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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 Number 0-23817
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NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
United States of America 23-2900888
------------------------ ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
301 Second Avenue, Warren, Pennsylvania 16365
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
(814) 726-2140
--------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock ($.10 par value) 47,723,227 shares outstanding as of
September 30, 2003.
NORTHWEST BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2003 and June 30, 2003 1
Consolidated Statements of Income for the three months
ended September 30, 2003 and 2002 2
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended September 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the three months
ended September 30, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
Certifications 28
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, JUNE 30,
ASSETS 2003 2003
------ ---- ----
CASH AND CASH EQUIVALENTS $ 64,208 75,563
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 296,665 244,437
MARKETABLE SECURITIES AVAILABLE-FOR-SALE
(AMORTIZED COST OF $1,159,914 AND $884,667) 1,165,359 896,631
MARKETABLE SECURITIES HELD-TO-MATURITY
(MARKET VALUE OF $513,954 AND $486,922) 508,891 477,821
----------- -----------
TOTAL CASH, INTEREST-EARNING DEPOSITS AND
MARKETABLE SECURITIES 2,035,123 1,694,452
MORTGAGE LOANS - 1 TO 4 FAMILY 2,304,198 2,064,181
COMMERCIAL REAL ESTATE LOANS 391,869 377,507
CONSUMER LOANS 795,108 701,561
COMMERCIAL BUSINESS LOANS 130,469 130,115
----------- -----------
TOTAL LOANS RECEIVABLE 3,621,644 3,273,364
ALLOWANCE FOR LOAN LOSSES (27,822) (26,593)
----------- -----------
LOANS RECEIVABLE, NET 3,593,822 3,246,771
FEDERAL HOME LOAN BANK STOCK, AT COST 47,513 33,764
ACCRUED INTEREST RECEIVABLE 23,034 18,714
REAL ESTATE OWNED, NET 3,348 3,664
PREMISES AND EQUIPMENT, NET 69,222 63,190
GOODWILL 129,581 76,206
OTHER ASSETS 135,931 85,606
----------- -----------
TOTAL ASSETS $ 6,037,574 $ 5,222,367
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
NONINTEREST-BEARING DEMAND DEPOSITS 208,517 190,987
INTEREST-BEARING DEMAND DEPOSITS 724,865 670,935
SAVINGS DEPOSITS 1,742,321 1,488,885
TIME DEPOSITS 2,198,651 1,912,749
----------- -----------
TOTAL DEPOSITS 4,874,354 4,263,556
BORROWED FUNDS 554,437 465,750
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 11,160 21,319
ACCRUED INTEREST PAYABLE 7,521 4,101
OTHER LIABILITIES 14,212 11,709
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES 99,000 99,000
----------- -----------
TOTAL LIABILITIES 5,560,684 4,865,435
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.10 PAR VALUE: 10,000,000 AUTHORIZED
NO SHARES ISSUED -- --
COMMON STOCK, $.10 PAR VALUE: 100,000,000 SHARES
AUTHORIZED, 47,723,227 AND 47,693,981 ISSUED
AND OUTSTANDING, RESPECTIVELY 4,772 4,769
PAID-IN CAPITAL 185,757 72,787
RETAINED EARNINGS 282,822 271,599
ACCUMULATED OTHER COMPREHENSIVE INCOME:
NET UNREALIZED GAIN ON SECURITIES AVAILABLE-
FOR-SALE, NET OF INCOME TAXES 3,539 7,777
----------- -----------
476,890 356,932
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,037,574 5,222,367
=========== ===========
See accompanying notes to unaudited consolidated financial statements
1
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
INTEREST INCOME:
LOANS RECEIVABLE $55,935 57,554
MORTGAGE-BACKED SECURITIES 4,750 6,355
TAXABLE INVESTMENT SECURITIES 3,465 2,359
TAX-FREE INVESTMENT SECURITIES 2,790 1,873
INTEREST-EARNING DEPOSITS 659 870
------- -------
TOTAL INTEREST INCOME 67,599 69,011
INTEREST EXPENSE:
DEPOSITS 25,729 28,603
BORROWED FUNDS 7,190 6,017
------- -------
TOTAL INTEREST EXPENSE 32,919 34,620
NET INTEREST INCOME 34,680 34,391
PROVISION FOR LOAN LOSSES 1,727 1,667
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 32,953 32,724
NONINTEREST INCOME:
SERVICE CHARGES AND FEES 3,277 3,406
TRUST AND OTHER FINANCIAL SERVICES INCOME 908 853
INSURANCE COMMISSION INCOME 167 385
GAIN ON SALE OF MARKETABLE SECURITIES, NET 3,314 287
GAIN ON SALE OF LOANS, NET 286 509
GAIN ON SALE OF REAL ESTATE OWNED, NET 553 47
INCOME FROM BANK OWNED LIFE INSURANCE 885 752
OTHER OPERATING INCOME 371 433
------- -------
TOTAL NONINTEREST INCOME 9,761 6,672
NONINTEREST EXPENSE:
COMPENSATION AND EMPLOYEE BENEFITS 14,342 13,050
PREMISES AND OCCUPANCY COSTS 3,649 3,176
OFFICE OPERATIONS 2,081 1,878
PROCESSING EXPENSES 2,081 1,933
ADVERTISING 552 508
OTHER EXPENSES 2,240 2,214
------- -------
TOTAL NONINTEREST EXPENSE 24,945 22,759
------- -------
INCOME BEFORE INCOME TAXES 17,769 16,637
FEDERAL AND STATE INCOME TAXES 5,313 5,194
------- -------
NET INCOME $12,456 11,443
======= =======
BASIC EARNINGS PER SHARE $ 0.26 0.24
======= =======
DILUTED EARNINGS PER SHARE $ 0.26 0.24
======= =======
See accompanying notes to unaudited consolidated financial statements
2
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2002 Accum.
Common Stock Other Total
------------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
Beginning balance at June 30, 2002 47,549,659 $ 4,755 71,838 233,831 6,216 $ 316,640
Comprehensive income:
Net income -- -- -- 11,443 -- 11,443
Change in unrealized gain
on securities, net of tax and
reclassification adjustment -- -- -- -- 2,096 2,096
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 11,443 2,096 13,539
Exercise of stock options 21,444 2 129 -- -- 131
Dividends declared ($.08 per share) -- -- -- (976) -- (976)
---------- ---------- ---------- ---------- ---------- ----------
Ending balance at September 30, 2002 47,571,103 $ 4,757 71,967 244,298 8,312 $ 329,334
========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003 Accum.
Common Stock Other Total
------------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
------ ------ ------- -------- ------ ------
Beginning balance at June 30, 2003 47,693,981 $ 4,769 72,787 271,599 7,777 $ 356,932
Comprehensive income:
Net income -- -- -- 12,456 -- 12,456
Change in unrealized gain on
securities, net of tax and
reclassification adjustment -- -- -- -- (4,238) (4,238)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 12,456 (4,238) 8,218
Exercise of stock options 29,246 3 166 -- -- 169
Proceeds from incremental
stock offering, net of related
expenses of $2,196 -- -- 112,804 -- -- 112,804
Dividends declared ($.10 per share) -- -- -- (1,233) -- (1,233)
---------- ---------- ---------- ---------- ---------- ----------
Ending balance at September 30, 2003 47,723,227 $ 4,772 185,757 282,822 3,539 $ 476,890
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
3
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Three Months
Ended Ended
9/30/2003 9/30/2002
--------- ---------
OPERATING ACTIVITIES:
Net Income 12,456 11,443
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,727 1,667
Net loss (gain) on sale of assets (4,153) (843)
Net depreciation, amortization and accretion 1,450 2,405
Decrease (increase) in other assets 11,354 (5,200)
Increase (decrease) in other liabilities (6,882) (2,624)
Net amortization (accretion) of premium/discount on
marketable securities 2,454 (279)
Other -- --
-------- --------
Net cash provided by operating activities 18,406 6,569
INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity -- (125,407)
Purchase of marketable securities available-for-sale (333,358) (73,262)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 197,365 31,435
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 184,169 42,658
Proceeds from sales of marketable securities,
available-for-sale 192,827 25,008
Loan originations (473,464) (254,898)
Proceeds from loan maturities and principal reductions 309,756 151,453
Proceeds from loan sales 40,641 42,178
Purchase of FHLB stock (969) --
Proceeds from sale of real estate owned 1,714 1,443
Net (purchase) sale of real estate owned for investment 77 (172)
Purchase of premises and equipment (3,801) (2,907)
Acquisitions, net of cash received (95,167) 2,619
-------- --------
Net cash provided (used) by investing activities 19,790 (159,852)
4
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
Three Months Three Months
Ended Ended
9/30/2003 9/30/2002
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net 1,411 151,198
Proceeds from long-term borrowings -- 180,000
Repayments of long-term borrowings (186,893) (3)
Net increase (decrease) in short-term borrowings 89,207 840
Increase (decrease) in advances by borrowers for
taxes and insurance (12,788) (11,813)
Cash dividends paid (1,233) (976)
Proceeds from stock offering, net 112,804 --
Proceeds from stock options exercised 169 131
-------- --------
Net cash provided by financing activities 2,677 319,377
Net increase (decrease) in cash and cash equivalents 40,873 166,094
======== ========
Cash and cash equivalents at beginning of period 320,000 217,754
Net increase (decrease) in cash and cash equivalents 40,873 166,094
-------- --------
Cash and cash equivalents at end of period 360,873 383,848
======== ========
Cash paid during the period for:
Interest on deposits and borrowings (including interest
credited to deposit accounts of $19,457, $23,739 29,499 35,373
======== ========
Income taxes 440 552
======== ========
Business acquisitions:
Fair value of assets acquired 908,873 176,885
Cash received (paid) (95,167) 2,619
-------- --------
Liabilities assumed 813,706 179,504
======== ========
Non-cash activities:
Loans transferred to real estate owned 845 1,014
======== ========
Sale of real estate owned financed by the Company 249 206
======== ========
See accompanying notes to unaudited consolidated financial statements
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Northwest group of companies is organized in a two-tier holding company
structure. Northwest Bancorp, MHC is a federal mutual holding company which owns
approximately 59% of the outstanding shares of common stock of Northwest
Bancorp, Inc. (the "Company"). For the third consecutive fiscal year the mutual
holding company has 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. The Company is a federal corporation and is
organized as a savings and loan holding company also regulated by the OTS. The
primary activity of the Company is the ownership of all of the issued and
outstanding common stock of Northwest Savings Bank, a Pennsylvania chartered
savings bank, and Jamestown Savings Bank, a New York chartered savings bank.
Together the banks operate 144 community banking offices throughout northwest,
southwest and central Pennsylvania, western New York and eastern Ohio.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with instructions for Form 10-Q and, accordingly, do
not include the necessary footnote information for a complete presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments have been included which are necessary
for a fair presentation of financial position and results of operations. The
consolidated statements have been prepared using the accounting policies
described in the financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2003. Certain items previously
reported have been reclassified to conform with the current period's reporting
format. The results of operations for the three months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
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 enough 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 current 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 the
potential impairment of such loans under SFAS 114, "Accounting by Creditors for
Impairment of a Loan". 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
6
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. Management believes, to the best of their knowledge, that all known
losses as of the balance sheet date have been recorded.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Northwest Savings
Bank ("Northwest"), Jamestown Savings Bank ("Jamestown"), Bell Federal Savings
and Loan Association of Bellevue (for the period September 1, 2003 through
September 30, 2003) ("Bell"), Northwest Capital Trust I, Northwest Bancorp
Statutory Trust I, Northwest Consumer Discount Company, Northwest Finance
Company, Northwest Financial Services, Inc., Northwest Capital Group, Inc.,
Boetger & Associates, Inc., Rid-Fed, Inc., Allegheny Services, Inc., and Great
Northwest Corporation. All significant intercompany items have been eliminated.
(3) 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 three savings bank subsidiaries of the Company: Northwest,
Jamestown and Bell, 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 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, which operates 47 offices in
Pennsylvania and two offices in southwestern New York. The 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 and
Allegheny Services, Inc. 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.
AS OF OR FOR THE THREE MONTHS ENDED:
Community Consumer
SEPTEMBER 30, 2003 ($ IN 000'S) Banks Finance All Other* Consolidated
- ------------------------------- ----- ------- ----------- ------------
External interest income $ 63,014 4,430 155 67,599
Intersegment interest income 1,154 - (1,154) -
Interest expense 31,160 1,232 527 32,919
Provision for loan losses 1,065 662 - 1,727
Noninterest income 9,399 293 69 9,761
Noninterest expense 22,844 1,937 164 24,945
Income tax expense (benefit) 5,514 370 (571) 5,313
Net income 12,984 522 (1,050) 12,456
Total assets $5,990,220 125,506 (78,152) 6,037,574
7
Community Consumer
SEPTEMBER 30, 2002 ($ IN 000'S) Banks Finance All Other* Consolidated
- ------------------------------- ----- ------- ----------- ------------
External interest income $ 64,351 4,606 54 69,011
Intersegment interest income 1,486 - (1,486) -
Interest expense 33,042 1,595 (17) 34,620
Provision for loan losses 893 774 - 1,667
Noninterest income 6,409 263 - 6,672
Noninterest expense 20,864 1,803 92 22,759
Income tax expense (benefit) 5,451 289 (546) 5,194
Net income 11,996 408 (961) 11,443
Total assets $4,778,726 127,170 (90,565) 4,815,331
* Eliminations consist of intercompany interest income and interest expense.
(4) BUSINESS COMBINATION
On August 31, 2003, the Company completed the previously announced acquisition
of First Bell Bancorp, Inc., and its subsidiary Bell Federal Savings and Loan
Association of Bellevue (collectively "Bell"), both headquartered in Bellevue,
Pennsylvania. The acquisition included the seven offices of Bell, assets of
$935.9 million including cash of $22.6 million, investments of $544.8 million,
loans of $224.5 million, goodwill of $53.1 million, core deposit intangible of
$15.1 million, noncompete intangible of $1.1 million, and other assets of $74.7
million. Liabilities assumed in the acquisition of $813.7 million include
deposits of $609.4 million, long-term debt of $186.7 million and other
liabilities of $17.6 million. Under terms of the agreement, shareholders of
First Bell Bancorp, Inc. received $26.25 in cash for each share of common stock,
or approximately $114.3 million. The acquisition created approximately $53.1
million of goodwill, none of which is tax deductible, $15.1 million of core
deposit intangible with an estimated life of seven years and a non-compete
intangible of $1.1 million with an estimated life of one year. The results of
operations have been included in the consolidated financial statements beginning
September 1, 2003.
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
The following table provides information for intangible assets subject to
amortization for the periods indicated:
SEPTEMBER 30, JUNE 30,
2003 2003
------------- --------
Amortizable intangible assets:
Core deposit intangibles - gross $ 19,503 4,401
Less: accumulated amortization (1,744) (1,621)
======== ========
Core deposit intangibles - net $ 17,759 2,780
======== ========
Customer and Contract intangible assets - gross 1,881 831
Less: accumulated amortization (101) (81)
-------- --------
Customer and Contract intangible assets - net $ 1,780 750
======== ========
8
The following table provides information for the changes in the carrying amount
of goodwill:
COMMUNITY CONSUMER
BANKS FINANCE TOTAL
----- ------- -----
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
Goodwill acquired 53,100 275 53,375
Amortization -- -- --
Impairment losses -- -- --
-------- -------- --------
Balance at September 30, 2003 $128,413 1,168 129,581
======== ======== ========
The following information shows the actual aggregate amortization expense for
the current quarter, the prior year's quarter, and prior fiscal year as well as
the estimated aggregate amortization expense, based upon current levels of
intangible assets, for the current fiscal year and each of the five succeeding
fiscal years:
For the three months ended 9/30/02 $ 115
For the three months ended 9/30/03 143
For the fiscal year ended 6/30/03 650
For the fiscal year ended 6/30/04 4,270
For the fiscal year ended 6/30/05 4,267
For the fiscal year ended 6/30/06 3,387
For the fiscal year ended 6/30/07 2,732
For the fiscal year ended 6/30/08 2,083
For the fiscal year ended 6/30/09 1,537
(6) GUARANTEES
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 $11.9 million, of
which $10.3 million is fully collateralized. No liability has been recorded for
these obligations. There are no recourse provisions that would enable the
Company to recover any amounts from third parties.
9
(7) STOCK-BASED COMPENSATION
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," ("SFAS 123") 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, which requires 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 (in thousands, except per share amounts):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
---------- ----------
Net income:
As reported $ 12,456 11,443
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (124) (91)
---------- ----------
Pro forma 12,332 11,352
========== ==========
Basic earnings per share:
As reported 0.26 0.24
Pro forma 0.26 0.24
Diluted earnings per share:
As reported 0.26 0.24
Pro forma 0.26 0.24
There was no stock-based employee compensation expense included in reported net
income during the three months ended September 30, 2003 or 2002.
10
(8) 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 (in thousands, except per share amounts):
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
------- -------
Reported net income $12,456 11,443
Weighted average common shares outstanding 47,710 47,564
Common stock equivalents due to effect of stock
options 598 494
------- -------
Total weighted average common
shares and equivalents 48,308 48,058
======= =======
Basic earnings per share: $ 0.26 0.24
======= =======
Diluted earnings per share: $ 0.26 0.24
======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document may contain certain
forward-looking statements, as defined in the Securities Exchange Act of 1934,
as amended, and the regulations thereunder. These forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, economic, regulatory and other factors as
discussed herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they reflect management's analysis only as of the
date of this report. The Company has no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 2003 TO SEPTEMBER 30,
2003
ASSETS
At September 30, 2003 the Company had total assets of $6.038 billion, an
increase of $815.2 million, or 15.6%, from $5.222 billion at June 30, 2003. This
increase is primarily attributed to the acquisition of First Bell Bancorp, Inc.
and its subsidiary, Bell Federal Savings and Loan Association of Bellevue. At
September 30, 2003, the acquisition added assets of approximately $709.2
million, including net loans of $218.8 million, investments of $424.5 million,
cash of $58.7 million, and bank owned life insurance of $22.8 million. The
acquisition created intangible assets of approximately $69.3 million.
Cash and cash equivalents, interest-earning deposits and marketable securities
totaled $2.035 billion at September 30, 2003, an increase of $340.7 million, or
20.1%, from $1.694 billion at June 30, 2003. This increase is a direct result of
the acquisition of Bell, which at September 30, 2003 had cash and cash
equivalents, interest-earning deposits and marketable securities of $483.2
million. Net loans receivable increased by $347.1 million, or 10.7%, to $3.594
billion at September 30, 2003 from $3.247 at June 30, 2003. This increase
resulted from the acquisition of Bell, which at September 30, 2003 had net loans
receivable of $218.8 million, and loan originations through the Company's retail
network.
LIABILITIES
Deposits increased by $610.8 million, or 14.3%, to $4.874 billion at September
30, 2003 from $4.264 billion at June 30, 2003. This increase resulted primarily
from the acquisition of Bell, which had deposits of $594.6 million at September
30, 2003. Borrowed funds increased by $88.6 million, or 19.0%, to $554.4 million
at September 30, 2003 from $465.8 million at June 30, 2003. This increase is
primarily the result of the Bell acquisition, which had borrowings of $90.0
million at September 30, 2003.
CAPITAL RESOURCES AND LIQUIDITY
Total shareholders' equity at September 30, 2003 was $476.9 million, an increase
of $120.0 million, or 33.6%, from $356.9 million at June 30, 2003. This increase
was primarily attributable to the completion of an incremental stock offering
during the period, whereby the Company raised capital of $112.8 million, net of
issuance expenses of $2.2 million. In addition, the Company had net income for
the three month period of $12.5 million partially offset by the payment of cash
dividends of $1.2 million, and the decrease in the unrealized gain on
securities, net of tax, of $4.2 million.
12
The Company's banking subsidiaries, Northwest and Jamestown, are subject to
various regulatory capital requirements administered by the state and federal
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, the banking subsidiaries must
meet specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgements by the regulators about components,
risk-weighting and other factors.
Quantitative measures, established by regulation to ensure capital adequacy
require the banking subsidiaries to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined).
September 30, 2003
Minimum Capital Well Capitalized
Actual Requirements Requirements
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to risk weighted assets):
Northwest Savings Bank $326,392 12.51% $208,653 8.00% $260,817 10.00%
Jamestown Savings Bank $ 21,330 10.40% $ 16,415 8.00% $ 20,519 10.00%
Tier I Capital (to risk weighted assets):
Northwest Savings Bank $299,767 11.49% $104,327 4.00% $156,490 6.00%
Jamestown Savings Bank $ 19,618 9.56% $ 8,208 4.00% $ 12,311 6.00%
Tier I Capital (leverage) (to average assets):
Northwest Savings Bank $299,767 6.23% $144,348 3.00%* $240,580 5.00%
Jamestown Savings Bank $ 19,618 5.47% $ 10,761 3.00%* $ 17,936 5.00%
13
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%
* 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 September 30, 2003, the Company had not been advised
of any additional requirements in this regard.
The Company's banking subsidiaries, Northwest 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 and the applicable state
department of banking during their regular examinations. The Banks' internal
liquidity requirements are based upon liquid assets as a percentage of deposits
and borrowings ("liquidity ratio"). The Banks have always maintained a level of
liquid assets in excess of regulatory and internal requirements, and the
liquidity ratio at September 30, 2003 was 24.2% and 50.7% for Northwest and
Jamestown, respectively. The Company and its subsidiaries adjust liquidity
levels in order to meet funding needs for deposit outflows, payment of real
estate taxes and insurance on mortgage loan escrow accounts, repayment of
borrowings, when applicable, and loan commitments.
The Company paid $1.2 million in cash dividends during the first three months of
the current fiscal year, compared with $976,000 in the prior year period. No
dividends were paid to Northwest Bancorp, MHC during either period presented.
The common stock dividend payout ratio (dividend declared per share divided by
net income per share) was 38.5% in the current year first quarter on a dividend
of $.10 compared with 33.3% in the same period last year on a dividend of $.08
per share.
14
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are automatically placed on nonaccrual status when
they are more than 90 days contractually delinquent and may also be placed on
nonaccrual status even if not more than 90 days delinquent but other conditions
exist. Other nonperforming assets represent property acquired by the Company
through foreclosure or repossession. Foreclosed property is carried at the lower
of its fair value less estimated costs to sell or the principal balance of the
related loan. Nonperforming assets decreased by $2.1 million, or 5.8%, to $34.2
million at September 30, 2003 from $36.3 million at June 30, 2003. Management
believes that the generally low level of nonperforming assets is attributable to
stringent credit policies and sustained collection procedures.
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis: September 30, 2003 June 30, 2003
- ------------------------------------------ ------------------ -------------
One-to-four family residential loans $10,967 $11,140
Multifamily and commercial real estate loans 11,797 11,975
Consumer loans 5,190 4,896
Commercial business loans 2,878 4,602
Total $30,832 $32,613
Total nonperforming loans as a percentage of
net loans receivable .86% 1.00%
Total real estate acquired through foreclosure
and other real estate owned $ 3,348 $ 3,664
Total nonperforming assets $34,180 $36,277
Total nonperforming assets as a percentage of
total assets .57% .69%
A loan is considered to be impaired, as defined by SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), 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 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 September
30, 2003 and June 30, 2002 were $30.8 million and $32.6 million, respectively.
15
ALLOWANCE FOR LOAN LOSSES
The Company's Board of Directors has adopted an "Allowance for Loan Losses"
(ALL) policy designed to provide management with a systematic methodology for
determining and documenting the ALL each reporting period. This methodology was
developed to provide a consistent process and review procedure to ensure that
the ALL is in conformity with the Company's policies and procedures and other
supervisory and regulatory guidelines.
On a monthly basis, the Credit Review and Administration ("CRA") department, as
well as loan officers, branch managers and department heads, review and monitor
the loan portfolio for problem loans. This review includes the monthly
delinquency reports as well as historical comparisons and trend analysis. On a
quarterly basis the CRA department grades or classifies problem loans or
potential problem loans based upon their knowledge of the lending relationship
and other information previously accumulated. The Company's loan grading system
for problem loans is consistent with industry regulatory guidelines which
classify loans as "special mention", "substandard", "doubtful" or "loss." Loans
that do not expose the Company to risk sufficient to warrant classification in
one of the subsequent categories, but which possess some weaknesses, are
designated as "special mention". A "substandard" loan is any loan that is more
than 90 days contractually delinquent or is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans classified as "doubtful" have all the weaknesses inherent
in those classified as "substandard" with the added characteristic that the
weaknesses present make a collection or liquidation in full, on the basis of
currently existing facts, conditions or values, highly questionable and
improbable. Loans classified as "loss" are considered uncollectible so that
their continuance as assets without the establishment of a specific loss reserve
in not warranted.
The loans that have been classified as substandard or doubtful are reviewed by
the CRA department for possible impairment under the provisions of SFAS 114. 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 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 measurement 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 individually for impairment,
it is grouped with other loans that possess common characteristics for
impairment evaluation and analysis under the provisions of Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies." This
segmentation is accomplished by grouping loans of similar product types, risk
characteristics and industry concentration into homogeneous pools. A range of
losses for each pool is then established based upon historical loss ratios. This
historical net charge-off amount is then analyzed and adjusted based on
historical delinquency trends as well as the current economic, political,
regulatory and interest rate environment and used to estimate the current
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 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
16
on this review and discussion the appropriate amount of ALL is estimated and any
adjustments to reconcile the actual ALL 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 ALL levels and ratios
compared to 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 ALL 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 ALL 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.
17
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
Net income for the three months ended September 30, 2003 was $12.5 million, or
$.26 per diluted share, an increase of $1.1 million from $11.4 million, or $.24
per diluted share, for the same quarter last year. This increase resulted from a
slight increase in net interest income and a $3.0 million increase in the gain
on sale of investments offset by a $2.2 million increase in noninterest expense.
Net income for the three months ended September 30, 2003 represents an 11.96%
and .90% return on average equity and return on average assets, respectively,
compared to 14.20% and 1.03% for the same quarter last year.
INTEREST INCOME
Total interest income decreased by $888,000, or 1.3%, on a taxable equivalent
basis, to $69.5 million primarily due to a decrease in the average yield on
interest earning assets to 5.33% from 6.79%. The effect of this decrease in the
average yield on interest earning assets was largely offset by the increase in
the average balance of interest earning assets. Average interest earning assets
increased by $1.065 billion, or 25.7%, to $5.208 billion for the three months
ended September 30, 2003 from $4.143 billion for the three months ended
September 30, 2002. The decrease in the average yield on interest earning assets
resulted from the continued effect of the current interest rate environment,
while the increase in the average interest earning assets resulted from strong
internal growth and the acquisition of Bell.
Interest income on loans receivable decreased by $1.6 million, or 2.8%, on a
taxable equivalent basis, to $56.3 million primarily because of a decrease in
the average rate to 6.66% from 7.57%. The effect of this decrease was partially
offset by an increase in the average balance outstanding of $321.5 million.
Average loans outstanding increased primarily as a result of internal loan
growth as well as from the acquisition of Bell. As a result of the Bell
acquisition, average loans receivable outstanding increased by $74.2 million.
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
year at interest rate levels lower than the then existing average portfolio
rate.
Interest income on mortgage-backed securities decreased by $1.6 million, or
25.3%, to $4.8 million primarily because of a decrease in the average yield to
2.09% from 4.63%. The effect of the decrease in average yield was partially
offset by an increase in the average balance of $360.3 million, or 65.7%, to
$908.7 million. The average yield on mortgage-backed securities, of which
approximately 64% are variable rate, decreased primarily as a result of the
continued reduction in short-term market interest rates. The average balance
increased primarily as a result of investing the excess funds in these variable
rate investments, as well as from the acquisition of Bell. Bell contributed
approximately $100.5 million of the increase in average balance.
Interest income on investment securities increased by $2.6 million, or 51.4%, to
$7.6 million, on a taxable-equivalent basis. The average balance increased by
$281.9 million, or 93.4% to $583.8 million, while the average yield decreased to
5.19% from 6.62%, on a taxable equivalent basis. The increase in the average
balance of investment securities was primarily due to the investment of funds
generated from strong internal deposit growth, along with the acquisition of
Bell. The acquisition of Bell contributed $61.1 million to the increase in
average balance. The decrease in the taxable equivalent yield was a result of
purchasing investment securities in a lower interest rate environment.
Interest income on interest-earning deposits decreased by $211,000, or 24.3%,
because the average yield decreased to 0.89% from 1.66%. The decrease in average
yield was partially offset by an increase in the average balance of
interest-earning deposits of $86.6 million, or 41.4%, to $296.1 million. The
decrease in the average interest rate is a result of the decrease in the
targeted fed funds rate by the Federal Reserve Bank and the increase in average
balance resulted primarily from the Company's growth.
18
INTEREST EXPENSE
Total interest expense decreased by $1.7 million, or 4.9%, to $32.9 million
largely due to a decrease in the average cost of interest-bearing liabilities to
2.68% from 3.56%, which was partially offset by an increase in the average
balance of interest-bearing liabilities of $1.025 billion, or 26.3%, to $4.919
billion. The decrease in the cost of funds resulted primarily from the Company's
depositors continuing to move funds from certificates of deposit to savings
accounts and insured money fund accounts which have no term and lower interest
rates, and the Company's downward adjustment of interest rates paid on all
deposits to remain competitive within our market area. The increase in the
average balance of interest-bearing liabilities resulted primarily from an
increase of $823.5 million, or 23.6%, in the average balance of deposits, mainly
attributed to the growth of existing offices along with new office openings and
acquisitions. Bell contributed approximately $200.7 million of the increase in
average balances for the three month period ended September 30, 2003. Average
borrowed funds also increased by $201.8 million, or 66.0%, as the Company
secured long-term fixed-rate borrowings from the FHLB which were used to
purchase variable rate assets.
NET INTEREST INCOME
Net interest income increased by $813,000, or 2.3%, on a taxable equivalent
basis, to $36.5 million compared to $35.7 million the prior year period. This
increase in net interest income was attributable to the overall growth in the
Company's balance sheet. The Company's net interest rate spread compressed to
2.65%, from 3.23% as the average yield on interest earning assets decreased more
than the average cost on interest bearing liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $60,000, or 3.6%, to $1.7 million.
Management analyzes the allowance for loan losses as described in the section
entitled "Allowance for Loan Losses." The provision that is recorded is
sufficient, in management's judgment, to bring this reserve to a level that
reflects the risk inherent in the Company's loan portfolio relative to loan mix,
economic conditions and historical loss experience. As part of this analysis,
management considered the increase in net charge-offs for the period of
$341,000, or 31.5%, to $1.4 million compared to $1.1 million for the same period
last year. In addition, management considered the growth in the loan portfolio
during the current quarter and the increase in nonperforming loans of $11.3
million, or 58.1%, to $30.8 million at September 30, 2003 from $19.5 million at
September 30, 2002.
NONINTEREST INCOME
Noninterest income increased by $3.1 million, or 46.3%, to $9.8 million for the
current quarter from $6.7 million for the same period in the prior year. Service
charges and fees decreased $129,000, or 3.8%, to $3.3 million. Trust and other
financial services income increased by $55,000, or 6.4%, to $908,000 for the
quarter primarily as a result of the continued growth of assets under management
and expansion of services provided by Boetger & Associates. Insurance commission
income decreased $218,000, or 56.6%, to $167,000 primarily as a result of the
Company no longer offering single premium life insurance related to consumer
loans. The Company's gain on sale of investments increased by $3.0 million to
$3.3 million as a result of the Company selling municipal bonds acquired with
the purchase of Bell. These long-term securities were sold as part of the
Company's current asset and liability management strategy. Gain on sale of REO
increased $506,000 over the prior year as the Company continues to manage its
level of foreclosed properties.
NONINTEREST EXPENSE
Noninterest expense increased by $2.1 million, or 9.6%, to $24.9 million from
$22.8 million for the same quarter in the prior year. All major expense
categories increased as a result of a combination of the significant growth of
the Company's retail network, including the acquisition of Bell, the expansion
of its investment management, trust and brokerage services, and the addition of
new products and services.
19
Management believes that despite these increases in costs due to expansion,
progress has been made in controlling operating expense as the ratio of
operating expense to average assets has decreased below 2.0%.
INCOME TAXES
The provision for income taxes for the three months ended September 30, 2003
increased by $119,000, or 2.3%, compared to the same period last year. This
increase in income tax expense is primarily due to an increase in income before
income taxes of $1.1 million, or 6.8%, to $17.8 million from $16.6 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
No new accounting standards have been issued since July 1, 2003.
20
AVERAGE BALANCE SHEET
(Dollars in Thousands)
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 calculated using
daily averages.
Three Months Ended September 30,
2003 2002
----------------------------------- -------------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ---- ---------- ---------- ----
ASSETS:
Interest earning assets:
Loans receivable (a)(b)(d) $3,380,559 $ 56,283 6.66% $3,059,069 $ 57,916 7.57%
Mortgage-backed securities (c) $ 908,722 $ 4,750 2.09% $ 548,464 $ 6,355 4.63%
Investment securities (c)(d)(e) $ 583,817 $ 7,568 5.19% $ 301,937 $ 5,000 6.62%
FHLB stock $ 38,704 $ 190 1.96% $ 23,731 $ 197 3.32%
Other interest earning deposits $ 296,080 $ 659 0.89% $ 209,460 $ 870 1.66%
---------- ---------- ---- ---------- ---------- ----
Total interest earning assets $5,207,882 $ 69,450 5.33% $4,142,661 $ 70,338 6.79%
Noninterest earning assets (f) $ 344,003 $ 284,308
---------- ----------
TOTAL ASSETS $5,551,885 $4,426,969
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Savings accounts $1,018,183 $ 3,848 1.51% $ 720,518 $ 4,751 2.64%
Now accounts $ 688,160 $ 1,746 1.01% $ 433,313 $ 1,309 1.21%
Money market demand accounts $ 611,997 $ 2,585 1.69% $ 422,424 $ 2,826 2.68%
Certificate accounts $1,994,169 $ 17,550 3.52% $1,912,725 $ 19,717 4.12%
Borrowed funds (g) $ 507,612 $ 5,322 4.19% $ 305,791 $ 4,088 5.35%
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ 99,000 $ 1,868 7.55% $ 99,000 $ 1,929 7.79%
---------- ---------- ---- ---------- ---------- ----
Total interest bearing liabilities $4,919,121 $ 32,919 2.68% $3,893,771 $ 34,620 3.56%
Noninterest bearing liabilities $ 216,070 $ 210,822
---------- ----------
Total liabilities $5,135,191 $4,104,593
Shareholders' equity $ 416,694 $ 322,376
---------- ----------
TOTAL LIABILITIES AND EQUITY $5,551,885 $4,426,969
========== ==========
Net interest income/Interest rate spread $ 36,531 2.65% $ 35,718 3.23%
Net interest earning assets/Net interest margin $ 288,761 2.81% $ 248,890 3.45%
Ratio of interest earning assets to
interest bearing liabilities 1.06X 1.06X
(a) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(b) Interest income includes accretion/ amortization of deferred loan fees/
expenses.
(c) Average balances do not include the effect of unrealized gains or losses
on securities held as available-for-sale.
(d) Interest income on tax-free investment securities and tax-free loans is
presented on a taxable equivalent basis.
(e) Average balances include FNMA and FHLMC stock.
(f) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(g) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
21
RATE/ VOLUME ANALYSIS
(Dollars in Thousands)
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 (changes in volume
multiplied by prior rate), (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume), (iii) the net
change. Changes that cannot be attributed to either rate or volume have been
allocated among both rate and volume.
Three months ended September 30, 2003 and 2002
NET
RATE VOLUME CHANGE
---- ------ ------
Interest earning assets:
Loans receivable $ (7,720) $ 6,087 $ (1,633)
Mortgage-backed securities $ (5,779) $ 4,174 $ (1,605)
Investment securities $ (2,100) $ 4,668 $ 2,568
FHLB stock $ (131) $ 124 $ (7)
Other interest-earning deposits $ (571) $ 360 $ (211)
-------- -------- --------
Total interest-earning assets $(16,301) $ 15,413 $ (888)
Interest-bearing liabilities:
Savings accounts $ (2,866) $ 1,963 $ (903)
Now accounts $ (333) $ 770 $ 437
Money market demand accounts $ (1,509) $ 1,268 $ (241)
Certificate accounts $ (3,007) $ 840 $ (2,167)
Borrowed funds $ (1,464) $ 2,698 $ 1,234
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ (61) $ -- $ (61)
-------- -------- --------
Total interest-bearing liabilities $ (9,240) $ 7,539 $ (1,701)
-------- -------- --------
Net change in net interest income $ (7,061) $ 7,874 $ 813
======== ======== ========
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a savings bank holding company, the Company's primary market risk is interest
rate risk. Interest rate risk is the sensitivity of net interest income to
variations in interest rates over a specified time period. The sensitivity
results from differences in the time periods in which interest rate sensitive
assets and liabilities mature or reprice. The Company attempts to control
interest rate risk by matching, within acceptable limits, the repricing periods
of its assets and liabilities. Because the Company's interest sensitive
liabilities typically have repricing periods or maturities of short duration,
the Company has attempted to shorten the maturities of its assets by emphasizing
the origination of short-term, fixed-rate consumer loans, one-to-four family
residential mortgage loans with terms of fifteen years or less and adjustable
rate mortgage loans, consumer loans and commercial loans. In addition, the
Company has purchased shorter term or adjustable-rate investment securities and
adjustable-rate mortgage-backed securities.
The Company has an Asset/ Liability Committee consisting of several members of
senior management which meets monthly to review market interest rates, economic
conditions, the pricing of interest earning assets and interest bearing
liabilities and the Company's balance sheet structure. On a quarterly basis,
this Committee also reviews the Company's interest rate risk position.
The Company also has a Risk Management Committee comprised of certain members of
the Board of Directors which meets quarterly and reviews interest rate risks and
trends, the Company's interest sensitivity position, the Company's liquidity
position and the market risk inherent in the Company's investment portfolio.
In an effort to assess market risk, the Company utilizes a simulation model to
determine the effect of immediate incremental increases and decreases in
interest rates in 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 effect of actual changes in
interest on these assumptions may differ from simulated results. The Company has
established the following guidelines for assessing 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 present value of the Company's assets and liabilities. Given a parallel
shift of 2% in interest rates, the market value of equity may not decrease by
more than 35% of total shareholders' equity.
The following table illustrates the simulated impact of a 1% or 2% upward or 1%
downward movement in interest rates on net income, return on average equity,
earnings per share and market value of equity. Given the low interest rate
environment that existed in the current period, the impact of a 2% downward
shift is not shown in the table. This analysis was prepared assuming that
interest-earning asset levels at September 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 September 30,
2003 levels.
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Increase Decrease
------------------ -----------------
Parallel shift in interest rates over the next 12 months 1.0% 2.0% 1.0% 2.0%
----- ----- ------ ---
Projected percentage increase/(decrease) in net income 1.6% 7.9% (4.2)% NM
Projected increase/(decrease) in return on average equity 0.2% 1.0% (0.6)% NM
Projected increase/(decrease) in earnings per share $ 0.00 $ 0.09 $ (0.05) NM
Projected percentage increase/(decrease) in market value of equity 2.6% 3.8% (10.5)% NM
NM - Not meaningful
The figures included in the table above represent projections which were
computed based upon certain assumptions including prepayment rates and decay
rates which cannot be accurately predicted. There are no assurances that these
assumptions and the resultant impact on the Company's financial ratios will
approximate the figures presented above.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of and the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of the end of this fiscal quarter. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, these disclosure controls and procedures are effective in
timely alerting them to the material information relating to the Company (or the
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There were no significant changes in the Company's internal controls during the
period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of the most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31, 2003, the Board of Directors of the Company approved and adopted
the Northwest Bancorp, Inc. 2003 Stock Issuance Plan (the "Plan"). The Plan was
approved by the Office of Thrift Supervision on July 15, 2003.
Pursuant to the registration statement on Form S-3, declared effective on July
15, 2003 (Commission File No. 333-105131) (the "Registration Statement"), the
Company registered up to 7,666,667 shares of common stock for purchase at a
price between $15.00 and $16.50 per share. In accordance with the Plan and
pursuant to the Registration Statement, the stock was first issued to eligible
depositors of Northwest Savings Bank, Leeds Federal Savings Bank and Jamestown
Savings Bank, stockholders of the Company, persons residing in the counties in
which the Company does business, and the general public. The offering was
oversubscribed and orders from depositors, stockholders and persons residing in
the counties in which the Company does business were filled. On August 25, 2003,
the Company issued 7,255,520 shares at $15.85 per share, and these shares began
trading on August 26, 2003.
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The offering, which was concluded on August 21, 2003, resulted in net proceeds
of $112.8 million. Expenses related to the offering were $2.2 million, including
expenses paid to Ryan Beck & Co., Inc., who acted as the Company's financial
advisor.
The proceeds from the offering were invested in interest-bearing deposits, until
August 29, 2003, when $112.8 million of the net proceeds was used to acquire
First Bell Bancorp, Inc. and its wholly-owned subsidiary, Bell Federal Savings
and Loan Association of Bellevue.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
31.1 Certification of the Company's Chief Executive Officer pursuant to Rule
13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to Rule
13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company's Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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(B) REPORTS ON FORM 8-K
During the first fiscal quarter, the Company filed or furnished the following
Current Reports on Form 8-K:
(1) A report dated July 15, 2003, which included, under Items 5 and 7, the
Company's press release announcing the commencement of a public offering
of shares.
(2) A report dated July 22, 2003, which included, under Items 7 and 9, the
Company's press release announcing annual earnings.
(3) A report dated August 11, 2003, which included, under Items 5 and 7, the
Company's press release announcing regulatory approval to acquire First
Bell Bancorp, Inc.
(4) A report dated August 22, 2003, which included, under Items 5 and 7, the
Company's press release announcing the conclusion of the Company's public
offering of shares.
(5) A report dated September 2, 2003, which included, under Items 5 and 7, the
Company's press release announcing the completion of the acquisition of
First Bell Bancorp, Inc.
(6) A report dated September 12, 2003, which included, under Items 5 and 7,
Northwest Bancorp, MHC's press release announcing the signing of the
definitive agreement to acquire Skibo Financial, MHC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST BANCORP, INC.
Date: November 13, 2003 By: /s/ William J. Wagner
------------------ ---------------------------------------
William J. Wagner
President and Chief Executive Officer
Date: November 13, 2003 By: /s/ William W. Harvey, Jr.
------------------ ---------------------------------------
William W. Harvey, Jr.
Senior Vice President and
Chief Financial Officer
27