sale 4,149 5,196
Loans receivable -- 58
Investment in bank subsidiaries 240,121 225,876
Goodwill 2,443 2,921
Other assets 1,069 137
------------ ------------
Total assets $ 247,969 234,328
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Loan payable -- 561
Other liabilities 81 110
------------ ------------
Total liabilities 81 671
Shareholders' equity 247,888 233,657
------------ ------------
Total liabilities and shareholders' equity $ 247,969 234,328
============ ============
These parent company statements reflect the activity from the date of
formation on February 17, 1998.
91
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Statements of Income
Years ended
------------------------------------------
June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Income:
Interest income $ 256 312 140
Dividends from bank subsidiary 6,350 10,500 1,250
Undistributed earnings from equity
investment in bank subsidiaries 20,779 9,714 7,573
Gain on sale of marketable securities
available-for-sale 39 -- --
Other income 869 -- --
------------ ------------ ------------
Total income 28,293 20,526 8,963
Expense:
Compensation and benefits 674 185 40
Goodwill amortization 307 296 4
Other expense 34 80 2
------------ ------------ ------------
Total expense 1,015 561 46
------------ ------------ ------------
Net income before taxes 27,278 19,965 8,917
Federal and state income taxes 75 (77) 42
------------ ------------ ------------
Net income $ 27,203 20,042 8,875
============ ============ ============
These parent company statements reflect the activity from the date of
formation on February 17, 1998.
(Continued)
92
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
Years ended
----------------------------------------
June 30,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Operating activities:
Net income $ 27,203 20,042 8,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (20,779) (9,714) (8,076)
Depreciation and amortization 325 292 5
Noncash compensation expense related to
stock benefit plans 1,145 2,244 --
Gain on sale of marketable securities
available-for-sale 39 -- --
Net change in other assets and liabilities (532) 820 520
------------ ------------ ------------
Net cash provided by operating activities 7,401 13,684 1,324
------------ ------------ ------------
Investing activities:
Purchase of stock of subsidiaries -- (6,966) (3,884)
Principal payments on loans (561) (910) --
Purchase of marketable securities available-for-sale (497) -- --
Proceeds from sale of marketable securities
available-for-sale 1,261 -- --
------------ ------------ ------------
Net cash provided (used) by investing
activities 203 (7,876) (3,884)
------------ ------------ ------------
Cash flows from financing activities:
Cash dividends paid (7,577) (7,556) (1,873)
Stock issuance for acquisition -- 1,193 --
Proceeds from options exercised 20 220 214
Capitalization of parent company -- -- 4,694
------------ ------------ ------------
Net cash provided (used) by financing
activities (7,557) (6,143) 3,035
------------ ------------ ------------
Net increase (decrease) increase in cash
and cash equivalents $ 47 (335) 475
============ ============ ============
Cash and cash equivalents at beginning of year 140 475 --
Net increase (decrease) in cash and cash equivalents 47 (335) 475
------------ ------------ ------------
Cash and cash equivalents at end of year $ 187 140 475
============ ============ ============
These Parent Company statements reflect the activity from the date of formation
on February 17, 1998.
(Continued)
93
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(All dollar amounts presented in tables are in thousands)
(22) Segment Reporting
Northwest Bancorp, Inc., through its wholly owned subsidiaries Northwest
Savings Bank and Jamestown Savings Bank, and affiliated companies
performs traditional banking services. These financial services include
making loans to individuals and businesses, offering an array of deposit
products and investing in marketable securities. The retail network of
offices is located throughout northwestern, southwestern and central
Pennsylvania as well as southwestern New York and eastern Ohio. These
market areas all possess similar characteristics. The operating results
of the Company as a single entity are used by management in making
operating decisions. Therefore, the consolidated financial statements, as
presented, represent the results of a single financial services segment.
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for the Company's 2000 Annual Meeting of Stockholders
(the "2000 Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The "Proposal I--Election of Directors" section of the Company's 2000
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's 2000
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The "Transactions with Certain Related Persons" section of the
Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following documents are filed as part of this Form 10-K.
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition - at June 30, 2000
and 1999
(C) Consolidated Statements of Income - Years ended June 30, 2000,
1999 and 1998
(D) Consolidated Statements of Changes in Shareholders' Equity -
Years ended June 30, 2000, 1999 and 1998
(E) Consolidated Statements of Cash Flows - Years ended June 30,
2000, 1999 and 1998
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
(b) Reports on Form 8-K
-------------------
The Company has not filed a Current Report on Form 8-K during the quarter
ended June 30, 2000.
95
(c) Exhibits
--------
(a) (3) Exhibits:
- -----------------
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
----------- ------------------------------------- ---------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Articles of Incorporation and Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10(1 Restated Deferred Compensation Plan for *
Directors
10(2 Retirement Plan for Outside Directors *
10(3 Northwest Savings Bank Nonqualified *
Supplemental Retirement Plan
10(4 Employee Stock Ownership Plan *
10(5 Employment Agreement between the Bank *
and John O. Hanna, President and Chief
Executive Officer
10(6 Employee Severance Compensation Plan *
11 Statement re: computation of per share None
earnings
12 Statement re: computation or ratios Not required
16 Letter re: change in certifying None
accountant
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
96
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
----------- ---------------------------------- ---------------
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
- ------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-31687), originally filed with the SEC on July
21, 1997, as amended on October 9, 1997 and November 4, 1997.
97
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.
NORTHWEST BANCORP, INC.
Date: September 28, 2000 By: /s/ John O. Hanna
----------------------------
John O. Hanna, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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.
By: /s/ John O. Hanna By: /s/ William J. Wagner
-------------------------------------------- --------------------------------------------
John O. Hanna, President William J. Wagner, Executive Vice President
Chief Executive Officer and Director and Director (Principal Financial/Accounting Officer)
(Principal Executive Officer)
Date: September 28, 2000 Date: September 28, 2000
By: /s/John M. Bauer By: /s/Richard L. Carr
-------------------------------------------- --------------------------------------------
John M. Bauer, Director Richard L. Carr, Director
Date: September 28, 2000 Date: September 28, 2000
By: /s/ Richard E. McDowell By: /s/ Thomas K. Creal, III
-------------------------------------------- --------------------------------------------
Richard E. McDowell, Director Thomas K. Creal, III, Director
Date: September 28, 2000 Date: September 28, 2000
By: /s/ Joseph T. Stadler By: /s/ John J. Doyle
-------------------------------------------- --------------------------------------------
Joseph T. Stadler, Director John J. Doyle, Director
Date: September 28, 2000 Date: September 28, 2000
By: /s/ Walter J. Yahn By: /s/ Robert G. Ferrier
-------------------------------------------- --------------------------------------------
Walter J. Yahn, Director Robert G. Ferrier, Director
Date: September 28, 2000 Date: September 28, 2000
98