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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, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
COMMISSION FILE NO. 0-23817
NORTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES 23-2900888
------------------------------------ --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 SECOND AVENUE, WARREN, PENNSYLVANIA 16365
--------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(814) 726-2140
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO
---- ----.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES X NO
---- ----.
As of August 31, 2003, there were issued and outstanding 47,718,854
shares of the Registrant's Common Stock, including 28,110,698 shares held by
Northwest Bancorp, MHC, the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on December 31,
2002, as reported by the Nasdaq National Market, was approximately $163.5
million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2003 Annual Meeting of Stockholders of the
Registrant (Part III).
PART I
ITEM 1. BUSINESS
GENERAL
NORTHWEST BANCORP, INC.
Northwest Bancorp, Inc. is a Federal corporation formed on June 29,
2001, as the successor to a Pennsylvania corporation of the same name. Both the
Federal corporation and its Pennsylvania predecessor are referred to as the
"Company." The Company became 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 in December of 1997, and completed in
February of 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. On August 25, 2003, the Company completed an incremental stock
offering whereby the Company's parent contributed 7,255,500 shares of the
Company's stock to the Company and the Company sold the same number of shares in
a subscription offering. After the subscription offering, the Mutual Holding
Company owned approximately 59% of the Company's outstanding shares. As of June
30, 2003, the primary 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, 2003, the Company, through the Bank and Jamestown,
operated 137 community banking offices throughout its market area in northwest,
southwest and central Pennsylvania, western New York, and eastern Ohio. The
Company, through the Bank and its wholly owned subsidiaries, also operates 45
consumer lending offices throughout Pennsylvania and two consumer lending
offices 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 borrowings and the cost of employee compensation and benefits.
The Company's principal executive office is located at 301 Second
Avenue, 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 sold a minority of its
to-be outstanding shares to stockholders other than the Mutual Holding Company
in a stock offering conducted as part of the Reorganization.
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The Bank's principal executive office is located at 301 Second Avenue,
Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
JAMESTOWN SAVINGS BANK
Jamestown began operations on November 9, 1995 as a de novo New
York-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, including 400,000 shares that 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, 2003, Jamestown had eight offices in western New York.
MARKET AREA
The Company has been, and intends to continue to be, an independent
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. Since the early 1990s, the Company has expanded, primarily through
acquisitions, into the southwestern and central regions of Pennsylvania. As of
June 30, 2003, the Company operated in Pennsylvania 124 community banking
offices and 45 consumer finance offices located in the counties of Allegheny,
Armstrong, Bedford, Berks, Blair, Butler, Cambria, Cameron, Centre, Chester,
Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Dauphin, Elk,
Erie, Fayette, Forest, Huntingdon, Indiana, Jefferson, Lancaster, Lawrence,
Lebanon, Luzerne, Lycoming, McKean, Mercer, Mifflin, Northumberland, Potter,
Schuylkill, Tioga, Venango, Warren, Washington, Westmoreland and York. These 41
counties, which comprise 66% of the counties in Pennsylvania, are primarily
experiencing a flat to declining growth rate in total population. In addition,
like most of Pennsylvania, approximately 40% of the total population is 45 years
old or older with approximately 25% of the population under the age of 18. Per
capita income in these counties averages approximately $17,942 and the median
house value is $82,700. Pennsylvania, like most of the nation, is experiencing
an economic slowdown with unemployment rising from 4.6% in July 2001 to 5.6% in
July 2003, which is slightly below the national average of approximately 6.2%.
Most of the communities the Company serves, while showing improvement, are still
dependent on the manufacturing sector, which accounts for approximately 16.0% of
all Pennsylvania jobs compared to the national average of 12.2%. This sector has
been hardest hit by the downturn in the economy and has seen an increase in
foreign competition. Bankruptcy filings have been 4.2 out of every 1,000 people
in Pennsylvania filing for bankruptcy protection, which is below the national
average of 5.3 out of every 1,000 people. In addition, the Company operated in
Ohio five community banking offices located in the counties of Ashtabula, Geauga
and Lake. Through Jamestown, the Company operated in New York eight community
banking offices located in the counties of Chautauqua, Erie and Cattaraugus. The
Company, through the Bank and its subsidiaries, also operates two consumer
finance offices 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
3
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
generally retains in its portfolio all consumer loans, multifamily residential
and commercial real estate loans, and commercial business loans that it
originates.
4
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,
-------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family ................ $ 2,112,811 63.6% $ 2,056,105 66.9% $ 2,005,020 68.7%
Multifamily and commercial.......... 377,507 11.4 304,456 9.9 249,049 8.5
------------ -------- ------------ ------- ----------- -------
Total real estate loans............. 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2
Consumer:
Automobile.......................... 118,120 3.6 117,240 3.8 94,475 3.2
Home improvement.................... 378,341 11.4 293,865 9.6 260,169 8.9
Education loans..................... 90,485 2.7 84,817 2.8 77,753 2.7
Loans on savings accounts........... 7,132 0.2 7,733 0.2 8,923 0.3
Other (1)........................... 107,483 3.2 113,570 3.7 134,023 4.6
------------ -------- ------------ ------- ----------- -------
Total consumer loans ............... 701,561 21.1 617,225 20.1 575,343 19.7
Commercial business................... 130,115 3.9 95,968 3.1 89,784 3.1
------------ -------- ------------ ------- ----------- -------
Total loans receivable, gross..... 3,321,994 100.0% 3,073,754 100.0% 2,919,196 100.0%
-------- ------- -------
Deferred loan fees.................... (7,409) (2,938) (2,517)
Undisbursed loan proceeds............. (41,221) (36,168) (39,808)
Allowance for loan losses
(real estate loans)................. (13,087) (11,703) (11,629)
Allowance for loan losses
(other loans)....................... (13,506) (10,339) (8,661)
------------ ------------ ------------
Total loans receivable, net....... $ 3,246,771 $ 3,012,606 $ 2,856,581
============ ============ ===========
AT JUNE 30,
------------------------------------------------
2000 1999
--------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ --------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family ................ $ 1,836,154 70.9% $ 1,718,002 73.8%
Multifamily and commercial.......... 192,897 7.5 152,466 6.6
------------ ------- ------------ -------
Total real estate loans............. 2,029,051 78.4 1,870,468 80.4
Consumer:
Automobile.......................... 72,955 2.8 58,885 2.5
Home improvement.................... 212,049 8.2 129,960 5.6
Education loans..................... 70,619 2.7 64,341 2.8
Loans on savings accounts........... 8,052 0.3 6,263 0.3
Other (1)........................... 147,267 5.7 156,034 6.7
------------ ------- ------------ -------
Total consumer loans ............... 510,942 19.7 415,483 17.9
Commercial business................... 49,992 1.9 40,039 1.7
------------ ------- ------------ -------
Total loans receivable, gross..... 2,589,985 100.0% 2,325,990 100.0%
======= =======
Deferred loan fees.................... (1,829) (923)
Undisbursed loan proceeds............. (25,266) (23,056)
Allowance for loan losses
(real estate loans)................. (11,334) (10,619)
Allowance for loan losses
(other loans)....................... (6,926) (6,154)
------------ ------------
Total loans receivable, net....... $ 2,544,630 $ 2,285,238
============ ============
- ---------------------------------------
(1) Consist primarily of secured and unsecured personal loans.
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,
---------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.......................... $ 404,164 12.2% $ 229,596 7.5% $ 170,054 5.8%
Fixed............................... 2,086,154 62.8 2,130,965 69.3 2,084,015 71.4
------------ ------ ------------ ------- ----------- -------
Total real estate loans............ 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2
Other loans:
Adjustable.......................... 186,561 5.6 225,889 7.3 197,403 6.8
Fixed............................... 645,115 19.4 487,304 15.9 467,724 16.0
------------ ------ ------------ ------- ----------- -------
Total other loans.................. 831,676 25.0 713,193 23.2 665,127 22.8
------------ ------ ------------ ------- ----------- -------
$ 3,321,994 100.0% $ 3,073,754 100.0% $2,919,196 100.0%
============ ====== ============ ======= =========== =======
AT JUNE 30,
---------------------------------------------------
2000 1999
----------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.......................... $ 108,628 4.2% $ 99,029 4.3%
Fixed............................... 1,920,423 74.2 1,771,439 76.1
------------ ------- ------------ -------
Total real estate loans............ 2,029,051 78.4 1,870,468 80.4
Other loans:
Adjustable.......................... 151,177 5.8 132,873 5.7
Fixed............................... 409,757 15.8 322,649 13.9
------------ ------- ------------ -------
Total other loans.................. 560,934 21.6 455,522 19.6
------------ ------- ------------ -------
$ 2,589,985 100.0% $ 2,325,990 100.0%
============ ======= ============ =======
5
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,
2003. 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.
WITHIN 1 YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS BEYOND 5 YEARS TOTAL
------------- --------- --------- --------- -------------- -----
(IN THOUSANDS)
Real estate loans:
One- to four-family residential.. $ 137,763 $ 129,588 $ 83,621 $ 207,224 $ 1,513,194 $ 2,071,590
Multifamily and commercial....... 140,584 36,577 53,194 111,169 35,983 377,507
Consumer loans...................... 282,881 85,294 77,516 118,437 137,433 701,561
Commercial business loans........... 45,892 11,940 17,364 36,290 18,629 130,115
------------ ------------ ------------ ------------ ------------ ------------
Total loans......................... $ 607,320 $ 263,399 $ 231,695 $ 473,120 $ 1,705,239 $ 3,280,773
============ ============ ============ ============ ============ ============
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 2003, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 2004. Adjustable- and floating-rate loans are included in the
table based on the contractual due date of the loan.
FIXED ADJUSTABLE TOTAL
------------ ------------ ------------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential......................................... $ 1,952,446 $ 39,270 $ 1,991,716
Multifamily and commercial.............................................. 99,026 228,814 327,840
Consumer loans............................................................. 331,931 123,142 455,073
Commercial business loans.................................................. 41,039 20,267 61,306
------------- ------------ ------------
Total loans................................................................ $ 2,424,442 $ 411,493 $ 2,835,935
============= ============ ============
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.
The Company currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one, three and five years, based on changes
in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totaled $41.3 million, or
1.3% of the Company's gross loan portfolio at June 30, 2003.
6
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 either performed by
the Company's in-house appraisal staff or by an appraiser who has been deemed
qualified by the Company's chief appraiser. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2003, the Company's portfolio of loans serviced by others totaled $ 946,000. The
Company currently has no formal plans to enter into new loan participations.
Included in the Company's $ 2.113 billion of one- to four-family
residential real estate loans are construction loans of $25.3 million, or 0.8%
of the Company's total loan portfolio. The Company offers fixed-rate and
adjustable-rate residential construction loans primarily for the construction of
owner-occupied one- to four-family residences in the Company's market area to
builders or to owners who have a contract for construction. Construction loans
are generally structured to become permanent loans, and are originated with
terms of up to 30 years with an allowance of up to one year for construction.
During the construction phase the loans have a fixed interest rate and convert
into either a fixed-rate or an adjustable-rate mortgage loan at the end of the
construction period. Advances are made as construction is completed. In
addition, the Company originates loans within its market area that are secured
by individual unimproved or improved lots. Land loans are currently offered with
fixed-rates for terms of up to 10 years. The maximum loan-to-value ratio for the
Company's land loans is 75% of the appraised value, and the maximum
loan-to-value ratio for the Company's construction loans is 95% of the lower of
cost or appraised value.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
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, 2003, 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, 2003, had a
principal balance of $5.0 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. This loan was performing in
accordance with its terms as of June 30, 2003. The Company's largest commercial
real estate loan relationship at June 30, 2003, had a principal balance of $8.9
million and was collateralized by nursing home facilities in northwestern,
Pennsylvania. This loan was performing in accordance with its terms as of June
30, 2003. Multifamily residential and commercial real estate loans are offered
with both adjustable interest rates and fixed
7
interest rates. The terms of each multifamily residential and commercial real
estate loan are negotiated on a case-by-case basis. The Company generally makes
multifamily residential and commercial real estate loans up to 75% of the
appraised value of the property collateralizing the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
CONSUMER LOANS. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
home equity loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2003, the
disbursed portion of home equity lines of credit totaled $ 106.0 million, or
15.1%, of consumer loans, with $163.2 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
COMMERCIAL BUSINESS LOANS. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. The largest commercial business loan relationship was a loan
to the Mutual Holding Company which had a principal balance of $12.0 million,
and was secured by all of the assets of the Mutual Holding Company.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and
8
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 Credit 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
Company has a Senior Loan Committee which has lending authority as designated in
the Company's loan policy that 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 without prior approval
from the Board of Directors. 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, 2003, the
Company had commitments to originate $118.5 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,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Loans receivable, gross, at beginning of period............................. $ 3,073,754 $ 2,919,196 $ 2,589,985
Originations................................................................ 1,301,263 974,413 776,001
Principal repayments........................................................ (948,781) (697,427) (450,120)
Loan purchases including acquisitions....................................... 130,631 22,945 57,213
Loan sales and change in undisbursed loan proceeds.......................... (231,820) (140,991) (50,503)
Transfer to REO............................................................. (3,053) (4,382) (3,380)
------------ ------------ ------------
Loans receivable, gross, at end of period................................ $ 3,321,994 $ 3,073,754 $ 2,919,196
============ ============ ============
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 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, 2003 the Company had $7.4 million of net deferred
loan origination fees. Loan origination fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from operations of real estate owned ("REO"). The Company recognized fees and
service charges of $13.4 million, $11.9 million and $10.0 million, for the
fiscal years ended June 30, 2003, 2002 and 2001, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same
loans-to-one borrower limits as those applicable to national banks, which
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, 2003, the largest aggregate amount loaned by the
Company to one borrower totaled $12.0 million and was secured by
9
all of the assets of the Mutual Holding Company. The Company's second largest
lending relationship totaled $8.9 million and was secured by commercial real
estate. The Company's third largest lending relationship totaled $7.9 million
and was secured by land and real estate. The Company's fourth largest lending
relationship was for $7.9 million and was secured by commercial real estate. The
Company's fifth largest lending relationship totaled $5.7 million and was
secured by real estate and business personal property.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. The Company's collection procedures provide that
when a loan is 10 days delinquent and a mortgage loan is 15 days delinquent, 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, personal Contact is attempted, a collection letter is sent,
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 REO until such time as it is sold.
When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss reserve allocations, the difference is charged against the allowance
for loan losses. Any subsequent write-down of REO is charged against earnings.
LOANS PAST DUE AND NONPERFORMING ASSETS. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. Effective November 1998, the Company changed
its policy so that a loan is considered past due if less than 90% of a
contractually due payment has been paid. Prior to this change, a loan was
considered past due only if no amount had been paid. As a result of this change,
the Company recorded a significant increase in the amount of loans which were 90
days or more past due as of June 30, 1999. When a loan is delinquent 90 days or
more, the Company fully reserves all accrued interest thereon and ceases to
accrue interest thereafter. For all the dates indicated, the Company did not
have any material restructured loans within the meaning of SFAS 15.
10
AT JUNE 30,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- ---------- ---------- ----------- ----------
NUMBER BALANCE
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 59 days:
One- to four-family residential loans........ 78 $ 2,665 $ 4,068 $ 3,055 $ 2,030 $ 3,632
Multifamily and commercial loans............. 11 1,291 1,278 1,184 806 320
Consumer loans............................... 868 3,705 3,243 3,439 2,108 3,491
Commercial business loans.................... 10 308 165 418 535 --
-------- ------- ------- -------- -------- --------
Total loans past due 30 days to 59 days..... 967 $ 7,969 $ 8,754 $ 8,096 $ 5,479 $ 7,443
-------- ------- ------- -------- -------- --------
Loans past due 60 days to 89 days:
One- to four-family residential loans........ 66 $ 2,890 $ 3,478 $ 3,001 $ 2,205 $ 4,895
Multifamily and commercial loans............. 9 873 269 248 152 314
Consumer loans............................... 477 1,903 1,604 1,262 777 957
Commercial business loans.................... 4 159 35 758 47 --
-------- ------- ------- -------- -------- --------
Total loans past due 60 days to 89 days..... 556 $ 5,825 $ 5,386 $ 5,269 $ 3,181 $ 6,166
-------- ------- ------- -------- -------- --------
Loans past due 90 days or more (1):
One- to four-family residential loans........ 219 $11,140 $ 7,278 $ 6,874 $ 5,753 $ 8,623
Multifamily and commercial loans............. 32 11,975 2,407 2,296 1,923 2,141
Consumer loans............................... 1,235 4,896 3,991 3,129 2,459 2,202
Commercial business loans.................... 29 4,602 2,124 5,336 125 3,150
-------- ------- ------- -------- -------- --------
Total loans past due 90 days or more........ 1,515 $32,613 $15,800 $ 17,635 $ 10,260 $ 16,116
-------- ------- ------- -------- -------- --------
Total loans 30 days or more past due........... 3,038 $46,407 $29,940 $ 31,000 $ 18,920 $ 29,725
======== ======= ======= ======== ======== ========
Total loans 90 days or more past due (1).... 1,515 $32,613 $15,800 $17,635 $ 10,260 $ 16,116
Total REO...................................... 59 3,664 5,157 3,697 2,144 3,383
-------- ------- ------- -------- -------- --------
Total loans 90 days or more past due and REO... 1,574 $36,277 $20,957 $ 21,332 $ 12,404 $ 19,499
======== ======= ======= ======== ======== ========
Total loans 90 days or more past due to
net loans receivable......................... 1.00% 0.52% 0.62% 0.40% 0.71%
Total loans 90 days or more past due
and REO to total assets...................... 0.69% 0.49% 0.55% 0.36% 0.63%
- -------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 2003, gross interest income of
approximately $2.0 million would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout the period. No
interest income on nonaccrual loans was included in income during such period.
CLASSIFICATION OF ASSETS. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the 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, 2003, the Company had 41 loans,
with an aggregate principal balance of $18.0 million, designated as special
mention.
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.
11
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
AT JUNE 30,
---------------------------------------------------
2003 2002 2001
---------- ----------- ----------
(IN THOUSANDS)
Substandard assets............................................. $ 47,278 $ 38,398 $ 35,011
Doubtful assets................................................ 3,256 1,465 33
Loss assets.................................................... -- -- 160
--------- --------- ---------
Total classified assets..................................... $ 50,534 $ 39,863 $ 35,204
========= ========= =========
ALLOWANCE FOR LOAN LOSSES. Loans that have been classified as
substandard or doubtful are reviewed by the Credit Review and Administration
("CRA") department for possible impairment under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan." A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments.
If an individual loan is deemed to be impaired the CRA department
determines the proper measure of impairment for each loan based on one of three
methods as prescribed by SFAS No. 114: (1) the present value of expected future
cash flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or (3) the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is more or less than
the recorded investment in the loan, the CRA department adjusts the specific
allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered to be individually
impaired, it is grouped with other loans that possess common characteristics for
impairment evaluation and analysis under the provisions of SFAS No. 5,
"Accounting for Contingencies." This segmentation is accomplished by grouping
loans of similar product types, risk characteristics and industry concentration
into homogeneous pools. Each pool is then analyzed based on historical
delinquency, charge-off and recovery trends adjusting for the current economic,
political, regulatory and interest rate environment. A range of losses is then
established that reflects the highest and lowest loss ratios in any one fiscal
year. This historical net charge-off amount as a percentage of loans outstanding
for each group is used to estimate the measure of impairment.
The individual impairment measures along with the estimated range of
losses for each homogeneous pool are consolidated into one summary document.
This summary schedule along with the support documentation used to establish
this schedule is presented to the Credit Committee by the Vice President of CRA
on a quarterly basis. The Credit Committee is comprised of members of Senior
Management from mortgage, consumer and commercial lending, appraising,
administration, finance and the President of the Company. The Credit Committee
reviews the processes and documentation presented, reviews the concentration of
credit by industry and customer, discusses lending products, activity,
competition and collateral values, as well as economic conditions in general and
in each market area of the Company. Based on this review and discussion the
appropriate range of the allowance for loan losses is estimated and any
adjustments to reconcile the actual allowance for loan losses with this estimate
is determined. In addition, the Credit Committee considers if any changes to the
methodology are needed. The Credit Committee also reviews and discusses the
Company's delinquency trends, nonperforming asset amounts and allowance for loan
losses levels and ratios with its peer group as well as state and national
statistics. Following the Credit Committee's review and approval, a similar
review is performed by the Board of Director's Risk Management Committee.
In addition to the reviews by the Credit Committee and the Risk
Management Committee, regulators from either the FDIC or State Department of
Banking perform an extensive review on an annual basis for the adequacy of the
allowance for loan losses and its conformity with regulatory guidelines and
pronouncements. The internal audit department also performs a regular review of
the detailed supporting schedules for accuracy and reports their findings to the
Audit Committee of the Board of Directors. Any recommendations or enhancements
from these independent parties are considered by management and the Credit
Committee and implemented accordingly.
Management acknowledges that this is a dynamic process and consists of
factors, many of which are external and out of management's control, that can
change often, rapidly and substantially. The adequacy of the allowance for loan
losses is based upon estimates using all the information previously discussed as
well as current and known circumstances and events. There is no assurance that
actual portfolio losses will not be substantially different than those that were
estimated.
12
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,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Net loans receivable................................. $ 3,246,771 $ 3,012,606 $ 2,856,581 $ 2,544,630 $2,285,238
Average loans outstanding............................ 3,169,180 2,935,629 2,715,012 2,436,260 2,128,480
Allowance for loan losses balance at beginning of
period............................................. 22,042 20,290 18,260 16,773 15,769
Provision for loan losses............................ 8,431 6,360 5,347 4,149 3,629
Charge-offs:
Real estate loans.................................. (239) (292) (176) (289) (514)
Consumer loans..................................... (4,281) (4,452) (3,528) (2,987) (3,049)
Commercial loans................................... (1,258) (569) (158) -- (101)
------------ ----------- ------------- ------------ -----------
Total charge-offs................................. (5,778) (5,313) (3,862) (3,276) (3,664)
------------ ----------- ------------- ------------ -----------
Recoveries:
Real estate loans.................................. 47 63 32 75 367
Consumer loans..................................... 527 382 453 481 470
Commercial loans................................... 123 23 60 33 61
------------ ----------- ------------ ------------ ----------
Total recoveries.................................. 697 468 545 589 898
Acquired through acquisition......................... 1,201 237 -- 25 141
------------ ----------- ------------ ------------ ----------
Allowance for loan losses balance at end of period. $ 26,593 $ 22,042 $ 20,290 $ 18,260 $ 16,773
============ =========== ============ ============ ==========
Allowance for loan losses as a percentage of net
loans receivable................................... 0.82% 0.73% 0.71% 0.72% 0.73%
Net charge-offs as a percentage of average
loans outstanding.................................. 0.16% 0.17% 0.12% 0.11% 0.13%
Allowance for loan losses as a percentage of
nonperforming loans................................ 81.54% 139.51% 115.06% 177.97% 104.08%
Allowance for loan losses as a percentage
of nonperforming loans and REO..................... 73.31% 105.18% 95.12% 147.21% 86.02%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category at the dates
indicated.
AT JUNE 30,
----------------------------------------------------------------------------
2003 2002 2001
----------------------- ---------------------- ------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
----------- --------- ----------- --------- ----------- -----------
Balance at end of period
applicable to:
Real estate loans.............. $ 13,087 75.0% $ 11,703 76.8% $ 11,629 77.2%
Consumer loans................. 10,965 21.1 8,855 20.1 6,682 19.7
Commercial business loans...... 2,541 3.9 1,484 3.1 1,979 3.1
----------- --------- ----------- --------- ----------- ---------
Total allowance for loan loss.. $ 26,593 100.0% $ 22,042 100.0% $ 20,290 100.0%
=========== ========= =========== ========= =========== =========
AT JUNE 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
% OF TOTAL % OF TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1)
----------- --------- ----------- ----------
Balance at end of period
applicable to:
Real estate loans.............. $ 11,334 78.4% $ 10,619 80.4%
Consumer loans................. 5,976 19.7 5,318 17.9
Commercial business loans...... 950 1.9 836 1.7
----------- --------- ----------- ---------
Total allowance for loan loss.. $ 18,260 100.0% $ 16,773 100.0%
=========== ========= =========== =========
- -----------------------------------
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Company's investment portfolio is comprised of 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's efforts to
protect its net interest margin in the event that interest rates rise. This was
accomplished by controlling the increase of long-term fixed rate mortgage loans
and by deploying more funds to the investment portfolio. In addition to interest
sensitivity concerns, the Company is maintaining more of its funds in marketable
securities because of concerns that some of the rapid deposit growth over the
last several years could be funds that will eventually leave the Company for
alternative investments.
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
13
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,
---------------------------------------------------
2003 2002 2001
---------- ----------- ----------
(IN THOUSANDS)
Mortgage-backed securities balance at beginning of period (1)......... $ 524,601 $ 504,274 $ 420,177
Purchases............................................................. 947,546 160,665 114,926
Sales................................................................. (2,879) -- (11,127)
Securities acquired by business combination........................... 15,632 -- --
Increase (decrease) in market value of securities available for sale.. (2,863) 4,519 5,725
Principal payments and amortization of premiums and discounts......... (575,002) (144,857) (25,427)
---------- ----------- ----------
Mortgage-backed securities balance at end of period (1)............... $ 907,035 $ 524,601 $ 504,274
========== =========== ==========
Investment securities balance at beginning of period (2).............. 307,625 $ 226,636 $ 205,562
Purchases............................................................. 278,406 177,778 68,982
Sales................................................................. (79,991) (50,647) (3,985)
Securities acquired by business combination........................... 12,390 -- --
Increase (decrease) in market value of securities available for sale.. 5,264 154 7,012
Writedowns............................................................ -- (400) --
Maturities and amortization of premiums and discounts................. (56,277) (45,896) (50,935)
---------- ----------- ----------
Investment securities balance at end of period (2).................... $ 467,417 $ 307,625 $ 226,636
========== =========== ==========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to
maturity.
(2) Includes investment securities available for sale and held to maturity.
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.
14
AT JUNE 30,
--------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
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................... $ 8,297 $ 8,417 $ 3,663 $ 3,713 $ 3,379 $ 3,387
Variable-rate pass through certificates................ 57,988 58,162 52,278 52,426 4,743 4,834
Fixed-rate collateralized mortgage obligations ("CMOs") 24,651 24,596 8,318 8,494 2,284 2,373
Variable-rate CMOs..................................... 258,466 259,966 199,601 200,179 198,934 194,356
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities held to maturity.... 349,402 351,141 263,860 264,812 209,340 204,950
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates................... $ 43,449 $ 45,461 $ 61,502 $ 63,974 $ 72,522 $ 74,038
Variable-rate pass through certificates................ 128,528 129,486 12,958 13,040 15,148 15,252
Fixed-rate CMOs........................................ 191,911 190,167 35,315 35,685 3 3
Variable-rate CMOs..................................... 190,978 192,519 145,335 148,042 206,149 205,641
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities available for sale.. 554,866 557,633 255,110 260,741 293,822 294,934
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities..................... 904,268 908,774 518,970 525,553 $ 503,162 $ 499,884
--------- --------- --------- --------- ========= =========
Investment securities held to maturity:
U.S. Government and agency............................. $ 17,032 $ 19,209 $ 18,040 $ 20,156 $ 34,518 $ 35,819
Municipal securities................................... 65,556 68,905 65,274 65,759 50,641 50,388
Corporate debt issues.................................. 45,831 47,667 49,329 48,164 44,832 42,215
--------- --------- --------- --------- --------- ---------
Total investment securities held to maturity......... $ 128,419 $ 135,781 $ 132,643 $ 134,079 $ 129,991 $ 128,422
========= ========= ========= ========= ========= =========
Investment securities available for sale:
U.S. Government and agency ............................ $ 41,900 $ 43,703 $ 23,604 $ 23,952 $ 27,220 $ 27,793
Municipal securities................................... 119,796 123,654 77,742 78,011 57,538 57,588
Corporate debt issues.................................. 27,502 27,581 1,476 1,333 986 905
Equity securities and mutual funds..................... 140,603 144,060 68,228 71,686 7,123 10,359
--------- --------- --------- --------- --------- ---------
Total investment securities available for sale....... $ 329,801 $ 388,998 $ 171,050 $ 174,982 $ 92,867 $ 96,645
========= ========= ========= ========= ========= =========
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,
---------------------------------------------------
2003 2002 2001
-------- - ----------- ----------
(IN THOUSANDS)
Mortgage-backed securities:
FNMA ............................................................. $ 355,722 $193,814 $210,548
GNMA .............................................................. 58,834 76,412 91,535
FHLMC.............................................................. 426,753 235,344 181,500
Other (non-agency)................................................. 65,726 19,031 20,691
------- ---------- ----------
Total mortgage-backed securities................................ $907,035 $ 524,601 $ 504,274
======== =========== ==========
15
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, 2003. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
AT JUNE 30, 2003
-----------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------------ ------------------------- --------------------------
ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations.... $ -- --% $ -- --% $ 14,985 7.10%
Municipal securities...................... -- -- 90 5.25 -- --
Corporate debt issues..................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities held to
maturity............................. $ -- --% $ 90 5.25% $ 14,985 7.10%
Investment securities available for sale:
U.S. Government and agency obligations.... $ -- --% $ -- --% $ 11,900 3.77%
Equity securities and mutual funds........ -- -- -- -- -- --
Municipal securities...................... -- -- -- -- 459 4.22
Corporate debt issues..................... 1,006 5.01 7,089 5.29 15,000 1.63
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
available for sale................... $ 1,006 5.01% $ 7,089 5.29% $ 27,359 2.61%
Mortgage-backed securities held to
maturity:
Pass-through certificates................. $ 57,988 3.20% $ 739 2.90% $ 104 3.53%
CMOs...................................... 258,439 2.08 -- -- 13,470 2.45
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
held to maturity..................... $ 316,427 2.28% $ 739 2.90% $ 13,574 2.46%
Mortgage-backed securities available for
sale:
Pass through certificates................. $ 128,528 2.61% $ 931 6.94% $ 3,430 3.59%
CMOs...................................... 190,977 2.97 -- -- 60,919 2.64
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
available for sale................... $ 319,505 2.82% $ 931 6.94% $ 64,349 2.69%
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities and mortgage-
backed securities......................... $ 636,938 2.56% $ 8,849 5.26% $ 120,267 3.20
========== ========== ========== ========== ========== ==========
AT JUNE 30, 2003
----------------------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------- ----------------------------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST MARKET VALUE YIELD
---------- ---------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations.... $ 2,047 8.35% $ 17,032 $ 19,209 7.25%
Municipal securities...................... 65,466 5.04 65,556 68,905 5.04
Corporate debt issues..................... 45,831 8.03 45,831 47,667 8.03
---------- ---------- ------------ ----------- ----------
Total investment securities held to
maturity............................. $ 113,344 6.31% $ 128,419 $ 135,781 6.40%
Investment securities available for sale:
U.S. Government and agency obligations.... $ 30,000 2.24% $ 41,900 $ 43,703 2.68%
Equity securities and mutual funds........ 140,603 2.26 140,603 144,060 2.26
Municipal securities...................... 119,337 4.77 119,796 123,654 4.77
Corporate debt issues..................... 4,407 3.92 27,502 27,581 3.06
---------- ---------- ------------ ----------- ----------
Total investment securities
available for sale................... $ 294,347 3.30% $ 329,801 $ 338,998 3.29%
Mortgage-backed securities held to
maturity:
Pass-through certificates................. $ 7,454 4.67% $ 66,285 $ 66,579 3.36%
CMOs...................................... 11,208 3.31 283,117 284,562 2.15
---------- ---------- ------------ ----------- ----------
Total mortgage-backed securities
held to maturity..................... $ 18,662 3.85% $ 349,402 $ 351,141 2.38%
Mortgage-backed securities available for
sale:
Pass through certificates................. $ 39,088 6.32% $ 171,977 $ 174,947 3.50%
CMOs...................................... 130,993 3.12 382,889 382,686 2.97
---------- ---------- ------------ ----------- ----------
Total mortgage-backed securities
available for sale................... $ 170,081 3.86% $ 554,866 $ 557,633 3.13%
---------- ---------- ------------ ----------- ----------
Total investment securities and mortgage-
backed securities......................... $ 596,434 4.05% $ 1,362,488 $ 1,383,553 3.28%
========== ========== ============ =========== ==========
16
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, 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 deposit activities of the Company for
the periods indicated.
YEARS ENDED JUNE 30,
------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS)
Balance at beginning of period...................................... $ 3,593,122 $ 3,264,940 $ 2,886,509
Net savings activity................................................ 226,656 88,883 131,763
Net checking activity............................................... 227,648 49,913 2,019
Deposits acquired................................................... 121,754 84,960 137,941
------------- ------------- ------------
Net increase before interest credited............................ 576,058 223,756 271,723
Interest credited................................................... 94,376 104,426 106,708
------------- ------------- ------------
Net increase in deposits......................................... 670,434 328,182 378,431
------------- ------------- ------------
Balance at end of period...................................... $ 4,263,556 $ 3,593,122 $ 3,264,940
============= ============= ============
The following table sets forth the dollar amount of deposits in the
various types of savings accounts offered by the Company between the dates
indicated.
AT JUNE 30,
-----------------------------------------------------------------------------
2003 2002
------------------------------------ ---------------------------------------
BALANCE PERCENT (1) RATE (2) BALANCE PERCENT (1) RATE (2)
---------- ------------ -------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Savings accounts................. $ 920,721 21.60% 1.67% $ 698,336 19.44% 2.62%
Checking accounts................ 861,922 20.21 0.86 605,582 16.85 0.86
Money market accounts............ 568,164 13.33 2.06 407,974 11.35 2.71
Certificates of deposit:
Maturing within 1 year........ 845,985 19.84 2.93 1,046,783 29.14 3.80
Maturing 1 to 3 years......... 719,909 16.88 4.01 542,222 15.09 4.39
Maturing more than 3 years.... 346,855 8.14 4.55 292,225 8.13 5.02
----------- --------- --------- ----------- --------- ---------
Total certificates............ 1,912,749 44.86 3.63 1,881,230 52.36 4.16
----------- --------- --------- ----------- --------- ---------
Total deposits................... $ 4,263,556 100.00% 2.44% $ 3,593,122 100.00% 3.14%
=========== ========= ========= =========== ========= =========
AT JUNE 30,
-------------------------------------
2001
-------------------------------------
BALANCE PERCENT (1) RATE (2)
--------- ------------- ----------
(DOLLARS IN THOUSANDS)
Savings accounts................. $ 455,031 13.94% 3.17%
Checking accounts................ 522,580 16.00 0.96
Money market accounts............ 208,220 6.38 3.69
Certificates of deposit:
Maturing within 1 year........ 1,691,033 51.79 6.02
Maturing 1 to 3 years......... 313,697 9.61 5.79
Maturing more than 3 years.... 74,379 2.28 6.02
----------- --------- ---------
Total certificates............ 2,079,109 63.68 5.99
----------- --------- ---------
Total deposits................... $ 3,264,940 100.00% 4.65%
=========== ========= =========
- -------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
17
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,
----------------------------------------------------
2003 2002 2001
---------------- ------------- ----------------
RATE (IN THOUSANDS)
----
Less than 2.00%............................................................... $ 317,502 $ 24,433 $ --
2.00 - 2.99%.................................................................. 354,304 431,963 301
3.00 - 3.99%.................................................................. 421,431 410,835 79,616
4.00 - 4.99%.................................................................. 559,407 579,715 330,509
5.00 - 5.99%.................................................................. 211,408 233,925 428,362
6.00 - 6.99%.................................................................. 32,140 171,642 1,124,205
7.00 - 7.99%.................................................................. 16,487 28,653 116,052
8.00% or greater.............................................................. 70 64 64
-------------- ------------- ----------------
Total..................................................................... $ 1,912,749 $ 1,881,230 $ 2,079,109
============== ============= ================
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 2003.
AMOUNT DUE
--------------------------------------------------------------------------------
LESS THAN ONE
RATE YEAR 1-2 YEARS 2-3 YEARS AFTER 3 YEARS TOTAL
---- --------------- ------------ -------------- --------------- -----------
(IN THOUSANDS)
Less than 2.00%............................... $ 295,995 $ 21,333 $ 42 $ 132 $ 317,502
2.00 - 2.99%.................................. 207,599 110,170 36,109 426 354,304
3.00 - 3.99%.................................. 131,206 151,657 54,554 84,014 421,431
4.00 - 4.99%.................................. 152,116 83,964 142,786 180,541 559,407
5.00 - 5.99%.................................. 46,029 36,413 49,321 79,645 211,408
6.00 - 6.99%.................................. 10,548 16,002 3,576 2,014 32,140
7.00 - 7.99%.................................. 2,422 13,155 827 83 16,487
8.00% or greater.............................. 70 -- -- -- 70
------------ ------------ ------------ ------------ ------------
Total...................................... $ 845,985 $ 432,694 $ 287,215 $ 346,855 $ 1,912,749
============ ============ ============ ============ ============
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, 2003.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Three months or less........................................................................... $ 31,527
Three through six months....................................................................... 36,570
Six through twelve months...................................................................... 46,075
Over twelve months............................................................................. 183,342
-------------
Total........................................................................................ $ 297,514
=============
BORROWINGS
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.
18
DURING THE YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2002 2001 2000
------------------- ---------------------- ------------------
(DOLLARS IN THOUSANDS)
FHLB-Pittsburgh borrowings:
Average balance outstanding $ 412,817 $ 237,907 $ 247,291
Maximum outstanding at end of any month during period 471,416 243,547 304,583
Balance outstanding at end of period 430,014 235,500 245,552
Weighted average interest rate during period 4.78% 5.47% 5.84%
Weighted average interest rate at end of period 4.89% 5.35% 5.36%
Reverse repurchase agreements:
Average balance outstanding $ 20,791 $ 12,798 $ 24,059
Maximum outstanding at end of any month during period 29,226 19,568 28,997
Balance outstanding at end of period 29,226 17,166 24,165
Weighted average interest rate during period 1.80% 2.82% 6.14%
Weighted average interest rate at end of period 1.27% 1.98% 4.47%
Other borrowings:
Average balance outstanding $ 6,603 $ 6,571 $ 7,208
Maximum outstanding at end of any month during period 6,696 6,647 10,315
Balance outstanding at end of period 6,510 6,594 6,495
Weighted average interest rate during period 6.50% 6.63% 7.03%
Weighted average interest rate at end of period 5.12% 6.63% 6.65%
Total borrowings:
Average balance outstanding $ 440,211 $ 257,276 $ 278,558
Maximum outstanding at end of any month during period 496,026 269,603 339,531
Balance outstanding at end of period 465,750 259,260 276,212
Weighted average interest rate during period 4.66% 5.37% 5.90%
Weighted average interest rate at end of period 4.66% 5.16% 5.31%
COMPETITION
The Company's market area in Pennsylvania, western New York and eastern
Ohio has a large concentration of financial institutions, some of which are
significantly larger and have greater financial resources than the Company, and
all of which are competitors of the Company to varying degrees. As a result, the
Company encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes offices of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for deposits 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
The Company has four subsidiaries: the Bank and Jamestown, as well as
Northwest Capital Trust I and Northwest Bancorp Statutory Trust I, all of which
are wholly-owned. The Bank has six wholly owned subsidiaries, Great Northwest
Corporation, Northwest Financial Services, Inc., Boetger & Associates, Inc.,
Northwest Consumer Discount Company, Inc., Allegheny Services, Inc., and
Northwest Capital Group, Inc. Jamestown has no subsidiaries. For financial
reporting purposes all of these companies are included in the consolidated
financial statements of the Company.
19
Northwest Capital Trust I is a wholly owned Delaware statutory
business trust. The sole activity of this Trust was the issuance of 2,760,000 of
8.75% Cumulative Trust Preferred Securities through a public offering on
November 30, 2001 (liquidation value of $25 per preferred security or
$69,000,000) with a stated maturity date of December 31, 2031. At June 30, 2003,
the Company had an equity investment in Northwest Capital Trust I of $2.1
million. For the fiscal year ended June 30, 2003 Northwest Capital Trust I
reported no net income.
Northwest Bancorp Statutory Trust I is the second wholly owned Delaware
statutory business trust formed by the Company during the 2002 fiscal year. The
sole activity of this Trust was the issuance of 30,000 Cumulative Trust
Preferred Securities to a pooled vehicle through a private transaction on
December 18, 2001 (liquidation value of $1,000 per preferred security or
$30,000,000) with a stated maturity date of December 23, 2031. At June 30, 2003,
the Company had an equity investment in Northwest Bancorp Statutory Trust I of
$928,000, and for the fiscal year ended June 30, 2003, Northwest Bancorp
Statutory Trust I reported no net income.
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, 2003, the Bank had an equity investment in
Great Northwest of $4.2 million. For the fiscal year ended June 30, 2003, Great
Northwest had net income of $474,000 generated primarily from federal low-income
housing tax credits.
Northwest Financial Services' principal activity is the operation of
retail brokerage activities for the Company. It also maintains ownership
interests in 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, 2003, the Bank had an equity investment in Northwest Financial
Services of $6.9 million, and for the fiscal year ended June 30, 2003, Northwest
Financial Services had net income of $182,000.
Northwest Consumer Discount Company operates 45 consumer finance offices
throughout Pennsylvania and operates two consumer finance offices in New York
State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 2003, the Bank had an equity investment in Northwest
Consumer Discount Company of $16.9 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2003 was $1.8
million. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreation vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Allegheny Services, Inc. is a Delaware investment company that holds
mortgage loans originated through the Bank's wholesale lending business. In
addition, this Company has loans to both Northwest Savings Bank and Northwest
Consumer Discount Company. At June 30, 2003 the Bank had an equity investment in
Allegheny Services, Inc. of $483.2 million, and for the fiscal year ended June
30, 2003, Allegheny Services, Inc. had net income of $17.3 million.
Boetger & Associates, Inc. is an actuarial services firm acquired July
1, 2002. At June 30, 2003 the Bank had an equity investment of $1.1 million in
Boetger and Associates and for the fiscal year ended June 30, 2003 Boetger &
Associates had net income of $54,000.
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. Northwest Capital Group, Inc. also holds title to several
other properties that were acquired in foreclosure. At June 30, 2003 the Bank
had an equity investment of $26,000 in Northwest Capital Group and for the
fiscal year ended June 30, 2003 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. At June 30, 2003 Northwest Financial Services had an
20
equity investment of $1.1 million in Rid-Fed, Inc. and for the fiscal year ended
June 30, 2003 Rid-Fed, Inc. reported no net income.
Northwest Finance Company, Inc. is a wholly owned subsidiary of
Northwest Consumer Discount Company. Northwest Finance Company operates two
consumer finance offices in Jamestown and Fredonia, New York. As of June 30,
2003, Northwest Consumer Discount Company's equity investment in Northwest
Finance Company was $(112,000). For the year ended June 30, 2003, Northwest
Finance Company had net income of $7,000.
Federal regulations require SAIF-insured institutions to provide 30 days
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings association,
or is inconsistent with the purposes of federal banking law. Upon the making of
such a determination, the FDIC may order the savings association to divest the
subsidiary or take other actions.
PERSONNEL
As of June 30, 2003, the Company and its wholly owned subsidiaries had
1,340 full-time and 297 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 Company is a Federal corporation, and the Mutual Holding Company is
a Federal mutual holding company. The Company and the Mutual Holding Company are
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS.
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.
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.
21
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws as well as other state,
federal and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the current
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney, or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
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 is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. In addition, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are paid jointly by Bank
Insurance Fund ("BIF") insured institutions and SAIF-insured institutions. The
FICO interest payments are paid pro rata by banks and thrifts based on
approximately 2.1 basis point of 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 each of the fiscal years 1999, 2003, the Company recaptured into taxable
income approximately $1.3 million of the post-1987 bad debt reserves. At June
30, 2003, the Company had a balance of approximately $1.3 million of bad debt
reserves in retained income that is subject to recapture over the next year
under this legislation.
22
CAPITAL REQUIREMENTS
Any savings institution 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 institution'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 capital guidelines of the
Department. Although not adopted in regulation form, the Department utilizes
capital standards of 6% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
LOANS-TO-ONE BORROWER LIMITATION
Under federal regulations, with certain limited exceptions, a
Pennsylvania chartered savings bank may lend to a single or related group of
borrowers on an "unsecured" basis an amount equal to 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but
generally does not include real estate. The Company's internal policy, however,
is to make no loans either individually or in the aggregate to one entity in
excess of $7.5 million without prior approval from the Board of Directors.
PROMPT CORRECTIVE ACTION
Under federal regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution to
comply with supervisory actions as if it were in the next lower category (except
that the FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of June 30, 2003, the Bank and Jamestown were
"well-capitalized institutions" for this purpose.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
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.
THE USA PATRIOT ACT
23
In response to the events of September 11th, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
- Section 326 of the Act authorizes the Secretary of the
Department of Treasury, in conjunction with other bank
regulators, to issue regulations that provide for minimum
standards with respect to customer identification at the time
new accounts are opened. On July 23, 2002, the federal bank
regulators jointly issued proposed rules to implement Section
326. The proposed rules require financial institutions to
establish a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts. This identifying information would be essentially the
same information currently obtained by most financial
institutions for individual customers.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking
accounts or correspondence accounts in the United States for
non-United States persons or their representatives (including
foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect
and report money laundering.
- Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
will be subject to certain record keeping obligations with
respect to correspondent accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
HOLDING COMPANY REGULATION
Generally. Federal law allows a state savings bank, such as the Bank,
that qualifies as a "Qualified Thrift Lender," discussed below, to elect to be
treated as a savings association for purposes of the savings and loan company
provisions of the HOLA. Such election results in its holding company being
regulated as a savings and loan holding company by the OTS rather than as a bank
holding company by the Federal Reserve Board. The Company and the Mutual Holding
Company have made such election by converting from a Pennsylvania corporation
and a Pennsylvania mutual holding company to a Federal corporation and Federal
mutual holding company, respectively, effective June 30, 2001. The Company and
the Mutual Holding Company are savings and loan holding companies within the
meaning of the HOLA. As such, the Company and the Mutual Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and the Mutual Holding Company and any nonsavings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. As federal corporations, the Company and the
Mutual Holding Company are generally not subject to state business organizations
laws.
24
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered
mid-tier holding company, such as the Company, may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act,
unless the Director of the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies; or (B) in which multiple
savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock
acquired in connection with a qualified stock issuance if the purchase of such
stock by such savings and loan holding company is approved by the Director. In
addition, a Federal mutual holding company may engage in any activities
permissible for a financial holding company under Section 4(k) of the Bank
Holding Company Act and regulations of the Federal Reserve Board thereunder,
including underwriting debt and equity securities, insurance agency and
underwriting, and merchant banking. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and has a period of two years to cease any
nonconforming activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of more than 5% of the voting stock of another
savings institution or savings and loan holding company without the prior
approval of the OTS, and from acquiring or retaining control of an any
depository institution that is not FDIC-insured. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.
The Company is regulated as a multiple savings and loan holding company
for interstate acquisition purposes by virtue of its ownership of the Bank and
Jamestown Savings Bank. The OTS is prohibited from approving any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies, and (ii) the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Qualified Thrift Lender Test. To be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), both the Bank and Jamestown Savings bank must qualify as a
Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, each of the
Bank and Jamestown Savings Bank must maintain compliance with the test for a
"domestic building and loan association," as defined in the Internal Revenue
Code, or with the Qualified Thrift Lender test. Under the Qualified Thrift
Lender test, a savings institution is required to maintain at least 65% of its
"portfolio assets" (total assets less: (1) specified liquid assets up to 20% of
total assets; (2) intangibles, including goodwill; and (3) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and related securities) in at least 9 months out of each 12-month period. As of
June 30, 2003 the Bank and Jamestown Savings Bank met the Qualified Thrift
Lender test.
Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends. The OTS reviews dividend waiver notices on a
case-by-case basis. Since the Mutual Holding Company converted to a federal
charter it has waived all dividends paid by the Company.
25
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to issue from the mutual to the stock form of
ownership (a "Conversion Transaction"). There can be no assurance when, if ever,
a Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company. Based upon
current OTS policy, in a Conversion Transaction, each share of Common Stock held
by the Company's public stockholders ("Minority Stockholders") would be
automatically converted into a number of shares of common stock of the New
Holding Company determined pursuant an exchange ratio that ensures that after
the Conversion Transaction, subject to any adjustment to reflect the receipt of
cash in lieu of fractional shares, the percentage of the to-be outstanding
shares of the New Holding Company issued to Minority Stockholders in exchange
for their Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority Stockholders immediately prior to the
Conversion Transaction. The total number of shares held by Minority Stockholders
after the Conversion Transaction would also be affected by any purchases by such
persons in the offering that would be conducted as part of the Conversion
Transaction.
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.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which provides for corporate governance, disclosure and
accounting reforms intended to address corporate and accounting fraud. The Act
establishes a new accounting oversight board that will enforce auditing, quality
control and independence standards, and will be funded by fees from all publicly
traded companies. The Act also places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
will require preapproval by the company's audit committee. In addition, the Act
makes certain changes to the requirements for audit partner rotation after a
period of time. The Act also requires chief executive officers and chief
financial officers, or their equivalent, to certify to the accuracy of periodic
reports filed with the Securities and Exchange Commission, subject to civil and
criminal penalties if they knowingly or willingly violate this certification
requirement. In addition, under the Act, counsel will be required to report to
the chief executive officer or chief legal officer of the company, evidence of a
material violation of the securities laws or a breach of fiduciary duty by a
company and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restating a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the public company. In addition,
companies must disclose whether at least one member of the committee
26
is a "financial expert" (as such term will be defined by the Securities and
Exchange Commission) and if not, why not. Under the Act, a company's registered
public accounting firm will be prohibited from performing statutorily mandated
audit services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Act prohibits any officer or director of a company or any other person
acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent accountant engaged in the audit of
the company's financial statements for the purpose of rendering the financial
statements materially misleading. The Act also requires the Securities and
Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. The Act requires the company's registered public accounting firm
that issues the audit report to attest to and report on management's assessment
of the company's internal controls.
Although we will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, management
does not expect that such compliance will have a material impact on our results
of operations or financial condition.
REGULATORY ENFORCEMENT AUTHORITY
Federal law provides federal banking regulators with substantial
enforcement powers. 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.
DIVIDENDS
The Company's ability to pay dividends depends, to a large extent, upon
the Bank's ability to pay dividends to the Company. The Banking Code of the
Commonwealth of Pennsylvania states, in part, that dividends may be declared and
paid by the Bank only out of accumulated net earnings and may not be declared or
paid unless surplus (retained earnings) is at least equal to capital. The Bank
has not declared or paid any dividends which caused the Bank's retained earnings
to be reduced below the amount required. Finally, dividends may not be declared
or paid if the Bank is in default in payment of any assessment due to the FDIC.
At June 30, 2003, the Bank's retained earnings exceeded required capital by
$194.7 million and the Bank was not in default of any assessment due the
FDIC.
In addition, the Bank is required to notify the OTS prior to paying a
dividend to the Company, and receive the nonobjection of the OTS to any such
dividend.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company files a
consolidated federal income tax return with its wholly owned subsidiaries on a
fiscal year basis. The applicable federal income tax expense or benefit is
properly allocated to each subsidiary based upon taxable income or loss
calculated on a separate company basis. The Mutual Holding Company is not
permitted to file a consolidated federal income tax return with the Company, and
must pay Federal income tax on 20% of the dividends received from the Company,
if any. 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, if any.
In April 1992, the FASB issued SFAS 109. The Company currently is
accounting for income taxes in accordance with SFAS 109. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws. SFAS 109 was implemented by
the Bank effective July 1, 1993.
27
The statute of limitations is open for potential examinations by the
Internal Revenue Service for the tax years ended June 30, 2000 through June 30,
2003.
STATE TAXATION. The Company is subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends
received from the Bank qualify for a 100% dividends received deduction and are
not subject to Corporate Net Income Tax. In addition, the Company's investments
in its subsidiaries qualify as exempt intangible assets and greatly reduce the
amount of Capital Stock Tax assessed.
The Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Bank's financial net income determined
in accordance with generally accepted accounting principles, with certain
adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction.
The subsidiaries of the Bank are subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania and other
applicable taxes in the states where they conduct business.
ITEM 2. PROPERTIES
As of June 30, 2003, the Company conducted its business through its main
office located in Warren, Pennsylvania, 123 other full-service offices
throughout its market area in northwest, southwest and central Pennsylvania,
eight offices in southwestern New York, and five offices in eastern Ohio. The
Company and its wholly owned subsidiaries also operated 45 consumer finance
offices located throughout Pennsylvania and two consumer lending office in New
York. At June 30, 2003, the Company's premises and equipment had an aggregate
net book value of approximately $63.2 million.
28
Listed below is the location of each of the Company's community banking
offices.
PENNSYLVANIA
Austin, Potter Co.
-- 21 Turner Street
Bellefonte, Centre Co.
-- 117 North Allegheny Street
Bethel Park, Allegheny Co.
-- 6284 Library Road
Bradford (4), McKean Co.
-- Bradford Mall - 1001 E. Main Street
-- 33 Main Street
-- 85 West Washington Street
-- 950 E. Main Street
Bridgeville, Allegheny Co.
-- 431 Washington Avenue
Butler, Butler Co.
-- 151 Pittsburgh Road
Canonsburg, Washington Co.
-- 148 West Pike Street
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue
Clarion (2), Clarion Co.
-- 601 Main Street
-- 97 West Main Street
Clearfield, Clearfield Co.
-- 1200 South Second Street
Columbia, Lancaster Co.
-- 350 Locust Street
Coudersport, Potter Co.
-- 302 N. East Street
Corry, Erie Co.
-- 150 North Center Street
Cranberry, Venango Co.
-- Cranberry Mall
Ebensburg, Cambria Co.
-- 176 Lovell Avenue
Edinboro, Erie Co.
-- Walmart, 108 Washington Towne Blvd
Elizabeth, Allegheny Co.
-- 603 Scenery Drive
Elizabethtown, Lancaster Co.
-- 2296 South Market Street
Emporium, Cameron Co.
-- 2 East Fourth Street
Erie (11), 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
-- 800 State Street
Franklin, Venango Co.
-- 1301 Liberty Street
Fredericktown, Washington Co.
-- Front Street
Galeton, Potter Co.
-- 30 West Street
Gibsonia, Allegheny Co.
-- The Village of St. Barnabus
5850 Meridian Road
Greenville, Mercer Co.
-- Walmart, 45 Williamson Road
Grove City, Mercer Co.
-- 200 S. Center Street
Hanover, York Co.
-- 1 Center Square
Harborcreek, Erie Co.
-- 4270 East Lake Road
Hershey, Dauphin Co.
-- 10 West Chocolate Avenue
29
Johnsonburg (2), Elk Co.
-- 553 Market Street
-- Johnsonburg Plaza, Route 219
Johnstown(2), Cambria Co.
-- 225 Franklin Street
-- 475 Theatre Drive
Kane (2), McKean Co.
-- 56 Fraley Street
-- 355 Biddle 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
Lawrenceville, Tioga Co.
-- 53 Main Street
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
Mansfield, Tioga Co.
-- 50 South Main Street
Marianna, Washington Co.
-- 1784 Main Street
Marienville, Forest Co.
-- Walnut & West Spruce Street
McDonald, Washington Co.
-- 101 East Lincoln Avenue
Meadville (4), Crawford Co.
-- 932 Diamond Park
-- 1073 Park Avenue
-- 880 Park Avenue
-- 730 North Main Street
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
Pittsburgh (2), Allegheny Co.
-- 543 Brownsville Road
-- 710 Old Clairton Road
Pleasantville, Venango Co.
-- 102 East State Street
Pottsville, Schuylkill Co.
-- 104 North Centre Street
Ridgway (2), Elk Co.
-- 170 Main Street
-- 125 Main Street
Rimersburg, Clarion Co.
-- 629 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
30
Shinglehouse, Potter Co.
-- 105 West Academy Street
Sligo, Clarion Co.
-- 1613 Bald Eagle Street
Smethport, McKean Co.
-- 428 Main Street
Smithfield, Huntingdon Co.
-- 100 Fairgrounds Road
Springboro, Crawford Co.
-- 105 South Main Street
St. Marys (2), Elk Co.
-- 39 South St. Marys 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 (2), Crawford Co.
-- Spring & Franklin Street
-- 319 West Central Avenue
Union City (2), Erie Co.
-- 22 North Main Street
-- 4 Perry Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Volant, Lawrence Co.
-- Main Street
Wampum, Lawrence Co.
-- 342 Main Street
Warren (3), Warren Co.
-- Warren Mall
1666 Market Street Ext.
-- 125 Ludlow Street
-- Liberty Street at Second Avenue
Washington (2), Washington Co.
-- Walmart, 30 Trinity Point Drive
-- Shop-n-Save, 125 West Beau Street
Wattsburg, Erie Co.
-- 14457 Main Street
Weedville, Elk Co.
-- 499 River Road
Wellsboro (2), Tioga Co.
-- 61 Main Street
-- 16 Main Street
Westfield, Tioga Co.
-- 100 East Main Street
Westmont, Cambria Co.
-- 1740 Lyter Drive
Wrightsville, York Co.
-- 120 North 4th Street
York (3), York Co.
-- Queensgate Shopping Center
2220 South Queens Street
-- Stonybrook Plaza
3649 East Market Street
-- 1700 Roosevelt Avenue
NEW YORK
Jamestown (3) Chautauqua Co.
-- 23 West Third Street
-- 768 Foote Avenue
-- 7 West Third Street
Kenmore, Erie Co.
-- 2981 Delaware Avenue
Lakewood, Chautauqua Co.
-- 311 East Fairmount Avenue
Mayville, Chautauqua Co.
-- 29 S. Erie Street
Olean, Cattaraugus Co.
-- 2513 West State Street
Williamsville, Erie Co.
-- Eastern Hills Mall
-- 4545 Transit Road
OHIO
Ashtabula, Ashtabula Co.
-- 1040 Lake Avenue
31
Chardon, Geauga Co.
-- 325 Center Street
Geneva, Ashtabula Co.
-- 30 East Main Street
Madison, Lake Co.
-- 1903 Hubbard Road
Painesville, Lake Co.
-- 70 Richmond Street
32
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions
arising in the normal course of business. In the opinion of management, the
resolution of these legal actions is not expected to have a material adverse
effect on the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of the fiscal year covered by this report, the
Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NWSB." As of June 30, 2003, the Company had 20 registered market
makers, 4,087 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
47,693,981 shares outstanding. As of such date, the Mutual Holding Company held
35,366,218 shares of common stock and stockholders other than the Mutual Holding
Company held 12,327,763 shares. The following table sets forth market price and
dividend information for the Company's common stock. Information is presented
for each quarter of the previous two fiscal years.
FISCAL YEAR ENDED CASH DIVIDENDS
JUNE 30, 2003 HIGH LOW DECLARED
--------------------- ---------------- --------------- ----------------
First quarter $ 14.41 $ 9.98 $ 0.08
Second quarter 15.80 12.17 0.08
Third quarter 16.51 13.55 0.08
Fourth quarter 16.99 15.15 0.08
FISCAL YEAR ENDED CASH DIVIDENDS
JUNE 30, 2002 HIGH LOW DECLARED
--------------------- ---------------- --------------- ----------------
First quarter $ 12.10 $ 9.70 $ 0.06
Second quarter 11.94 9.70 0.06
Third quarter 12.80 10.98 0.06
Fourth quarter 14.95 11.80 0.06
Payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the payment
of dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
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.
33
AT JUNE 30,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ----------- ---------- -----------
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: (IN THOUSANDS)
Total assets.......................................... $ 5,222,367 $ 4,305,535 $ 3,852,831 $ 3,407,292 $ 3,078,832
Investment securities held-to-maturity................ 128,419 132,643 129,991 97,590 118,307
Investment securities available-for-sale.............. 338,998 174,982 96,645 107,972 121,923
Mortgage-backed securities held-to-maturity........... 349,402 263,860 209,340 140,166 135,557
Mortgage-backed securities available-for-sale......... 557,633 260,741 294,934 280,011 212,700
Loans receivable net:
Real estate........................................ 2,428,601 2,309,752 2,200,115 1,990,622 1,835,870
Consumer........................................... 690,596 608,370 568,661 504,966 410,165
Commercial......................................... 127,574 94,484 87,805 49,042 39,203
Total loans receivable, net..................... 3,246,771 3,012,606 2,856,581 2,544,630 2,285,238
Deposits.............................................. 4,263,556 3,593,122 3,264,940 2,886,509 2,463,711
Advances from FHLB and other borrowed funds........... 465,750 259,260 276,212 239,941 348,915
Shareholders' equity.................................. 356,932 316,640 275,713 247,888 233,657
YEARS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ----------- ----------- ---------- -----------
SELECTED CONSOLIDATED OPERATING DATA: (IN THOUSANDS)
Total interest income.................................. $ 275,619 $ 274,500 $ 269,430 $ 239,724 $ 206,593
Total interest expense................................. 137,638 147,255 157,322 132,099 114,911
----------- ------------ ------------ ----------- ------------
Net interest income................................. 137,981 127,245 112,108 107,625 91,682
Provision for loan losses.............................. 8,431 6,360 5,347 4,149 3,629
----------- ------------ ------------ ----------- ------------
Net interest income after provision for loan losses. 129,550 120,885 106,761 103,476 88,053
----------- ------------ ------------ ----------- ------------
Noninterest income..................................... 26,735 18,173 15,054 11,271 6,010
Noninterest expense.................................... 98,007 84,524 82,339 73,634 63,110
----------- ------------ ------------ ----------- ------------
Income before income tax expense and cumulative effect
of accounting change................................ 58,278 54,534 39,476 41,113 30,953
Income tax expense..................................... 16,587 16,600 12,699 13,910 10,914
Minority interest in net loss of subsidiary............ - -- -- -- 3
----------- ------------ ------------ ----------- ------------
Income before cumulative effect of accounting change... 41,691 37,934 26,777 27,203 20,042
Cumulative effect of accounting change................. -- 2,237 -- -- --
----------- ------------ ------------ ----------- ------------
Net income....................................... $ 41,691 $ 40,171 $ 26,777 $ 27,203 $ 20,042
=========== ============ ============ =========== ============
Basic per share amounts:
Income before cumulative effect of accounting change $ 0.88 $ 0.80 0.57 0.58 0.42
Cumulative effect of accounting change.............. -- 0.05 -- -- --
----------- ------------ ------------ ------------ ------------
Net income.......................................... $ 0.88 $ 0.85 $ 0.57 $ 0.58 $ 0.42
=========== ============ ============ ============ ============
Diluted per share amounts:
Income before cumulative effect of accounting change $ 0.87 $ 0.79 $ 0.56 $ 0.57 $ 0.42
Cumulative effect of accounting change.............. -- 0.05 -- -- --
----------- ------------ ------------ ------------ ------------
Net income.......................................... $ 0.87 $ 0.84 $ 0.56 $ 0.57 $ 0.42
=========== ============ ============ ============ ============
AT OR FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ----------- ---------- -----------
KEY FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (net income divided
by average total assets).............................. 0.85% 0.99% 0.75% 0.83% 0.71%
Return on average equity (net income divided by
average equity)....................................... 12.36 13.61 10.25 11.39 8.86
Average capital to average assets........................ 6.89 7.24 7.27 7.29 8.01
Capital to total assets.................................. 6.84 7.35 7.16 7.28 7.59
Net interest rate spread (average yield on interest-earning
assets less average cost of interest-bearing liabilities) 2.97 3.11 2.97 3.26 3.20
Net interest margin (net interest income as a
percentage of average interest-earning assets) ....... 3.14 3.42 3.35 3.54 3.49
Noninterest expense to average assets ................... 2.00 2.07 2.29 2.25 2.23
Net interest income to noninterest expense............... 1.41x 1.51x 1.36x 1.46x 1.45x
Dividend payout ratio.................................... 36.78 28.57 28.57 28.07 38.10
Nonperforming loans to net loans receivable.............. 1.00 0.52 0.62 0.40 0.71
Nonperforming assets to total assets..................... 0.69 0.49 0.55 0.36 0.63
Allowance for loan losses to nonperforming loans......... 81.54 139.51 115.06 177.97 104.08
Allowance for loan losses to net loans receivable........ 0.82 0.73 0.71 0.72 0.73
Average interest-earning assets to average
interest-bearing liabilities.......................... 1.06x 1.08x 1.08x 1.07x 1.07x
Number of:
Full-service offices.................................. 137 126 118 106 94
Consumer finance offices.............................. 47 49 45 43 36
34
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.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policy involves accounting estimates
that: a) require assumptions about highly uncertain matters, and b) could vary
sufficiently to cause a material effect on the Company's financial condition or
results of operations.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Company recognizes
that losses will be experienced on loans and that the risk of loss will vary
with, among other things, the type of loan, the creditworthiness of the
borrower, general economic conditions and, the quality of the security for the
loan. The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management in its determination of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes a review
of historical losses, peer group comparisons, industry data and economic
conditions. As an integral part of their examination process, regulatory
agencies periodically review the Company's allowance for loan losses and may
require the Company to make additional provisions for estimated losses based
upon judgments different from those of management. In establishing the allowance
for loan losses, loss factors are applied to various pools of outstanding loans.
Loss factors are derived using the Company's historical loss experience and may
be adjusted for factors that affect the collectibility of the portfolio as of
the evaluation date. Commercial loans over a certain dollar amount are evaluated
individually to determine the required allowance for loan losses and to evaluate
for potential impairment of such loans under SFAS 114. Although management
believes that it uses the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and results of operations could be adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect the Company's
financial condition and results of operations. The allowance review methodology
is based on information known at the time of the review. Changes in factors
underlying the assessment could have a material impact on the amount of the
allowance that is necessary and the amount of provision to be charged against
earnings. Such changes could impact future results.
FINANCIAL CONDITION
GENERAL. Total assets increased by $916.8 million, or 21.3%, to $5.222
billion at June 30, 2003 from $4.306 billion at June 30, 2002. This increase was
funded primarily by a $670.4 million increase in deposits, a $206.5 million
increase in borrowed funds and net income of $41.7 million. Total assets
increased by $452.7 million, or 11.8%, to $4.306 billion at June 30, 2002 from
$3.853 billion at June 30, 2001. This increase was funded primarily by a $328.2
million increase in deposits, the issuance of $99.0 million of trust preferred
securities and net income of $40.2 million.
35
The additional funds received in both fiscal years 2003 and 2002 were used to
increase loans receivable and marketable securities.
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS.
Interest-earning deposits in other financial institutions increased by $91.3
million to $244.4 million at June 30, 2003 from $153.1 million at June 30, 2002.
Interest-earning deposits in other financial institutions increased by $108.1
million to $153.1 million at June 30, 2002 from $45.0 million at June 30, 2001.
These increases are due to the Company increasing its liquidity position as part
of its asset and liability management strategy in preparation for rising
interest rates. The balances in these accounts fluctuate daily based on the net
cash flow from the Company's activities.
INVESTMENT SECURITIES. Investment securities increased by $159.8
million, or 51.9%, to $467.4 million at June 30, 2003 from $307.6 million at
June 30, 2002. This increase resulted primarily from the Company investing the
increase in deposits in variable rate securities in anticipation of rising
interest rates. Investment securities increased by $81.0 million, or 35.7%, to
$307.6 million at June 30, 2002 from $226.6 million at June 30, 2001. This
increase resulted from the investment of funds received from the growth in
deposits as well as the proceeds received from the trust preferred offerings,
discussed below.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased by
$382.4 million, or 72.9%, to $907.0 million at June 30, 2003 from $524.6 million
at June 30, 2002. This increase resulted from the Company purchasing variable
rate mortgage-backed securities to position itself for rising interest rates.
Mortgage-backed securities increased by $20.3 million, or 4.0%, to $524.6
million at June 30, 2002 from $504.3 million at June 30, 2001. This increase
resulted from the investment of funds received from the growth in deposits as
well as the proceeds received from the trust preferred offerings.
LOANS RECEIVABLE. Net loans receivable increased by $234.2 million, or
7.8%, to $3.247 billion at June 30, 2003 from $3.013 billion at June 30, 2002.
This small increase, which was low by historic standards, was controlled by the
Company in an effort to control its exposure to rising interest rates.
Contributing to this increase was the acquisition of Prestige Bank, a federal
savings bank, which had $130.6 million of net loans. Net loans receivable
increased by $156.0 million, or 5.5%, to $3.013 billion at June 30, 2002 from
$2.857 billion at June 30, 2001. This increase, which was low by historic
standards, resulted primarily from loan growth across the Company's market area
as well as the purchase of approximately $21.9 million of loans as part of the
acquisition of four retail offices during the 2002 year.
BANK-OWNED LIFE INSURANCE. From June to September 2002 the Company
purchased $60.0 million of insurance on the lives of a certain group of key
employees. The investment returns from such policies will be used to offset the
increase in employee benefit costs such as healthcare. The cash surrender value
of these policies is included in the consolidated statements of financial
condition as other assets and any increase in the cash surrender value is
recorded as noninterest income on the consolidated statements of income. The
appreciation in cash surrender value is currently excluded from taxable income
for federal tax purposes and results in a reduction of the Company's effective
tax rate of approximately 2.0%. As of June 30, 2003, the Company had $63.4
million of bank-owned life insurance, including $3.4 million of appreciation in
value.
DEPOSITS. Deposits increased by $670.4 million, or 18.7%, to $4.264
billion at June 30, 2003 from $3.593 billion at June 30, 2002. This increase was
primarily due to strong internal growth throughout the Company's market area and
the acquisition of Prestige Bank, which had approximately $122.0 million of
deposits. Deposits increased by $328.2 million, or 10.1%, to $3.593 billion at
June 30, 2002 from $3.265 billion at June 30, 2001. This increase was primarily
due to deposit growth throughout the Company's market area as well as the
successful integration and strong growth of de novo offices opened during the
year. In addition, the acquisition of four retail offices during the current
fiscal year contributed deposits of approximately $85.0 million.
BORROWINGS. Borrowings increased by $206.5 million, or 79.7%, to $465.8
million at June 30, 2003 from $259.3 million at June 30, 2002. This increase
resulted from the Company's interest-rate risk management strategy of borrowing
long-term fixed-rate funds from the Federal Home Loan Bank of Pittsburgh
("FHLB") and purchasing floating rate investment securities. Borrowings
decreased by $16.9 million, or 6.1%, to $259.3 million at June 30, 2002 from
$276.2 million at June 30, 2001, as the Company utilized a portion of the
aforementioned deposit growth to replace retail repurchase agreements and reduce
its borrowings from the Federal Home Loan Bank of Pittsburgh.
36
TRUST PREFERRED SECURITIES. During the year ended June 30, 2002,
the Company issued $99.0 million of Trust Preferred Securities in two separate
offerings through its newly formed and wholly owned Delaware statutory business
trusts, Northwest Capital Trust I and Northwest Bancorp Statutory Trust I. The
first involved the issuance of $69.0 million of 8.75% Cumulative Trust Preferred
Securities through a public offering on November 30, 2001 (liquidation amount
$25 per preferred security). This security trades on the Nasdaq National Market
under the symbol NWSBP. The second offering of $30.0 million was sold in a
private transaction to a pooled investment vehicle on December 18, 2001 with a
floating rate of interest equal to the three-month LIBOR plus 3.60%, reset
quarterly. The trust-preferred securities qualify as regulatory Tier 1 capital
and the cash distributions are tax deductible.
SHAREHOLDERS' EQUITY. Shareholders' equity increased by $40.3 million,
or 12.7%, to $356.9 million at June 30, 2003 from $316.6 million at June 30,
2002. This increase was primarily due to net income of $41.7 million, which was
partially offset by the payment of common stock dividends in the amount of $3.9
million. The majority of the remaining net increase was the result of the
Company recording a net unrealized gain in the value of securities available for
sale of $1.6 million. Shareholders' equity increased by $40.9 million, or 14.8%,
to $316.6 million at June 30, 2002 from $275.7 million at June 30, 2001. This
increase was primarily due to net income of $40.2 million, which was partially
offset by the declaration of common stock dividends in the amount of $2.9
million. The remaining net increase was the result of the Company recording a
net unrealized gain in the value of securities available for sale of $3.0
million due to the decrease in short-term market interest rates.
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, borrowed
funds, and trust-preferred securities. 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. Also
contributing to the Company's earnings is noninterest income which consists
primarily of service charges, fees related to insurance and investment
management and trust services, and gains and losses on sale of assets. Interest
income and noninterest income are offset by a provision for loan losses, general
administrative and other expenses, including employee compensation and benefits,
occupancy and equipment costs, as well as by state and federal income tax
expense.
Net income for the fiscal year ended June 30, 2003 was $41.7 million, or
$0.87 per diluted share, an increase of $1.5 million, or 3.8%, from $40.2
million, or $0.84 per diluted share, for the fiscal year ended June 30, 2002.
This increase in net income resulted from increases in net interest income and
noninterest income, partially offset by increases in the provision for loan
losses and noninterest expense. For the fiscal year ended June 30, 2002 net
income was $40.2 million, or $0.84 per diluted share, and was significantly
enhanced by the adoption of Statement of Financial Accounting Standards No. 141,
"Business Combinations." This pronouncement required that the Company's
remaining negative goodwill of approximately $2.2 million be taken into income
as a one-time cumulative change in accounting principle. Excluding the effects
of this one-time item, net income for the year would have been $37.9 million, or
$0.79 per diluted share, an increase of $11.1 million, or 41.7%, from $26.8
million, or $0.56 per diluted share, for the prior fiscal year ended June 30,
2001. This increase in net income resulted primarily from a $15.1 million, or
13.5%, increase in net interest income and a $3.1 million, or 20.7%, increase in
noninterest income partially offset by an increase in noninterest expense of
$2.2 million, or 2.7%, and an increase in the provision for loan losses of $1.0
million, or 18.9%.
INTEREST INCOME. Total interest income increased by $2.4 million, or
0.9%, on a taxable equivalent basis, to $281.5 million for the fiscal year ended
June 30, 2003 from $279.1 million for the fiscal year ended June 30, 2002. This
increase was primarily due to an increase in average interest-earning assets of
$719.5 million. This increase was almost completely offset by a decrease in the
average rate earned on interest earning assets of 1.08%, from 7.23% to 6.15%.
Total interest income increased by $7.1 million, or 2.6%, on a taxable
equivalent basis, to $279.1 million for the fiscal year ended June 30, 2002 from
$272.0 million for the fiscal year ended June 30, 2001. This increase was
primarily due to an increase in average interest earning assets of $434.4
million, or 12.7%, to $3.859 billion from $3.424 billion, which was partially
offset by a decrease in the yield on average interest earning assets to 7.23%
from 7.94%. The increase in average interest earning assets was primarily due to
the continued strong internal growth of the Company's
37
existing funding sources along with the investment of funds received from
acquisitions and new office openings. The yield on average interest earning
assets decreased as a result of the aforementioned growth occurring during a
period of declining market interest rates, the pre-payment and modification of
fixed rate loans in a declining rate environment and the repricing of variable
rate assets at lower interest rates.
Interest income on loans receivable decreased by $867,000, or less than
1%, on a taxable equivalent basis, to $228.8 million for the year ended June 30,
2003 from $229.6 million for the year ended June 30, 2002. This decrease
resulted primarily because the average yield on loans decreased to 7.22% from
7.82% which more than offset the increase in average loans outstanding from
$2.936 billion to $3.169 billion. Interest income on loans receivable increased
by $6.9 million, or 3.1%, on a taxable equivalent basis, to $229.6 million for
the year ended June 30, 2002 from $222.7 million for the year ended June 30,
2001. This increase resulted primarily from an increase in average loans
outstanding of $220.6 million, or 8.1%, to $2.936 billion from $2.715 billion,
which was partially offset by a decrease in the average yield on loans to 7.78%
from 8.20%. Average loans outstanding increased over the past two years because
of strong loan demand throughout the Company's market area as well as the
aforementioned acquisitions. The decrease in average yield resulted primarily
from the repricing of variable rate loans and the refinancing of fixed rate
loans in a declining interest rate environment along with the growth in the
Company's loan portfolio over the past two years at interest rate levels lower
than the existing average portfolio rate.
Interest income on mortgage-backed securities decreased by $230,000, or
less than 1%, to $26.3 million for the year ended June 30, 2003 from $26.5
million for the year ended June 30, 2002. The decrease resulted because the
average rate decreased significantly by 1.55% from 5.18% to 3.63% while the
average balance increased significantly by $212.6 million from $512.0 million to
$724.6 million. The significant increase in average balance resulted from the
Company's efforts to increase its investment portfolio in an effort to protect
its net interest margin in the event that interest rates rise. The decrease in
average rate is a result of the current interest rate environment and the
Company's interest-rate risk strategy of investing in variable rate investments.
Interest income on mortgage-backed securities decreased by $2.7 million, or
9.0%, to $26.5 million for the year ended June 30, 2002 from $29.2 million for
the year ended June 30, 2001. This decrease occurred primarily because of a
decrease in the average yield to 5.18% from 6.58%, which was partially offset by
an increase in the average balance of $69.0 million, or 15.6%, to $512.0 million
from $443.0 million. The average yield on mortgage-backed securities,
approximately 86% of which are variable rate, decreased in response to the
significant reduction in short-term market interest rates during calendar 2001.
The average balance increased primarily as a result of investing the funds from
the aforementioned deposit growth.
Interest income on investment securities increased by $3.4 million, or
18.5%, on a taxable equivalent basis, to $21.7 million for the year ended June
30, 2003 from $18.3 million for the year ended June 30, 2002. This increase
resulted primarily because the average balance of investment securities
increased by $73.9 million, or 27.3%, to $344.5 million from $270.6 million,
which was partially offset by a decrease in the taxable equivalent yield to
6.30% from 6.76%. The increase in the average balance of investment securities
was primarily due to the Company investing funds in assets that are more liquid
as part of the Company managing its balance sheet in the event interest rates
begin to rise. The decrease in the taxable equivalent yield was primarily a
result of the continued decrease in interest rates. Interest income on
investment securities increased by $574,000, or 3.2%, on a taxable equivalent
basis, to $18.3 million for the year ended June 30, 2002 from $17.7 million for
the year ended June 30, 2001. This increase resulted primarily because the
average balance of investment securities increased by $42.1 million, or 18.4%,
to $270.6 million from $228.5 million, which was partially offset by a decrease
in the taxable equivalent yield to 6.76% from 7.76%. The increase in the average
balance of investment securities was primarily due to the investment of funds
generated from the aforementioned deposit growth. The decrease in the taxable
equivalent yield was primarily a result of purchasing investment securities in a
lower yielding rate environment.
Interest income on interest-earning deposits increased by $418,000 or
12.0%, to $3.9 million for the year ended June 30, 2003 from $3.5 million for
the year ended June 30, 2002. The increase is primarily attributed an increase
in the average balance of $192.7 million to $310.5 million from $117.8 million.
This increase was primarily due to the significant volume of cash flow generated
by the loan and investment portfolios which are placed in overnight deposits
until they can be deployed into loans and investments. Interest income on
interest-earning deposits increased by $2.6 million, or 298.2%, to $3.5 million
for the year ended June 30, 2002 from $877,000 for the year ended June 30, 2001.
This increase occurred primarily because the average balance of interest-earning
deposits increased by $101.4 million to $117.8 million from $16.4 million, which
was partially offset by a decrease in the
38
average yield to 2.96% from 5.36%. The increase in average balance is primarily
because the proceeds from the $99.0 million of Trust Preferred Securities issued
by the Company are currently invested in overnight federal funds. Over the past
two years, the Company increased its liquidity position as part of its asset and
liability management strategy to be able to take advantage of future rising
interest rates. The decrease in the average yield is a result of the sharp
decline in short-term market interest rates over the last two years.
INTEREST EXPENSE. Total interest expense decreased by $9.7 million, or
6.5%, to $137.6 million for the fiscal year ended June 30, 2003 from $147.3
million for the year ended June 30, 2002. This decrease was primarily due to a
decrease in the average cost of interest-bearing liabilities to 3.18% from 4.12%
which was partially offset by an increase in the average balance of
interest-bearing liabilities by $758.6 million, or 21.2%, to $4.334 billion from
$3.575 billion. The decrease in the cost of funds resulted from the continued
low level of short-term interest rates and the movement of deposits from
certificates of deposits to savings and money market accounts. The increase in
the average balance of interest-bearing liabilities resulted primarily from
strong deposit growth throughout our market area. Total interest expense
decreased by $10.0 million, or 6.4%, to $147.3 million for the fiscal year ended
June 30, 2002 from $157.3 million for the year ended June 30, 2001. This
decrease was primarily due to a decrease in the average cost of interest-bearing
liabilities to 4.12% from 4.97% which was partially offset by an increase in the
average balance of interest-bearing liabilities by $411.0 million, or 13.0%, to
$3.575 billion from $3.164 billion. The decrease in the cost of funds resulted
from the Company's deposit accounts and borrowing relationships repricing at
much lower rates in response to the significant decreases in short-term market
interest rates during calendar 2001. Partially offsetting the decrease in
short-term interest rates was the effect of the newly issued Trust Preferred
Securities which had a weighted average cost of 7.81%. The increase in the
average balance of interest-bearing liabilities resulted primarily from an
increase of $375.5 million, or 13.0%, in the average balance of deposits,
attributed primarily to the growth of existing offices along with new office
openings and acquisitions. In addition, the Company issued $99.0 million of
Trust Preferred Securities in two separate offerings during the second fiscal
quarter which increased average interest-bearing liabilities outstanding by
$56.7 million. Partially offsetting these increases in average balances was a
decrease in average borrowed funds of $21.3 million, or 7.6%, to $257.3 million
from $278.6 million as the Company replaced retail repurchase agreements and
FHLB borrowings with deposits.
NET INTEREST INCOME. Net interest income increased by $12.0 million, or
9.1%, on a taxable equivalent basis, to $143.9 million for the fiscal year ended
June 30, 2003 compared to $131.9 million for the fiscal year ended June 30,
2002. As previously summarized, this increase in net interest income was
attributable to the increase in average interest earning assets and interest
bearing liabilities, offset by the decrease in net interest spread. Net interest
income increased by $17.2 million, or 15.0%, on a taxable equivalent basis, to
$131.9 million for the fiscal year ended June 30, 2002 compared to $114.7
million for the fiscal year ended June 30, 2001. As previously summarized, this
increase in net interest income was attributable to the significant increase in
net interest earning assets during the year coupled with a favorable increase in
the Company's net interest margin. The Company was also able to improve its net
interest rate spread as the cost of funds on short-term interest bearing
liabilities decreased by more than the yield on interest earning assets in
response to lower market interest rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$2.0 million, or 32.6%, to $8.4 million for the year ended June 30, 2003 from
$6.4 million for the year ended June 30, 2002. Management analyzes the allowance
for loan losses as described in the section "Allowance for Loan Losses." The
provision is recorded to bring this reserve to a level that reflects the risk
inherent in the Company's loan portfolio relative to loan mix, current economic
conditions and historical loss experience. As part of this analysis, management
considered the increase in net charge-offs of $300,000, or 4.9%, to $5.1 million
for the year ended June 30, 2003 from $4.8 million for the year ended June 30,
2002. In addition, management considered the growth in the total loan portfolio
for the current year of approximately $243.8 million, the increase in impaired
loans of $17.3 million and the increase in classified assets of approximately
$10.6 million, or 26.8%, to $50.5 million for the year ended June 30, 2003 from
$39.9 million for the year ended June 30, 2002. Impaired loans increased $17.3
million or 112.8%, to $32.6 million for the year ended June 30, 2003 from $15.3
million for the year ended June 30, 2002. Impaired loans as of June 30, 2003
includes $2.1 million of impaired loans with a related impairment reserve of
$1.3 million. To the best of management's knowledge, management believes that
all known losses as of June 30, 2003 have been recorded. The provision for loan
losses increased by $1.0 million, or 18.9%, to $6.4 million for the year ended
June 30, 2002 from $5.3 million for the year ended June 30, 2001. Management
considered the increase in net charge-offs of $1.5 million, or 46.1%, to $4.8
million for the year ended June 30, 2002 from $3.3 million for the year ended
June 30, 2001. In addition, management considered the growth in the total loan
portfolio for the year of approximately $156 million and the increase in
classified assets of approximately $4.7 million, or 13.2%, to $39.9.
39
NONINTEREST INCOME. Noninterest income increased by $8.5 million, or
47.1%, to $26.7 million for the year ended June 30, 2003 from $18.2 million for
the year ended June 30, 2002. This increase in noninterest income was primarily
related to increases in service charges and fees, income from bank-owned life
insurance and gains on the sale of securities and loans. In addition, trust and
other financial services income increased by $1.3 million, or 55.6%, to $3.5
million for the current year from $2.2 million the prior year as a result of the
Company's acquisition of Boetger & Associates, an actuarial and benefits
consulting firm, on July 1, 2002. Noninterest income increased by $3.1 million,
or 20.7%, to $18.2 million for the fiscal year ended June 30, 2002 from $15.1
million for the fiscal year ended June 30, 2001. This increase in noninterest
income was primarily related to the increase in service charges and fees
associated with the Company's growth both internally and through acquisitions.
In addition, trust and other financial services income increased by $1.8
million, or 382.8%, to $2.2 million for the year from $465,000 the prior year as
a result of the acquisition of Heritage Trust Company in April 2001. Partially
offsetting this increase was a decrease in insurance commission income of
$390,000, or 20.4%, to $1.5 million for the year from $1.9 million the prior
year. This decrease in insurance commissions occurred primarily at Northwest
Consumer Discount Company as a result of a decrease in both loan originations
and outstandings, which is typical in a low interest rate environment also
offsetting the increase in noninterest income was a $400,000 loss due to the
write-down of two trust-preferred securities of other financial institutions
that it maintains in its "held-to-maturity" investment portfolio. This
write-down to market value of these "non-rated" securities occurred primarily
because of deteriorating financial performance of the issuers.
NONINTEREST EXPENSE. Noninterest expense increased by $13.5 million, or
16.0%, to $98.0 million for the year ended June 30, 2003 from $84.5 million for
the year ended June 30, 2002. All major expense categories experienced an
increase in the current year. Compensation and employee benefit expense
increased by $6.3 million, or 13.0%, to $54.4 million; premises and occupancy
costs increased by $1.7 million, or 14.1%, to $13.5 million; processing
expenses, which includes data processing, check processing and ATM processing,
increased by $975,000, or 13.7%, to $8.1 million; and other operating expenses
increased by $2.5 million, or 31.0%, to $10.5 million. These increases were
primarily a result of the significant growth of the Company including the growth
of its retail network of offices, the acquisition of Prestige Bank, the
acquisition of Boetger and Associates as well as the addition of new products
and services. Noninterest expense increased by $2.2 million, or 2.7%, to $84.5
million for the year ended June 30, 2002 from $82.3 million for the year ended
June 30, 2001. All major expense categories, except the amortization expense of
goodwill, experienced an increase in the 2002 year. Compensation and employee
benefit expense increased by $4.6 million, or 10.6%, to $48.2 million; premises
and occupancy costs increased by $1.3 million, or 12.3%, to $11.9 million;
processing expenses, which includes data processing, check processing and ATM
processing, increased by $666,000, or 10.3%, to $7.1 million; and other
operating expenses increased by $1.5 million, or 16.9%, to $10.2 million. These
increases were primarily a result of the significant growth of the Company
including the growth of its retail network of offices, the expansion of its
investment management, trust and brokerage services as well as the addition of
new products and services. The amortization of goodwill was eliminated because
the Company adopted the provisions of SFAS 142 "Goodwill and Other Intangible
Assets", on July 1, 2001. Adoption of this pronouncement eliminated
approximately $8.5 million of goodwill amortization in the 2002 fiscal year.
INCOME TAXES. Income tax expense decreased slightly by $13,000, or less
than 1%, to $16.6 million for the year ended June 30, 2003 from $16.6 million
for the 2003 fiscal year ended June 30, 2002. The decrease is a result of tax
planning initiatives implemented by the Company during the year, including the
purchase of bank-owned life insurance which is currently excluded from federal
taxable income. Income tax expense increased by $3.9 million, or 30.7%, to $16.6
million for the year ended June 30, 2002 from $12.7 million for the year ended
June 30, 2001. This increase was primarily due to an increase in net income
before tax which was partially offset by a decrease in the effective tax rate to
30.4% for the year ended June 30, 2002 from 32.2% for the year ended June 30,
2001. This decrease in effective tax rate was primarily due to an increase in
the Company's portfolio of tax-exempt assets as well as the incorporation of a
Delaware investment company which decreased state income tax expense.
40
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Company's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily averages.
YEARS ENDED JUNE 30
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1)(2) (4)....... $ 3,169,180 $ 228,761 7.22% $ 2,935,629 $ 229,628 7.82%
Mortgage-backed securities (3).... 724,606 26,301 3.63 511,965 26,531 5.18
Investment securities(3)(4)(5).... 344,460 21,686 6.30 270,647 18,307 6.76
FHLB stock........................ 29,649 881 2.97 22,773 1,151 5.05
Interest-earning deposits......... 310,456 3,910 1.26 117,795 3,492 2.96
----------- ---------- ------------ -----------
Total interest-earning assets .... 4,578,351 281,539 6.15 3,858,809 279,109 7.23
Noninterest-earning assets(6)....... 313,319 218,104
----------- ------------
Total assets..................... $ 4,891,670 $ 4,076,913
=========== ============
Interest-bearing liabilities:
Savings accounts.................. $ 812,530 17,701 2.18 $ 564,448 15,473 2.74
NOW accounts...................... 555,515 6,873 1.24 393,616 4,747 1.21
Money market demand accounts...... 498,298 11,403 2.29 314,455 9,019 2.87
Certificate accounts.............. 1,928,082 73,530 3.81 1,988,489 99,765 5.02
Borrowed funds(7)................. 440,211 20,521 4.66 257,276 13,821 5.37
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures.......... 99,000 7,610 7.69 56,736 4,430 7.81
----------- ---------- ------------ -----------
Total interest-bearing liabilities 4,333,636 137,638 3.18 3,575,020 147,255 4.12
Noninterest-bearing liabilities..... 220,855 206,629
----------- ------------
Total liabilities................. 4,554,491 3,781,649
Shareholders' equity................ 337,179 295,264
----------- ------------
Total liabilities and equity...... $ 4,891,670 $ 4,076,913
=========== ============
Net interest income................. $ 143,901 $ 131,854
========== ===========
Net interest rate spread(8)......... 2.97% 3.11%
======== ========
Net interest-earning assets......... $ 244,715 $ 283,789
=========== ============
Net interest margin(9).............. 3.14% 3.42%
======== ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 1.06x 1.08x
=========== ============
YEARS ENDED JUNE 30
------------------------------------
2001
------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1)(2) (4)....... $ 2,715,012 $ 222,740 8.20%
Mortgage-backed securities (3).... 442,985 29,161 6.58
Investment securities(3)(4)(5).... 228,503 17,733 7.76
FHLB stock........................ 21,521 1,506 7.00
Interest-earning deposits......... 16,361 877 5.36
----------- ----------
Total interest-earning assets .... 3,424,382 272,017 7.94
Noninterest-earning assets(6)....... 169,737
-----------
Total assets..................... $ 3,594,119
===========
Interest-bearing liabilities:
Savings accounts.................. $ 425,583 13,501 3.17
NOW accounts...................... 351,883 4,612 1.31
Money market demand accounts...... 187,823 6,929 3.69
Certificate accounts.............. 1,920,171 115,839 6.03
Borrowed funds(7)................. 278,558 16,441 5.90
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures.......... -- -- --
----------- ----------
Total interest-bearing liabilities 3,164,018 157,322 4.97
Noninterest-bearing liabilities..... 168,925
-----------
Total liabilities................. 3,332,943
Shareholders' equity................ 261,176
-----------
Total liabilities and equity...... $ 3,594,119
===========
Net interest income................. $ 114,695
==========
Net interest rate spread(8)......... 2.97%
=========
Net interest-earning assets......... $ 260,364
===========
Net interest margin(9).............. 3.35%
=========
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 1.08x
============
- -----------------------------------------
(1) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(2) Interest income includes accretion/amortization of deferred loan
fees/expenses.
(3) Average balances do not include the effect of unrealized gains or losses
on securities held as available-for-sale.
(4) Interest income on tax-free investment securities and tax-free loans are
presented on a taxable equivalent basis.
(5) Average balances include FNMA and FHLMC stock.
(6) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(7) Average balances include FHLB advances, securities sold under agreements
to repurchase and other borrowings.
(8) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
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) and (iii) the net change.
Changes that cannot be attributed to either rate or volume have been allocated
among both rate and volume.
41
YEARS ENDED JUNE 30,
----------------------------------------------------------------------------
2003 VS. 2002 2002 VS. 2001
----------------------------------------------------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO TOTAL DUE TO TOTAL
-------------------- INCREASE ------------------- INCREASE
RATE VOLUME (DECREASE RATE VOLUME (DECREASE)
--------- ------- ---------- ------- ------- -----------
Interest-earning assets: (IN THOUSANDS)
Loans receivable......................... $ (19,136) $ 18,269 $ (867) $ (11,211) $ 18,099 $ 6,888
Mortgage-backed securities............... (11,249) 11,019 (230) (7,171) 4,541 (2,630)
Investment securities.................... (1,614) 4,993 3,379 (2,697) 3,271 574
FHLB stock............................... (618) 348 (270) (443) 88 (355)
Interest-earning deposits................ (5,293) 5,711 418 (2,822) 5,437 2,615
-------- --------- --------- --------- -------- ----------
Total interest-earning assets.......... (37,910) 40,340 2,430 (24,344) 31,436 7,092
Interest-bearing liabilities:
Savings accounts......................... (4,573) 6,801 2,228 (2,433) 4,405 1,972
NOW accounts............................. 126 2,000 2,126 (412) 547 135
Money market demand accounts............. (2,889) 5,273 2,384 (2,582) 4,672 2,090
Certificate accounts..................... (23,286) (2,949) (26,235) (20,195) 4,121 (16,074)
Borrowed funds........................... (3,128) 9,828 6,700 (1,420) (1,200) (2,620)
Guaranteed preferred beneficial interests
in the Company's junior subordinated
debentures............................. (120) 3,300 3,180 -- 4,430 4,430
--------- --------- --------- --------- -------- ----------
Total interest-bearing liabilities...... (33,870) 24,253 (9,617) (27,042) 16,975 (10,067)
Net change in net interest income...... $ (4,040) $ 16,087 $ 12,047 $ 2,698 $ 14,461 $ 17,159
========== ========= ========= ========= ======== ==========
REGULATORY CAPITAL REQUIREMENTS. The FDIC's capital regulations
establish a minimum 3.0% Tier I leverage capital requirement for the most
highly-rated state-chartered, non-member banks, with an additional cushion of at
least 100 to 200 basis points for all other state-chartered, non-member banks,
which effectively will increase the minimum Tier I leverage ratio for such other
banks to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization, rated composite
1 under the Uniform Financial Institutions Rating System. Leverage or core
capital is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit card relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2003, the
Company's banking subsidiaries each exceeded 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
42
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.
The following table summarizes the Bank's total stockholders' equity,
regulatory capital, total risk-based assets, leverage and risk-based regulatory
ratios at June 30, 2003 and 2002.
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
(DOLLARS IN THOUSANDS)
Total shareholder's equity or GAAP capital ......................... $ 374,314 $ 328,681
Less: unrealized gain on securities available for sale ............. (7,221) (5,699)
Less: nonqualifying intangible assets .............................. (77,836) (71,903)
Leverage capital ................................................... 289,757 251,079
Plus: Tier 2 capital(1) ............................................ 26,552 22,628
Total risk-based capital ........................................... $ 315,809 $ 273,707
=========== ===========
Average total assets for leverage ratio ............................ $ 4,795,103 $ 3,922,717
=========== ===========
Net risk-weighted assets including off-balance sheet items ......... $ 2,553,491 $ 2,210,382
=========== ===========
Leverage capital ratio ............................................. 6.03% 6.40%
Minimum requirement(2) ............................................. 3.00% to 5.00% 3.00% to 5.00%
Risk-based capital ratio ........................................... 12.37% 12.38%
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 following table summarizes Jamestown's total stockholders' equity,
regulatory capital, total risk-based assets, leverage and risk-based regulatory
ratios at June 30, 2003 and 2002.
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
(DOLLARS IN THOUSANDS)
Total shareholder's equity or GAAP capital ......................... $ 19,125 $ 14,234
Less: unrealized gain on securities available for sale ............. (471) (469)
Less: nonqualifying intangible assets .............................. -- --
Leverage capital ................................................... 18,654 13,765
Plus: Tier 2 capital(1) ............................................ 1,551 962
Total risk-based capital ........................................... $ 20,205 $ 14,727
=========== ===========
Average total assets for leverage ratio ............................ $ 335,372 $ 234,509
=========== ===========
Net risk-weighted assets including off-balance sheet items ......... $ 191,552 $ 133,412
=========== ===========
Leverage capital ratio ............................................. 5.56% 5.87%
Minimum requirement(2) ............................................. 3.00% to 5.00% 3.00% to 5.00%
Risk-based capital ratio ........................................... 10.55% 11.04%
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 Bank is also subject to Pennsylvania Department of Banking
("Department") capital guidelines. Although not adopted in regulation form, the
Department utilizes capital standards of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
LIQUIDITY AND CAPITAL RESOURCES. The Bank and Jamestown are 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. Liquidity is quantified through the use of a standard liquidity ratio
of liquid assets to short-term borrowings plus deposits. Using this formula, the
Bank's and Jamestown's liquidity ratios were 28.0% and 51.1%, respectively, as
of June 30, 2003. The Bank and Jamestown adjust their 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.
43
In addition to deposits, 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 $244.4 million
at June 30, 2003. Other assets qualifying for liquidity outstanding at June 30,
2003, amounted to $1.137 billion. 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.
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, 2003, the Company had $430.0 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, 2003, the Company's customers had $163.2 million of unused
lines of credit available and $118.5 million in loan commitments. 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, 2003, totaled
$846.0 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 $453.8 million, $138.8 million and $133.8 million for
the fiscal years ended June 30, 2003, 2002 and 2001, 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, 2003, 2002 and 2001 were $948.8 million, $697.4
million and $450.1 million, respectively. Loan originations for the years ended
June 30, 2003, 2002 and 2001 were $1.301 billion, $974.4 million and $776.0
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, 2003, 2002 and 2001 were $233.9 million, $132.5 million and $61.4 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 as investment securities mature. During recent years, the Company
has utilized cash to increase its portfolio of marketable securities. Cash flow
from the repayment of principal and the maturity of marketable securities for
the fiscal years ended June 30, 2003, 2002 and 2001 were $630.4 million, $193.1
million and $78.0 million, respectively. During the fiscal years ended June 30,
2003, 2002 and 2001, the company utilized cash to purchase marketable securities
in the amount of $1.226 billion, $338.4 million and $183.9 million,
respectively.
The Company utilizes borrowings as a source of liquidity, when
necessary, and as a source of funds for long term investment when market
conditions permit. The net cash flow from the receipt and repayment of
borrowings was a net increase of $151.3 million for the fiscal year ended June
30, 2003, a net decrease of $17.0 million for the fiscal year ended June 30,
2002 and a net increase of $36.3 million for the fiscal year ended June 30,
2001.
44
Other activity with respect to cash flow was the payment of cash
dividends on common stock in the amount of $3.9 million, $2.9 million and $7.6
million for the fiscal years ended June 30 2003, 2002 and 2001, respectively.
The current fiscal year ended June 30, 2003 was the second year in which
Northwest Bancorp, MHC waived its right to receive cash dividends from the
Company. Dividends paid to Northwest Bancorp, MHC during the fiscal years ended
June 30, 2003, 2002 and 2001 were $0, $0 and $5,640,000, respectively. Dividends
waived by Northwest Bancorp, MHC during fiscal years ending June 30, 2003 and
2002 were $11,317,000 and $8,488,000, 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.
IMPACT OF NEW ACCOUNTING STANDARDS
In December, 2002, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS 148
also amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Effective January 1, 2003, the Company adopted the
disclosure provisions of this statement, as required. The Company does not
anticipate a material effect from the provisions of this statement.
In April, 2003, the FASB released Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instrument and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, except for
certain hedging relationships designated after June 30, 2003. All provisions of
this statement should be applied prospectively, unless specified within the
standard. Certain provisions of this statement that relate to Statement 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective dates. The Company does not anticipate that SFAS 149 will have a
material effect on its financial statements.
In May, 2003, the FASB released Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 concludes the first phase of the
FASB's redeliberations of the Exposure Draft, Accounting for Financial
Instruments with Characteristics of Liabilities, Equity or Both. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. It is to be implemented by reporting the
cumulative effect of a change in accounting principle for financial instruments
created before the issuance date of the statement and still existing at the
beginning of the interim period of adoption. The Company does not anticipate a
material effect on its financial statements when this statement is adopted.
SUBSEQUENT TRANSACTIONS
On August 31, 2003, the Company completed its previously announced
acquisition of First Bell Bancorp, Inc., and its subsidiary Bell Federal Savings
and Loan Association of Bellevue (collectively "Bell"). Bell had seven offices
in the Pittsburgh, Pennsylvania area and assets of approximately $850.0 million,
deposits of approximately $600.0 million
45
and shareholders' equity of approximately $70.0 million. Under terms of the
agreement, shareholders received $26.25 in cash for each share of First Bell
Bancorp, resulting in a cash payment of approximately $114.0 million and
intangible assets of approximately $60.0 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 same 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, 2003, such
loans constituted $548.4 million, or 16.8%, 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, 2003, totaled $482.5 million
or 14.8% of the Company's total loan portfolio. Of the Company's $4.892 billion
of interest-earning assets at June 30, 2003, $1.339 billion, or 27.3%, consisted
of assets with adjustable rates of interest. The Company also attempts to reduce
interest rate risk by lengthening the maturities of its interest-bearing
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, 2003, total interest-bearing assets maturing or repricing
within one year exceeded total interest-earning liabilities maturing or
repricing in the same period by $715.6 million, representing a cumulative
positive one-year gap ratio of 13.7%. The Company has an Asset/Liability
Committee with members consisting of various individuals from Senior Management.
This committee meets monthly in an effort to effectively manage the Company's
balance sheet and to monitor activity and set pricing. The Company also 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.
46
The following table sets forth, on an amortized cost basis, the amounts
of interest-earning assets and interest-bearing liabilities outstanding at June
30, 2003, 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 YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS 10-20 YEARS
----------------- ------------ -------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
Rate-sensitive assets:
Interest-earning deposits....... $ 244,437 $ -- $ -- $ -- $ --
Mortgage-backed securities:.....
Fixed........................ 126,893 80,625 19,831 30,306 10,921
Variable..................... 628,385 1,732 1,434 2,597 4,311
Investment securities........... 252,969 31,677 64,755 115,821 2,195
Real estate loans:
Adjustable-rate.............. 31,296 10,027 -- -- --
Fixed-rate................... 592,542 640,429 324,460 381,797 91,039
Home equity lines of credit..... 76,981 -- -- -- --
Education loans................. 90,485 -- -- -- --
Other consumer loans............ 326,105 207,990 -- -- --
Commercial loans................ 289,574 150,510 65,437 2,101 --
------------ ------------ ------------ ------------ ------------
Total rate-sensitive assets.. $ 2,659,667 $ 1,122,990 $ 475,917 $ 532,622 $ 108,466
============ ============ ============ ============ ============
Rate-sensitive liabilities:
Fixed maturity deposits......... $ 845,985 $ 719,909 $ 306,396 $ 40,321 $ 138
Money market deposit accounts... 400,278 -- 92,773 -- 75,113
Savings accounts................ 471,000 80,000 -- -- 369,721
Checking accounts............... 149,057 -- -- -- --
FHLB advances................... 16,253 35,056 43,696 333,912 1,097
Other borrowings................ 31,523 2,830 1,383 -- --
Trust Preferred Securities...... 30,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total rate-sensitive
liabilities............... $ 1,944,096 $ 837,795 $ 444,248 $ 374,233 $ 446,069
============ ============ ============ ============ ============
Interest sensitivity gap per period $ 715,571 $ 285,195 $ 31,669 $ 158,389 $( 337,603)
============ ============ ============ ============ =============
Cumulative interest sensitivity gap $ 715,571 $ 1,000,766 $ 1,032,435 $ 1,190,824 $ 853,221
============ ============ ============ ============ ============
Cumulative interest sensitivity gap
as a percentage of total assets 13.70% 19.16% 19.77% 22.80% 16.34%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities.... 136.81% 135.97% 132.00% 133.08% 121.09%
AMOUNTS MATURING OR REPRICING
---------------------------------
OVER 20 YEARS TOTAL
---------------------------------
(DOLLARS IN THOUSANDS)
Rate-sensitive assets:
Interest-earning deposits....... $ -- $ 244,437
Mortgage-backed securities:.....
Fixed........................ -- 268,576
Variable..................... -- 638,459
Investment securities........... -- 467,417
Real estate loans:
Adjustable-rate.............. -- 41,323
Fixed-rate................... -- 2,030,267
Home equity lines of credit..... -- 76,981
Education loans................. -- 90,485
Other consumer loans............ -- 534,095
Commercial loans................ -- 507,622
------------ ------------
Total rate-sensitive assets.. $ -- $ 4,899,662
============ =============
Rate-sensitive liabilities:
Fixed maturity deposits......... $ -- $ 1,912,749
Money market deposit accounts... -- 568,164
Savings accounts................ -- 920,721
Checking accounts............... 712,865 861,922
FHLB advances................... -- 430,014
Other borrowings................ -- 35,736
Trust Preferred Securities...... 69,000 99,000
------------ ------------
Total rate-sensitive
liabilities.............. $ 781,865 $ 4,828,306
============ ============
Interest sensitivity gap per period $( 781,865) $ 71,356
============= ============
Cumulative interest sensitivity gap $ 71,356 $ 71,356
============ ============
Cumulative interest sensitivity gap
as a percentage of total assets 1.37% 1.37%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities.... 101.48% 101.48%
When assessing the interest rate sensitivity of the company, analysis of
historical trends indicates that loans will prepay at various speeds (or annual
rates) depending on the variance between the weighted average portfolio rates
and the current market rates. In preparing the table above, it has been assumed
market rates will remain constant at current levels and as a result, the
Company's loans will be affected as follows: (i) adjustable-rate mortgage loans
will prepay at an annual rate of 20%; (ii) fixed-rate mortgage loans will prepay
at an annual rate of 20% to 25%; (iii) commercial loans will prepay at an annual
rate of 15%; (iv) consumer loans held by the Bank will prepay at an annual rate
of 25%; and (v) consumer loans held by Northwest Consumer will prepay at an
annual rate of 60% to 65%. In regards to the Company's deposits, it has been
assumed that (i) fixed maturity deposits will not be withdrawn prior to
maturity; (ii) money market accounts will gradually reprice over the next five
years; and (iii) savings accounts and checking accounts will reprice either when
the rates on such accounts reprice as interest rate levels change, or when
deposit holders withdraw funds from such accounts and select other types of
deposit accounts, such as certificate accounts, which may have higher interest
rates. For purposes of this analysis, management has estimated, based on
historical trends, that only $149 million of the Company's checking accounts and
$471 million of the Company's
47
savings accounts are interest sensitive and will reprice in one year or less,
and that the remainder will reprice over longer time periods.
The above assumptions utilized by management are annual percentages
based on remaining balances and should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced by the Company.
Moreover, certain shortcomings are inherent in the analysis presented by the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as some
adjustable-rate loans, have features that restrict changes in interest rates on
a short-term basis and over the life of the asset. Moreover, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
In an effort to assess the market risk, the Company utilizes a
simulation model to determine the effect of immediate incremental increases or
decreases in interest rates on net interest income and the market value of the
Company's equity. Certain assumptions are made regarding loan prepayments and
decay rates of passbook and NOW accounts. Because it is difficult to accurately
project the market reaction of depositors and borrowers, the effects of actual
changes in interest on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming
interest rate risk:
- Net income simulation. Given a parallel shift of 2% in
interest rates, the estimated net income may not
decrease by more than 20% 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 income, return on average
equity, diluted earnings per share and market value of equity. This analysis was
prepared assuming that interest-earning asset levels at June 30, 2003 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, 2003 levels.
MOVEMENTS IN INTEREST RATES FROM
JUNE 30, 2003 RATES
--------------------------------------------------------
INCREASE DECREASE
------------------------- -------------------------
1% 2% 1% 2%
---------- ---------- ---------- ----------
Simulated impact over the next 12 months
compared with June 30, 2003:
Percentage increase/(decrease) in net income.............. 1.0% 13.9% (6.9)% NM
Increase/(decrease) in return on average equity........... 0.2% 1.6% (0.7)% NM
Increase/(decrease) in diluted earnings per share......... $ 0.01 $ 0.13 $ (0.06) NM
Percentage increase/(decrease) in market value of equity.. 7.8% 14.0% (10.2)% NM
NM - Not meaningful
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are included in Part III, Item 14 of this
Form 10-K.
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes made in our internal controls
during the period covered by this report or, to our knowledge, in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
49
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 2003 Annual Meeting of Stockholders
(the "2003 Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The "Proposal I--Election of Directors" section of the Company's 2003
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The "Proposal I--Election of Directors" section of the Company's 2003
Proxy Statement is incorporated herein by reference.
The Company does not have any equity compensation program that was not
approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2003 regarding
equity compensation plans that have been approved by stockholders.
====================================================================================================================================
NUMBER OF SECURITIES TO BE ISSUED UPON NUMBER OF SECURITIES
EQUITY COMPENSATION PLANS EXERCISE OF OUTSTANDING OPTIONS AND WEIGHTED AVERAGE REMAINING AVAILABLE FOR REMAINING
APPROVED BY STOCKHOLDERS RIGHTS EXERCISE PRICE PLAN
- ------------------------------------------------------------------------------------------------------------------------------------
1995 Stock Option Plan 797,646 $ 6.04 --
- ------------------------------------------------------------------------------------------------------------------------------------
2000 Stock Option Plan 385,010 $11.27 409,215
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,182,656 $ 7.74 409,215
====================================================================================================================================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Transactions with Certain Related Persons" section of the Company's
2003 Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition - at June
30, 2003 and 2002
(C) Consolidated Statements of Income - Years ended June 30,
2003, 2002 and 2001
(D) Consolidated Statements of Changes in Shareholders'
Equity - Years ended June 30, 2003, 2002 and 2001
(E) Consolidated Statements of Cash Flows - Years ended June
30, 2003, 2002 and 2001
(F) Notes to Consolidated Financial Statements.
50
(a)(2) Financial Statement Schedules
(b) Reports on Form 8-K
On April 3, 2003 the Company filed a current report on Form 8-K
stating that the Company had adopted a stock issuance plan, whereby,
the Company intended to issue incremental public shares from those
held by Northwest Bancorp, MHC.
On April 22, 2003 the Company filed a current report on Form 8-K
announcing its earnings for the three and nine month periods ended
March 31, 2003.
On April 25, 2003 the Company filed a current report on Form 8-K
announcing that William J. Wagner had been named to succeed John O.
Hanna as Chairman of the Company.
On June 26, 2003 the Company filed a current report on Form 8-K
stating its intention to increase its quarterly dividend, after
approval by the Board of Directors.
(c) Exhibits
(a) (3) Exhibits:
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Hereto
- -------------------------- -------------------------------------------------- --------------------------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Articles of Incorporation and Bylaws ***
4 Instruments defining the rights of security *
holders, including indentures
9 Voting trust agreement None
10.1 Restated Deferred Compensation Plan for Directors *
10.2 Retirement Plan for Outside Directors *
10.3 Northwest Savings Bank Nonqualified Supplemental *
Retirement Plan
10.4 Employee Stock Ownership Plan *
10.5 Employee Severance Compensation Plan *
10.6 Employment Agreement for William J. Wagner **
10.7 Form of Senior Vice President Employment **
Agreement
11 Statement re: computation of per share earnings None
12 Statement re: computation or ratios Not required
16 Letter re: change in certifying accountant None
51
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Hereto
- -------------------------- -------------------------------------------------- --------------------------------------
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant **
22 Published report regarding matters submitted to None
vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
Information from reports furnished to State None
insurance regulatory authorities
31.1 Certification pursuant to Rule 13a-14 of the 31.1
Securities Exchange Act of 1934, as Amended, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, as Amended, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 31.2
32 Certification pursuant to 18 U.S.C. Section 32
1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- -----------
* 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.
** This document has been filed with the Securities and Exchange Commission
on September 30, 2002.
*** Incorporated by referenced to the Definitive Proxy Statement for the
2000 Annual Meeting of Shareholders (File No. 000-23817), filed with the
SEC on November 21, 2000.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST BANCORP, INC.
Date: September 29, 2003 By: /s/ William J. Wagner
----------------------------------------------------
William J. Wagner, Chairman, President and
Chief Executive Officer (Principal
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/ William J. Wagner By: /s/ William W. Harvey
----------------------------------------- ----------------------------------------------------
William J. Wagner, Chairman, President, William W. Harvey, Jr., Senior Vice
Chief Executive Officer and Director President, Finance (Principal
Financial and Accounting Officer)
Date: September 29, 2003 Date: September 29, 2003
By: /s/ John M. Bauer By: /s/ Richard L. Carr
----------------------------------------- ----------------------------------------------------
John M. Bauer, Director Richard L. Carr, Director
Date: September 29, 2003 Date: September 29, 2003
By: /s/ Richard E. McDowell By: /s/ Thomas K. Creal
----------------------------------------- ----------------------------------------------------
Richard E. McDowell, Director Thomas K. Creal, III, Director
Date: September 29, 2003 Date: September 29, 2003
By: /s/ Joseph T. Stadler By: /s/ Joseph F. Long
----------------------------------------- ----------------------------------------------------
Joseph T. Stadler, Director Joseph F. Long, Director
Date: September 29, 2003 Date: September 29, 2003
By: /s/ A. Paul King By: /s/ Robert G. Ferrier
----------------------------------------- ----------------------------------------------------
A. Paul King, Director Robert G. Ferrier, Director
Date: September 29, 2003 Date: September 29, 2003
53
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(With Independent Auditors' Report Thereon)
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, 2003 and 2002 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, 2003.
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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northwest Bancorp,
Inc. and subsidiaries as of June 30, 2003 and 2002 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2003 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the consolidated financial statements, effective July
1, 2001, the Company changed its method of accounting for goodwill and other
intangible assets resulting from business combinations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No.
147, Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9.
/s/ KPMG
Pittsburgh, Pennsylvania
July 16, 2003
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 2003 and 2002
(Amounts in thousands, excluding share data)
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 75,563 64,687
Interest-earning deposits in other financial institutions 244,437 153,067
Marketable securities available-for-sale (amortized cost of
$884,667 and $426,160) 896,631 435,723
Marketable securities held-to-maturity (market value of
$486,922 and $398,891) 477,821 396,503
Loans receivable, net of allowance for estimated
losses of $26,593 and $22,042 3,246,771 3,012,606
Accrued interest receivable 18,714 19,738
Real estate owned, net 3,664 5,157
Federal Home Loan Bank stock, at cost 33,764 23,702
Premises and equipment, net 63,190 55,374
Goodwill 76,206 71,236
Other assets 85,606 67,742
------------ ------------
Total assets $ 5,222,367 4,305,535
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 4,263,556 3,593,122
Borrowed funds 465,750 259,260
Advances by borrowers for taxes and insurance 21,319 21,065
Accrued interest payable 4,101 5,169
Other liabilities 11,709 11,279
Guaranteed preferred beneficial interests in Company's junior
subordinated deferrable interest debentures 99,000 99,000
------------ ------------
Total liabilities 4,865,435 3,988,895
Shareholders' equity
Preferred stock, $0.10 par value. Authorized 10,000,000 shares;
issued and outstanding 0 and 0 shares at June 30, 2003 and
2002, respectively -- --
Common stock, $0.10 par value. Authorized 100,000,000
shares; issued and outstanding 47,693,981 and 47,549,659
shares at June 30, 2003 and 2002, respectively 4,769 4,755
Paid-in capital 72,787 71,838
Retained earnings, substantially restricted 271,599 233,831
Accumulated other comprehensive income, net 7,777 6,216
------------ ------------
Total shareholders' equity 356,932 316,640
------------ ------------
Total liabilities and shareholders' equity $ 5,222,367 4,305,535
============ ============
See accompanying notes to consolidated financial statements.
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
2003 2002 2001
---------- ---------- ----------
Interest income:
Loans receivable $ 227,317 228,333 222,740
Mortgage-backed securities 26,301 26,531 29,161
Taxable investment securities 9,778 9,710 11,630
Tax-free investment securities 8,313 6,434 5,022
Interest-earning deposits 3,910 3,492 877
---------- ---------- ----------
Total interest income 275,619 274,500 269,430
Interest expense:
Deposits 109,507 129,004 140,881
Borrowed funds 28,131 18,251 16,441
---------- ---------- ----------
Total interest expense 137,638 147,255 157,322
---------- ---------- ----------
Net interest income 137,981 127,245 112,108
Provision for loan losses 8,431 6,360 5,347
---------- ---------- ----------
Net interest income after provision
for loan losses 129,550 120,885 106,761
Noninterest income:
Service charges and fees 13,428 11,910 10,030
Trust and other financial services income 3,492 2,245 465
Insurance commission income 1,188 1,523 1,913
Gain on sale of marketable securities, net 1,264 73 368
Gain on sale of loans 1,729 730 478
Gain on sale of real estate owned 493 592 602
Income from bank owned life insurance 3,253 144 --
Writedown of investment securities -- (400) --
Other operating income 1,888 1,356 1,198
---------- ---------- ----------
Total noninterest income 26,735 18,173 15,054
---------- ---------- ----------
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
2003 2002 2001
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits $ 54,445 48,176 43,569
Premises and occupancy costs 13,537 11,869 10,570
Office operations 7,933 7,148 5,639
Processing expenses 8,083 7,108 6,442
Amortization of goodwill -- -- 7,362
Advertising 3,483 2,185 1,631
Other expenses 10,526 8,038 7,126
---------- ---------- ----------
Total noninterest expense 98,007 84,524 82,339
---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting
change 58,278 54,534 39,476
Provision for income taxes:
Federal 14,362 14,507 10,488
State 2,225 2,093 2,211
---------- ---------- ----------
Total provision for income taxes 16,587 16,600 12,699
---------- ---------- ----------
Income before cumulative effect of
accounting change 41,691 37,934 26,777
Cumulative effect of accounting change -- 2,237 --
---------- ---------- ----------
Net income $ 41,691 40,171 26,777
========== ========== ==========
Basic per share amounts:
Income before cumulative effect of accounting
change $ 0.88 0.80 0.57
Cumulative effect of accounting change -- 0.05 --
---------- ---------- ----------
Net income $ 0.88 0.85 0.57
========== ========== ==========
Diluted per share amounts:
Income before cumulative effect of accounting
change $ 0.87 0.79 0.56
Cumulative effect of accounting change -- 0.05 --
---------- ---------- ----------
Net income $ 0.87 0.84 0.56
========== ========== ==========
See accompanying notes to consolidated financial statements.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
ACCUMULATED UNEARNED
OTHER RECOGNITION
COMPREHENSIVE AND TOTAL
COMMON PAID-IN RETAINED INCOME RETENTION SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS), NET PLAN SHARES EQUITY
-------- -------- -------- ------------- ------------ -------------
Balance at June 30, 2000 $ 4,736 70,949 177,371 (5,104) (64) 247,888
Comprehensive income:
Net income -- -- 26,777 -- -- 26,777
Change in unrealized loss on securities,
net of tax and reclassification
adjustment -- -- -- 8,282 -- 8,282
-------- -------- -------- ------------- ------------ -------------
Total comprehensive income -- -- 26,777 8,282 -- 35,059
Exercise of stock options 7 301 -- -- -- 308
Tax benefit for excess of fair value above
cost of stock option plans -- 33 -- -- -- 33
RRP shares released -- -- -- -- 7 7
Dividends declared ($0.16 per share) -- -- (7,582) -- -- (7,582)
-------- -------- -------- ------------- ------------ -------------
Balance at June 30, 2001 4,743 71,283 196,566 3,178 (57) 275,713
Comprehensive income:
Net income -- -- 40,171 -- -- 40,171
Change in unrealized gain on securities,
net of tax and reclassification
adjustment -- -- -- 3,038 -- 3,038
-------- -------- -------- ------------- ------------ -------------
Total comprehensive income -- -- 40,171 3,038 -- 43,209
Exercise of stock options 12 420 -- -- -- 432
Tax benefit for excess of fair value above
cost of stock option plans -- 135 -- -- -- 135
RRP shares released -- -- -- -- 57 57
Dividends declared ($0.24 per share) -- -- (2,906) -- -- (2,906)
-------- -------- -------- ------------- ------------ -------------
Balance at June 30, 2002 4,755 71,838 233,831 6,216 -- 316,640
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
ACCUMULATED UNEARNED
OTHER RECOGNITION
COMPREHENSIVE AND TOTAL
COMMON PAID-IN RETAINED INCOME RETENTION SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS), NET PLAN SHARES EQUITY
-------- -------- -------- ------------- ------------ -------------
Comprehensive income:
Net income $ -- -- 41,691 -- -- 41,691
Change in unrealized gain on securities,
net of tax and reclassification
adjustment -- -- -- 1,561 -- 1,561
-------- -------- -------- ------------- ------------ -------------
Total comprehensive income -- -- 41,691 1,561 -- 43,252
Exercise of stock options 14 728 -- -- -- 742
Tax benefit for excess of fair value above
cost of stock option plans -- 221 -- -- -- 221
Dividends declared ($0.32 per share) -- -- (3,923) -- -- (3,923)
-------- -------- -------- ------------- ------------ -------------
Balance at June 30, 2003 $ 4,769 72,787 271,599 7,777 -- 356,932
======== ======== ======== ============= ============ =============
See accompanying notes to consolidated financial statements.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
2003 2002 2001
----------- -------- --------
Operating activities:
Net income $ 41,691 40,171 26,777
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 8,431 6,360 5,347
Net gain on sales of assets (3,486) (1,395) (1,448)
Amortization of goodwill -- -- 7,362
Net depreciation, amortization and
accretion 10,217 5,892 5,449
Decrease (increase) in other assets 830 (2,457) (6,080)
Increase (decrease) in other liabilities (2,049) 1,998 3,011
Net accretion of discounts on marketable
securities 898 (2,491) (1,839)
Noncash compensation expense related
to stock benefit plans -- 57 7
Noncash writedown of investment securities -- 400 --
Noncash cumulative effect of change in
accounting principle -- (2,237) --
Other -- -- 35
----------- -------- --------
Net cash provided by operating
activities 56,532 46,298 38,621
Investing activities:
Purchase of marketable securities held-to-maturity (478,871) (129,047) (126,420)
Purchase of marketable securities available-for-sale (747,081) (209,396) (57,488)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 413,988 72,144 25,662
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 216,394 120,960 52,291
Proceeds from sales of marketable securities
available-for-sale 84,134 50,720 15,477
Purchase of bank-owned life insurance (10,000) (50,000) --
Loan originations (1,301,263) (974,413) (776,001)
Proceeds from loan maturities and principal
reductions 948,781 697,427 450,120
Proceeds from loan sales 233,868 132,464 61,365
Purchase of Federal Home Loan Bank stock (7,422) (1,203) (1,230)
Proceeds from sale of real estate owned 5,317 3,514 2,429
Sale of real estate owned for investment (87) 32 97
Purchase of premises and equipment (11,422) (13,184) (8,166)
Acquisitions, net of cash received 2,619 53,443 59,681
----------- -------- --------
Net cash used by investing activities (651,045) (246,539) (302,183)
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2003, 2002, and 2001
(Amounts in thousands, excluding share data)
2003 2002 2001
----------- -------- --------
Financing activities:
Increase in deposits, net $ 548,680 243,222 240,490
Proceeds from long-term borrowings 180,000 1,041 116,963
Repayments of long-term borrowings (40,776) (17,294) (31,217)
Net decrease in short-term borrowings 12,056 (699) (49,475)
Increase (decrease) in advances by borrowers
for taxes and insurance (20) (767) (725)
Proceeds from issuance of guaranteed preferred
beneficial interests in Company's junior
subordinated debentures -- 99,000 --
Cash dividends paid (3,923) (2,906) (7,582)
Proceeds from options exercised 742 432 308
----------- -------- --------
Net cash provided by financing activities 696,759 322,029 268,762
----------- -------- --------
Net increase in cash and
cash equivalents 102,246 121,788 5,200
=========== ======== ========
Cash and cash equivalents at beginning of period 217,754 95,966 90,766
Net increase in cash and cash equivalents 102,246 121,788 5,200
----------- -------- --------
Cash and cash equivalents at end of period $ 320,000 217,754 95,966
=========== ======== ========
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of
$94,376, $104,426, and $106,708, respectively) $ 139,031 145,806 155,954
Income taxes 15,399 14,689 15,808
Noncash activities:
Business acquisitions:
Fair value of assets acquired $ 176,885 32,566 79,253
Net cash received 2,619 53,443 59,681
----------- -------- --------
Liabilities assumed $ 179,504 86,009 138,934
=========== ======== ========
Loan foreclosures and repossessions $ 3,053 4,382 3,380
Sale of real estate owned financed by the Company $ 815 838 315
See accompanying notes to consolidated financial statements.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
The Northwest group of companies is organized in a two-tier
holding company structure. Northwest Bancorp, MHC is a federal
mutual holding company and, at June 30, 2003, owned
approximately 74% of the outstanding shares of common stock of
Northwest Bancorp, Inc. (the Company) and 100% of Leeds
Federal Savings Bank. The current fiscal year ended June 30,
2003 was the second fiscal year in which Northwest Bancorp,
MHC applied for, and received, approval from the Office of
Thrift Supervision (OTS), its primary regulator, to waive its
right to receive cash dividends from the Company. Dividends
waived by Northwest Bancorp, MHC during fiscal 2003 and 2002
were $11,317,000 and $8,488,000. Dividends paid to Northwest
Bancorp, MHC during fiscal 2001 were $5,640,000.
Northwest Bancorp, Inc., which is headquartered in Warren,
Pennsylvania, is a federal savings and loan 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 124 banking locations
in Pennsylvania, 8 banking locations in southwestern New York
and 5 banking locations in eastern Ohio. The Company and its
subsidiaries also offer loan products through 45 consumer
finance offices in Pennsylvania and two in New York.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after
elimination of all 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
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
specific identification basis. The Company held no securities
classified as trading at June 30, 2003 and 2002.
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 reversed 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, 2003 and 2002.
Loan fees and certain direct loan origination costs are
deferred, and the net deferred fee or cost is then recognized
using the level-yield method over the contractual life of the
loan as an adjustment to interest income.
(f) PROVISION FOR LOAN LOSSES
Provisions for estimated loan losses and the amount of the
allowance for loan losses are based on losses inherent in the
loan portfolio that are both probable and reasonably estimable
at the date of the financial statements. Management believes,
to the best of their knowledge, that all known losses as of
the balance sheet dates have been recorded.
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.
Nonaccrual loans are deemed to be impaired unless fully
secured with liquid collateral. 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. Larger 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.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
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 reversed.
(g) REAL ESTATE OWNED
Real estate owned is comprised of property acquired through
foreclosure or voluntarily conveyed by delinquent borrowers.
These assets are recorded on the date acquired at the lower of
the related loan balance or market value of the collateral, as
determined by an appraisal. Subsequently, foreclosed assets
are valued at the lower of the amount recorded at acquisition
date or the current market value, less estimated disposition
costs. Gains or losses realized from the disposition of such
property are credited or charged to noninterest income.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is accumulated on
a straight-line basis over the estimated useful lives of the
related assets. Estimated lives range from three to thirty
years. Amortization of leasehold improvements is accumulated
on a straight-line basis over the terms of the related leases
or the useful lives of the related assets, whichever is
shorter.
(i) GOODWILL
On July 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 141, Business Combinations (SFAS
141). SFAS 141 addresses financial accounting and reporting
for business combinations and supercedes APB Opinion No. 16,
Business Combinations and FASB Statement No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises.
This statement effectively eliminates the use of the pooling
method of accounting for business combinations and states that
all business combinations in the scope of this statement are
to be accounted for using only the purchase method. The
provisions of this statement apply to all business
combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001 or later. Because the
Company has generally used purchase accounting for its
business combinations, this statement has not materially
changed its ongoing operation.
Also on July 1, 2001, and concurrently with SFAS 141, the
Company adopted SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets
and supercedes APB Opinion No. 17, Intangible Assets. This
statement addresses how goodwill and other intangible assets
should be accounted for after they have been initially
recognized in the financial statements. This statement, among
other things, eliminates the regularly scheduled amortization
of goodwill and replaces this method with a two-step process
for testing the impairment of goodwill on at least an annual
basis. This approach could cause more volatility in the
Company's reported net income because impairment losses, if
any, could occur irregularly and in varying amounts.
Immediately upon adoption, and as required by SFAS 141 and
SFAS 142, existing negative goodwill of $2.2 million was
recorded in income as the
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
cumulative effect of a change in accounting principle and the
Company stopped amortizing the remaining goodwill of $65.5
million. There was no tax effect associated with the
recognition of negative goodwill of $2.2 million as such
amount arose in a tax-free reorganization. In addition, the
Company performed its initial impairment analysis of goodwill
and other intangible assets noting that the estimated fair
value exceeded the carrying amount.
On October 1, 2002, the FASB issued SFAS 147 Acquisitions of
Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9 (SFAS
147). The standard clarifies that a branch acquisition that
meets the definition of a business should be accounted for as
a business combination. Otherwise the transaction should be
accounted for as an acquisition of net assets that does
result in the recognition of goodwill. The effect of the
standard is to exclude a branch acquisition that meets the
definition of a business from the scope of SFAS 72 and
include it within the scope of SFAS 141. Upon adoption,
intangible assets arising from branch acquisitions that meet
the definition of a business combination shall be reclassified
to goodwill at the later of the date of acquisition or the
date SFAS 142 was applied in its entirety. The reclassified
goodwill shall be accounted for and reported prospectively as
goodwill under SFAS 142. In addition, because the Company
adopted SFAS 142 prior to October 1, 2002, all previously
issued interim and annual financial statements that reflect
amortization of the reclassified goodwill shall be restated to
remove that amortization expense. As a result of adopting SFAS
147, the Company reclassified approximately $60.0 million of
unidentifiable intangible assets to goodwill as of June 30,
2002 (such amount was $54.0 million as of July 1, 2001).
Adopting SFAS 147 also increased net income for the year ended
June 30, 2002 by $4.3 million.
As prescribed by Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets (SFAS 142),
goodwill is no longer amortized to expense, but rather is
tested for impairment periodically. At least annually,
management reviews goodwill and evaluates events or changes in
circumstances that may indicate impairment in the carrying
amount of goodwill. The impairment test is performed at the
reporting unit level. If the sum of the expected undiscounted
future cash flows of the reporting unit is less than the
carrying amount of the reporting unit's net assets, an
impairment loss will be recognized. Impairment, if any, is
measured on a discounted future cash flow basis.
Prior to the adoption of SFAS 142 on July 1, 2001, the Company
amortized goodwill using the straight-line method over the
estimated benefit period of ten years.
(j) CORE DEPOSIT INTANGIBLES
The Company engages an independent third party of experts to
analyze and prepare a core deposit study for all acquisitions.
This study reflects the cumulative present value benefit of
acquiring deposits versus an alternative source of funding.
Based upon this analysis, the amount of the premium related to
the core deposits of the business purchased is calculated
along with the estimated life of the acquired deposits. The
core deposit intangible, which is recorded in other assets, is
then amortized to expense on an accelerated basis over an
approximate life of 7 years.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(k) BANK-OWNED LIFE INSURANCE
The Company owns insurance on the lives of a certain group of
key employees. The policies were purchased to help offset the
cost of increases in various fringe benefit plans including
healthcare. The cash surrender value of these policies is
included in other assets on the consolidated statements of
financial condition and any increases in the cash surrender
value are recorded as noninterest income on the consolidated
statements of income. In the event of the death of an insured
individual under these policies, the Company would receive a
death benefit which would be recorded as noninterest income.
(l) DEPOSITS
Interest on deposits is accrued and charged to expense monthly
and is paid or credited in accordance with the terms of the
accounts.
(m) 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 Pensions.
(n) 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.
(o) STOCK OPTIONS
The Company accounts for its stock-based compensation plans
under the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" utilizing the intrinsic-value-based
method, on which APB No. 25 is based. In accordance with SFAS
No. 123 "Accounting for Stock-based Compensation," the Company
previously adopted the disclosure only option and continues to
apply the provisions of APB No. 25, for financial statement
purposes. The Black-Scholes option pricing model was used to
determine the fair value estimates for disclosure purposes.
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:
2003 2002 2001
-------- -------- --------
Net income:
As reported $ 41,691 40,171 26,777
Deduct total stock-based
employee compensation
expense determined under
fair-value-based method for
all awards, net of tax (249) (118) (189)
Pro forma 41,442 40,053 26,588
Basic earnings per share:
As reported 0.88 0.85 0.57
Pro forma 0.87 0.84 0.56
Diluted earnings per share:
As reported 0.87 0.84 0.56
Pro forma 0.86 0.83 0.56
There was no stock-based employee compensation expense
included in reported net income during fiscal 2003, 2002, and
2001.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) dividend yields
ranging from 1.60% to 2.50%; (2) expected volatility of 18% to
33%; (3) risk-free interest rates ranging from 4.50% to 6.50%;
and (4) expected lives of seven years. The effects of applying
SFAS No. 123 may not be representative of the effects on
reported net income in future years.
(p) SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," requires that public business enterprises report
financial and descriptive information about their reportable
operating segments. Based on the guidance provided by this
statement, the Company has identified two reportable segments,
Community Banks and Consumer Finance.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(q) OFF-BALANCE-SHEET INSTRUMENTS
In the normal course of business, the Company extends credit
in the form of loan 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.
(r) USE OF ESTIMATES
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States
of America, 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.
(s) RECLASSIFICATION OF PRIOR YEARS' STATEMENTS
Certain items previously reported have been reclassified to
conform with the current year's reporting format.
(2) CHARTER CONVERSION
Effective June 29, 2001, the Company converted its charter from a
Pennsylvania corporation to a Federal corporation as approved by its
stockholders at the annual meeting held on December 20, 2000. In
addition, Northwest Bancorp, MHC, the Company's Mutual Holding Company,
also changed its charter from a Pennsylvania mutual holding company to
a federal mutual holding company. As a result of this conversion, the
primary regulators also changed from the current Board of Governors of
the Federal Reserve System and the Pennsylvania Department of Banking
to the Office of Thrift Supervision. The Company's savings bank
subsidiaries, however, have both retained their state savings bank
charters.
(3) BUSINESS COMBINATIONS
On September 13, 2002, the Company completed the acquisition of
Prestige Bancorp, Inc. and its subsidiary Prestige Bank, both
headquartered in Pleasant Hills, Pennsylvania. The acquisition included
four offices, assets of approximately $180.0 million and deposits of
approximately $122.0 million. The cash acquisition amount of
approximately $14.6 million created intangible assets of approximately
$6.0 million.
On December 14, 2001, the Company completed the acquisition of two
retail banking offices located in the Pennsylvania communities of
Johnsonburg and Emporium. The acquisition included approximately $55
million in deposits, $22 million in loans and the related fixed assets.
This cash purchase created intangible assets of approximately $5.7
million.
On November 16, 2001, the Company completed the acquisition of a retail
banking office in Ebensburg, Pennsylvania. The acquisition included
approximately $26 million of deposits and the related fixed assets.
This cash purchase created intangible assets of approximately $2.0
million.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
On April 27, 2001, the Company completed the acquisition of Heritage
Trust Company, an independent investment management and trust company
headquartered in Erie, Pennsylvania. With assets under management of
almost $300 million, Heritage provides a wide range of investment
management and trust services for individuals, businesses and
charitable organizations throughout northwestern Pennsylvania. The
transaction was accounted for using the purchase method of accounting
resulting in goodwill of approximately $4,170,000.
On January 31, 2001, the Company completed the acquisition of a retail
brokerage office in Warren, Pennsylvania, through its subsidiary,
Northwest Financial Services, Inc. The new office provides financial
consulting and full service brokerage to the greater Warren area. The
transaction was accounted for using the purchase method of accounting
resulting in goodwill of approximately $50,000.
On November 3, 2000, the Company completed the acquisition of nine
retail banking offices in Potter and Tioga counties in north central
Pennsylvania. The acquisition included approximately $138 million in
deposits and $57 million in consumer and business loans, along with the
related fixed assets. The transaction was accounted for using the
purchase method of accounting and resulted in recording an intangible
asset of approximately $15,325,000.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(4) MARKETABLE SECURITIES
Marketable securities at June 30, 2003, 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 five years - ten years $ 14,985 1,532 -- 16,517
Due after ten years 2,047 645 -- 2,692
Municipal securities:
Due in one year - five years 90 4 -- 94
Due after ten years 65,466 3,345 -- 68,811
Corporate debt issues:
Due after ten years 45,831 2,311 (475) 47,667
Mortgage-backed securities:
Fixed rate pass-through 8,297 120 -- 8,417
Variable rate pass-through 57,988 219 (45) 58,162
Fixed rate CMO 24,651 185 (240) 24,596
Variable rate CMO 258,466 1,566 (66) 259,966
-------- -------- -------- -------
Total mortgage-
backed securities 349,402 2,090 (351) 351,141
-------- -------- -------- -------
Total securities
held-to-maturity $477,821 9,927 (826) 486,922
======== ======== ======== =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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 five years - ten years $ 11,900 1,800 -- 13,700
Due after ten years 30,000 3 -- 30,003
Equity securities and mutual funds 140,603 3,768 (311) 144,060
Municipal securities:
Due in five years - ten years 459 23 -- 482
Due after ten years 119,337 3,846 (11) 123,172
Corporate debt issues:
Due in one year or less 1,006 11 -- 1,017
Due in one year - five years 7,089 287 -- 7,376
Due in five years - ten years 15,000 -- -- 15,000
Due after ten years 4,407 -- (219) 4,188
Mortgage-backed securities:
Fixed rate pass-through 43,449 2,030 (18) 45,461
Variable rate pass-through 128,528 960 (2) 129,486
Fixed rate CMO 191,911 135 (1,879) 190,167
Variable rate CMO 190,978 1,578 (37) 192,519
----------- ------ ------ -------
Total mortgage-
backed securities 554,866 4,703 (1,936) 557,633
----------- ------ ------ -------
Total securities
available-for-sale $ 884,667 14,441 (2,477) 896,631
=========== ====== ====== =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 2002, 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 five years - ten years $ 10,013 676 -- 10,689
Due after ten years 8,027 1,440 -- 9,467
Municipal securities:
Due in one year - five years 100 6 -- 106
Due after ten years 65,174 1,166 (687) 65,653
Corporate debt issues:
Due in one year - five years 1,019 31 -- 1,050
Due after ten years 48,310 275 (1,471) 47,114
Mortgage-backed securities:
Fixed rate pass-through 3,663 64 (14) 3,713
Variable rate pass-through 52,278 186 (38) 52,426
Fixed rate CMO 8,318 176 -- 8,494
Variable rate CMO 199,601 1,668 (1,090) 200,179
--------- ----- ------ -------
Total mortgage-
backed securities 263,860 2,094 (1,142) 264,812
--------- ----- ------ -------
Total securities
held-to-maturity $ 396,503 5,688 (3,300) 398,891
========= ===== ====== =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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 $ 5,501 38 -- 5,539
Due in one year - five years 10,974 92 -- 11,066
Due in five years - ten years 7,129 218 -- 7,347
Equity securities and mutual funds 68,228 3,500 (42) 71,686
Municipal securities:
Due in one year or less 100 3 -- 103
Due in five years - ten years 498 5 -- 503
Due after ten years 77,144 678 (417) 77,405
Corporate debt issues:
Due after ten years 1,476 -- (143) 1,333
Mortgage-backed securities:
Fixed rate pass-through 61,502 2,472 -- 63,974
Variable rate pass-through 12,958 89 (7) 13,040
Fixed rate CMO 35,315 395 (25) 35,685
Variable rate CMO 145,335 2,882 (175) 148,042
--------- ----- ---- -------
Total mortgage-
backed securities 255,110 5,838 (207) 260,741
--------- ----- ---- -------
Total securities
available-for-sale $ 426,160 10,372 (809) 435,723
========= ====== ==== =======
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations.
The following table presents information regarding the issuers and the
carrying value of the Company's mortgage-backed securities:
JUNE 30
-------------------
2003 2002
---------- -------
Mortgage-backed securities:
FNMA $ 355,722 193,814
GNMA 58,834 76,412
FHLMC 426,753 235,344
Other (nonagency) 65,726 19,031
---------- -------
Total mortgage-backed securities $ 907,035 524,601
========== =======
Marketable securities having a carrying value of $375,720,000 at
June 30, 2003, were pledged under collateral agreements. During
the fiscal years 2003, 2002, and 2001, the Company sold marketable
securities
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
classified as available-for-sale for $84,134,000, $50,720,000, and
$15,477,000, respectively. The gross pretax profit on these sales was
$1,264,000, $73,000, and $368,000. In addition, during fiscal 2002, the
Company experienced other than temporary declines in its
held-to-maturity portfolio resulting in write-downs of $400,000.
(5) LOANS RECEIVABLE
Loans receivable at June 30, 2003 and 2002, are summarized in the table
below:
2003 2002
----------- ----------
Real estate loans:
One- to four-family $ 2,112,811 2,056,105
Multi-family and commercial 377,507 304,456
----------- ---------
Total real estate loans 2,490,318 2,360,561
Consumer loans:
Automobile 118,120 117,240
Home improvement 378,341 293,865
Education 90,485 84,817
Loans on savings accounts 7,132 7,733
Other 107,483 113,570
----------- ---------
Total consumer loans 701,561 617,225
Commercial loans 130,115 95,968
----------- ---------
Total loans receivable, gross 3,321,994 3,073,754
Deferred loan fees (7,409) (2,938)
Allowance for loan losses (26,593) (22,042)
Undisbursed loan proceeds (real estate loans) (41,221) (36,168)
----------- ---------
Total loans receivable, net $ 3,246,771 3,012,606
=========== =========
At June 30, 2003 and 2002, the Company serviced loans for others
approximating $327,243,000 and $214,269,000, 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, 2003, approximately 93% of the Company's 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, 2003, include $590,725,000 of adjustable
rate loans and $2,731,269,000 of fixed rate loans.
Loans receivable at June 30, 2002, include $455,485,000 of adjustable
rate loans and $2,618,269,000 of fixed rate loans.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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, 2003 and 2002, are presented in the following table:
JUNE 30
-------------------
2003 2002
---------- -------
Loan commitments $ 118,465 74,581
Undisbursed lines of credit 163,235 116,559
Standby letters of credit 12,589 6,058
---------- -------
$ 294,289 197,198
========== =======
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, 2003, for fixed rate
loans, are $92,480,000. The interest rates on these commitments
approximate market rates at June 30, 2003. Outstanding mortgage loan
commitments at June 30, 2003, for adjustable rate loans are
$25,985,000. The fair value of these commitments are affected by
fluctuations in market rates of interest.
The Company issues standby letters of credit in the normal course of
business. Standby letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. Standby
letters of credit generally are contingent upon the failure of the
customer to perform according to the terms of the underlying contract
with the third party. The Company is required to perform under a
standby letter of credit when drawn upon by the guaranteed third party
in the case of nonperformance by the Company's customer. The credit
risk associated with standby letters of credit is essentially the same
as that involved in extending loans to customers and is subject to
normal credit policies. Collateral may be obtained based on
management's credit assessment of the customer. The maximum potential
amount of future payments the Company could be required to make under
these standby letters of credit is $12,589,000, of which $10,823,000 is
fully collateralized. No liability has been recognized by the Company
for the obligations and there are no recourse provisions that would
enable the Company to recover any amounts from third parties.
The Company automatically places loans on nonaccrual status when they
become more than 90 days contractually delinquent or when the paying
capacity of the obligor becomes inadequate to meet the requirements of
the contract. When a loan is placed on nonaccrual, all previously
accrued and uncollected interest is reversed against current period
interest income. Nonaccrual loans at June 30, 2003, 2002 and 2001 were
$32,613,000, $15,800,000 and $17,635,000, respectively.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
A loan is considered to be impaired, as defined by SFAS No. 114
"Accounting by Creditors for Impairment of a Loan," when, based on
current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of
the loan agreement including both contractual principal and interest
payments. The amount of impairment is required to be measured using one
of the three methods prescribed by SFAS 114: (1) the present value of
expected future cash flows discounted at the loan's effective interest
rate; (2) the loan's observable market price; or (3) the fair value of
collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than the recorded investment in the loan a
specific reserve is allocated for the impairment. Impaired loans at
June 30, 2003, 2002, and 2001 were $32,613,000, $15,327,000, and
$16,043,000, respectively. Average impaired loans during fiscal 2003,
2002, and 2001 were $23,749,000, $16,152,000 and $12,979,000,
respectively.
There were no commitments to lend additional funds to debtors on
nonaccrual status.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of June 30, 2003 and 2002, is presented
in the following table:
JUNE 30
--------------------------------
2003 2002
-------- ------
Investment securities $ 3,433 3,764
Mortgage-backed securities 2,738 1,987
Loans receivable 12,543 13,987
-------- ------
$ 18,714 19,738
======== ======
(7) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for losses on loans receivable for the years
ended June 30, 2003, 2002, and 2001, are presented in the following
table:
2003 2002 2001
-------- ------ ------
Balance, beginning of fiscal year $ 22,042 20,290 18,260
Provision 8,431 6,360 5,347
Charge-offs (5,778) (5,313) (3,862)
Acquisitions 1,201 237 --
Recoveries 697 468 545
-------- ------ ------
Balance, end of fiscal year $ 26,593 22,042 20,290
======== ====== ======
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. Management believes, to the best of their knowledge, that
all known losses as of the balance sheet dates have been recorded.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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 5% of borrowings outstanding plus 0.5% of
unused FHLB borrowing capacity.
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2003 and 2002, are summarized by
major classification in the following table:
2003 2002
--------- ------
Land and land improvements $ 5,883 5,329
Office buildings and improvements 54,105 47,574
Furniture, fixtures, and equipment 41,445 35,704
Leasehold improvements 5,900 5,303
--------- ------
Total, at cost 107,333 93,910
Less accumulated depreciation and amortization 44,143 38,536
--------- ------
Premises and equipment, net $ 63,190 55,374
========= ======
Depreciation and amortization expense for the years ended June 30,
2003, 2002, and 2001, was $6,014,000, $5,339,000, and $4,517,000,
respectively.
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 2021. Minimum annual rentals by fiscal year
are summarized in the following table:
2004 $ 2,061
2005 1,639
2006 1,320
2007 1,017
2008 907
Thereafter 3,501
--------
$ 10,445
========
Rental expense for the years ended June 30, 2003, 2002, and 2001, was
$2,698,000, $2,535,000, and $2,237,000, respectively.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(10) GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the effect on net income and earnings per
share as a result of adopting SFAS Nos. 141, 142, and 147.
FOR THE FISCAL YEAR ENDED JUNE 30
-----------------------------------
2003 2002 2001
-------- ------ ------
Reported net income $ 41,691 40,171 26,777
Deduct: Cumulative effect of accounting change -- 2,237 --
Add back: Goodwill amortization -- -- 7,362
-------- ------ ------
Adjusted net income $ 41,691 37,934 34,139
======== ====== ======
Basic earnings per share:
Reported net income $ 0.88 0.85 0.57
Deduct: Cumulative effect of accounting change -- 0.05 --
Add back: Goodwill amortization -- -- 0.15
-------- ------ ------
Adjusted net income $ 0.88 0.80 0.72
======== ====== ======
Diluted earnings per share:
Reported net income $ 0.87 0.84 0.56
Deduct: Cumulative effect of accounting change -- 0.05 --
Add back: Goodwill amortization -- -- 0.15
-------- ------ ------
Adjusted net income $ 0.87 0.79 0.71
======== ====== ======
The following table provides information for intangible assets subject
to amortization for the periods indicated:
JUNE 30
-------------------------------
2003 2002
-------- ------
Amortized intangible assets:
Core deposit intangibles - gross $ 4,401 3,655
Less: accumulated amortization (1,621) (1,052)
-------- ------
Core deposit intangibles - net $ 2,780 2,603
======== ======
Customer contract intangible assets - gross 831 --
Less: accumulated amortization (81) --
-------- ------
Customer contract intangible assets - net $ 750 --
======== ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
The following information shows the actual aggregate amortization
expense for the current and prior fiscal years as well as the estimated
aggregate amortization expense, based upon current levels of intangible
assets, for each of the five succeeding fiscal years:
For the fiscal year ended 6/30/01 $ 165
For the fiscal year ended 6/30/02 283
For the fiscal year ended 6/30/03 650
For the fiscal year ended 6/30/04 649
For the fiscal year ended 6/30/05 631
For the fiscal year ended 6/30/06 553
For the fiscal year ended 6/30/07 438
For the fiscal year ended 6/30/08 328
The following table provides information for the changes in the
carrying amount of goodwill:
COMMUNITY CONSUMER
BANKS FINANCE TOTAL
--------- -------- ------
Balance at June 30, 2001 $ 62,409 893 63,302
Goodwill acquired 5,697 -- 5,697
Amortization -- -- --
Impairment losses -- -- --
Negative goodwill write-off 2,237 -- 2,237
--------- --- ------
Balance at June 30, 2002 70,343 893 71,236
Goodwill acquired 4,970 -- 4,970
Amortization -- -- --
Impairment losses -- -- --
--------- --- ------
Balance at June 30, 2003 $ 75,313 893 76,206
========= === ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(11) DEPOSITS
Deposit balances at June 30, 2003 and 2002, are shown in the table
below:
2003 2002
------------ ---------
Savings accounts $ 920,721 698,336
Interest-bearing checking accounts 670,935 429,339
Noninterest-bearing checking accounts 190,987 176,243
Money market deposit accounts 568,164 407,974
Certificates of deposit 1,912,749 1,881,230
------------ ---------
$ 4,263,556 3,593,122
============ =========
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $297,514,000 at June 30,
2003 and $289,430,000 at June 30, 2002. Generally, deposits in excess
of $100,000 are not federally insured.
The following table summarizes the contractual maturity of the
certificate accounts:
2003 2002
----------- ---------
Due within 12 months $ 845,985 1,046,783
Due between 12 and 24 months 432,694 344,372
Due between 24 and 36 months 287,215 197,850
Due between 36 and 48 months 196,404 179,749
Due between 48 and 60 months 109,992 103,500
After 60 months 40,459 8,976
----------- ---------
$ 1,912,749 1,881,230
=========== =========
The following table summarizes the interest expense incurred on the
respective deposits:
YEARS ENDED JUNE 30
---------------------------------------
2003 2002 2001
--------- ------- -------
Savings accounts $ 17,701 15,473 13,501
Interest-bearing checking accounts 6,873 4,747 4,612
Money market deposit accounts 11,403 9,019 6,929
Certificate accounts 73,530 99,765 115,839
--------- ------- -------
$ 109,507 129,004 140,881
========= ======= =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(12) BORROWED FUNDS
Borrowed funds at June 30, 2003 and 2002, are presented in the
following table:
2003 2002
---------------------------- --------------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- -------- ---------- -------
Term notes payable to the FHLB of Pittsburgh:
Due within one year $ 16,253 % 6.62 $ 34,200 % 6.04
Due between one and two years 35,056 6.15 150 4.00
Due between two and three years -- -- 25,000 6.05
Due between four and five years 43,696 3.97 -- --
Due between five and ten years 333,912 4.80 175,000 5.13
Due between ten and twenty years 1,097 2.76 1,150 2.75
----------- ----------
430,014 4.89 235,500 5.35
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh -- -- -- --
Other borrowings due between
one and two years 180 10.00 180 10.00
Investor notes payable, due
various dates through 2006 6,330 4.98 6,414 6.53
Securities sold under agreement to
repurchase, due within one year 29,226 1.27 17,166 1.98
----------- ----------
Total borrowed funds $ 465,750 $ 259,260
=========== ==========
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 $175,000,000 maturing on December 7,
2003. 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.
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 2003 and 2002 was $20,791,000
and $12,798,000, respectively. The maximum amount of security
repurchase agreements outstanding during fiscal years 2003 and 2002 was
$29,226,000 and $19,568,000, respectively.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(13) INCOME TAXES
Total income tax was allocated for the years ended June 30, 2003, 2002,
and 2001, as follows:
2003 2002 2001
-------- ------ ------
Income before income taxes $ 16,587 16,600 12,699
Shareholders' equity for unrealized gain/
(loss) on securities available-for-sale 840 1,636 4,455
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (221) (135) (33)
-------- ------ ------
$ 17,206 18,101 17,121
======== ====== ======
Income tax expense (benefit) applicable to income before taxes consists
of:
YEARS ENDED JUNE 30
-----------------------------
2003 2002 2001
-------- ------ ------
Current $ 14,685 14,981 14,002
Deferred 1,902 1,619 (1,303)
-------- ------ ------
$ 16,587 16,600 12,699
======== ====== ======
The significant components of deferred income tax expense (benefit) are
as follows:
JUNE 30
-----------------------------
2003 2002 2001
------- ------- -------
Deferred income tax expense (benefit) $ 1,686 1,058 (1,473)
NOL carryforward 216 561 170
------- ------- -------
$ 1,902 1,619 (1,303)
======= ======= =======
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
---------------------------
2003 2002 2001
------ ------ ------
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (5.4) (4.9) (5.5)
State income tax, net of federal benefit 2.5 2.5 3.6
Valuation allowance -- (0.9) (0.3)
Bank-owned life insurance (2.0) (0.1) --
Other (1.6) (1.2) (0.6)
------ ---- ----
Effective tax rate % 28.5 30.4 32.2
====== ==== ====
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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, 2003 and 2002, are presented below:
2003 2002
------- -------
Deferred tax assets:
Deferred fee income $ 953 837
Deferred compensation expense 1,645 1,372
Net operating loss carryforwards 604 36
Bad debts 7,030 5,173
Accrued postretirement benefit cost 392 406
Pension expense -- 567
Intangible asset -- 34
Purchase accounting 738 --
Other 1,206 998
------- -------
12,568 9,423
Valuation allowance -- --
------- -------
12,568 9,423
Deferred tax liabilities:
Marketable securities available-for-sale 4,187 3,347
Pension expense 307 --
Intangible asset 1,837 --
Mortgage servicing rights 835 707
Fixed assets 801 507
Other 530 187
------- -------
8,497 4,748
------- -------
Net deferred tax asset $ 4,071 4,675
======= =======
The Company has determined that no valuation allowance is necessary for
the 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. During fiscal year 2002, the Company reversed
the $492,000 valuation allowance related to Jamestown Savings Bank's
net operating loss carry forwards.
Under provisions of the Internal Revenue Code, Northwest has
approximately $1,250,000 of federal net operating losses and
approximately $2,400,000 of state net operating losses which expire in
years 2005 through 2020. These net operating losses were acquired as
part of the Prestige Bank acquisition.
(14) SHAREHOLDERS' EQUITY
Retained earnings are partially restricted in connection with
regulations related to the insurance of savings accounts, which require
Northwest and Jamestown 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.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
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, 2003, includes approximately
$28,293,000 representing such bad debt deductions for which no deferred
income taxes have been provided.
(15) EARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing net
income available to common shareholders by the weighted-average number
of common shares outstanding for the period, without considering common
stock equivalents or any dilutive items. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. There were no anti-dilutive options in any
period presented in the table below. The computation of basic and
diluted earnings per share follows:
YEARS ENDED JUNE 30
--------------------------
2003 2002 2001
------- ------ ------
Reported net income $41,691 40,171 26,777
Deduct cumulative effect of accounting change -- 2,237 --
------- ------ ------
Net income before cumulative effect of accounting change $41,691 37,934 26,777
======= ====== ======
Weighted average common shares outstanding 47,626 47,479 47,392
Common stock equivalents due to effect of stock
options 531 511 357
------- ------ ------
Total weighted average common
shares and equivalents 48,157 47,990 47,749
======= ====== ======
Basic earnings per share:
Reported net income $ 0.88 0.85 0.57
Deduct cumulative effect of accounting change -- 0.05 --
------- ------ ------
Net income before cumulative effect of accounting change $ 0.88 0.80 0.57
======= ====== ======
Diluted earnings per share:
Reported net income $ 0.87 0.84 0.56
Deduct cumulative effect of accounting change -- 0.05 --
------- ------ ------
Net income before cumulative effect of accounting change $ 0.87 0.79 0.56
======= ====== ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(16) 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 $3,945,000,
$3,186,000, and $2,652,000 for the years ended June 30, 2003,
2002, and 2001, respectively. Net periodic pension cost for
the Company's defined benefit pension plans consist of the
following:
YEARS ENDED JUNE 30
-----------------------------
2003 2002 2001
------- ------- -------
Service cost $ 2,526 2,195 1,913
Interest cost 2,207 1,940 1,693
Expected return on plan assets (1,910) (1,800) (1,698)
Net amortization and deferral 349 109 60
------- ------ ------
Net periodic pension cost $ 3,172 2,444 1,968
======= ====== ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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, 2003 and 2002:
2003 2002
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 33,220 27,953
Service cost 2,526 2,195
Interest cost 2,207 1,940
Actuarial loss 4,665 1,758
Benefits paid (1,046) (626)
-------- --------
Benefit obligation at end of year $ 41,572 33,220
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year 24,245 22,736
Actual return on plan assets (1,042) (67)
Employer contribution 5,991 2,202
Benefits paid (1,046) (626)
-------- --------
Fair value of plan assets at end of year $ 28,148 24,245
======== ========
Funded status (13,424) (8,975)
Unrecognized transition asset (177) (218)
Unrecognized prior service cost 423 518
Unrecognized net actuarial loss 14,401 7,079
Adjustment to recognize minimum liability (171) (158)
-------- --------
Accrued benefit cost $ 1,052 (1,754)
======== ========
The following table sets forth the assumptions used to develop
the preceding information for the net pension cost and
benefits:
YEARS ENDED JUNE 30
--------------------------
2003 2002 2001
------ ---- ----
Discount rate % 6.25 6.75 7.00
Expected long-term rate of return on assets 8.00 8.00 8.00
Rate increase in compensation levels 4.00 4.00 4.00
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
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
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
------------------------------
2003 2002 2001
------ ------- ---------
Service cost $ 2 7 12
Interest cost 64 56 65
Recognized actuarial gain 2 (178) (48)
------ ---- ---
Net periodic (benefit) cost $ 68 (115) 29
====== ==== ===
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, 2003 and 2002:
2003 2002
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 993 837
Service cost 2 7
Interest cost 64 56
Actuarial (gain) loss 310 214
Benefits paid (108) (121)
------- ----
Benefit obligation at end of year 1,261 993
Fair value of plan assets at end of year -- --
------- ----
Funded status (1,261) (993)
Unrecognized net actuarial (gain) loss 438 130
------- ----
Accrued benefit cost $ (823) (863)
======= ====
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
YEARS ENDED JUNE 30
------------------------------------
2003 2002 2001
---------- -------- ---------
Discount rate % 6.25 6.75 7.00
Monthly cost of healthcare insurance
per beneficiary $ 198.61 141.41 117.31
Annual rate of increase in healthcare costs % 4.00 4.00 4.00
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
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 $6,974, in the aggregate, and
the accumulated postretirement benefit obligation for healthcare
benefits would increase by $111,591.
(c) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has continued its previously 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 now makes annual
contributions to the ESOP at the board's discretion based on current
year earnings. Company shares are then purchased periodically in the
open market and allocated to employee accounts based on each employee's
relative portion of the Company's total eligible compensation recorded
during the year.
ESOP compensation expense was $1,123,000, $871,000, and $831,000 for
the fiscal years ended June 30, 2003, 2002, and 2001, respectively.
(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 was 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 were
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, was recognized pro
rata over the five years during which the shares were payable. The
recipients are 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.
(e) STOCK OPTION PLAN
On November 21, 1995, the Company adopted the 1995 Stock Option Plan.
The objective of the Stock Option Plan is to provide an additional
performance incentive to the Company's employees and outside directors.
The Stock Option Plan authorized the grant of stock options and limited
stock appreciation rights for 1,380,000 shares of the Company's common
stock. On December 20, 1995, the Company granted 242,000 nonstatutory
stock options to its outside directors at an exercise price of $5.58
per share (95% of the Company's common stock fair market value per
share at grant date) and 923,200 incentive stock options to employees
at an exercise price of $5.875 per share. On March 22, 1996, the
Company granted 122,800 incentive stock options to employees at an
exercise price of $5.625 per share. On December 16, 1998, the Company
granted 15,086 incentive stock options to employees at an exercise
price of $9.875 per share. On October 20, 1999, the Company granted
2,000 nonstatutory stock options to an outside director and 57,700
incentive stock options to employees at an exercise price of $7.812 per
share. On June 21, 2000, the Company granted the remaining 17,214
incentive stock options as well as 786 previously forfeited options at
an exercise
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
price of $6.875 per share. On November 17, 2000, the Company adopted
the 2000 Stock Option Plan. This Plan authorized the grant of stock
options and limited stock rights for 800,000 shares of the Company's
common stock. On October 17, 2001 the Company granted 84,000
nonstatutory stock options to its outside directors and 143,845
incentive stock options to employees at an exercise price of $9.780 per
share. On August 21, 2002, the Company granted 162,940 incentive stock
options to employees at an exercise price of $13.30 per share. These
options are exercisable for a period of ten years from the grant date
with each recipient vesting at the rate of 20% per year commencing with
the grant date.
The following table summarizes the activity in the Company's Option
Plan during the periods ending June 30:
2003 2002 2001
------------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- ------------ --------- -------- --------- --------
Balance at
beginning of year 1,177,880 $ 6.74 1,124,316 $ 6.00 1,219,931 $ 5.98
Granted 162,940 13.30(a) 227,845 9.78(a) -- --
Exercised (156,792) 5.94 (166,569) 5.86 (84,815) 5.68
Forfeited (1,372) 7.82 (7,712) 8.15 (10,800) 5.91
--------- --------- ---------
Balance at end of year 1,182,656 7.74 1,177,880 6.74 1,124,316 6.00
========= ========= =========
Exercisable at end
of year 902,983 6.64 966,861 6.14 1,075,056 5.92
(a) Weighted average fair value of options at grant date: $3.76 and
$2.48, respectively.
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE PRICE PRICE PRICE PRICE PRICE TOTAL
$ 5.580 $ 5.625 $ 5.875 $ 6.875 $ 7.812 $ 9.780 $ 9.875 $ 13.302 $ 7.744
-------- -------- -------- -------- -------- -------- -------- -------- ---------
Options outstanding:
Number of options 70,700 44,737 606,283 12,660 48,480 222,318 14,786 162,692 1,182,656
Weighted average
remaining contract
life (years) 2.50 2.75 2.50 7.00 6.25 8.25 5.50 9.00 4.72
Options exercisable:
Number of options 70,700 44,737 606,283 9,440 36,972 87,725 14,786 32,340 902,983
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure about Fair Value of Financial Instruments
(SFAS 107), requires disclosure of fair value information about
financial instruments whether or not recognized in the consolidated
statement of financial condition. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The carrying
amounts reported in the consolidated statement of financial condition
approximate fair value for the following financial instruments: cash on
hand and interest-earning deposits in other institutions, accrued
interest receivable, accrued interest payable, and marketable
securities available-for-sale.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
The following table sets forth the carrying amount and estimated fair
value of the Company's financial instruments included in the
consolidated statement of financial condition as of June 30:
2003 2002
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- --------- -----------
Financial assets:
Cash and equivalents $ 320,000 320,000 217,754 217,754
Securities available-for-sale 896,631 896,631 435,723 435,723
Securities held-to-maturity 477,821 486,922 396,503 398,891
Loans receivable 3,280,773 3,458,496 3,037,586 3,148,632
Accrued interest receivable 18,714 18,714 19,738 19,738
FHLB stock 33,764 33,764 23,702 23,702
---------- --------- --------- ---------
Total financial assets $5,027,703 5,214,527 4,131,006 4,244,440
========== ========= ========= =========
Financial liabilities:
Savings and checking accounts $2,350,807 2,350,807 1,711,892 1,711,892
Time deposits 1,912,749 1,974,350 1,881,230 1,898,987
Borrowed funds 465,750 500,449 259,260 270,360
Trust-preferred securities 99,000 109,293 99,000 101,496
Accrued interest payable 4,101 4,101 5,169 5,169
---------- --------- --------- ---------
Total financial liabilities $4,832,407 4,939,000 3,956,551 3,987,904
========== ========= ========= =========
Fair value estimates are made at a point-in-time, based on relevant
market data and information about the instrument. The following methods
and assumptions were used in estimating the fair value of financial
instruments at June 30, 2003 and 2002.
MARKETABLE SECURITIES
Estimated market values are based on quoted market prices, dealer
quotes and prices obtained from independent pricing services. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar securities. Refer to note 4 of the
consolidated financial statements for the detail of type of investment
securities.
LOANS RECEIVABLE
Loans with comparable characteristics including collateral and
repricing structures were segregated for valuation purposes. Each loan
pool was separately valued utilizing a discounted cash flow analysis.
Projected monthly cash flows were discounted to present value using a
market rate for comparable loans. Characteristics of comparable loans
included remaining term, coupon interest and estimated prepayment
speeds. Delinquent loans were evaluated separately given the impact
delinquency has on the projected future cash flow of the loan and the
approximate discount or market rate.
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
DEPOSIT LIABILITIES
SFAS 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits, money market and other
savings accounts, to be the amount payable on demand. Although market
premiums paid for depository institutions reflect an additional value
for these low-cost deposits, SFAS 107 prohibits adjusting fair value
for any value expected to be derived from retaining those deposits for
a future period of time or from the benefit that results from the
ability to fund interest-earning assets with these deposit liabilities.
The fair value estimates of deposit liabilities do not include the
benefit that results from the low-cost funding provided by these
deposits compared to the cost of borrowing funds in the market. Fair
values for time deposits are estimated using a discounted cash flow
calculation that applies contractual cost currently being offered in
the 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.
BORROWED FUNDS
The fixed rate advances were valued by comparing their contractual cost
to the prevailing market cost.
TRUST-PREFERRED SECURITIES
The fair value of fixed rate trust-preferred securities is based on the
closing trade price on the last day of the fiscal year. The variable
rate trust-preferred securities are calculated using the discounted
cash flows at the prevailing rate of interest.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
These financial instruments generally are not sold or traded, and
estimated fair values are not readily available. However, the fair
value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar
agreements. Commitments to extend credit issued by the Company are
generally short-term in nature and, if drawn upon, are issued under
current market terms. At June 30, 2003 and 2002, there was no
significant unrealized appreciation or depreciation on these financial
instruments.
(18) REGULATORY CAPITAL REQUIREMENTS
The Company's banking subsidiaries are subject to various regulatory
capital requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
the regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices must be met. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company's banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). At June
30, 2003 and 2002, the Company's banking subsidiaries exceed all
capital adequacy requirements to which they are subject. At June 30,
2003, the maximum amount available for dividend payments by Northwest
to the Company, while maintaining its "well Capitalized" status, is
approximately $60.5 million.
As of June 13, 2003, 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 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.
The actual, required and well capitalized levels as of June 30, 2003
and 2002, are as follows: (in thousands)
JUNE 30, 2003
-----------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
--------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
Total capital (to risk
weighted assets):
Northwest Savings Bank $315,809 12.37% $204,279 8.00% $255,349 10.00%
Jamestown Savings Bank 20,205 10.55 15,324 8.00 19,155 10.00
Tier I capital (to risk
weighted assets):
Northwest Savings Bank 289,257 11.33 102,140 4.00 153,209 6.00
Jamestown Savings Bank 18,654 9.74 7,662 4.00 11,493 6.00
Tier I capital (leverage)
(to average assets):
Northwest Savings Bank 289,257 6.03 143,853 3.00* 239,755 5.00
Jamestown Savings Bank 18,654 5.56 10,061 3.00* 16,769 5.00
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
JUNE 30, 2002
-------------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
----------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
Total capital (to risk
weighted assets):
Northwest Savings Bank $273,707 12.38% $176,932 8.00% $221,165 10.00%
Jamestown Savings Bank 14,727 11.04 10,673 8.00 13,341 10.00
Tier I capital (to risk
weighted assets):
Northwest Savings Bank 251,079 11.35 88,466 4.00 132,699 6.00
Jamestown Savings Bank 13,765 10.32 5,336 4.00 8,004 6.00
Tier I capital (leverage)
(to average assets):
Northwest Savings Bank 251,079 6.40 117,617 3.00* 196,029 5.00
Jamestown Savings Bank 13,765 5.87 7,035 3.00* 11,725 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, 2003, the Company had not been advised of any additional
requirements in this regard.
(19) CONTINGENT LIABILITIES
The Company and its subsidiaries are subject to a number of asserted
and unasserted claims encountered in the normal course of business.
Management believes that the aggregate liability, if any, that may
result from such potential litigation will not have a material adverse
effect on the Company's financial statements.
(20) COMPONENTS OF COMPREHENSIVE INCOME
For the year ended June 30:
2003 2002 2001
------- ------- -------
Unrealized gain (loss) on marketable
securities available-for-sale $ 3,101 4,674 12,502
Tax (expense) benefit (1,085) (1,636) (4,373)
Reclassification adjustment for (gains) losses
included in net income, net of tax
of $245, $-0-, and $(82), respectively (455) -- 153
------- ------ ------
Net unrealized gain (loss) $ 1,561 3,038 8,282
======= ====== ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(21) NORTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
Statements of Financial Condition
(Amounts in thousands)
JUNE 30
--------------------
2003 2002
-------- --------
ASSETS
Cash and cash equivalents $ 42,390 63,871
Marketable securities available-for-sale 2,299 4,231
Investment in bank subsidiaries 396,501 345,977
Loan receivable - Northwest Bancorp, MHC 12,000 --
Goodwill 2,138 2,138
Other assets 3,874 4,133
-------- -------
Total assets $459,202 420,350
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures payable $102,062 102,062
Other liabilities 208 1,648
-------- -------
Total liabilities 102,270 103,710
Shareholders' equity 356,932 316,640
-------- -------
Total liabilities and shareholders' equity $459,202 420,350
======== =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
Statements of Income
YEARS ENDED JUNE 30
----------------------------------
2003 2002 2001
-------- -------- --------
Income:
Interest income $ 2,042 1,313 212
Dividends from bank subsidiary -- 1,250 6,500
Undistributed earnings from equity
investment in bank subsidiaries 45,778 41,204 20,367
Gain on sale of marketable securities
available-for-sale -- -- 142
Other income 9 8 351
-------- ------- ------
Total income 47,829 43,775 27,572
Expense:
Compensation and benefits 272 302 462
Goodwill amortization -- -- 304
Other expense 319 77 29
Interest expense 7,845 4,567 --
-------- ------- ------
Total expense 8,436 4,946 795
-------- ------- ------
Net income before taxes 39,393 38,829 26,777
Federal and state income taxes (2,298) (1,342) --
-------- ------- ------
Net income $ 41,691 40,171 26,777
======== ======= ======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
YEARS ENDED JUNE 30
----------------------------------
2003 2002 2001
-------- -------- --------
Operating activities:
Net income $ 41,691 40,171 26,777
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Undistributed earnings of subsidiaries (45,778) (41,204) (20,367)
Depreciation and amortization -- (1) 304
Noncash compensation expense related to
stock benefit plans -- 57 7
Gain on sale of marketable securities
available-for-sale -- -- (142)
Net change in other assets and liabilities (1,145) (2,071) 432
-------- ------- -------
Net cash provided (used) by operating
activities (5,232) (3,048) 7,011
-------- ------- -------
Investing activities:
Additional investment in subsidiaries (3,000) (33,062) --
Loan to Northwest Bancorp, MHC (12,000) -- --
Purchase of marketable securities available-for-sale -- -- (69)
Proceeds from sale of marketable securities
available-for-sale -- -- 538
Proceeds from maturity of marketable securities
available-for-sale 1,932 -- --
-------- ------- -------
Net cash provided (used) by investing
activities (13,068) (33,062) 469
-------- ------- -------
Financing activities:
Cash dividends paid (3,923) (2,906) (7,582)
Proceeds from issuance of debentures -- 102,062 --
Proceeds from options exercised 742 432 308
-------- ------- -------
Net cash provided (used) by financing
activities (3,181) 99,588 (7,274)
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents $(21,481) 63,478 206
======== ======= =======
Cash and cash equivalents at beginning of year 63,871 393 187
Net increase (decrease) in cash and cash equivalents (21,481) 63,478 206
-------- ------- -------
Cash and cash equivalents at end of year $ 42,390 63,871 393
======== ======= =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
(22) BUSINESS SEGMENTS
The Company has identified two reportable business segments based upon
the operating approach currently used by management. The Community
Banks segment includes the two savings bank subsidiaries of the
Company, Northwest Savings Bank and Jamestown Savings Bank, as well as
the subsidiaries of the savings banks that provide similar products and
services. The savings banks are community-oriented institutions that
offer a full array of traditional deposit and loan products, including
mortgage, consumer and commercial loans, as well as trust, investment
management, actuarial and benefit plan administration, and brokerage
services typically offered by a full service financial institution. The
Consumer Finance segment is comprised of Northwest Consumer Discount
Company, a subsidiary of Northwest Savings Bank, that operates
forty-seven offices in Pennsylvania and two in southwestern New York.
This subsidiary compliments the services of the banks by offering
personal installment loans for a variety of consumer and real estate
products. This activity is funded primarily through its intercompany
borrowing relationship with Northwest Savings Bank. Net income is
primarily used by management to measure segment performance. The
following tables provide financial information for these segments. The
All Other column represents the parent company, other nonbank
subsidiaries, and elimination entries necessary to reconcile to the
consolidated amounts presented in the financial statements.
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
JUNE 30, 2003 ($ IN 000's) BANKS FINANCE OTHER* CONSOLIDATED
- ------------------------------- ---------- -------- ------ ------------
External interest income $ 257,330 17,858 431 275,619
Intersegment interest income 5,278 -- (5,278) --
Interest expense 130,986 5,705 947 137,638
Provision for loan losses 5,860 2,571 -- 8,431
Noninterest income 25,625 1,110 -- 26,735
Noninterest expense 89,846 7,570 591 98,007
Income tax expense (benefit) 17,589 1,296 (2,298) 16,587
Net income 43,952 1,826 (4,087) 41,691
Total assets 5,078,418 123,747 20,202 5,222,367
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
JUNE 30, 2002 ($ IN 000's) BANKS FINANCE OTHER* CONSOLIDATED
- -------------------------------------- ---------- --------- -------- ------------
External interest income $ 255,014 19,274 212 274,500
Intersegment interest income 6,710 -- (6,710) --
Interest expense 143,273 7,234 (3,252) 147,255
Provision for loan losses 3,180 3,180 -- 6,360
Noninterest income 16,921 1,252 -- 18,173
Noninterest expense 77,125 7,020 379 84,524
Income tax expense (benefit) 16,657 1,285 (1,342) 16,600
Cumulative effect of accounting change 2,237 -- -- 2,237
Net income 40,647 1,807 (2,283) 40,171
Total assets 4,165,605 129,608 10,322 4,305,535
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
JUNE 30, 2001 ($ IN 000's) BANKS FINANCE OTHER* CONSOLIDATED
- ------------------------------- ---------- ---------- ------- ------------
External interest income $ 248,957 20,253 220 269,430
Intersegment interest income 10,605 -- (10,605) --
Interest expense 156,850 11,084 (10,612) 157,322
Provision for loan losses 2,580 2,767 -- 5,347
Noninterest income 13,336 1,576 142 15,054
Noninterest expense 75,467 6,413 459 82,339
Income tax expense (benefit) 11,988 711 -- 12,699
Net income 26,013 854 (90) 26,777
Total assets 3,709,253 137,151 6,427 3,852,831
* Eliminations consist of intercompany interest income and interest
expense.
(23) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED
SECURITIES)
The Company has two Delaware statutory business trusts, Northwest
Capital Trust I and Northwest Bancorp Statutory Trust I (the Trusts).
These trusts exist solely to issue preferred securities to third
parties for cash, issue common securities to the Company in exchange
for capitalization of the trusts, invest the proceeds from the sale of
trust securities in an equivalent amount of debentures of the Company
and engage in other activities that are incidental to those previously
listed. Northwest Capital Trust I issued
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
2,760,000 of 8.75% Cumulative Trust Preferred Securities through a
public offering on November 30, 2001 (liquidation value of $25 per
preferred security or $69,000,000) with a stated maturity of December
31, 2031. The securities trade on the Nasdaq Stock Market under the
symbol NWSBP. Northwest Bancorp Statutory Trust I issued 30,000
Cumulative Trust Preferred Securities in a private transaction to a
pooled investment vehicle on December 18, 2001 (liquidation value of
$1,000 per preferred security or $30,000,000) with a stated maturity of
December 23, 2031 and a floating rate of interest, which is reset
quarterly, equal to three month LIBOR plus 3.60%. The trust-preferred
securities qualify as regulatory Tier I capital and the cash
distributions are tax deductible. For financial reporting purposes, the
trusts are included in the consolidated financial statements of the
Company. The trust-preferred securities are presented as a separate
line item on the Consolidated Statements of Financial Condition and the
distributions are included with interest expense on borrowed funds on
the Consolidated Statements of Income.
The Trusts have invested the proceeds of the offerings in junior
subordinated deferrable interest debentures issued by the Company. The
structure of these debentures mirrors the structure of the
trust-preferred securities. Northwest Capital Trust I holds $71,134,025
of the Company's 8.75% junior subordinated debentures, due December 31,
2031. Northwest Bancorp Statutory Trust I holds $30,928,000 of the
Company's junior subordinated debentures due December 23, 2031 with a
floating rate of interest, reset quarterly, of three-month LIBOR plus
3.60%. The rate in effect at June 30, 2003 was 4.66%. These
subordinated debentures are the sole assets of the trusts.
Cash distributions on the trust securities are made on a quarterly
basis to the extent interest on the debentures is received by the
trusts. The Company has the right to defer payment of interest on the
subordinated debentures at any time, or from time-to-time, for periods
not exceeding five years. If interest payments on the subordinated
debentures are deferred, the distributions on the trust securities also
are deferred. Interest on the subordinated debentures and distributions
on the trust securities is cumulative. The Company obligation
constitutes a full, irrevocable and unconditional guarantee on a
subordinated basis of the obligations of the trust under the preferred
securities.
The trusts must redeem the preferred securities when the debentures are
paid at maturity or upon an earlier redemption of the debentures to the
extent the debentures are redeemed. All or part of the debentures may
be redeemed at any time on or after December 31, 2006. Also, the
debentures may be redeemed at any time if existing laws or regulations,
or the interpretation or application of these laws or regulations,
change, causing:
- the interest on the debentures to no longer be deductible by
the Company for federal income tax purposes;
- the trust to become subject to federal income tax or to
certain other taxes or governmental charges;
- the trust to register as an investment company;
- the Company to become subject to capital requirements and the
preferred securities do not qualify as Tier I capital.
In addition, all or part of the debentures may be redeemed on or after
December 31, 2003 and prior to December 31, 2006 in the unlikely event
of a mutual-to-stock conversion of Northwest Bancorp, MHC (the
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(All dollar amounts presented in tables are in thousands)
mutual holding company of Northwest Bancorp, Inc.). Under such
circumstances the debentures may be redeemed at a price equal to the
accrued and unpaid interest to the date fixed for redemption plus 107%
of the principal amount, thereof, and holders of the preferred
securities will receive 107% of the liquidation amount of $25 per
preferred security plus any accrued and unpaid distributions to the
date of redemption.
The Company may, at any time, dissolve the trust and distribute the
debentures to the trust security holders, subject to receipt of any
required regulatory approval(s).
(24) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE
30 31 31 30
--------- -------- --------- ---------
(In thousands, except per share data)
Fiscal 2003:
Interest income $69,011 70,170 69,267 67,171
Interest expense 34,620 35,856 33,810 33,352
------- ------- ------- -------
Net interest income 34,391 34,314 35,457 33,819
Provision for loan losses 1,659 2,157 2,295 2,320
Noninterest income 6,672 7,008 6,403 6,652
Noninterest expenses 22,767 24,459 25,417 25,364
------- ------- ------- -------
Income before
income taxes 16,637 14,706 14,148 12,787
Income taxes 5,194 4,418 3,952 3,023
------- ------- ------- -------
Net income $11,443 10,288 10,196 9,764
======= ======= ======= =======
Basic earnings per share $ 0.24 0.22 0.21 0.20
======= ======= ======= =======
Diluted earnings per share $ 0.24 0.21 0.21 0.20
======= ======= ======= =======
(Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, 2002, and 2001
(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 2002:
Interest income $ 69,657 68,657 68,783 67,403
Interest expense 41,202 38,231 34,491 33,331
--------- -------- ------ ------
Net interest income 28,455 30,426 34,292 34,072
Provision for loan losses 1,418 1,473 1,664 1,805
Noninterest income 4,663 4,757 3,741 5,012
Noninterest expenses 19,790 20,962 21,595 22,177
--------- -------- ------ ------
Income before
income taxes and
cumulative effect of
accounting change 11,910 12,748 14,774 15,102
Income taxes 3,708 3,940 4,696 4,256
--------- -------- ------ ------
Income before
cumulative effect of
accounting change 8,202 8,808 10,078 10,846
Cumulative effect of accounting
change 2,237 -- -- --
--------- -------- ------ ------
Net income $ 10,439 8,808 10,078 10,846
========= ======== ====== ======
Basic per share amounts:
Income before cumulative effect
of accounting change $ 0.17 0.19 0.21 0.23
Cumulative effect of accounting
change 0.05 -- -- --
--------- -------- ------ ------
Net income $ 0.22 0.19 0.21 0.23
========= ======== ====== ======
Diluted per share amounts:
Income before cumulative effect
of accounting change $ 0.17 0.18 0.21 0.23
Cumulative effect of accounting
change 0.05 -- -- --
--------- -------- ------ ------
Net income $ 0.22 0.18 0.21 0.23
========= ======== ====== ======
(25) SUBSEQUENT EVENTS (UNAUDITED)
On August 25, 2003, the Company completed an incremental stock offering
whereby the Company's parent, Northwest Bancorp, MHC, contributed
7,255,520 shares to the Company, and through a subscription offering
the Company sold 7,255,520 shares. The shares were issued at $15.85 per
share, resulting in gross proceeds of $115.0 million. After the
offering, Northwest Bancorp, MHC owns approximately 59% of the
outstanding shares, and 41% are held by public shareholders.
On August 31, 2003, the Company completed its previously announced
acquisition of First Bell Bancorp, Inc., and its subsidiary, Bell
Federal Savings and Loan (Bell). Bell is a federal savings bank with
seven offices in Allegheny County, Pennsylvania, and assets of
approximately $850.0 million, deposits of approximately $600.0 million,
and shareholders' equity of approximately $70.0 million. Under the
terms of the agreement, shareholders received $26.25 for each share of
First Bell Bancorp, Inc. resulting in a cash payment of approximately
$114.0 million and intangible assets of approximately $60.0 million.