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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, 1999
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2900888
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(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
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value $.10 per share
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(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, 1999, there were issued and outstanding 13,127,008 shares of
the Registrant's Common Stock, not including 34,228,065 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, 1999, as
reported by the Nasdaq National Market, was approximately $131.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the November 1999 Annual Meeting of Stockholders (Part
III).
PART I
------
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, 1999, 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, 1999, the Company, through the Bank and Jamestown, operated
94 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 35 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, or 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, 1999, 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, 1999, the
Company operated in Pennsylvania 88 community banking offices and 35 consumer
finance offices, located in the following counties: Allegheny, Armstrong,
Bedford, Butler, Centre, Chester, Clarion, Clearfield, Clinton, Crawford,
Cumberland, Dauphin, Elk, Erie, Fayette, Huntingdon, Indiana, Jefferson,
Lawrence, Lancaster, Lebanon, Luzerne, Lycoming, McKean, Mifflin, Schuylkill,
Venango, Warren, Washington, Westmoreland and York. In addition, the Company
operated community banking offices in Ashtabula 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,
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1999 1998 1997 1996
--------------------- -------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
----------- -------- ---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
Real estate:
One- to four-family (1).... $1,694,946 73.6% $1,368,736 69.4% $1,096,315 68.8% $1,008,288 70.8%
Multifamily and commercial. 152,466 6.6 128,831 6.5 100,912 6.3 97,612 6.8
---------- ----- ---------- ------ ---------- ------ ---------- ------
Total real estate loans... 1,847,412 80.2 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Consumer:
Home equity and home
improvement............... 39,067 1.7 33,963 1.7 37,607 2.4 38,146 2.7
Education loans............ 64,341 2.8 59,791 3.0 53,542 3.3 47,842 3.4
Loans on savings accounts.. 6,263 .3 6,898 .4 7,176 .5 6,543 .5
Other (2).................. 305,812 13.3 252,443 12.8 212,472 13.3 159,532 11.2
---------- ----- ---------- ------ ---------- ------ ---------- ------
Total consumer loans (3).. 415,483 18.1 353,095 17.9 310,797 19.5 252,063 17.7
Commercial business........ 40,039 1.7 123,188 6.2 86,087 5.4 67,045 4.7
---------- ----- ---------- ------ ---------- ------ ---------- ------
Total loans receivable,
gross.................... 2,302,934 100.0% 1,973,850 100.0% 1,594,111 100.0% 1,425,008 100.0%
===== ====== ====== ======
Deferred loan fees......... (923) (1,357) (2,384) (3,495)
Undisbursed loan proceeds.. -- (49,435) (41,618) (33,428)
Allowance for loan losses
(real estate loans)........ (10,619) (8,103) (6,898) (9,133)
Allowance for loan losses
(other loans).............. (6,154) (7,666) (6,713) (3,997)
---------- ---------- ---------- ----------
Total loans receivable,
net...................... $2,285,238 $1,907,289 $1,536,498 $1,374,955
========== ========== ========== ==========
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At June 30,
-------------------------
1995
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Amount Percent
------------ -----------
Real estate:
One- to four-family (1).... $ 880,110 73.6%
Multifamily and commercial. 53,022 4.4
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Total real estate loans... 933,132 78.0
Consumer:
Home equity and home
improvement............... 40,547 3.4
Education loans............ 39,315 3.3
Loans on savings accounts.. 5,930 .5
Other (2).................. 119,611 10.0
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Total consumer loans (3).. 205,403 17.2
Commercial business........ 56,788 4.8
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Total loans receivable,
gross.................... 1,195,323 100.0%
==========
Deferred loan fees......... (3,772)
Undisbursed loan proceeds.. (14,982)
Allowance for loan losses
(real estate loans)........ (8,102)
Allowance for loan losses
(other loans).............. (3,732)
----------
Total loans receivable,
net...................... $1,164,735
==========
- ------------------------------------------------------
(1) Includes $49.0 million of loans originated and held by the Bank's
subsidiaries at June 30, 1999.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $67.1 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 1999.
Fixed- and Adjustable-Rate Loans. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed-
and adjustable-rate loans at the dates indicated.
At June 30,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
Mortgage loans:
Adjustable.............$ 99,029 4.3% $ 55,493 2.8% $ 78,568 4.9% $ 94,426 6.6% $ 111,184 9.3%
Fixed.................. 1,748,383 75.9 1,442,074 73.1 1,118,659 70.2 1,011,474 71.0 821,948 68.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage loans.. 1,847,412 80.2 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6 933,132 78.1
Other loans:
Adjustable............. 132,873 5.8 117,100 5.9 117,301 7.4 114,943 8.1 117,323 9.8
Fixed.................. 322,649 14.0 359,183 18.2 279,583 17.5 204,165 14.3 144,868 12.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other loans..... 455,522 19.8 476,283 24.1 396,884 24.9 319,108 22.4 262,191 21.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$2,302,934 100.0% $1,973,850 100.0% $1,594,111 100.0% $1,425,008 100.0% $1,195,323 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
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,
1999. 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.. $108,913 $ 78,793 $ 76,922 $169,947 $1,260,371 $1,694,946
Multifamily and commercial....... 39,419 13,655 12,218 26,938 60,236 152,466
Consumer loans.................... 175,735 54,445 50,189 93,414 41,700 415,483
Commercial business loans......... 24,962 3,244 2,392 5,119 4,322 40,039
-------- -------- -------- -------- ---------- ----------
Total loans..................... $349,029 $150,137 $141,721 $295,418 $1,366,629 $2,302,934
======== ======== ======== ======== ========== ==========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
June 30, 1999, the dollar amount of all fixed-rate and adjustable-rate loans due
after June 30, 2000. 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.. $1,579,296 $ 45,240 $1,624,536
Multifamily and commercial....... 87,756 51,727 139,483
Consumer......................... 239,245 91,742 330,987
Commercial....................... 14,177 20,567 34,744
---------- -------- ----------
Total............................ $1,920,474 $209,276 $2,129,750
========== ======== ==========
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 and three 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 $39.5 million,
or 1.7% of the Company's total loan portfolio at June 30, 1999.
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 90% 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,
1999, the Company's portfolio of loans serviced by others totaled $2.5 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $1.695 billion of one- to four-family residential
real estate loans are $17.6 million, or .76% 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 either a fixed-rate or an
adjustable interest rate that adjusts monthly and convert into either a
fixed-rate or an adjustable-rate mortgage loan at the end of the construction
period. Upon completion of the construction, the permanent loan is priced to
reflect a rate no lower than current interest rates on one- to four-family
mortgage loans. 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 5 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 80% 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, 1999, 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, 1999, had a
principal balance of $5.4 million, and was collateralized by a personal care
facility in McKean County, Pennsylvania. The Company's largest commercial real
estate loan at June 30, 1999, had a principal balance of $7.1 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 70% 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 75% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 1999, the
disbursed portion of home equity lines of credit totalled $39.1 million, or
9.4%, of consumer loans, with $64.3 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 to its
consumer loan loss allowance based upon management's evaluation of current
economic conditions and the risk inherent in the loan portfolio.
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 $3.2
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, 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, 1999, the Company had
commitments to originate $34.4 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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Loans receivable, net, at beginning
of period........................... $1,907,289 $1,536,498 $1,374,955
Originations......................... 881,861 802,145 563,188
Principal repayments................. (512,069) (425,325) (371,295)
Loan purchases including acquisitions 22,386 26,904 19,289
Loan sales........................... (10,851) (30,094) (47,985)
Transfer to REO...................... (3,378) (2,839) (1,654)
---------- ---------- ----------
Loans receivable, net, at end of
period............................. $2,285,238 $1,907,289 $1,536,498
========== ========== ==========
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, Statement of
Financial Accounting Standards No. 91 requires that the Company defer loan
origination fees and costs
8
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,
1999 the Company had $923,000 of 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 $4.5 million,
$3.3 million and $2.4 million, for the fiscal years ended June 30, 1999, 1998
and 1997, 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, 1999, the largest
aggregate amount loaned by the Company to one borrower totaled $7.1 million and
was secured by land and real estate. The Company's second largest lending
relationship totaled $5.4 million and was secured by a personal care facility in
McKean County, Pennsylvania. The Company's third largest lending relationship
was for $4.4 million and was secured by a personal care facility in Erie County,
Pennsylvania. The Company's fourth largest lending relationship totaled $3.6
million and was secured by commercial and residential real estate. The Company's
fifth largest lending relationship totaled $3.6 million and was secured by a
limited care apartment facility in Warren County, Pennsylvania.
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 provisions, 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. In the current fiscal year, the Company
changed its policy regarding delinquency status. In past years, a borrower was
not considered delinquent if they had paid any portion of a payment. Under
current Company policy, a loan is considered delinquent if less than 90% of a
contractually-due payment has been paid. This change became effective on
November 13, 1998 when the Company converted to a new core application software
system and, as a result of this change, the Company recorded a significant
increase in the amount of loans which are 90 days or more past due. Management
has noted, however, that the Company's loan collectors are aware of this change
in payment status and have taken appropriate action over the past two fiscal
quarters to reduce the number of delinquent loans. 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,
---------------------------------------------------------
1999 1998 1997 1996 1995
----------------- -------- -------- -------- --------
Number Balance
------- --------
(Dollars in Thousands)
Loans past due 30 days to 59 days:
One- to four-family residential loans......... 102 $ 3,632 $ 4,842 $ 3,224 $ 3,031 $ 2,140
Multifamily and commercial loans.............. 6 320 79 -- 423 281
Consumer loans................................ 623 3,491 3,632 2,477 2,178 1,135
Commercial business loans..................... -- -- 458 183 240 --
------- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days...... 731 $ 7,443 $ 9,011 $ 5,884 $ 5,872 $ 3,556
------- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans......... 110 $ 4,895 $ 2,386 $ 1,491 $ 1,153 $ 1,165
Multifamily and commercial loans.............. 6 314 219 -- 21 139
Consumer loans................................ 236 957 954 908 1,143 443
Commercial business loans..................... -- -- 841 180 148 45
------- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days...... 352 $ 6,166 $ 4,400 $ 2,579 $ 2,465 $ 1,792
------- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans......... 190 $ 8,623 $ 6,013 $ 6,229 $ 4,913 $ 6,473
Multifamily and commercial loans.............. 17 2,141 390 2,585 2,704 3,262
Consumer loans................................ 398 2,202 1,631 1,161 772 539
Commercial business loans..................... 1 3,150 578 455 1,092 150
------- ------- ------- ------- ------- -------
Total loans past due 90 days or more......... 606 $16,116 $ 8,612 $10,430 $ 9,481 $10,424
------- ------- ------- ------- ------- -------
Total loans 30 days or more past due.......... 1,689 $29,725 $22,023 $18,893 $17,818 $15,772
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1)...... $16,116 $ 8,612 $10,430 $ 9,481 $10,424
Total REO..................................... 44 3,383 3,506 4,549 5,771 5,895
------- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO.. 1,733 $19,499 $12,118 $14,979 $15,252 $16,319
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable.......................... .71% .45% .68% .69% .89%
Total loans 90 days or more past due
and REO to total assets....................... .63% .47% .72% .81% 1.03%
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 1999, gross interest income of
approximately $551,000 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.
10
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 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, 1999, the Company had four loans,
with an aggregate principal balance of $5.3 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
allowances represent 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,
------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
Substandard assets.......... $30,852 $20,138 $24,242
Doubtful assets............. 99 -- 260
Loss assets................. 20 -- 133
------- ------- -------
Total classified assets.. $30,971 $20,138 $24,635
======= ======= =======
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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In Thousands)
Net loans receivable...................................... $2,285,238 $1,907,289 $1,536,498 $1,374,955 $1,164,735
Average loans outstanding................................. 2,120,525 1,673,599 1,449,807 1,243,758 1,093,602
Allowance for loan losses balance at beginning of period.. 15,769 13,611 13,130 11,833 11,238
Provision for loan losses................................. 3,629 4,072 2,491 1,502 1,098
Charge-offs:
Real estate loans:........................................ (514) (132) (383) (141) (53)
Consumer loans............................................ (3,049) (2,384) (2,004) (1,192) (830)
Commercial loans.......................................... (101) -- (150) -- (188)
---------- ---------- ---------- ---------- ----------
Total charge-offs........................................ (3,664) (2,516) (2,537) (1,333) (1,071)
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate loans......................................... 367 -- 10 176 --
Consumer loans............................................ 470 393 363 250 332
Commercial loans.......................................... 61 -- 1 2 1
---------- ---------- ---------- ---------- ----------
Total recoveries......................................... 898 393 374 428 333
Acquired through acquisition.............................. 141 209 153 700 235
---------- ---------- ---------- ---------- ----------
Allowance for loan losses balance at end of period........ $ 16,773 $ 15,769 $ 13,611 $ 13,130 $ 11,833
========== ========== ========== ========== ==========
Allowance for loan losses as a percentage of net
loans receivable.......................................... .73% .83% .89% .95% 1.02%
Net loans charged-off as a percentage of average
loans outstanding......................................... .17% .15% .17% .11% .10%
Allowance for loan losses as a percentage of
nonperforming loans....................................... 104.08% 183.10% 130.50% 138.49% 113.52%
Allowance for loan losses as a percentage
of nonperforming loans and REO............................ 86.02% 130.13% 90.87% 86.09% 72.51%
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,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
% 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.......... $10,619 80.2% $ 8,103 75.9% $ 6,898 75.1% $ 9,133 77.6% $ 8,101 78.0%
Consumer loans............. 5,318 18.1 4,957 17.9 4,499 19.5 3,009 17.7 2,773 17.2
Commercial business loans.. 836 1.7 2,709 6.2 2,214 5.4 988 4.7 959 4.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for
loan losses................ $16,773 100.0% $15,769 100.0% $13,611 100.0% $13,130 100.0% $11,833 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ------------------------------------
(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
12
borrowing funds and investing the proceeds in marketable securities in order to
improve net interest 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 certain
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,
-------------------------------
1999 1998 1997
---------- --------- ---------
(In Thousands)
Mortgage-backed securities
balance at beginning of period
(1).............................. $305,764 $291,597 $291,446
Purchases......................... 118,514 62,366 10,892
Sales............................. (772) (27,618) (14,554)
Securities acquired by business
combination...................... 351 5,391 18,788
Increase (decrease) in market
value of securities available
for sale......................... 114 845 (1,532)
Principal payments and
amortization of premiums and
discounts........................ (75,714) (26,817) (13,443)
-------- -------- --------
Mortgage-backed securities
balance at end of period (1)..... $348,257 $305,764 $291,597
======== ======== ========
Investment securities balance at
beginning of period (2).......... $204,213 $122,103 $106,047
Purchases......................... 108,474 141,094 19,100
Sales............................. (26,544) (46,471) --
Securities acquired by business
combination...................... 2,771 17,076 9,120
Increase (decrease) in market
value of securities available
for sale......................... (2,095) 2,901 969
Maturities and amortization of
premiums and discounts........... (46,589) (32,490) (13,133)
-------- -------- --------
Investment securities balance at
end of period (2)................ $240,230 $204,213 $122,103
======== ======== ========
- -------------------------------------
(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,
-------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
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..................... $ 731 $ 772 $ 5,663 $ 5,745 $ 10,853 $ 10,771
Variable-rate pass through certificates.................. 7,212 7,307 9,936 10,059 13,397 13,690
Fixed-rate collateralized mortgage obligations ("CMOs").. -- -- 4,578 4,571 1,400 1,399
Variable-rate CMOs....................................... 127,614 126,603 90,064 88,520 84,911 82,999
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity....... 135,557 134,682 110,241 108,895 110,561 108,859
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates..................... $ 53,898 $ 52,814 $ 5,396 $ 5,391 $ 36,782 $ 37,896
Variable-rate pass through certificates.................. 9,342 9,326 11,523 11,579 770 784
Fixed-rate collateralized mortgage obligations ("CMOs").. 17 17 37 35 99 107
Variable-rate CMOs....................................... 148,748 150,543 178,000 178,518 143,658 142,249
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale..... 212,005 212,700 194,956 195,523 181,309 181,036
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities........................ $347,562 $347,382 $305,197 $304,418 $291,870 $289,895
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency............................... $ 56,692 $ 56,614 $ 51,358 $ 51,982 $ 42,868 $ 43,334
Municipal securities..................................... 31,842 30,422 3,811 3,947 -- --
Corporate debt issues.................................... 29,773 28,633 27,852 27,993 551 551
Equity securities........................................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity............ 118,307 115,669 $ 83,021 $ 83,922 $ 43,419 $ 43,885
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency............................... 65,597 65,232 $ 75,826 $ 76,995 $ 63,290 $ 63,272
Municipal securities..................................... 51,440 50,830 37,307 38,289 11,322 11,489
Corporate debt issues.................................... 985 955 985 985 -- --
Equity securities........................................ 2,155 4,906 2,229 4,923 2,169 3,923
-------- -------- -------- -------- -------- --------
Total investment securities available for sale.......... $120,177 $121,923 $116,347 $121,192 $ 76,781 $ 78,684
======== ======== ======== ======== ======== ========
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,
----------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Mortgage-backed securities:
FNMA....................................... $128,256 $143,992 $140,775
GNMA....................................... 57,881 12,457 29,338
FHLMC...................................... 141,017 138,962 120,400
Other (non-agency)......................... 21,103 10,353 1,084
-------- -------- --------
Total mortgage-backed securities $348,257 $305,764 $291,597
======== ======== ========
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, 1999. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
At June 30, 1999
----------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
----------------------- ----------------------- --------------------- ----------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---------- ----------- ---------- ----------- ---------- -------- --------- -----------
(Dollars in Thousands)
Investment securities held
to maturity:
U.S. Government and
agency obligations....... $ 14,967 6.73% $11,440 6.81% $ 9,985 6.70% $ 20,300 7.21%
Municipal securities...... -- -- -- -- 100 5.35 31,742 4.81
Corporate debt issues..... -- -- -- -- 250 9.00 29,523 8.05
-------- ---- ------- ---- ------- ----- -------- ----
Total investment
securities held to
maturity................ 14,967 6.73 11,440 6.81 10,335 6.73 81,565 6.58
Investment securities
available for sale:
U.S. Government and
agency obligations....... 4,492 6.54 47,539 6.46 3,490 6.51 10,076 5.40
Equity securities......... -- -- -- -- -- -- 2,155 6.58
Municipal securities..... 80 5.87 975 5.13 896 5.28 49,489 5.17
Corporate debt issues.... -- -- -- -- -- -- 985 5.85
-------- ---- ------- ---- ------- ----- -------- ----
Total investment
securities available
for sale................ 4,572 6.54 48,514 6.43 4,386 6.25 62,705 5.26
Mortgage-backed securities
held to maturity:
Pass-through certificates. 7,212 6.68 -- -- -- -- 731 8.77
CMOs...................... 127,614 5.84 -- -- -- -- -- --
-------- ---- ------- ---- ------- ----- -------- ----
Total mortgage-backed
securities held
to maturity............. 134,826 5.88 -- -- -- -- 731 8.77
Mortgage-backed securities
available for sale:
Pass through certificates. 9,342 5.67 171 5.89 673 5.93 53,054 6.75
CMOs...................... 148,748 5.90 -- -- 17 10.17 -- --
-------- ---- ------- ---- ------- ----- -------- ----
Total mortgage-backed
securities available
for sale................. 158,090 5.89 171 5.89 690 6.03 53,054 6.75
-------- ---- ------- ---- ------- ----- -------- ----
Total investment
securities and
mortgage-backed
securities.............. $312,455 5.93% $60,125 6.50% $15,411 6.56% $198,055 6.21%
======== ==== ======= ==== ======= ===== ======== ====
At June 30, 1999
--------------------------------
Total
--------------------------------
Annualized
Weighted
Amortized Market Average
Cost Value Yield
--------- -------- --------
(Dollars in Thousands)
Investment securities held
to maturity:
U.S. Government and
agency obligations....... $ 56,692 $ 56,614 6.91%
Municipal securities...... 31,842 30,422 4.81
Corporate debt issues..... 29,773 28,633 8.06
-------- -------- ----
Total investment
securities held to
maturity................ 118,307 115,669 6.63
Investment securities
available for sale:
U.S. Government and
agency obligations....... 65,597 65,232 6.31
Equity securities......... 2,155 4,906 6.58
Municipal securities..... 51,440 50,830 5.17
Corporate debt issues.... 985 955 5.85
-------- -------- ----
Total investment
securities available
for sale................ 120,177 121,923 5.82
Mortgage-backed securities
held to maturity:
Pass-through certificates. 7,943 8,079 6.87
CMOs...................... 127,614 126,603 5.84
-------- -------- ----
Total mortgage-backed
securities held
to maturity............. 135,557 134,682 5.90
Mortgage-backed securities
available for sale:
Pass through certificates. 63,240 62,140 6.58
CMOs...................... 148,765 150,560 5.90
-------- -------- ----
Total mortgage-backed
securities available
for sale................. 212,005 212,700 6.10
-------- -------- ----
Total investment
securities and
mortgage-backed
securities.............. $586,046 $584,974 6.10%
======== ======== ====
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,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Balance at beginning of period.......... $2,022,503 $1,640,815 $1,450,047
Net savings activity.................... 90,938 17,278 79,838
Net checking activity................... 26,186 79,691 23,671
Deposits acquired....................... 249,987 220,243 34,594
---------- ---------- ----------
Net increase before interest credited.. 367,111 317,212 138,103
Interest credited....................... 74,097 64,476 52,665
---------- ---------- ----------
Net increase in deposits............... 441,208 381,688 190,768
---------- ---------- ----------
Balance at end of period.............. $2,463,711 $2,022,503 $1,640,815
========== ========== ==========
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,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- --------------------------------------
Balance Percent(1) Rate(2) Balance Percent(1) Rate(2) Balance Percent(1) Rate(2)
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- --------------
(Dollars in Thousands)
Savings accounts.......... $ 409,029 16.60% 3.24% $ 340,377 16.83% 3.30% $ 299,365 18.24% 3.30%
Checking accounts......... 389,148 15.80 1.38 315,755 15.61 1.61 222,845 13.58 2.12
Money market accounts..... 164,484 6.68 3.73 114,187 5.65 3.68 83,609 5.10 3.37
Certificates of deposit:
Maturing within 1 year.... 992,723 40.29 5.22 771,665 38.15 5.57 607,421 37.02 5.61
Maturing 1 to 3 years..... 417,367 16.94 5.11 404,175 19.98 5.90 357,070 21.76 6.01
Maturing more than
3 years.................. 90,960 3.69 5.65 76,344 3.78 6.00 70,505 4.30 6.03
---------- ----- ---- ---------- ----- ---- ---------- ------ ----
Total certificates....... 1,501,050 60.92 5.22 1,252,184 61.91 5.70 1,034,996 63.08 5.78
---------- ----- ---- ---------- ----- ---- ---------- ------ ----
Total deposits............ $2,463,711 100.0% 4.18% $2,022,503 100.0% 4.55% $1,640,815 100.00% 4.71%
========== ===== ==== ========== ===== ==== ========== ====== ====
- -----------------------------------------------
(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,
-----------
1999 1998 1997
----------- ---------- --------------
Rate (In Thousands)
- ------------------
2.00 - 2.99%...... $ -- $ 88 $ 37
3.00 - 3.99%...... 4,016 2,956 1,234
4.00 - 4.99%...... 552,807 121,533 63,668
5.00 - 5.99%...... 815,790 760,738 576,850
6.00 - 6.99%...... 120,294 312,693 329,083
7.00 - 7.99%...... 7,083 47,959 55,170
8.00% or greater.. 1,060 6,217 8,954
---------- ---------- ----------
$1,501,050 $1,252,184 $1,034,996
========== ========== ==========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 1999.
Amount Due
------------------------------------------------------
Less Than 1-2 2-3 After 3
One Year Years Years Years Total
------- ------- -------- ------- -------
Rate (In Thousands)
- ------------------
2.00 - 2.99%...... $ -- $ -- $ -- $ -- $ --
3.00 - 3.99%...... 3,314 88 150 464 4,016
4.00 - 4.99%...... 452,303 96,169 4,065 270 552,807
5.00 - 5.99%...... 443,669 271,033 36,973 64,115 815,790
6.00 - 6.99%...... 85,294 847 8,042 26,111 120,294
7.00 - 7.99%...... 7,083 -- -- -- 7,083
8.00% or greater.. 1,060 -- -- -- 1,060
-------- -------- ------- ------- ----------
Total............. $992,723 $368,137 $49,230 $90,960 $1,501,050
======== ======== ======= ======= ==========
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, 1999.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
Three months or less................................. $ 69,889
Three through six months............................. 37,032
Six through twelve months............................ 37,032
Over twelve months................................... 56,906
--------
Total............................................... $200,859
========
17
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.
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,
---------------------------------
1999 1998 1997
---------- ---------- ---------
(Dollars in Thousands)
FHLB Pittsburgh borrowings:
Average balance outstanding(1)............. $279,410 $144,798 $141,108
Maximum outstanding at end of any month
during period............................. 359,135 237,161 164,212
Balance outstanding at end of period....... 317,387 232,161 164,212
Weighted average interest rate during
period.................................... 5.28% 5.20% 5.73%
Weighted average interest rate at end of
period.................................... 5.59% 5.86% 6.12%
Reverse repurchase agreements:
Average balance outstanding(1)............. $ 29,525 $ 41,220 $ 16,578
Maximum outstanding at end of any month
during period............................. 43,932 50,028 50,116
Balance outstanding at end of period....... 23,905 50,028 50,116
Weighted average interest rate during
period.................................... 5.20% 5.31% 5.86%
Weighted average interest rate at end of
period.................................... 4.91% 5.48% 5.60%
Other borrowings:
Average balance outstanding(1)............. $ 7,995 $ 8,264 $ 10,075
Maximum outstanding at end of any month
during period............................. 8,682 9,056 11,462
Balance outstanding at end of period....... 7,623 7,517 9,130
Weighted average interest rate during
period.................................... 6.74% 5.36% 6.95%
Weighted average interest rate at end of
period.................................... 6.62% 6.84% 6.96%
Total borrowings:
Average balance outstanding(1)............. $316,930 $194,282 $167,761
Maximum outstanding at end of any month
during period............................. 388,471 289,706 223,458
Balance outstanding at end of period....... 348,915 289,706 223,458
Weighted average interest rate during
period.................................... 5.30% 5.23% 5.24%
Weighted average interest rate at end of
period.................................... 5.56% 5.82% 6.04%
- ------------------------------------------
(1) Computed on the basis of month-end balances.
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
18
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.
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, 1999, the Bank had an equity
investment in Great Northwest of $1.9 million. For the fiscal year ended June
30, 1999, Great Northwest had net income of $458,000 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, 1999, the Bank had an equity
investment in Northwest Financial Services of $5.4 million, and for the fiscal
year ended June 30, 1999, Northwest Financial Services had net income of
$250,000.
Northwest Consumer Discount Company operates 35 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, 1999, the Bank had an equity investment in Northwest
Consumer Discount Company of $10.9 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 1999 was $1.5
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 to its consumer loan loss
allowance based upon management's evaluation of current economic conditions and
the risk inherent in the loan portfolio.
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, 1999 the Bank had an equity investment of
$25,000 in Northwest Capital Group and for the fiscal year ended June 30, 1999
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, 1999 Northwest Financial Services had an equity
investment of $1.0 million in Rid-Fed, Inc. and for the fiscal year ended June
30, 1999 Rid-Fed, Inc. had no net income.
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, 1999,
19
Northwest Consumer Discount Company's equity investment in Northwest Finance
Company was $(87,000). For the year ended June 30, 1999, Northwest Finance
Company had a net income of $11,000.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), SAIF-insured institutions are required 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 (i) constitutes a
serious risk to the safety, soundness or stability of the savings association,
or (ii) is inconsistent with the purposes of FIRREA. Upon the making of such a
determination, the FDIC may order the savings association to divest the
subsidiary or take other actions.
Personnel
As of June 30, 1999, the Company and its wholly owned subsidiaries had 938
full-time and 222 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.
20
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.
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.
21
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 per $100 in deposits, payable on November
27, 1996 and amounted to $8.6 million for the Bank. 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. The FICO assessment is 1.29 basis points per $100 for BIF
deposits and 6.44 basis points per $100 for SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits).
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 1999, the Company recaptured into taxable income approximately
$1.3 million of the post-1987 bad debt reserves. At June 30, 1999, the Company
had a balance of approximately $6.7 million of bad debt reserves in retained
income that is subject to recapture equally over the next five 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 requiring a minimum 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. At June 30, 1999, the Bank exceeded the Department's
capital guidelines.
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. Under the provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), loans which exceeded the
permitted limit on the effective date of the new rules were deemed not to be in
violation of the new rules, but the aggregate principal balance of such loans
cannot be increased beyond the amount legally committed to prior to FIRREA.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement the system of prompt corrective action
established by Section 38 of the FDIA, which were effective as of December 19,
1992. Under the regulations, a bank shall be deemed to be (i) "well capitalized"
if it has total risk-based
22
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%. Section 38 of the
FDIA and the 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, 1999, the Bank was a "well-
capitalized institution" for this purpose.
Activities and Investments of Insured State-Chartered Banks
Section 24 of the FDIA, as amended by the FDICIA, 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 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.
23
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;
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.
24
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
FIRREA included substantial enhancement to the enforcement powers available
to federal banking regulators. This enforcement 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. FIRREA significantly increased the amount of, and
grounds for, civil money penalties and requires, except under certain
circumstances, public disclosure of final enforcement action by the federal
banking agencies.
Dividends
The Company's ability to pay dividends depends, to 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, 1999, the Bank's retained earnings exceeded required capital by
$67.3 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 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.
25
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 Bank was audited by the Internal Revenue Service for the tax periods
ended June 30, 1989, 1990, 1991 and 1992, and the IRS recently completed its
routine audit for the tax periods ended June 30, 1993, 1994 and November 4,
1994. See Notes 1 and 12 to the Consolidated Financial Statements which are part
of the Annual Report to Stockholders.
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 reduced 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.
ITEM 2. PROPERTIES
- -------------------
The Company conducts its business through its main office located in
Warren, Pennsylvania, 88 other full-service offices throughout its market area
in northwest, southwest and central Pennsylvania, four offices in southwestern
New York, and two offices in eastern Ohio. The Company and its wholly owned
subsidiaries also operate 35 consumer finance offices located throughout
Pennsylvania and one consumer lending office in New York. At June 30, 1999, the
Company's premises and equipment had an aggregate net book value of
approximately $35.5 million. The Company believes that its current facilities
are adequate to meet the present and immediately foreseeable needs of the
Company and Holding Company.
26
Listed below is the location of each of the Company's community banking
offices.
PENNSYLVANIA
Bellefonte, Centre Co.
-- 117 North Allegheny Street
Bradford (3), McKean Co.
-- Bradford Mall
-- 33 Main Street
-- 85 West Washington Street
Bridgeville, Allegheny Co.
-- 431 Washington Avenue
Butler, Butler Co.
-- 151 Pittsburgh Road
Canonsburg, Washington Co.
-- 148 West Pike Road
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue
Clarion (2), Clarion Co.
-- 601 Main Street
-- 97 West Main Street
Clearfield, Clearfield Co.
-- 1200 Old Town Road
Columbia, Lancaster Co.
-- 350 Locust Street
Corry, Erie Co.
-- 150 North Center Street
Cranberry, Venango Co.
-- Cranberry Mall
Elizabethtown, Lancaster Co.
-- 2296 South Market Street
Erie (10), Erie Co.
-- 2256 West 8th Street
-- K-Mart Plaza West
2863 West 26th Street
-- K-Mart Plaza East
4423 Buffalo Road
-- Millcreek Mall
-- 3805 Peach Street
-- 5624 Peach Street
-- 401 State Street
-- 121 West 26th Street
-- K-Mart Plaza South
1328 East Grandview Blvd.
-- 1945 Douglas Parkway
Franklin, Venango Co.
-- 1301 Liberty Street
Fredericktown, Washington Co.
-- Front Street
Gibsonia, Allegheny Co.
-- The Village of St. Barnabus
5850 Meridian Road
Hanover, York Co.
-- 1 Center Square
Harborcreek, Erie Co.
-- 4270 East Lake Road
Hershey, Dauphin Co.
-- 10 West Chocolate Avenue
Johnsonburg, Elk Co.
-- 553 Market Street
*Johnstown(2), Cambria Co.
-- 225 Franklin Street*
-- 475 Theatre Drive*
Kane, McKean Co.
-- 56 Fraley Street
Kittanning (2), Armstrong Co.
-- Franklin Village Mall
-- 165 Butler Road
Lake City, Erie Co.
-- 2102 Rice Avenue
Lancaster(3), Lancaster County
-- 24 West Orange Street
-- 922 Columbia Avenue
-- 1195 Manheim Pike
27
Lebanon (2), Lebanon Co.
-- 770 Cumberland Street
-- 547 South 10th Street
Lewistown, Mifflin County
-- 51 West Market Street
Lititz, Lancaster Co.
-- 744 South Broad Street
Lock Haven, Clinton Co.
-- 104 East Main Street
Loyalsock, Lycoming Co.
-- 815 Westminster Drive
Marianna, Washington Co.
-- 1784 Main Street
*Marienville, Forest Co.
-- Walnut & West Spruce Street
McDonald, Washington Co.
-- 101 East Lincoln Avenue
Meadville (3), Crawford Co.
-- 932 Diamond Park
-- 1073 Park Avenue
-- 880 Park Avenue
Mount Joy, Lancaster Co.
-- 24 East Main Street
Myerstown, Lebanon Co.
-- 1 West Main Avenue
New Bethlehem, Clarion Co.
-- 301 Broad Street
New Holland, Lancaster Co.
-- 201 West Main Street
North East, Erie Co.
-- 35 East Main Street
Oil City (3), Venango Co.
-- One East First Street
-- 301 Seneca Street
-- 259 Seneca Street
Palmyra, Lebanon Co.
-- 1048 East Main Street
Pleasantville, Venango Co.
-- 102 East State Street
Pottsville, Schuylkill Co.
-- 104 North Centre Street
Ridgway, Elk Co.
-- Main & Mill Streets
Rimersburg, Carion Co.
-- 211 North Main Street
Sarver, Butler Co.
-- 737 South Pike Road
Schaefferstown, Lebanon Co.
-- Dutch-Way Shopping Mall
Route 501 North
*Sheffield, Warren Co.
-- 101 South Main Street
Sligo, Clairon Co.
-- 1613 Bald Eagle Street
*Smethport, McKean Co.
-- 428 Main Street
Smithfield, Huntingdon Co.
-- Fairgrounds Road
Springboro, Crawford Co.
-- 105 Main Street
St. Marys (2), Elk Co.
-- 201 Brusselles Street
-- St. Mary's Plaza
824 Million Dollar Highway
State College (3), Centre Co.
-- 201 West Beaver Avenue
-- 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
28
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 & Second Street
Wattsburg, Erie Co.
-- 14457 Main Street
Weedville, Elk Co.
-- Bennetts Valley
Rt. 555
*Westmont, Cambria Co.
-- Lyter and Entrance Way
Wrightsville, York Co.
-- 120 North 4th Street
York (2), York Co.
-- Queensgate Shopping Center
-- Stonybrook Plaza
3649 East Market Street
NEW YORK
Jamestown (2) Chautauqua Co. NY
-- 23 West Third Street
-- 768 Foote Avenue
Lakewood, Chautauqua Co. NY
-- 311 East Fairmount Avenue
Olean, Cattaraugus Co. NY
-- 2513 West State Street
OHIO
* Chardon, Geauga Co. OH
-- 325 Center Street
Geneva, Ashtabula Co. OH
-- 30 East Main Street
Madison, Lake Co. OH
-- 1903 Hubbard Road
*Painesville, Lake Co. OH
-- 70 Richmond Street
* Offices opened or acquired since June 30, 1999.
29
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in various legal actions arising in the normal
course of its 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.
The Bank and the Mutual Holding Company, along with unrelated parties, were
named as defendants in a class action lawsuit filed in the Allegheny County
Court of Common Pleas. The lawsuit was brought on behalf of purchasers of common
stock in the Bank's initial public offering which was completed in November
1994. The Complaint alleges that the defendants breached their contractual
obligations and fiduciary duties by carrying out the offering at a price that
allegedly was not justified by market and financial conditions. The defendants
previously obtained the dismissal of a lawsuit brought by the same counsel in
federal court making similar allegations under federal law. Management intends
to continue to vigorously defend against this action.
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
-------
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NWSB." As of June 30, 1999, the Company had 13 registered market
makers, 4,372 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
47,355,073 shares outstanding. As of such date, the Mutual Holding Company held
34,228,065 shares of common stock and stockholders other than the Mutual Holding
Company held 13,127,008 shares. The following table sets forth market price and
dividend information for the common stock or, prior to the completion of the
Two-Tier Reorganization, the Bank's common stock. Information is presented for
each quarter of the previous two fiscal years.
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
------------- ---- --- --------
First quarter $14.500 $ 8.625 $0.40
Second quarter 12.250 8.500 0.40
Third quarter 11.000 8.250 0.40
Fourth quarter 10.313 8.125 0.40
Fiscal Year Ended Cash Dividends
June 30, 1998 High Low Declared
------------- ---- --- --------
First quarter 13.125 7.813 .040
Second quarter 16.375 13.625 .040
Third quarter 17.188 13.000 .040
Fourth quarter 18.000 14.875 .040
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
30
payment of dividends, the Company's results of operations and financial
condition, tax consideration and general economic conditions. No assurance can
be given that dividends will be declared or, if 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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- -------------- ---------- ---------- ----------
Selected Consolidated Financial Condition Data: (In Thousands)
Total assets........................... $3,079,907 $2,562,584 $2,091,363 $1,877,925 $1,591,894
Interest-earning deposits in other
financial institutions................ 45,875 42,403 57,765 30,498 59,930
Investment securities held-to-maturity. 118,307 83,021 43,419 54,086 65,470
Investment securities
available-for-sale.................... 121,923 121,192 78,684 51,961 1,414
Mortgage-backed securities
held-to-maturity...................... 135,557 110,241 110,561 101,932 204,841
Mortgage-backed securities
available-for-sale.................... 212,700 195,523 181,036 189,514 38,343
Loans receivable net:
Real estate........................... 1,835,870 1,449,428 1,156,160 1,066,887 906,276
Consumer.............................. 410,165 348,096 306,228 249,051 202,630
Commercial............................ 39,203 109,765 74,110 59,017 55,829
Total loans receivable, net.......... 2,285,238 1,907,289 1,536,498 1,374,955 1,164,735
Deposits............................... 2,463,711 2,022,503 1,640,815 1,450,047 1,283,935
Advances from FHLB and other borrowed
funds................................. 348,915 289,706 223,458 211,761 103,439
Shareholders' equity................... 233,657 217,879 198,494 190,651 178,690
Years Ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- -------------- ---------- ---------- ----------
Selected Consolidated Operating Data: (In Thousands except per share amounts)
Total interest income.................. $ 205,398 $ 174,892 $ 153,518 $ 135,130 $ 118,158
Total interest expense................. 114,911 95,203 81,424 68,637 58,126
---------- ---------- ---------- ---------- ----------
Net interest income................... 90,487 79,689 72,094 66,493 60,032
Provision for loan losses.............. 3,629 4,072 2,491 1,502 1,098
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses...................... 86,858 75,617 69,603 64,991 58,934
---------- ---------- ---------- ---------- ----------
Noninterest income..................... 7,205 8,817 6,736 4,125 4,512
Noninterest expense.................... 63,110 50,318 54,203 40,827 36,971
---------- ---------- ---------- ---------- ----------
Income before income tax expense....... 30,953 34,116 22,136 28,289 26,475
Income tax expense..................... 10,914 12,995 8,472 10,803 10,181
---------- ---------- ---------- ---------- ----------
Minority interest in net loss of
subsidiary............................ 3 201 -- -- --
Net income........................... $ 20,042 $ 21,322 $ 13,664 $ 17,486 $ 16,294
========== ========== ========== ========== ==========
Basic earnings per share............... $0.42 $0.46 $0.30 $0.38 $0.23
Diluted earnings per share............. $0.42 $0.45 $0.30 $0.38 $0.23
31
At or for the Year Ended June 30,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Key Financial Ratios and Other
Data:
Return on average assets (net
income divided
by average total assets)(1)...... 0.71% 0.94% 0.70% 1.05% 1.09%
Return on average equity (net
income divided by
average equity)(1)............... 8.86 10.29 7.12 9.48 11.00
Average capital to average assets. 8.01 9.14 9.84 11.03 9.87
Capital to total assets........... 7.59 8.50 9.49 10.15 11.22
Net interest rate spread (average
yield on interest-earning
assets less average cost of
interest-bearing liabilities)... 3.16 3.37 3.53 3.72 3.81
Net interest margin (net interest
income as a percentage of average
interest-earning assets)........ 3.37 3.67 3.87 4.15 4.15
Noninterest expense to average
assets........................... 2.23 2.22 2.78 2.44 2.46
Net interest income to
noninterest expenses(1).......... 1.43x 1.58x 1.33x 1.63x 1.62x
Nonperforming loans to net loans
receivable....................... 0.71 0.45 0.68 0.69 0.89
Nonperforming assets to total
assets........................... 0.63 0.47 0.72 0.81 1.03
Allowance for loan losses to
nonperforming loans.............. 104.08 183.10 130.50 138.49 113.52
Allowance for loan losses to net
loans receivable................. 0.73 0.83 0.89 0.95 1.02
Average interest-bearing assets
to average
interest-bearing liabilities..... 1.05x 1.07x 1.08x 1.10x 1.08x
Number of:
Full-service offices............. 94 71 57 54 45
Consumer finance offices......... 36 34 30 29 28
Mortgage loan production offices. -- 5 7 8 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 $517.3 million, or 20.2%, to $3.080
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. Total assets
increased by $471.2 million, or 22.5%, to $2.563 billion at June 30, 1998 from
$2.091 billion at June 30, 1997. This increase was funded primarily by a $381.7
million increase in deposits, a $66.2 million increase in borrowed funds and net
income of $21.3 million. The additional funds received in both fiscal years 1999
and 1998 were utilized to increase investments in loans receivable,
mortgage-backed securities and other investment securities.
Interest-earning deposits in other financial institutions. Interest-
earning deposits in other financial institutions increased by $3.5 million, or
8.2%, to $45.9 million at June 30, 1999 from $42.4 million at June 30, 1998. The
balances in these accounts fluctuate daily based on the cash flow resulting from
the Company's other activities. Interest-earning deposits in other financial
institutions decreased by $15.4 million, or 26.6%, to $42.4
32
million at June 30, 1998 from $57.8 million at June 30, 1997 primarily as a
result of the Company receiving a large governmental deposit on the last day of
the prior fiscal year which temporarily inflated the ending balance at June 30,
1997.
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 through both
internal deposit growth and branch acquisitions. Investment securities increased
by $82.1 million, or 67.2%, to $204.2 million at June 30, 1998 from $122.1
million at June 30, 1997. In addition to receiving approximately $17.1 million
from the acquisition of 64.3% of Jamestown Savings Bank ("Jamestown") from
Northwest Bancorp, M.H.C. on March 24, 1998, the Company continued to increase
its portfolio of long-term municipal securities and high-yielding debt
obligations in an effort to improve net interest income.
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
$116.5 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 were principal payments of approximately
$74.0 million received during the year. Mortgage-backed securities increased by
$14.2 million, or 4.9%, to $305.8 million at June 30, 1998 from $291.6 million
at June 30, 1997. This increase resulted from the purchase of approximately
$62.4 million of mortgage-backed securities during the fiscal year which was
offset by the sale of approximately $28.0 million of mortgage-backed securities
and the receipt of principal payments of approximately $20.2 million.
Loans receivable. 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 resulted primarily from continued strong loan demand in the
Company's existing markets as well as new loan growth as a result of the
Company's expansion into other areas. In addition, the acquisition of Corry
Savings Bank ("Corry") on October 21, 1998 contributed net loans of
approximately $22.0 million. Net loans receivable increased by $370.8 million,
or 24.1%, to $1.907 billion at June 30, 1998 from $1.536 billion at June 30,
1997. This increase resulted primarily from strong loan demand in all of the
Company's market areas and was assisted in part by the receipt of $30.8 million
of net loans receivable from the Jamestown acquisition.
Deposits. 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 office facilities with deposits of
$225.5 million. In addition, the acquisition of Corry accounted for
approximately $25.0 million of the increase in deposits. 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. Deposits
increased by $381.7 million, or 23.3%, to $2.023 billion at June 30, 1998 from
$1.641 billion at June 30, 1997. This increase resulted primarily from the
acquisition of ten branch offices with deposits of $166.1 million. In addition,
the acquisition of Jamestown added deposits of $54.3 million. Normal deposit
growth in existing offices as well as the successful integration and growth of
new offices accounted for the remaining increase of $161.3 million.
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 borrowings
were used to fund asset growth in an effort to increase net interest income.
Borrowings increased by $66.2 million, or 29.6%, to $289.7 million at June 30,
1998 from $223.5 million at June 30, 1997. The Company increased its borrowed
funds and invested the proceeds in loans, investment securities and
mortgage-backed securities in an effort to increase net interest income.
Shareholders' equity. 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 the declaration of 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 earned shares of
common stock by the Company's employee stock benefit plans, partially offset by
a decrease in the unrealized gain on investment securities available for sale.
Shareholder's equity increased by $19.4 million, or
33
9.8%, to $217.9 million at June 30, 1998 from $198.5 million at June 30, 1997.
This increase was primarily due to net income of $21.3 million which was
partially offset by the declaration of common stock dividends in the amount of
$7.5 million. The remaining increase was primarily due to the Jamestown
acquisition, the release of earned shares of common stock by the Company's
employee stock benefit plans and an increase in the unrealized gain on
investment securities available for sale.
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 $20.0 million, $21.3 million, and $13.7
million for fiscal years ended June 30, 1999, 1998, and 1997, respectively. 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 $1.6 million decrease in
noninterest income. Partially offsetting these decreases was a $10.8 million
increase in net interest income and a $443,000 decrease in the provision for
loan losses. The $7.6 million, or 55.5% increase in net income for the fiscal
year ended June 30, 1998 as compared to the fiscal year ended June 30, 1997
resulted primarily from a one-time special assessment of $8.6 million ($5.1
million, after tax) in the prior year to recapitalize the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC"). See "--Deposit Insurance Premiums." Also contributing to the increase
in net income was a $7.6 million increase in net interest income and a $2.1
million increase in noninterest income. Offsetting these increases in net income
was a $1.6 million increase in the provision for loan losses and a $4.7 million
increase in noninterest expense, excluding the effect of the prior year SAIF
assessment.
Interest Income. Interest income increased by $30.5 million, or 17.4%, to
$205.4 million for the fiscal year ended June 30, 1999 from $174.9 million for
the fiscal year ended June 30, 1998. The increase in interest income was
primarily attributable to a $517.5 million, or 23.9%, increase in the balance of
average interest-earning assets to $2.687 billion from $2.170 billion. Partially
offsetting this increase was a decrease in the yield on average interest-earning
assets to 7.64% from 8.06%. The increase in the balance of 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 the Company during a period of historically low
interest rates. Interest income increased by $21.4 million, or 13.9%, to $174.9
million for the fiscal year ended June 30, 1998 from $153.5 million for the
fiscal year ended June 30, 1997. The increase in interest income was primarily
attributable to a $307.2 million, or 16.5%, increase in the balance of average
interest-earning assets to $2.170 billion from $1.863 billion. Partially
offsetting this increase was a decrease in the yield on average interest-earning
assets to 8.06% from 8.24%. The increase in the balance of average
interest-earning assets was primarily the result of growth in the Company's loan
portfolio due to strong loan demand and the Company's attempt to deploy funds
received from deposit growth. The decrease in the yield on average
interest-earning assets is reflective of market interest rates generally being
lower.
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 $446.9
million, or 26.7%, increase in average loans receivable to $2.121 billion for
the year ended June 30, 1999 compared to $1.674 billion for the year ended June
30, 1998. Partially offsetting this increase was a decrease in the yield on
average loans to 8.22% from 8.63%. The increase in average loans primarily
resulted from strong loan demand through the Company's market areas and the
acquisition of Corry which contributed net loans of
34
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 loans receivable increased by $17.4 million, or 13.7%, to
$144.4 million for the year ended June 30, 1998 from $127.0 million for the year
ended June 30, 1997. This increase primarily resulted from a $223.8 million, or
15.4%, increase in average loans receivable to $1.674 billion for the year ended
June 30, 1998 compared to $1.450 billion for the year ended June 30, 1997.
Partially offsetting this increase was a decrease in the yield on average loans
receivable to 8.63% from 8.76%. The increase in average loans receivable
primarily resulted from strong loan demand throughout the Company's market areas
and the acquisition of Jamestown which contributed net loans of approximately
$30.8 million. The decrease in the yield on average loans receivable for the
fiscal year ended June 30, 1998 compared to the fiscal year ended June 30, 1997
was primarily a result of mortgage loan prepayments, the proceeds from which
were used to fund additional loans at lower rates of interest.
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 5.76% for the year ended June 30, 1999 from 6.47% for
the year ended June 30, 1998. Partially offsetting this decrease in average
yield was a $3.9 million, or 1.3%, increase in the average balance of
mortgage-backed securities to $306.1 million for the year ended June 30, 1999
from $302.2 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 purchases of
approximately $116.5 million during the fiscal year which were offset by
principal payments of approximately $74.0 million. Interest income on
mortgage-backed securities increased by $406,000, or 2.1%, to $19.5 million for
the year ended June 30, 1998 from $19.1 million for the year ended June 30,
1997. This increase resulted primarily from a $23.4 million, or 8.4%, increase
in the average balance of mortgage-backed securities to $302.2 million for the
year ended June 30, 1998 from $278.8 million for the year ended June 30, 1997.
Partially offsetting this increase in average balance was a decrease in the
average yield to 6.47% from 6.87%. The average balance increased primarily
because of the purchase of mortgage-backed securities during the fiscal year,
utilizing funds received from the aforementioned branch acquisitions. In
addition, the Jamestown acquisition contributed approximately $5.4 million of
mortgage-backed securities. The average yield on mortgage-backed securities
declined as a result of a large percentage of the portfolio having variable
interest rates which repriced at lower market rates.
Interest income on investment securities increased by $2.0 million, or
19.4%, to $12.3 million for the year ended June 30, 1999 from $10.3 million for
the year ended June 30, 1998. This increase resulted primarily from a $40.0
million, or 24.7%, increase in the average balance of investment securities to
$201.9 million for the year ended June 30, 1999 from $161.9 million for the year
ended June 30, 1998. Partially offsetting this increase in average balance was a
decrease in the average yield to 6.11% from 6.37%. The increase in average
balance was primarily due to the investment of a percentage of the Company's
deposit and borrowing growth. The decrease in average yield resulted primarily
from the purchase of approximately $35.0 million of tax exempt municipal
securities during the fiscal year that have a lower nominal interest rate than
other securities in the Company's investment portfolio. Interest income on
investment securities increased by $3.4 million, or 49.3%, to $10.3 million for
the year ended June 30, 1998 from $6.9 million for the year ended June 30, 1997.
This increase resulted primarily from a $55.0 million, or 51.4%, increase in the
average balance of investment securities to $161.9 million for the year ended
June 30, 1998 from $106.9 million for the year ended June 30, 1997. Partially
offsetting the increase in average balance was a decrease in the average yield
to 6.37% from 6.48%. The increase in average balance was primarily due to the
investment of the proceeds received from the aforementioned branch acquisitions
as well as approximately $17.1 million from the addition of Jamestown's
investment portfolio. The decrease in the average yield was primarily the result
of lower nominal interest received on tax exempt securities, as the Company
purchased approximately $30 million of such securities during the fiscal year.
Partially offsetting the lower yields received from the tax exempt obligations
was the higher yields received from the purchase of approximately $30 million of
fixed-rate trust preferred securities.
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 $26.6
35
million, or 82.9%, increase in the average balance of interest-earning deposits
to $58.7 million for the year ended June 30, 1999 from $32.1 million for the
year ended June 30, 1998. Partially offsetting this increase in average balance
was a decrease in the average yield on interest-earning deposits to 1.74% from
2.10%. The increase in average balance was primarily due to an increase in
deposits-in-transit relating to the substantial growth in the number of retail
offices. The decrease in average yield reflects the decrease in market interest
rates in general. Interest income on interest-earning deposits increased by
$242,000, or 55.9%, to $675,000 for the year ended June 30, 1998 from $433,000
for the year ended June 30, 1997. This increase resulted primarily from an
increase in the average yield to 2.10% from 1.60%. In addition, the average
balance of interest-earning deposits increased by $5.0 million, or 18.5%, to
$32.1 million for the year ended June 30, 1998 from $27.1 million for the year
ended June 30, 1997. The increase in average yield and average balance is
principally the result of the timing as to when the Company is credited for
these deposits and the period in which they begin to earn interest.
Interest expense. Interest expense increased by $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 $534.9 million, or
26.4%, increase in the balance of average interest-bearing liabilities to $2.563
billion for the year ended June 30, 1999 from a $2.028 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
4.48% from 4.69%. The increase in average interest-bearing liabilities resulted
primarily from the increase in deposits from the aforementioned acquisitions
with deposits of approximately $250.0 million combined with the strong internal
growth of new office openings throughout the Company's market areas. 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. Interest expense increased by
$13.8 million, or 17.0%, to $95.2 million for the year ended June 30, 1998 from
$81.4 million for the year ended June 30, 1997. This increase resulted primarily
from a $300.8 million, or 17.4%, increase in average balance of interest-bearing
liabilities to $2.028 billion for the year ended June 30, 1998 from $1.727
billion for the year ended June 30, 1997. Partially offsetting the increase in
average balance was a decrease in the average cost of funds to 4.69% from 4.71%.
The increase in average interest-bearing liabilities resulted primarily from an
increase in deposits from the aforementioned branch acquisitions with deposits
of $166.1 million and the acquisition of Jamestown with deposits of $54.3
million. In addition, above average internal growth and new office openings
accounted for the remaining increase in deposits. Also contributing to the
increase in interest expense was a $26.5 million, or 15.8%, increase in average
borrowed funds to $194.3 million at June 30, 1998 from $167.8 million at June
30, 1997. Borrowings increased in order to fund growing loan demand and to fund
the purchase of marketable securities in order to enhance the Company's net
interest income. The decrease in the average cost of funds was primarily the
result of lower market rates on deposit accounts and borrowed funds.
Net interest income. Net interest income increased by $10.8 million, or
13.6%, to $90.5 million for the year ended June 30, 1999 from $79.7 million for
the year ended June 30, 1998. This increase resulted primarily from a $517.5
million, or 23.9%, increase in average interest-earning assets, the effect of
which was partially offset by a $534.9 million, or 26.4%, increase in average
interest-bearing liabilities and a decrease in the Company's net interest spread
to 3.16% for the year ended June 30, 1999 from 3.37% for the year ended June 30,
1998.
Net interest income increased by $7.6 million, or 10.5%, to $79.7 million
for the year ended June 30, 1998 from $72.1 million for the year ended June 30,
1997. This increase resulted primarily from a $307.2 million, or 16.5%, increase
in average interest-earning assets, the effect of which was partially offset by
a $300.8 million, or 17.4%, increase in average interest-bearing liabilities and
a decrease in the Company's net interest spread to 3.37% for the year ended June
30, 1998 from 3.53% for the year ended June 30, 1997.
Provision for Loan Losses. The Company establishes general valuation
allowances, which represent probable, but not yet identified 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
36
of credit risk and trends affecting the valuation of collateral for the
Company's loans. The Company provided $3.6 million, $4.1 million and $2.5
million in loan loss provisions for the fiscal years ended June 30, 1999, 1998
and 1997, respectively.
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 in their regulatory
examinations of the Company. 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 decreased by $1.6 million, or 18.2%,
to $7.2 million for the year ended June 30, 1999 from $8.8 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
loss of $686,000 in the current year on the sale of investment securities
compared to a gain on such sales in the previous year of $1.5 million. The loss
incurred in the current year 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 $1.0 million, or 14.5%,
to $7.9 million for the year ended June 30, 1999 from $6.9 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 deposits and loan
portfolio.
Noninterest income increased by $2.1 million, or 31.3%, to $8.8 million for
the year ended June 30, 1998 from $6.7 million for the year ended June 30, 1997.
This increase resulted primarily from a gain of $1.5 million, before income tax,
from the sale of long-term, fixed-rate mortgage-backed securities in
anticipation of these securities being prepaid in a falling interest rate
environment and a nonrecurring gain of $339,000, before income tax, from the
sale of other property held for investment. In addition, fee income increased
approximately $1.0 million, or 42.4%, primarily as a result of the introduction
of a debit card program with related transaction fee income. Partially
offsetting these increases in noninterest income was a $332,000 decrease in the
gain on sale of real estate owned.
Noninterest expense. 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 current fiscal year 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 this substantial growth,
computer conversion and normal inflationary increases in costs, all expense
categories increased in the current fiscal year when compared to the previous
year. 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.
Excluding the one-time assessment of $8.6 million in the prior year to
recapitalize the SAIF, noninterest expense increased by $4.7 million, or 10.3%,
to $50.3 million for the year ended June 30, 1998 from $45.6 million for the
year ended June 30, 1997. This increase was primarily attributable to increases
in compensation and benefits of $2.3 million, or 8.8%, primarily as a result of
adding employees to support the Company's growth. Also contributing to the
increase in compensation expense was an increase in employee stock ownership
plan ("ESOP") expense resulting from the significant increase in the average
market price of the Company's stock. Other increases
37
related to inflation and growth were experienced in premises and occupancy costs
which increased $694,000, or 13.4%, check processing expense which increased
$483,000, or 31.3% and other (miscellaneous) operating expenses which increased
$1.1 million, or 14.7%. Data processing expense increased $498,000, or 43.9%,
which was primarily attributable to the purchase of new core application
hardware and software with the conversion scheduled for November 1998. In
addition, amortization of intangibles expense increased $427,000, or 30.9%, due
to the aforementioned current year acquisitions. Partially offsetting these
increases in noninterest expense were decreases in federal deposit insurance
expense of $529,000, or 40.6%, due to a decrease in premiums as a result of the
SAIF recapitalization and a decrease in advertising expense of $323,000, or
20.1%, as the prior year expense included higher advertising costs related to
the Company's centennial anniversary celebration.
Income taxes. 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% for the year
ended June 30, 1999 from 38% for the year ended June 30, 1998 due to an increase
in tax free assets.
Income tax expense increased by $4.5 million, or 52.9% to $13.0 million for
the year ended June 30, 1998 from $8.5 million for the year ended June 30, 1997.
This increase was a direct result of the increase in income subject to tax, as
the effective tax rate remained constant at approximately 38%.
Deposit Insurance Premiums. The deposits of the Company are presently
insured by the 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 per $100 in 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. As of June 30, 1999, the FICO assessment was 1.29 basis points per
$100 of BIF deposits, and 6.44 basis points per $100 of SAIF deposits.
38
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 and the
average yields earned and rates paid. 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
month-end balances.
Years Ended June 30
-------------------
1999 1998
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)(2)... $2,120,525 174,393 8.22% $1,673,599 144,354 8.63%
Mortgage-backed
securities (3)(4)........ 306,143 17,649 5.76 302,220 19,547 6.47
Investment
securities(2)(3)(4)(5)... 201,871 12,333 6.11 161,860 10,316 6.37
Interest-earning deposits. 58,742 1,023 1.74 32,091 675 2.10
---------- ------- ---------- --------
Total interest-earning
assets................... 2,687,281 205,398 7.64 2,169,770 174,892 8.06
Noninterest-earning assets. 138,484 96,666
----------
Total assets............. $2,825,765 $2,266,436
========== ==========
Interest-bearing
liabilities:
Passbook and statement
savings.................. $ 359,137 11,816 3.29 $ 302,281 10,201 3.37
Checking accounts......... 357,102 5,004 1.40 264,086 4,469 1.69
Money market demand
accounts................. 136,810 4,830 3.53 96,558 3,395 3.52
Certificate accounts...... 1,393,199 76,457 5.49 1,171,009 66,981 5.72
FHLB advances and other
borrowed money(6)......... 316,930 16,804 5.30 194,282 10,157 5.23
---------- ------- ---------- --------
Total interest-bearing
liabilities.............. 2,563,178 114,911 4.48 2,028,316 95,203 4.69
Noninterest-bearing
liabilities............... 35,999 30,314
---------- ----------
Total liabilities......... 2,599,177 2,058,630
Minority interest in
subsidiary................ 294 623
Shareholders' equity....... 226,294 207,183
---------- ----------
Total liabilities and
equity................... $2,825,765 $2,266,436
========== ==========
Net interest income........ $ 90,487 $ 79,689
========== ==========
Net interest rate spread(7) 3.16% 3.37%
========== ==========
Net interest-earning assets $ 124,103 $141,454
========== ========
Net interest margin(8)..... 3.37% 3.67%
======= ========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities............... 1.05x 1.07x
========== ==========
Years Ended June 30
-------------------
1997
----
Average
Average Yield/
Balance Interest Cost
------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)(2)... $1,449,807 127,019 8.76%
Mortgage-backed
securities (3)(4)........ 278,801 19,141 6.87
Investment
securities(2)(3)(4)(5)... 106,945 6,925 6.48
Interest-earning deposits. 27,064 433 1.60
------ ----
Total interest-earning
assets................... 1,862,617 153,518 8.24
Noninterest-earning assets. 87,740
------
Total assets............. $1,950,357
==========
Interest-bearing
liabilities:
Passbook and statement
savings.................. $ 276,659 9,490 3.43
Checking accounts......... 207,140 3,992 1.93
Money market demand
accounts................. 81,902 2,735 3.34
Certificate accounts...... 994,028 56,410 5.67
FHLB advances and other
borrowed money(6)......... 167,761 8,797 5.24
------- -----
Total interest-bearing
liabilities.............. 1,727,490 81,424 4.71
Noninterest-bearing
liabilities............... 31,046
------
Total liabilities.........
Minority interest in
subsidiary................ --
Shareholders' equity....... 191.821
-------
Total liabilities and
equity................... 1,950,357
=========
Net interest income........ $72,094
=======
Net interest rate spread(7) 3.53%
====
Net interest-earning assets $ 135,127
=========
Net interest margin(8)..... 3.87%
====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities............... 1.08x
=====
- -------------------------
(1) Average loans receivable includes loans held as available-for-sale and
loans placed on nonaccrual status.
(2) Interest income on tax-free loans and investment securities is not
presented on a taxable equivalent basis.
(3) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(4) Interest income on marketable securities does not include market value
adjustments for securities available-for-sale.
(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.
39
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,
--------------------
1999 vs. 1998 1998 vs. 1997
------------- -------------
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...................... $(6,716) $38,549 $(1,794) 30,039 $(1,986) $19,607 $(304) $17,335
Mortgage-backed securities............ (2,124) 254 (28) (1,898) (1,109) 1,608 (93) 406
Investment securities................. (427) 2,550 (106) 2,017 (109) 3,556 (56) 3,391
Interest-earning deposits............. (117) 560 (95) 348 136 80 26 242
----- --- ---- --- --- -- -- ---
Total interest-earning assets....... (9,384) 41,913 (2,023) 30,506 (3,050) 24,851 (427) 21,374
Interest-bearing liabilities:
Passbook and statement savings........ (252) 1,915 (48) 1,615 (157) 882 (14) 711
Checking accounts..................... (768) 1,574 (271) 535 (487) 1,097 (133) 477
Money market demand accounts.......... 14 1,415 6 1,435 145 489 26 660
Certificate accounts.................. (2,718) 12,709 (515) 9,476 448 10,043 80 10,571
FHLB advances and other
borrowed money....................... 144 6,412 91 6,647 (27) 1,391 (4) 1,360
--- ----- -- ----- --- ----- -- -----
Total interest-bearing liabilities.. (3,580) 24,025 (737) 19,708 (78) 13,902 (45) 13,779
Net change in net interest income... $(5,804) $17,888 $(1,286) $10,798 $(2,972) $10,949 $(382) $ 7,595
======= ======= ======= ======= ======= ======= ===== =======
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, 1999, such
loans constituted $312.1 million, or 13.6%, 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, 1999, totalled $231.9
million or 10.1% of the Company's total loan portfolio. Of the Company's $2.937
billion of interest-earning assets at June 30, 1999, $526.6 million, or 17.9%,
consisted of assets with adjustable-rates of interest. However, because of the
general reduction in the level of market interest rates the origination of
adjustable-rate loans was limited during the fiscal year ended June 30, 1999.
The Company also attempts to reduce interest rate
40
risk by lengthening the maturities of its interest-bearing 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, 1999, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $253.8 million, representing a cumulative negative one-year
gap ratio of 8.24%. 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 the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999, 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................ $ 45,875 $ -- $ -- $ -- $ -- $ -- $ 45,875
Mortgage-backed securities:
Fixed................................... 7,395 12,494 9,696 15,934 8,043 -- 53,562
Variable................................ 294,695 -- -- -- -- -- 294,695
Investment securities.................... 19,559 35,694 24,947 14,664 145,366 -- 240,230
Real estate loans:
Adjustable-rate......................... 34,931 4,562 -- -- -- -- 39,493
Fixed-rate.............................. 373,163 476,496 293,082 367,575 72,569 112,061 1,694,946
Home equity lines of credit.............. 39,067 -- -- -- -- -- 39,067
Education loans.......................... 64,341 -- -- -- -- -- 64,341
Other consumer loans..................... 178,244 111,570 22,261 -- -- -- 312,075
Commercial loans......................... 96,083 51,232 20,779 24,411 -- -- 192,505
---------- --------- -------- -------- -------- --------- ----------
Total rate-sensitive assets............ $1,153,353 $ 692,048 $370,765 $422,584 $225,978 $ 112,061 $2,976,789
========== ========= ======== ======== ======== ========= ==========
Rate-sensitive liabilities:
Fixed maturity deposits.................. $ 992,723 $ 417,367 $ 60,364 $ 30,596 $ -- $ -- $1,501,050
Money market deposit accounts............ 32,896 65,792 65,796 -- -- -- 164,484
Savings accounts......................... 155,000 56,000 56,000 142,029 -- -- 409,029
Checking accounts........................ 30,000 -- -- -- -- 359,148 389,148
FHLB advances............................ 165,000 16,000 34,350 100,000 2,037 -- 317,387
Other borrowings......................... 31,528 -- -- -- -- -- 31,528
---------- --------- -------- -------- -------- --------- ----------
Total rate-sensitive liabilities....... $1,407,147 $ 555,159 $216,510 $272,625 $ 2,037 $ 359,148 $2,812,626
========== ========= ======== ======== ======== ========= ==========
Interest sensitivity gap per period....... $ (253,794) $ 136,889 $154,255 $149,959 $223,941 $(247,087) $ 164,163
========== ========= ======== ======== ======== ========= ==========
Cumulative interest sensitivity gap....... $ (253,794) $(116,905) $ 37,350 $187,309 $411,250 $ 164,163 $ 164,163
========== ========= ======== ======== ======== ========= ==========
Cumulative interest sensitivity gap as a
percentage of total assets............... (8.24)% (3.80)% 1.21% 6.08% 13.35% 5.33% 5.33%
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities.............................. 81.96% 94.04% 101.71% 107.64% 116.76% 105.84% 105.84%
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Company that: (i) adjustable-rate mortgage
loans will prepay at an annual rate of 20.0%; (ii) fixed-rate mortgage loans
will prepay at an annual rate of 10.0%; (iii) commercial loans will prepay at an
annual rate of 15.0%; (iv) consumer loans will prepay at an annual rate of
20.0%; (v) fixed maturity deposits will not be withdrawn prior to maturity; (vi)
money market accounts will gradually reprice over the next five years; and (vii)
passbook and checking accounts will reprice either when the rates on such
accounts reprice as interest rate levels change, or when deposit holders
41
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 $30 million of the Company's checking accounts and $155 million of the
Company's passbook 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, 1999 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, 1999 levels.
Movements in interest rates from
June 30, 1999 rates
-------------------
Increase Decrease
-------- --------
Simulated impact over the next 12 months
compared with June 30, 1999:.............. 1% 2% 1% 2%
-- -- -- --
Percentage increase/(decrease) in net
income.................................... (2.99%) (9.71%) 7.47% 11.95%
Increase/(decrease) in return on average
equity.................................... (0.28%) (0.92%) 0.70% 1.13%
Increase/(decrease) in earnings per share.. ($0.01) ($0.05) $0.04 $ 0.06
Percentage increase/(decrease) in market
value of equity........................... (18.85%) (42.98%) 20.01% 29.68%
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
42
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, 1999, 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.
43
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, 1999.
June 30, 1999 June 30, 1998
------------- -------------
Total shareholders' equity or
GAAP capital ............................ $ 233,657 $ 217,879
Add: Minority interest in
subsidiary .............................. -- 1,913
Less: unrealized gain on
securities available for sale ........... (1,978) (3,371)
Less: nonqualifying intangible
assets .................................. (41,643) (21,707)
Leverage capital ......................... 190,036 194,717
Plus: Tier 2 capital (1) ................. 18,011 15,769
Total risk-based capital ................. $ 208,047 $ 210,483
=========== ===========
Quarterly average total assets
for leverage ratio ...................... $ 3,015,829 $ 2,488,554
=========== ===========
Net risk-weighted assets
including off-balance sheet
items ................................... $ 1,642,302 $ 1,355,866
=========== ===========
Leverage capital ratio ................... 6.30% 7.82%
Minimum requirement (2) .................. 3.00% to 5.00% 3.00% to 5.00%
Risk-based capital ratio ................. 12.67% 15.52%
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 securities available-for-
sale.
(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 requiring a minimum 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 23.8% as of June 30, 1999. 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 $45.9 million at June 30, 1999. Other assets qualifying
for liquidity outstanding at June 30, 1999, amounted to $623.0 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.
44
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, 1999, the Company had $317.4 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, 1999, the Company's customers had $71.5 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, 1999, totaled $992.7 million. 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 $117.1 million, $97.0 million and $103.5 million for
the fiscal years ended June 30, 1999, 1998 and 1997, 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, 1999, 1998 and 1997 were $512.1 million, $425.3
million and $371.3 million, respectively. Loan originations for the years ended
June 30, 1999, 1998 and 1997 were $881.9 million, $802.1 million and $563.2
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, 1999, 1998 and 1997 were $7.4 million, $30.1 million and $47.9 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 investment securities. Cash flow from the repayment of principal
and the maturity of marketable securities for the fiscal years ended June 30,
1999, 1998 and 1997 were $122.5 million, $59.6 million and $27.0 million,
respectively. During the fiscal years ended June 30, 1999, 1998 and 1997, the
bank utilized cash to purchase marketable securities in the amount of $195.1
million, $167.4 million and $30.0 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 were net
increases of $59.2 million, $66.2 million and $6.6 million for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively.
Other activity with respect to cash flow was the payment of cash dividends
on common stock in the amount of $7.6 million, $7.5 million and $7.5 million for
the fiscal years ended June 30 1999, 1998 and 1997 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.
45
Capability of the Company's Data Processing to Accommodate the Year 2000.
The Company has devoted substantial resources to address the possible
impact of issues relating to the year 2000 ("Y2K") on the Company and its
operations. In 1997, after several years of assessing the potential problems,
the Company adopted a formal plan addressing the Y2K issue.
The Company's most critical operating system is its core application
processing and the Company addressed this mission critical area by converting to
a new core application processing system in November of 1998. The Company
recently completed its testing of this core application system and has deemed it
to be fully compliant for year 2000 processing. The approximate cost of this
conversion was $3,000,000. Approximately $1,500,00 of these costs were expenses
recorded in the quarter ended December 31, 1998. The remaining costs have been
capitalized and will be expensed over various periods in accordance with the
Company's depreciation policy.
Other than the core application conversion, costs relating to Y2K issues
are not expected to be material and are not expected to have a material effect
on the results of operations of the Company.
The Company is continuously monitoring relationships with material third
parties, including large deposit and loan customers, to assess the progress of
their Y2K efforts. It is possible that the Company could be negatively impacted
in the year 2000 because external parties have not successfully addressed their
Y2K issues. Although the effects of such third party problems are not known, the
Company does not foresee any problems which will be material in nature. To
mitigate its exposure to the failure of third parties, the Company is actively
designing a contingency plan which will allow it to continue services in the
event unforeseeable external factors disrupt normal operations in the year 2000.
However, there can be no assurance that any contingency plans will completely
mitigate the effects of any such failure.
Impact of New Accounting Standards. In June 1997, the FASB released SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements for fiscal years beginning
after December 15, 1997. As such, the Company adopted this statement in the
current fiscal year by adding the required disclosure in the Consolidated
Statement of Financial Condition, the Consolidated Statement of Changes in
Shareholders' Equity and the footnotes to the audited financial statements. The
adoption of SFAS 130 had no effect on the reported earnings or operations of the
Company.
During 1998, the Company adopted SFAS 131 "Disclosure about Segments of an
Enterprise and Related Information," which requires disclosures about reportable
segments of an enterprise. The determination of these segments is based upon the
manner in which the decision makers of an enterprise evaluates its financial
information. 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 herein, represent the results of a single financial
services segment.
In February 1998, the FASB released SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB Statements No.
87, 88, and 106" ("SFAS 132"). SFAS 132 standardizes disclosure requirements for
pensions and postretirement benefits where applicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. This
statement, however, does not change the measurement or recognition requirements
of pension or postretirement benefit plans. The Company adopted this statement
in the current fiscal year with no effect on the reported earnings or
operations.
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 is not expected to have a material effect on the
Company's financial position or results of operations.
46
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 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is encouraged, however, this statement should not be applied
retroactively to financial statements of prior periods. The Company does not
currently participate in any activity that qualifies as derivative or hedging
and, therefore, does not expect this statement to have a material effect on the
financial statements.
In June 1999, the FASB issued SFAS 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133 - an amendment of FSAB Statement 133", which delays the adoption
of FASB Statement 133 until June 30, 2000.
In October 1998, the FASB released SFAS 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity - an amendment of FASB Statement No. 65" ("SFAS 134").
SFAS 134 amends Statement 65 to require that after the securitization of
mortgage loans, a mortgage banking entity classify the resulting mortgage-backed
securities or other retained interests as either hold-to-maturity,
available-for-sale or trading based on its ability and intent to hold those
securities. SFAS 134 is effective for the first fiscal quarter beginning after
December 15, 1998 and had no impact on the Company's consolidated financial
statements.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
[LETTERHEAD OF KPMG LLP]
Independent Auditors' 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, 1999 and 1998, 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,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northwest Bancorp,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
August 20, 1999
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
(Amounts in thousands, excluding share data)
Assets 1999 1998
-------------- ------------
Cash and cash equivalents $ 38,378 16,992
Interest-earning deposits in other financial institutions 45,875 42,403
Marketable securities available-for-sale (notes 4 and 11) 334,623 316,715
Marketable securities held-to-maturity (market value of
$250,351 and $192,817) (notes 4 and 11) 253,864 193,262
Loans receivable, net of allowance for estimated
losses of $16,773 and $15,769 (notes 5, 7 and 11) 2,285,238 1,907,289
Accrued interest receivable (note 6) 14,548 13,254
Real estate owned, net 3,383 3,506
Federal Home Loan Bank stock, at cost (notes 8 and 11) 18,157 13,444
Premises and equipment, net (note 9) 35,463 26,239
Goodwill and other intangibles 39,328 22,065
Other assets 11,050 7,415
-------------- -------------
Total assets $ 3,079,907 2,562,584
============== =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 10) 2,463,711 2,022,503
Borrowed funds (note 11) 348,915 289,706
Advances by borrowers for taxes and insurance 18,954 15,348
Accrued interest payable 3,698 2,932
Other liabilities 10,972 12,303
-------------- -------------
Total liabilities 2,846,250 2,342,792
Minority interest in subsidiary -- 1,913
Shareholders' equity (notes 13, 15, 17 and 21):
Common stock, $.10 par value, authorized 100,000,000
shares; 47,355,073 and 46,840,970 issued and
outstanding at June 30, 1999 and 1998, respectively 4,736 4,684
Paid-in capital 70,374 67,248
Retained earnings, substantially restricted 157,745 145,259
Accumulated other comprehensive income, net 1,978 3,371
Unearned employee stock ownership plan shares (561) (1,412)
Unearned recognition and retention plan shares (615) (1,271)
-------------- -------------
Total shareholders' equity 233,657 217,879
-------------- -------------
Total liabilities and shareholders' equity $ 3,079,907 2,562,584
============== =============
See accompanying notes to consolidated financial statements.
48
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
----------------- ------------------ -----------------
Interest income:
Loans receivable $ 174,393 144,354 127,019
Mortgage-backed securities 17,649 19,547 19,141
Investment securities 12,333 10,316 6,925
Interest-bearing deposits 1,023 675 433
----------------- ------------------ -----------------
Total interest income 205,398 174,892 153,518
Interest expense:
Deposits (note 10) 98,107 85,046 72,627
Borrowed funds 16,804 10,157 8,797
----------------- ------------------ -----------------
Total interest expense 114,911 95,203 81,424
----------------- ------------------ -----------------
Net interest income 90,487 79,689 72,094
Provision for loan losses (note 7) 3,629 4,072 2,491
----------------- ------------------ -----------------
Net interest income after provision
for loan losses 86,858 75,617 69,603
Noninterest income:
Loan fees and service charges 4,500 3,347 2,351
Gain (loss) on sales of marketable securities, net (686) 1,500 901
Loss on sale of loans (481) (369) (420)
Gain on sale of real estate owned 150 164 496
Gain on sale of real estate owned for investment -- 339 --
Other operating income 3,722 3,836 3,408
----------------- ------------------ -----------------
Total noninterest income 7,205 8,817 6,736
(Continued)
49
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
----------------- ------------------ -----------------
Noninterest expense:
Compensation and employee benefits (note 15) $ 35,005 28,326 25,990
Premises and occupancy costs 7,116 5,857 5,163
SAIF recapitalization assessment (note 18) -- -- 8,565
Federal insurance premiums 1,132 773 1,302
Data processing 2,149 1,633 1,135
Check processing 2,364 2,026 1,543
Advertising 1,809 1,283 1,606
Amortization of intangibles 3,458 1,808 1,381
Other expenses 10,077 8,612 7,518
----------------- ------------------ -----------------
Total noninterest expense 63,110 50,318 54,203
----------------- ------------------ -----------------
Income before income taxes 30,953 34,116 22,136
Provision for income taxes (note 12):
Federal 8,910 11,232 7,076
State 2,004 1,763 1,396
----------------- ------------------ -----------------
Total provision for income taxes 10,914 12,995 8,472
Minority interest in net loss of subsidiary 3 201 --
----------------- ------------------ -----------------
Net income $ 20,042 21,322 13,664
================= ================== =================
Basic earnings per share (note 14) $ .42 .46 .30
================= ================== =================
Diluted earnings per share (note 14) $ .42 .45 .30
================= ================== =================
See accompanying notes to consolidated financial statements.
(Continued)
50
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 1999, 1998 and 1997
(Amounts in thousands)
Accumulated
other
Common Paid-in Retained comprehensive
stock capital earnings income, net
----------- ----------- ------------- -----------------
Balance at June 30, 1996 $ 2,338 67,671 125,239 1,325
Comprehensive income:
Net income -- -- 13,664 --
Change in unrealized gain on securities,
net of tax -- -- -- (299)
----------- ----------- ------------- -----------------
Total comprehensive income -- -- 13,664 (299)
ESOP shares released -- 183 -- --
RRP shares released -- -- -- --
Dividends declared -- -- (7,480) --
----------- ----------- ------------- -----------------
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, 1996 (3,328) (2,594) 190,651
Comprehensive income:
Net income -- -- 13,664
Change in unrealized gain on securities,
net of tax -- -- (299)
-------------- --------------- ---------------
Total comprehensive income -- -- 13,365
ESOP shares released 970 -- 1,153
RRP shares released -- 805 805
Dividends declared -- -- (7,480)
-------------- --------------- ---------------
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
============== =============== ===============
* Represents shares issued for the acquisition of Corry Savings Bank (see
note 3, Business Combinations).
See accompanying notes to financial statements.
(Continued)
51
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
---------------- ---------------- ----------------
Operating activities:
Net income $ 20,042 21,322 13,664
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 3,629 4,072 2,491
Net loss (gain) on sales of assets 1,017 (1,634) (977)
Purchase of marketable securities, trading (31,863) (36,061) --
Proceeds from sale of marketable securities,
trading 22,160 36,151 --
Depreciation and amortization 5,961 4,122 3,260
Accretion of deferred loan fees (805) (725) (715)
Increase in other assets (3,857) (1,373) (897)
Increase (decrease) in other liabilities 943 (3,022) 1,625
Accretion of discounts on marketable securities (255) (316) (431)
Noncash compensation expense related to
stock benefit plans 2,244 3,200 2,212
Other 241 -- --
---------------- ---------------- ----------------
Net cash provided by operating
activities 19,457 25,736 20,232
---------------- ---------------- ----------------
Investing activities:
Purchase of marketable securities held-to-maturity (106,562) (66,692) --
Purchase of marketable securities available-for-sale (88,563) (100,707) (29,992)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 48,051 27,611 18,315
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 74,491 32,012 8,692
Proceeds from sales of marketable securities available-
for-sale 4,470 39,437 15,496
Loan originations (881,861) (802,145) (563,188)
Proceeds from loan maturities and principal
reductions 512,069 425,325 371,295
Proceeds from loan sales 7,365 30,094 47,985
Purchase of Federal Home Loan Bank stock (4,511) (1,300) (973)
Proceeds from sale of real estate owned 3,312 3,196 1,978
Net (purchase) sale of real estate owned for investment 245 162 (391)
Purchase of premises and equipment (7,821) (4,276) (4,153)
Acquisitions, net of cash received 198,627 151,935 (13,959)
---------------- ---------------- ----------------
Net cash used by investing activities (240,688) (265,348) (148,895)
---------------- ---------------- ----------------
(Continued)
52
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
---------------- ---------------- ----------------
Financing activities:
Increase in deposits, net $ 191,221 166,024 156,174
Proceeds from long-term borrowings 101,281 136,622 63,136
Repayments of long-term borrowings (87,413) (70,544) (75,260)
Net increase in short-term borrowings 43,720 168 18,821
Increase in advances by borrowers for
taxes and insurance 3,423 2,302 480
Cash dividends paid (7,556) (7,486) (7,480)
Stock issuance for acquisition 1,193 -- --
Proceeds from options exercised 220 409 --
---------------- ---------------- ----------------
Net cash provided by financing activities 246,089 227,495 155,871
---------------- ---------------- ----------------
Net increase (decrease) in cash and
cash equivalents $ 24,858 (12,117) 27,208
================ ================ ================
Cash and cash equivalents at beginning of period 59,395 71,512 44,304
Net increase (decrease) in cash and cash equivalents 24,858 (12,117) 27,208
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 84,253 59,395 71,512
================ ================ ================
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of
$74,097, $64,476 and $52,665, respectively) $ 114,145 97,425 81,240
================ ================ ================
Income taxes $ 12,858 12,215 8,531
================ ================ ================
Noncash activities:
Business acquisitions:
Fair value of assets acquired 50,457 69,992 59,560
Cash received (paid) 198,627 148,751 (18,772)
Minority interest 1,913 (2,060) --
---------------- ---------------- ----------------
Liabilities assumed $ 250,997 216,683 40,788
================ ================ ================
Loan foreclosures and repossessions $ 3,378 2,839 1,654
================ ================ ================
Sale of real estate owned financed by the Company $ 456 147 108
================ ================ ================
See accompanying notes to consolidated financial statements.
(Continued)
53
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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
88 banking locations in Pennsylvania, four banking locations in
southwestern New York and two banking locations in eastern Ohio. The
Company and its subsidiaries also offer consumer finance products
through 35 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, 1999, 1998 and 1997
(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,
1999 and 1998.
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 loans, adjusted for estimated
prepayments.
(f) Real Estate Owned
Real estate owned (acquired by foreclosure or voluntarily conveyed by
delinquent borrowers) is initially recorded at fair value at the time
of acquisition and subsequently reported at the lower of its new cost
basis or fair value less estimated costs to sell. Gains and losses on
real estate owned 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 general loss allowance sufficient, in management's
judgment, to cover probable losses based on past experience and
economic conditions. Provisions for 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, 1999, 1998 and 1997
(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 for possible impairment 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 are twenty to thirty years for buildings, five
years for automobiles and five to ten years for furniture and other
equipment. 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, 1999, 1998 and 1997
(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, 1999, 1998 and 1997
(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.
The reorganization was accounted for in a manner similar to a pooling of
interests. Accordingly, the 1997 consolidated financial statements of the
Company are identical to the fiscal 1997 consolidated financial statements
of Northwest.
During the past fiscal year, the Board of Trustees of Northwest Bancorp MHC
authorized the purchase of up to 1,500,000 of the outstanding publicly
traded shares of Northwest Bancorp, Inc. As of June 30, 1999, the mutual
holding company had purchased 1,499,752 shares in the open market and now
owns 34,228,065, or 72.3%, of the outstanding shares of Northwest Bancorp,
Inc.
(3) Business Combinations
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.
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
(Continued)
58
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
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.
During fiscal 1997, Northwest completed the acquisition of a savings bank
and a consumer discount company: The savings bank had assets of
approximately $56,000,000 and was purchased for cash of $17,986,000, and
the consumer discount company had assets of approximately $1,050,000 and
was purchased for cash of $786,000. The acquisitions were recorded using
the purchase method of accounting resulting in goodwill of approximately
$3,000,000 which is being amortized over a 10-year period on a straight-
line basis.
(Continued)
59
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(4) Marketable Securities
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)
60
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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
================== ================ ================ ===============
(Continued)
61
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 1998, 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 $ 9,978 23 -- 10,001
Due in one year - five years 26,380 507 -- 26,887
Due after ten years 15,000 94 -- 15,094
Municipal securities:
Due after ten years 3,811 136 -- 3,947
Corporate debt issues:
Due in one year or less 100 -- -- 100
Due in five years - ten years 2,305 25 -- 2,330
Due after ten years 25,447 329 (213) 25,563
Mortgage-backed securities:
Fixed rate pass-through 5,663 82 -- 5,745
Variable rate pass-through 9,936 260 (137) 10,059
Fixed rate CMO 4,578 3 (10) 4,571
Variable rate CMO 90,064 692 (2,236) 88,520
----------------- ---------------- ---------------- ----------------
Total mortgage-
backed securities 110,241 1,037 (2,383) 108,895
----------------- ---------------- ---------------- ----------------
Total securities
held-to-maturity $ 193,262 2,151 (2,596) 192,817
================= ================ ================ ================
(Continued)
62
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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 $ 4,587 20 -- 4,607
Due in one year - five years 53,015 1,123 (4) 54,134
Due in five years - ten years 5,991 9 (5) 5,995
Due after ten years 12,233 30 (4) 12,259
Equity securities 2,229 2,694 -- 4,923
Municipal securities:
Due in one year - five years 2,158 70 (2) 2,226
Due in five years - ten years 5,304 219 -- 5,523
Due after ten years 29,845 696 (1) 30,540
Corporate debt issues:
Due after ten years 985 -- -- 985
Mortgage-backed securities:
Fixed rate pass-through 5,396 15 (20) 5,391
Variable rate pass-through 11,523 75 (19) 11,579
Fixed rate CMO 37 -- (2) 35
Variable rate CMO 178,000 2,263 (1,745) 178,518
----------------- ---------------- ---------------- ---------------
Total mortgage-
backed securities 194,956 2,353 (1,786) 195,523
----------------- ---------------- ---------------- ---------------
Total securities
available-for-sale $ 311,303 7,214 (1,802) 316,715
================== ================ ================ ===============
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, 1999, 1998 and 1997
(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,
-------------------------------------
1999 1998
----------------- -----------------
Mortgage-backed securities:
FNMA $ 128,256 143,992
GNMA 57,881 12,457
FHLMC 141,017 138,962
Other (nonagency) 21,103 10,353
----------------- -----------------
Total mortgage-backed
securities $ 348,257 305,764
================= =================
Marketable securities having a carrying value of $54,265,000 at June 30,
1999, were pledged under collateral agreements. During the fiscal years
1999, 1998 and 1997, the Company sold marketable securities classified as
either available-for-sale or trading for $26,630,000, $75,588,000 and
$15,496,000, respectively. The gross pretax profit on these sales was
$304,000, $1,500,000 and $901,000. 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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(5) Loans Receivable
Loans receivable at June 30, 1999 and 1998, are summarized in the table
below:
1999 1998
----------------- -----------------
Real estate loans:
One- to four-family $ 1,694,946 1,330,057
Multi-family and commercial 152,466 128,831
----------------- -----------------
Total real estate loans 1,847,412 1,458,888
Consumer loans:
Home equity and home improvement 39,067 33,963
Education loans 64,341 59,791
Loans on savings accounts 6,263 6,898
Other 305,812 252,401
----------------- -----------------
Total consumer loans 415,483 353,053
Commercial loans 40,039 112,474
----------------- -----------------
Total loans receivable, gross 2,302,934 1,924,415
Deferred loan fees (923) (1,357)
Allowance for loan losses (16,773) (15,769)
----------------- -----------------
Total loans receivable, net $ 2,285,238 1,907,289
================= =================
At June 30, 1999 and 1998, the Company serviced loans for others
approximating $71,107,000 and $90,930,000, 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, 1999, approximately 90% 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, 1999, include $231,902,000 of adjustable rate
loans and $2,071,032,000 of fixed rate loans.
(Continued)
65
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
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, 1999 and 1998, are
presented in the following table:
June 30,
-------------------------------------
1999 1998
----------------- -----------------
Mortgage loan commitments $ 34,402 51,746
Undisbursed lines of credit 71,506 66,539
Standby letters of credit 3,488 2,259
----------------- -----------------
$ 109,396 120,544
================= =================
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, 1999, for fixed rate
loans, are $31,902,000. The interest rates on these commitments approximate
market rates at June 30, 1999. The fair value of these commitments are
affected by fluctuations in market rates of interest. Outstanding mortgage
loan commitments at June 30, 1999, for adjustable rate loans are
$2,500,000.
All of the Company's nonaccrual loans, which totaled $16,116,000 at June
30, 1999, $8,612,000 at June 30, 1998, and $10,430,000 at June 30, 1997,
are considered to be impaired loans. Average impaired loans during 1999,
1998 and 1997 were $14,049,000, $11,204,000 and $11,818,000, respectively.
All of the Company's impaired loans at June 30, 1999, were collateral
dependent. Since, at June 30, 1999 and 1998, 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 1999. Interest income on impaired loans for
fiscal 1998 and 1997, recognized using a cash basis method of accounting,
was $230,000 and $205,000, respectively.
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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(6) Accrued Interest Receivable
Accrued interest receivable as of June 30, 1999 and 1998, is presented in
the following table:
June 30,
-----------------------------
1999 1998
------------ -------------
Investment securities $ 3,204 2,701
Mortgage-backed securities 1,362 1,588
Loans receivable 9,982 8,965
------------ -------------
$ 14,548 13,254
============ =============
(7) Allowance for Loan Losses
Changes in the allowance for losses on loans receivable for the years ended
June 30, 1999, 1998 and 1997, are presented in the following table:
1999 1998 1997
------------- ------------ -----------
Balance, beginning of fiscal year $ 15,769 13,611 13,130
Provision 3,629 4,072 2,491
Charge-offs (3,664) (2,516) (2,537)
Acquisitions 141 209 153
Recoveries 898 393 374
------------- ------------ -----------
Balance, end of fiscal year 16,773 15,769 13,611
============= ============ ===========
Management believes that the allowance for estimated loan losses is
appropriate as of June 30, 1999. 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, 1999, 1998 and 1997
(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, 1999 and 1998, are summarized by major
classification in the following table:
1999 1998
----------- -----------
Land and land improvements $ 3,282 2,987
Office buildings and improvements 31,786 25,942
Furniture, fixtures and equipment 22,140 17,088
Leasehold improvements 3,291 3,211
----------- -----------
Total, at cost 60,499 49,228
Less accumulated depreciation and amortization 25,036 22,989
----------- -----------
Premises and equipment, net $ 35,463 26,239
=========== ===========
Depreciation and amortization expense for the years ended June 30, 1999,
1998 and 1997, was $2,503,000, $2,118,000 and $1,879,000, respectively.
(Continued)
68
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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 2023. Minimum annual rentals by fiscal year are summarized in
the following table:
2000 $ 1,251
2001 1,043
2002 915
2003 798
2004 625
Thereafter 3,876
------------
Total $ 8,508
============
Rental expense for the years ended June 30, 1999, 1998 and 1997, was
$1,770,000, $1,379,000 and $1,362,000, respectively.
(10) Savings Deposits
Savings deposit balances at June 30, 1999 and 1998, are shown in the table
below:
1999 1998
-------------- --------------
Savings accounts $ 409,029 340,377
Interest-bearing checking accounts 339,269 280,958
Noninterest-bearing checking accounts 49,879 34,797
Money market deposit accounts 164,484 114,187
Certificates of deposit 1,501,050 1,252,184
-------------- --------------
$ 2,463,711 2,022,503
============= ==============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $200,859,000 at June 30, 1999 and
$151,268,000 at June 30, 1998.
(Continued)
69
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
The following table summarizes the contractual maturity of the certificate
accounts:
1999 1998
--------------- ---------------
Due within 12 months $ 992,723 771,665
Due between 12 and 24 months 368,137 347,456
Due between 24 and 36 months 49,230 56,719
Due between 36 and 60 months 60,364 48,410
After 60 months 30,596 27,934
--------------- --------------
$ 1,501,050 1,252,184
=============== ==============
The following table summarizes the interest expense incurred on the respective
savings deposits:
Year ended June 30,
----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Savings accounts $ 11,819 10,227 9,490
Interest-bearing checking accounts 5,001 4,469 3,992
Money market deposit accounts 4,830 3,395 2,735
Certificate accounts 76,457 66,955 56,410
--------------- --------------- ---------------
$ 98,107 85,046 72,627
=============== =============== ===============
(Continued)
70
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(11) Borrowed Funds
Borrowed funds at June 30, 1999 and 1998, are presented in the following
table:
1999 1998
------------------------------ ------------------------------
Average Average
Amount rate Amount rate
------------- ------------ ------------- -----------
Term notes payable to the FHLB of Pittsburgh:
Due within one year $ 2,000 % 7.18 $ 43,000 % 5.86
Due between one and two years 8,000 6.07 2,000 7.18
Due between two and three years 8,000 6.15 8,000 6.07
Due between three and five years 34,350 6.03 42,200 6.06
Due between five and ten years 100,000 5.51 25,150 6.04
Due between ten and twenty years 2,037 3.39 1,811 3.65
------------- -------------
154,387 5.68 122,161 5.97
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh 163,000 5.50 110,000 5.74
ESOP note payable, variable rate
equal to prime, due in one year 503 7.75 1,412 8.50
Investor notes payable, due
various dates through 2004 7,120 6.55 6,105 6.46
Securities sold under agreement to
Repurchase, due various dates
Through fiscal 2000 23,905 4.91 50,028 5.48
------------- -------------
Total borrowed funds $ 348,915 $ 289,706
============= =============
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 June 28,
2000. 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. AN SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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 1999 and 1998 was $29,525,000 and
$41,220,000, respectively. The maximum amount of security repurchase
agreements outstanding during fiscal years 1999 and 1998 was $43,932,000
and $50,028,000, respectively.
(12) Income Taxes
Total income tax expense (benefit) was allocated for the years ended June
30, 1999, 1998 and 1997, as follows:
1999 1998 1997
-------------- -------------- --------------
Income before income taxes $ 10,914 12,995 8,472
Shareholders' equity for unrealized gain/
(loss) on securities available-for-sale (820) 1,423 (226)
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (214) (449) -
-------------- -------------- --------------
$ 9,880 13,969 8,246
============== ============== ==============
Income tax expense (benefit) applicable to income before taxes consists
of:
Years ended June 30,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Current $ 11,668 13,455 9,633
Deferred (754) (460) (1,161)
-------------- -------------- --------------
$ 10,914 12,995 8,472
============== ============== ==============
(Continued)
72
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
The significant components of deferred income tax expense (benefit) are
as follows:
June 30,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Deferred income tax benefit $ (783) (609) (1,324)
NOL carryforward 29 149 163
------------- ------------ ------------
$ (754) (460) (1,161)
============= ============ ============
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,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Expected tax rate 35.0 35.0 35.0
Tax-exempt interest income (4.1) (1.9) (1.3)
State income tax, net of federal benefit 4.2 3.4 4.1
Valuation allowance (.5) 0.6 -
Other .7 1.0 .5
------------ ------------ ------------
Effective tax rate % 35.3 38.1 38.3
============ ============ ============
(Continued)
73
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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, 1999 and 1998, are presented below:
1999 1998
---------------- ---------------
Deferred tax assets:
Deferred fee income $ 1,044 1,399
Deferred compensation expense 1,028 959
Net operating loss carryforwards 768 797
Bad debts 2,886 2,396
Accrued postretirement benefit cost 400 380
Pension expense 498 241
Other 909 611
--------------- ---------------
7,533 6,783
Valuation allowance (654) (807)
--------------- ---------------
6,879 5,976
Deferred tax liabilities:
Marketable securities available-for-sale 1,207 2,027
Other 294 301
--------------- ---------------
1,501 2,328
--------------- ---------------
Net deferred tax asset $ 5,378 3,648
=============== ===============
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 $327,000 of net operating losses which expire in years 2005
through 2010. Jamestown has net operating losses of approximately
$1,870,000 which expire in years 2011 through 2013.
(Continued)
74
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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, 1999, 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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(14) Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings
Per Share," and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly
held stock or potential common stock. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all
entities with a complex capital structure and requires a reconciliation
of the components of basic and diluted EPS. Basic EPS excludes common
stock equivalents and dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. 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. Prior periods' EPS data presented have been restated. The
computation of basic and diluted earnings per share is shown in the table
below:
Years ended June 30,
--------------------------------------------------
1999 1998 1997
------------- -------------- --------------
Net income applicable to
common stock $ 20,042 21,322 13,664
Weighted-average common
shares outstanding 46,998 46,405 46,150
------------- -------------- --------------
Basic earnings per share $ .42 .46 .30
============= ============== ==============
Net income applicable to
common stock $ 20,042 21,322 13,664
------------- -------------- --------------
Weighted-average common
shares outstanding 46,998 46,405 46,150
Common stock equivalents due
to effect of stock options 490 698 151
------------- -------------- --------------
Total weighted-average common
shares and equivalents 47,488 47,103 46,301
============= ============== ==============
Diluted earnings per $ .42 .45 .30
share ============= ============== ==============
(Continued)
76
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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 $1,895,000, $1,872,000 and
$1,644,000 for the years ended June 30, 1999, 1998 and 1997,
respectively. Net periodic pension cost for the Company's defined
benefit pension plans consist of the following:
Years ended June 30,
--------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
Service cost $ 1,302 1,066 924
Interest cost 1,229 1,046 896
Expected return on plan assets (1,266) (914) (763)
Net amortization and deferral 80 54 66
--------------- -------------- ---------------
Net periodic pension cost $ 1,345 1,252 1,123
=============== ============== ==============
(Continued)
77
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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, 1999 and 1998:
1999 1998
--------------- ----------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 17,709 15,076
Service cost 1,302 1,066
Interest cost 1,229 1,046
Actuarial loss 878 810
Benefits paid (334) (289)
---------------- ------------------
Benefit obligation at end of year $ 20,784 17,709
================ ==================
Change in plan assets:
Fair value of plan assets at beginning of year 15,986 12,911
Actual return on plan assets 1,762 2,204
Employer contribution 1,385 1,160
Benefits paid (334) (289)
------------------ ----------------
Fair value of plan assets at end of year $ 18,799 15,986
================== ===============
Funded status (1,985) (1,723)
Unrecognized transition asset (338) (379)
Unrecognized prior service cost 800 894
Unrecognized net actuarial loss 685 331
Adjustment to recognize minimum liability (406) (343)
------------------ ----------------
Accrued benefit cost $ (1,244) (1,220)
================== ================
The following table sets forth the assumptions used to develop the
preceding information for the net pension cost and benefits:
Years ended June 30,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Discount rate % 7 7 7
Expected long-term rate of return on assets 8 7 7
Rate increase in compensation levels 4 4 4
(Continued)
78
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Assets of the Company's qualified noncontributory defined benefit
plan consists primarily of equity and fixed income securities.
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,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Service cost $ 44 41 71
Interest cost 57 44 88
Recognized actuarial gain (44) (130) -
-------------- -------------- --------------
Net periodic (benefit) cost $ 57 (45) 159
============== ============== ==============
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, 1999
and 1998:
1999 1998
---------------- ----------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 837 639
Service cost 44 41
Interest cost 59 45
Actuarial loss 165 153
Benefits paid (56) (41)
---------------- ----------------
Benefit obligation at end of year 1,049 837
Fair value of plan assets at end of year -- --
---------------- ----------------
Funded status (1,049) (837)
(Continued)
79
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Unrecognized net actuarial gain -- (194)
---------------- ----------------
Accrued benefit cost $ (1,049) (1,031)
================ ================
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
Years ended June 30,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Discount rate % 7 7 7
Monthly cost of healthcare insurance
per beneficiary $ 140.00 113.94 92.73
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 $11,811, in the aggregate, and the
accumulated postretirement benefit obligation for healthcare benefits
would increase by $110,447.
(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
(Continued)
80
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
earnings; dividends on unallocated ESOP shares are paid to the trustee
for debt service. ESOP compensation expense was $1,600,000, $2,668,000
and $1,437,000 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
The ESOP shares as of June 30, 1999 and 1998, were as follows:
1999 1998
---------------- ----------------
Allocated shares 1,007,331 818,010
Unearned shares 106,947 285,990
---------------- ----------------
1,114,278 1,104,000
================ ================
Fair value of unearned shares at June 30 $ 1,069 4,522
================ ================
(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.
(Continued)
81
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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. 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 remaining 76,914 options are to be
granted to employees as incentive stock options at an exercise price
equal to the Company's common stock fair value per share at grant date.
The following table summarizes the activity in the Company's Option Plan
during the periods ending June 30:
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
-------------- ------------- -------------- ------------ -------------- -------------
Balance at beginning
of year 1,185,600 $ 5.81 1,288,000 $ 5.80 1,288,000 $ 5.80
Granted 15,086 9.87(a) - - - -
Exercised (39,135) 5.70 (99,520) 5.66 - -
Forfeited (5,600) 5.73 (2,880) 5.63 - -
-------------- -------------- --------------
Balance at end of year 1,155,951 5.86 1,185,600 5.81 1,288,000 5.80
============== ============== ==============
Exercisable at end
of year 794,683 5.82 711,360 5.81 515,200 5.80
============== ============== ==============
(a) Weighted average fair value of options at grant date: $2.00
(Continued)
82
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Exercise Exercise Exercise Exercise
price price price price
$5.580 $5.625 $5.875 $9.875
-------------- -------------- -------------- --------------
Options outstanding:
Number of options 153,600 108,625 878,640 15,086
Weighted average remaining
contract life (years) 6.5 6.75 6.5 9.5
Options exercisable:
Number of options 107,520 70,606 615,048 1,509
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:
1999 1998 1997
-------------- -------------- --------------
Net income:
As reported $ 20,042 21,322 13,664
Pro forma 19,781 21,067 13,391
Basic earnings per share:
As reported .42 .46 .30
Pro forma .42 .45 .29
Diluted earnings per share:
As reported .42 .45 .30
Pro forma .42 .45 .29
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: dividend yield of 2.76 percent for all years; expected
volatility of 12.83 percent; risk-free interest rate of 5.65%; and 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, 1999, 1998 and 1997
(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, demand
deposits, accrued interest payable, marketable securities
available-for-sale, trading securities, variable rate borrowings and
investor notes payable.
The carrying value of marketable securities held-to-maturity exceeded
market value by $3,513,000 and $445,000 at June 30, 1999 and 1998,
respectively. 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.
The net carrying value of loans exceeded the net market value at June 30,
1999, by approximately $15,033,000 while at June 30, 1998, the net market
value of loans exceeded the net carrying value by $29,016,000. 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.
The carrying amounts and estimated fair values of deposits at June 30,
1999 and 1998, are as follows:
1999 1998
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------- ---------------- ---------------- ---------------
NOW and MMDA accounts $ 553,632 553,632 429,942 429,941
Savings accounts 409,029 409,029 340,377 340,378
Time deposits 1,501,050 1,503,717 1,252,184 1,261,350
================ ================ ================ ===============
Total deposits $ 2,463,711 2,466,378 2,022,503 2,031,669
================ ================ ================ ===============
(Continued)
84
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
The carrying amounts of NOW, MMDA and savings accounts approximate their
fair values. The fair value estimates above do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities 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
existing 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.
The estimated fair value of borrowed funds exceeded the carrying amounts
at June 30, 1999 and 1998, by $3,320,000 and $2,109,000, respectively.
Variable rate borrowings and investor notes payable were estimated to
approximate their carrying amounts. The fixed rate advances were valued
by comparing their contractual cost to the prevailing market cost.
(17) Regulatory Capital Requirements
The Company and its 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 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). As of
June 30, 1999, the Company and its subsidiaries exceed all capital
adequacy requirements to which they are subject.
As of March 31, 1999, 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)
85
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
The actual, required and well capitalized levels as of June 30, 1999 and
1998, are as follows: (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 (core)
(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
86
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
June 30, 1998
---------------------------------------------------------------------------------------
Minimum capital Well capitalized
Actual requirements requirements
-------------------------- ----------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ------------ ------------- ----------- ----------
Total capital (to risk
weighted assets):
Northwest Bancorp, Inc. $ 210,483 % 15.52 $ 108,469 % 8.00 $ 135,587 % 10.00
Northwest Savings Bank 200,669 15.12 106,182 8.00 132,728 10.00
Jamestown Savings Bank 5,520 20.70 2,133 8.00 2,667 10.00
Tier I capital (to risk
weighted assets):
Northwest Bancorp, Inc. 194,714 14.36 54,235 4.00 81,352 6.00
Northwest Savings Bank 185,131 13.95 53,091 4.00 79,637 6.00
Jamestown Savings Bank 5,273 19.77 1,067 4.00 1,600 6.00
Tier I capital (core)
(to average assets):
Northwest Bancorp, Inc. 194,714 7.82 74,657 3.00(*) 124,428 5.00
Northwest Savings Bank 185,131 7.63 72,763 3.00(*) 121,271 5.00
Jamestown Savings Bank 5,273 9.12 1,734 3.00(*) 2,890 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, 1999, the
Company had not been advised of any additional requirements in this
regard.
(18) Recapitalization of SAIF
On September 30, 1996, Congress enacted into law a one-time special
assessment to recapitalize the FDIC's Savings Association Insurance Fund
(SAIF). All institutions holding SAIF insured deposits as of March 31,
1995, paid a one-time assessment due November 27, 1996, of .657% on those
deposits. The Company's SAIF assessment was $8.6 million. Under generally
accepted accounting principles, this assessment was required to be accrued
as of September 30, 1996. The effect of this assessment on the net income
of the Company for the fiscal year ended June 30, 1997, was $5.1 million
after tax. As a result of the recapitalization of the SAIF, the Company was
not required to pay a regular deposit insurance premium for the three
months ended December 31, 1996. Effective January 1, 1997, as a result of
the SAIF now being fully funded, the premium the Company pays for deposit
insurance fell to .064% of insured deposits from the previous level of
.23%.
(Continued)
87
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(19) Contingent Liabilities
Northwest Savings Bank and Northwest Bancorp MHC, along with unrelated
parties, have been named as defendants in a class action lawsuit filed in
the Allegheny County Court of Common Pleas. This lawsuit is brought on
behalf of purchasers of common stock in the Bank's initial public offering
which was completed in November 1994. It alleges that the defendants
breached their contractual obligations and fiduciary duties by carrying out
the offering at a price that allegedly was not justified by market and
financial conditions. The defendants previously obtained the dismissal of a
lawsuit brought by the same counsel in federal court making similar
allegations under federal law. Management intends to continue to vigorously
defend against any such proceedings. The ultimate outcome of this
litigation cannot presently be determined; accordingly, no provision for
liability, if any, that may result has been recorded in the consolidated
financial statements.
The Company and its subsidiaries are subject to a number of other asserted
and unasserted claims encountered in the normal course of business.
Management believes that the aggregate liability, if any, resulting from
such pending and threatened actions and proceedings 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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(20) Selected Quarterly Financial Data (Unaudited)
Three months ended
-------------------------------------------------------------------------
September December March June
30 31 31 30
---------------- ---------------- ---------------- ---------------
(in thousands, except per share data)
Fiscal 1999
Interest income $ 48,958 50,120 52,191 54,129
Interest expense 27,735 28,829 28,888 29,459
---------------- ---------------- ---------------- ---------------
Net interest income 21,223 21,291 23,303 24,670
Provision for loan losses 790 866 812 1,161
Noninterest income 2,016 1,718 1,608 1,863
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
================ ================ ================ ===============
(Continued)
89
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(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 1998
Interest income $ 40,936 41,903 44,368 47,685
Interest expense 22,164 23,118 23,782 26,139
---------------- ---------------- --------------- ----------------
Net interest income 18,772 18,785 20,586 21,546
Provision for loan losses 660 611 1,111 1,690
Noninterest income 1,528 1,579 2,562 3,148
Noninterest expenses 11,344 11,932 13,089 13,953
---------------- ---------------- --------------- ----------------
Income before
income taxes 8,296 7,821 8,948 9,051
Income taxes 3,459 2,880 3,231 3,425
Minority interest in net loss - - 2 199
---------------- ---------------- --------------- ----------------
Net income $ 4,837 4,941 5,719 5,825
================ ================ =============== ================
Basic earnings per share $ .10 .11 .12 .13
================ ================ =============== ================
Diluted earnings per share $ .10 .11 .12 .12
================ ================ =============== ================
(21) Components of Comprehensive Income
For the year ended June 30:
1999 1998 1997
-------------- -------------- --------------
Unrealized gain (loss) on securities $ (1,857) 3,780 (563)
Tax (expense) benefit 576 (1,435) 264
Less reclassification adjustment for gains
included in net income, net of tax
benefit of $12 112 - -
-------------- -------------- --------------
Net unrealized gain (loss) $ (1,393) 2,345 (299)
============== ============== ==============
(Continued)
90
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(22) Northwest Bancorp, Inc. (Parent Company Only)
Statements of Financial Condition
(Amounts in thousands)
June 30,
--------------------------------
Assets 1999 1998
------------ -------------
Cash and cash equivalents $ 140 475
Marketable securities available-for-sale 5,196 5,206
Loans receivable 58 -
Investment in bank subsidiaries 225,876 213,438
Goodwill 2,921 145
Other assets 137 87
------------ -------------
Total assets $ 234,328 219,351
============ =============
Liabilities and Shareholders' Equity
Liabilities:
Loan Payable 561 1,412
Other liabilities 110 60
---------------- ----------------
Total liabilities 671 1,472
Shareholders' equity 233,657 217,879
---------------- ----------------
Total liabilities and shareholders' equity $ 234,328 219,351
================ ================
These parent company statements reflect the activity from the date of
formation on February 17, 1998.
(Continued)
91
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Statements of Income
Years ended
June 30,
-----------------------------------
1999 1998
---------------- ----------------
Income:
Interest income $ 312 140
Dividends from bank subsidiary 10,500 1,250
Undistributed earnings from equity investment in
bank subsidiaries 9,714 7,573
---------------- ----------------
Total income 20,526 8,963
Expense:
Compensation and benefits 185 40
Goodwill amortization 296 4
Other expense 80 2
---------------- ----------------
Total expense 561 46
---------------- ----------------
Net income before taxes 19,965 8,917
Federal and state income taxes (77) 42
---------------- ----------------
Net income $ 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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
Years ended
June 30,
-----------------------------------
1999 1998
---------------- ----------------
Operating activities:
Net income $ 20,042 8,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (9,714) (8,076)
Depreciation and amortization 292 5
Noncash compensation expense related to
stock benefit plans 3,175 -
Other 4 520
---------------- ----------------
Net cash provided by operating activities 13,799 1,324
---------------- ----------------
Investing activities:
Purchase of stock of subsidiaries (6,966) (3,884)
Principal payments on loans (910) -
---------------- ----------------
Net cash used by investing activities (7,876) (3,884)
---------------- ----------------
Cash flows from financing activities:
Cash dividends paid (7,555) (1,873)
Proceeds from issuance of stock 1,077 -
Proceeds from options exercised 220 214
Capitalization of parent company - 4,694
---------------- ----------------
Net cash provided by financing activities (6,258) 3,035
---------------- ----------------
Net (decrease) increase in cash and
cash equivalents $ (335) 475
================ ================
Cash and cash equivalents at beginning of period 475 -
Net (decrease) increase in cash and cash equivalents (335) 475
================ ================
Cash and cash equivalents at end of period $ 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, 1999, 1998 and 1997
(All dollar amounts presented in tables are in thousands)
(23) Segment Reporting
In the current fiscal year the Company adopted SFAS 131 "Disclosure about
Segments of an Enterprise and Related Information", which requires
disclosures about reportable segments of an enterprise. The determination
of these segments is based upon the manner in which the decision makers of
an enterprise evaluates its financial information.
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 1999 Annual Meeting of Stockholders (the "1999
Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The "Proposal I--Election of Directors" section of the Company's 1999 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 1999 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
1999 Proxy Statement is incorporated herein by reference.
95
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, 1999
and 1998
(C) Consolidated Statements of Income - Years ended June 30, 1999,
1998 and 1997
(D) Consolidated Statements of Changes in Shareholders' Equity Years
ended June 30, 1999, 1998 and 1997
(E) Consolidated Statements of Cash Flows - Years ended June 30,
1999, 1998 and 1997
(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, 1999.
(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 *
96
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- --------------------------------------- ---------------
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
23 Consent of independent auditors 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
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 SAVINGS BANK
Date: September 28, 1999 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
Chief Executive Officer and Director President and Director (Principal
(Principal Executive Officer) Financial/Accounting Officer)
Date: September 28, 1999 Date: September 28, 1999
By: /s/Richard L. Carr By: /s/ Richard E. McDowell
--------------------------------- ---------------------------------
Richard L. Carr, Director Richard E. McDowell, Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Thomas K. Creal, III By: /s/ Joseph T. Stadler
------------------------------ ---------------------------------
Thomas K. Creal, III, Director Joseph T. Stadler, Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ John J. Doyle By: /s/ Walter J. Yahn
------------------------------ ---------------------------------
John J. Doyle, Director Walter J. Yahn, Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ Robert G. Ferrier By: /s/ John S. Young
------------------------------ ---------------------------------
Robert G. Ferrier, Director John S. Young, Director
Date: September 28, 1999 Date: September 28, 1999
98