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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 DECEMBER 31, 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
-------
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) 47,788,950 shares outstanding as of
December 31, 2003.
NORTHWEST BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 2003 and June 30, 2003 1
Consolidated Statements of Income for the three months and
six months ended December 31, 2003 and 2002 2
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended December 31, 2003 and 2002 3
Consolidated Statements of Changes in Shareholders' Equity for
the six months ended December 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three months and
six months ended December 31, 2003 and 2002 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
Certifications 34
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30,
Assets 2003 2003
- ----------------------------------------------------------------------------------- ------------------------ -------------
Cash and Cash Equivalents $ 87,241 75,563
Interest-earning deposits in other financial institutions 87,633 244,437
Marketable securities available-for-sale (amortized cost of $1,102,901 and $884,667) 1,112,806 896,631
Marketable securities held-to-maturity (market value of $450,897 and $486,922) 444,259 477,821
-------- --------
Total cash, interest-earning deposits and marketable securities 1,731,939 1,694,452
Mortgage loans - one- to four- family 2,309,298 2,064,181
Commercial real estate loans 411,178 377,507
Consumer loans 831,009 701,561
Commercial business loans 130,958 130,115
---------- -----------
Total loans receivable 3,682,443 3,273,364
Allowance for loan losses (28,445) (26,593)
---------- -----------
Loans receivable, net 3,653,998 3,246,771
Federal Home Loan Bank stock, at cost 33,151 33,764
Accrued interest receivable 21,849 18,714
Real estate owned, net 3,436 3,664
Premises and equipment, net 73,535 63,190
Bank owned life insurance 88,126 63,397
Goodwill 126,705 76,206
Other assets 43,988 22,209
---------- -----------
Total assets $ 5,776,727 $ 5,222,367
========== ===========
Liabilities and Shareholder' equity
- --------------------------------------------------------------------------------
Liabilities:
Noninterest-bearing demand deposits 207,446 190,987
Interest-bearing demand deposits 642,230 670,935
Savings deposits 1,745,858 1,488,885
Time deposits 2,102,428 1,912,749
---------- -----------
Total deposits 4,697,962 4,263,556
Borrowed funds 452,033 465,750
Advances by borrowers for taxes and insurance 21,724 21,319
Accrued interest payable 4,007 4,101
Other liabilities 8,874 11,709
Junior subordinated deferrable interest debentures held by trusts that issued
guaranteed capital debt securities 102,062 -
Guaranteed preferred beneficial interests in capital debt securities issued
by consolidated trusts - 99,000
---------- -----------
Total liabilities 5,286,662 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, 47,788,950 and
47,693,981 issued and outstanding, respectively 4,779 4,769
Paid-in capital 185,975 72,787
Retained earnings 292,878 271,599
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale, net of income taxes 6,433 7,777
---------- -----------
490,065 356,932
---------- -----------
$ 5,776,727 $ 5,222,367
========== ===========
Total liabilities and shareholders' equity
See accompanying notes to unaudited consolidated financial statements
1
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six months ended
December 31, December 31,
2003 2002 2003 2002
----------- ----------- ----------- ----------
Interest income:
Loans receivable $ 58,214 58,021 $114,149 115,575
Mortgage-backed securities 6,877 6,512 11,627 12,867
Taxable investment securities 4,360 2,398 7,825 4,757
Tax-free investment securities 3,091 2,024 5,881 3,897
Interest-earning deposits 370 1,215 1,029 2,085
-------- -------- -------- --------
Total interest income 72,912 70,170 140,511 139,181
Interest expense:
Deposits 24,569 28,397 50,298 57,000
Borrowed funds 7,084 7,459 14,274 13,476
-------- -------- -------- --------
Total interest expense 31,653 35,856 64,572 70,476
Net interest income 41,259 34,314 75,939 68,705
Provision for loan losses 1,733 2,159 3,460 3,826
-------- -------- -------- --------
Net interest income after
provision for loan losses 39,526 32,155 72,479 64,879
Noninterest income:
Service charges and fees 3,462 3,490 6,739 6,896
Trust and other financial services income 941 807 1,849 1,660
Insurance commission income 192 370 359 755
Gain on sale of marketable securities, net 583 257 3,897 544
Gain on sale of loans, net 115 709 401 1,218
Gain on sale of real estate owned, net 507 135 1,060 182
Income from bank owned life insurance 1,058 872 1,943 1,624
Other operating income 452 368 823 801
-------- -------- -------- --------
Total noninterest income 7,310 7,008 17,071 13,680
Noninterest expense:
Compensation and employee benfits 16,718 13,570 31,060 26,620
Premises and occupancy costs 3,847 3,322 7,496 6,498
Office operations 2,371 2,262 4,452 4,140
Processing expenses 2,175 2,217 4,256 4,150
Advertising 580 778 1,132 1,286
Other expenses 4,270 2,308 6,510 4,522
-------- -------- -------- --------
Total noninterest expense 29,961 24,457 54,906 47,216
-------- -------- -------- --------
Income before income taxes 16,875 14,706 34,644 31,343
Federal and state income taxes 4,854 4,418 10,167 9,612
-------- -------- -------- --------
Net income 12,021 10,288 24,477 21,731
======== ======== ======== ========
Basic earnings per share $ 0.25 $ 0.22 $ 0.51 $ 0.46
======== ======== ======== ========
Diluted earnings per share $ 0.25 $ 0.21 $ 0.51 $ 0.45
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements
2
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, 2002 Accum.
Common Stock Other Total
------------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ---------- ---------- ---------- ----------
Beginning balance at September 30, 2002 47,571,103 $ 4,757 71,967 244,298 8,312 $ 329,334
Comprehensive income:
Net income -- -- -- 10,288 -- 10,288
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- -- (1,855) (1,855)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 10,288 (1,855) 8,433
Exercise of stock options 68,523 7 354 -- -- 361
Dividends declared ($.08 per share) -- -- -- (980) -- (980)
---------- ---------- ---------- ---------- ---------- ----------
Ending balance at December 31, 2002 47,639,626 $ 4,764 72,321 253,606 6,457 $ 337,148
========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED DECEMBER 31, 2003 Accum.
Common Stock Other Total
---------------------------- Paid-in Retained Comprehensive Shareholders
Shares Amount Capital Earnings Income Equity
-------------- ------------ ----------- ------------ -------------- ------------
Beginning balance at September 30, 2003 47,723,227 $ 4,772 185,757 282,822 3,539 $ 476,890
Comprehensive income:
Net income -- -- -- 12,021 -- 12,021
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- -- 2,894 2,894
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 12,021 2,894 14,915
Exercise of stock options 65,723 7 218 -- -- 225
Dividends declared ($.10 per share) -- -- -- (1,965) -- (1,965)
---------- ---------- ---------- ---------- ---------- ----------
Ending balance at December 31, 2003 47,788,950 $ 4,779 185,975 292,878 6,433 $ 490,065
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
3
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SIX MONTHS ENDED DECEMBER 31, 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 $316,640
Comprehensive income:
Net income - - - 21,731 - 21,731
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 241 241
---------- ------ ------ ------- -------- --------
Total comprehensive income - - - 21,731 241 21,972
Exercise of stock options 89,967 9 483 - - 492
Dividends declared ($.16 per share) - - - (1,956) - (1,956)
---------- ------ ------ ------- -------- --------
Ending balance at December 31, 2002 47,639,626 $4,764 72,321 253,606 6,457 $337,148
========== ====== ====== ======= ======== ========
SIX MONTHS ENDED DECEMBER 31, 2003 Accum.
CommonStock 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 - - - 24,477 - 24,477
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - (1,344) (1,344)
---------- ------ ------- ------- ----- --------
Total comprehensive income - - - 24,477 (1,344) 23,133
Exercise of stock options 94,969 10 384 - - 394
Proceeds from incremental stock offering,
net of related expenses of $2,196 - - 112,804 - - 112,804
Dividends declared ($.20 per share) - - - (3,198) - (3,198)
---------- ------ ------- ------- ----- --------
Ending balance at December 31, 2003 47,788,950 $4,779 185,975 292,878 6,433 $490,065
========== ====== ======= ======= ===== ========
See accompanying notes to unaudited consolidated financial statements
4
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended Six months ended
December 31, December 31,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net Income $12,021 10,288 24,477 21,731
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,733 2,159 3,460 3,826
Net loss (gain) on sale of assets (1,205) (1,101) (5,358) (1,944)
Net depreciation, amortization and accretion 3,311 2,543 4,761 4,833
Decrease (increase) in other assets 3,372 (3,662) 14,726 (8,747)
Increase (decrease) in other liabilities (5,976) 1,552 (12,858) (1,072)
Net amortization (accretion) of premium/ discount on
marketable securities 3,312 (256) 5,766 (535)
Other - - - -
------ ------ ------ ------
Net cash provided by operating activities 16,568 11,523 34,974 18,092
INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity - (139,740) - (265,147)
Purchase of marketable securities available-for-sale (159,263) (88,738) (492,621) (162,000)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 64,153 95,732 261,518 127,167
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 189,788 53,013 373,957 95,671
Proceeds from sales of marketable securities,
available-for-sale 25,730 32,972 218,557 57,980
Loan originations (266,968) (359,831) (740,432) (614,729)
Proceeds from loan maturities and principal
reductions 195,804 276,027 505,560 427,480
Proceeds from loan sales 7,845 73,720 48,486 115,898
Purchase of FHLB stock 14,362 (4,928) 13,393 (4,928)
Proceeds from sale of real estate owned 1,613 1,136 3,327 2,579
Net (purchase) sale of real estate owned for
investment 77 90 154 (82)
Purchase of premises and equipment (5,990) (3,299) (9,791) (6,206)
Acquisitions, net of cash received - - (95,167) 2,619
------ ------ ------ ------
Net cash used by investing activities 67,151 (63,846) 86,941 (223,698)
5
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Three months ended Six months ended
December 31, December 31,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net $(176,392) 125,432 (174,981) 276,630
Proceeds from long-term borrowings - - - 180,000
Repayments of long-term borrowings (15,814) (11,467) (202,707) (11,470)
Net increase (decrease) in short-term borrowings (86,336) 4,365 2,871 5,205
Increase (decrease) in advances by borrowers for
taxes and insurance 10,564 8,144 (2,224) (3,669)
Cash dividends paid (1,965) (980) (3,198) (1,956)
Proceeds from stock offering, net - - 112,804 -
Proceeds from stock options exercised 225 361 394 492
--------- -------- --------- --------
Net cash provided by financing activities (269,718) 125,855 (267,041) 445,232
Net increase (decrease) in cash and cash equivalents (185,999) 73,532 (145,126) 239,626
========= ======== ========= =======
Cash and cash equivalents at beginning of period $360,873 383,848 320,000 217,754
Net increase (decrease) in cash and cash equivalents (185,999) 73,532 (145,126) 239,626
--------- -------- --------- --------
Cash and cash equivalents at end of period 174,874 457,380 174,874 457,380
========= ======== ========= ========
Cash paid during the period for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of $24,335,
$23,778
$44,724 and $47,517, respectively) 35,167 36,168 64,666 71,541
========= ======== ========= ========
Income taxes 2,354 8,327 2,794 8,879
========= ======== ========= ========
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 1,194 433 2,039 1,447
========= ======== ========= ========
Sale of real estate owned financed by the Company 68 98 317 304
========= ======== ========= ========
See accompanying notes to unaudited consolidated financial statements
6
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 145 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 may have been reclassified to conform with the current period's
reporting format. The results of operations for the three months and six months
ended December 31, 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
7
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. 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"), 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 savings bank subsidiaries of the Company: Northwest and Jamestown,
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
DECEMBER 31, 2003 ($ IN 000'S) Banks Finance All Other* Consolidated
- --------------------------------------------------------------------------------------------
External interest income $ 68,363 4,401 148 72,912
- --------------------------------------------------------------------------------------------
Intersegment interest income 1,129 - (1,129) -
- --------------------------------------------------------------------------------------------
Interest expense 29,750 1,209 694 31,653
- --------------------------------------------------------------------------------------------
Provision for loan losses 1,040 693 - 1,733
- --------------------------------------------------------------------------------------------
Noninterest income 6,996 257 57 7,310
- --------------------------------------------------------------------------------------------
Noninterest expense 27,558 1,995 408 29,961
- --------------------------------------------------------------------------------------------
Income tax expense (benefit) 5,251 317 (714) 4,854
- --------------------------------------------------------------------------------------------
Net income 12,889 444 (1,312) 12,021
- --------------------------------------------------------------------------------------------
Total assets $5,627,402 124,946 24,379 5,776,727
- --------------------------------------------------------------------------------------------
8
Community Consumer
DECEMBER 31, 2002 ($ IN 000'S) Banks Finance All Other* Consolidated
- --------------------------------------------------------------------------------------------
External interest income $ 65,680 4,439 51 70,170
- --------------------------------------------------------------------------------------------
Intersegment interest income 1,360 - (1,360) -
- --------------------------------------------------------------------------------------------
Interest expense 34,234 1,466 156 35,856
- --------------------------------------------------------------------------------------------
Provision for loan losses 1,502 657 - 2,159
- --------------------------------------------------------------------------------------------
Noninterest income 6,768 240 - 7,008
- --------------------------------------------------------------------------------------------
Noninterest expense 22,465 1,887 105 24,457
- --------------------------------------------------------------------------------------------
Income tax expense (benefit) 4,707 278 (567) 4,418
- --------------------------------------------------------------------------------------------
Net income 10,900 391 (1,003) 10,288
- --------------------------------------------------------------------------------------------
Total assets $4,814,139 126,413 10,130 4,950,682
- --------------------------------------------------------------------------------------------
* Eliminations consist of intercompany interest income and interest expense.
AS OF OR FOR THE SIX MONTHS ENDED:
Community Consumer
DECEMBER 31, 2003 ($ IN 000'S) Banks Finance All Other* Consolidated
- --------------------------------------------------------------------------------------------
External interest income $ 131,377 8,831 303 140,511
- --------------------------------------------------------------------------------------------
Intersegment interest income 2,283 - (2,283) -
- --------------------------------------------------------------------------------------------
Interest expense 60,910 2,441 1,221 64,572
- --------------------------------------------------------------------------------------------
Provision for loan losses 2,105 1,355 - 3,460
- --------------------------------------------------------------------------------------------
Noninterest income 16,395 550 126 17,071
- --------------------------------------------------------------------------------------------
Noninterest expense 50,402 3,932 572 54,906
- --------------------------------------------------------------------------------------------
Income tax expense (benefit) 10,765 687 (1,285) 10,167
- --------------------------------------------------------------------------------------------
Net income 25,873 966 (2,362) 24,477
- --------------------------------------------------------------------------------------------
Total assets $5,627,402 124,946 24,379 5,776,727
- --------------------------------------------------------------------------------------------
Community Consumer
DECEMBER 31, 2002 ($ IN 000'S) Banks Finance All Other* Consolidated
- --------------------------------------------------------------------------------------------
External interest income $ 130,031 9,045 105 139,181
- --------------------------------------------------------------------------------------------
Intersegment interest income 2,846 - (2,846) -
- --------------------------------------------------------------------------------------------
Interest expense 67,276 3,061 139 70,476
- --------------------------------------------------------------------------------------------
Provision for loan losses 2,395 1,431 - 3,826
- --------------------------------------------------------------------------------------------
Noninterest income 13,177 503 - 13,680
- --------------------------------------------------------------------------------------------
Noninterest expense 43,329 3,690 197 47,216
- --------------------------------------------------------------------------------------------
Income tax expense (benefit) 10,158 567 (1,113) 9,612
- --------------------------------------------------------------------------------------------
Net income 22,896 799 (1,964) 21,731
- --------------------------------------------------------------------------------------------
Total assets $4,814,139 126,413 10,130 4,950,682
- --------------------------------------------------------------------------------------------
* Eliminations consist of intercompany interest income and interest expense.
9
(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
$933.0 million including cash of $22.6 million, investments of $544.8 million,
loans of $224.5 million, goodwill of $50.2 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 $50.2
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:
DECEMBER 31, JUNE 30,
2003 2003
-----------------------------------------
Amortizable intangible assets:
Core deposit intangibles - gross $ 19,503 4,401
Less: accumulated amortization (3,125) (1,621)
------------------- ------------------
Core deposit intangibles - net $ 16,378 2,780
=================== ==================
Customer and Contract intangible assets - gross 1,881 831
Less: accumulated amortization (385) (81)
------------------- ------------------
Customer and Contract intangible assets - net $ 1,496 750
=================== ==================
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 50,224 275 50,499
Amortization -- -- --
Impairment losses -- -- --
------------------- ------------------- -------------------
Balance at December 31, 2003 $ 125,537 1,168 126,705
=================== =================== ===================
10
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 12/31/02 $ 197
For the three months ended 12/31/03 1,665
For the six months ended 12/31/02 312
For the six months ended 12/31/03 1,808
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 $12.4 million, of
which $11.3 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.
(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.
11
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 ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------------- --------------- -------------- ---------------
Net income:
As reported $ 12,021 10,288 24,477 21,731
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (63) (41) (187) (132)
------ ------ ------ ------
Pro forma 11,958 10,247 24,290 21,599
====== ====== ====== ======
Basic earnings per share:
As reported 0.25 0.22 0.51 0.46
Pro forma 0.25 0.22 0.51 0.45
Diluted earnings per share:
As reported 0.25 0.21 0.51 0.45
Pro forma 0.25 0.21 0.50 0.45
- ----------------------------------------------------------------------------------------------------------------------------
There was no stock-based employee compensation expense included in reported net
income during the three or six months ended December 31, 2003 or 2002.
12
(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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Reported net income $ 12,021 10,288 24,477 21,731
Weighted average common shares outstanding 47,761 47,610 47,735 47,587
Common stock equivalents due to effect of stock
options 647 523 579 509
--------------- -------------- -------------- ---------------
Total weighted average common
shares and equivalents 48,408 48,133 48,314 48,096
=============== ============== ============== ===============
Basic earnings per share: $ 0.25 0.22 0.51 0.46
=============== ============== ============== ===============
Diluted earnings per share: $ 0.25 0.21 0.51 0.45
=============== ============== ============== ===============
13
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 DECEMBER 31,
2003
ASSETS
At December 31, 2003 the Company had total assets of $5.777 billion, an increase
of $554.4 million, or 10.6%, 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. Following the
restructuring of the assets and liabilities acquired with Bell, this acquisition
added assets of approximately $622.8 million, including net loans of $224.5
million, investments of $246.0 million, cash of $24.3 million, and bank owned
life insurance of $22.8 million. The acquisition created intangible assets of
approximately $66.4 million. The restructuring that was performed consisted
primarily of the sale of $101.0 million of municipal securities and the
repayment of $173.0 million of long-term fixed rate borrowings. These
transactions were completed in September 2003.
Cash and cash equivalents, interest-earning deposits and marketable securities
totaled $1.732 billion at December 31, 2003, an increase of $37.5 million, or
2.2%, from $1.694 billion at June 30, 2003. Net loans receivable increased by
$407.2 million, or 12.5%, to $3.654 billion at December 31, 2003 from $3.247 at
June 30, 2003. This increase resulted from the acquisition of Bell, which had
net residential mortgage loans receivable of $224.5 million, and loan
originations throughout the Company's existing retail network.
LIABILITIES
Deposits increased by $434.4 million, or 10.2%, to $4.698 billion at December
31, 2003 from $4.264 billion at June 30, 2003. This increase resulted primarily
from the acquisition of Bell, which included deposits of $609.4 million.
Borrowed funds decreased by $13.8 million, or 2.9%, to $452.0 million at
December 31, 2003 from $465.8 million at June 30, 2003. This decrease is the
result of the maturity of FHLB advances.
CAPITAL RESOURCES AND LIQUIDITY
Total shareholders' equity at December 31, 2003 was $490.1 million, an increase
of $133.2 million, or 37.3%, 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 six-month period of $24.5 million, which was partially offset by the payment
of cash dividends of $3.2 million, and a decrease in the unrealized gain on
securities, net of tax, of $1.3 million.
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
14
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).
December 31, 2003
Minimum Capital Well Capitalized
Actual Requirements Requirements
- -----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 400,578 14.10% $ 227,234 8.00% $ 284,043 10.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 22,158 10.74% $ 16,508 8.00% $ 20,636 10.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (to risk weighted assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 372,366 13.11% $ 113,617 4.00% $ 170,426 6.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 20,306 9.84% $ 8,254 4.00% $ 12,381 6.00%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Tier I Capital (leverage) (to average assets):
- -----------------------------------------------------------------------------------------------------------------------
Northwest Savings Bank $ 372,366 6.99% $ 159,777 3.00%* $ 266,294 5.00%
- -----------------------------------------------------------------------------------------------------------------------
Jamestown Savings Bank $ 20,306 5.47% $ 11,143 3.00%* $ 18,571 5.00%
- -----------------------------------------------------------------------------------------------------------------------
15
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 December 31, 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 maintained a level of liquid
assets in excess of regulatory and internal requirements, and the liquidity
ratio at December 31, 2003 was 27.5% and 46.3% 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 $3.2 million in cash dividends during the first six months of
the current fiscal year, compared with $2.0 million in the prior year period.
Northwest Bancorp, MHC waived its right to receive dividends in both periods
presented. The common stock dividend payout ratio (dividend declared per share
divided by diluted earnings per share) was 40.0% in the three-month period ended
December 31, 2003 on a dividend of $.10 compared with 38.1% in the three-month
period ended December 31, 2002 on a dividend of $.08 per share. Because
Northwest Bancorp, MHC waived the receipt of its dividend, the actual dividends
paid were 16.3% and 9.5% of net income for the three months ended December 31,
2003 and 2002, respectively.
As a result of the incremental stock offering in the current fiscal year,
7,255,520 shares, or 15.2%, of the total shares outstanding which were
previously held by Northwest Bancorp, MHC, were sold in a subscription offering
and are now held by minority shareholders and are receiving common stock
dividend.
16
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 $445,000, or 1.2%, to $35.8
million at December 31, 2003 from $36.3 million at June 30, 2003. Management
believes that the generally low level of nonperforming assets is attributable to
existing credit policies and sustained collection procedures.
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis: December 31, 2003 June 30, 2003
- --------------------------------------------------------------------------------------------------------------------
One-to four- family residential loans $ 12,529 $ 11,140
- --------------------------------------------------------------------------------------------------------------------
Multifamily and commercial real estate loans 11,447 11,975
- --------------------------------------------------------------------------------------------------------------------
Consumer loans 5,785 4,896
- --------------------------------------------------------------------------------------------------------------------
Commercial business loans 2,635 4,602
- --------------------------------------------------------------------------------------------------------------------
Total $ 32,396 $ 32,613
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans as a percentage of
net loans receivable .89% 1.00%
- --------------------------------------------------------------------------------------------------------------------
Total real estate acquired through foreclosure
and other real estate owned $ 3,436 $ 3,664
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 35,832 $ 36,277
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of total assets .62% .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 Company performs
impairment tests on all loans of $500,000 or greater covered under SFAS 114,
where there is a significant credit concern. 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. Residential mortgage and consumer loans
are not tested for impairment because they are included in large groups of
smaller-balance homogeneous loans that are excluded from the scope SFAS 114.
Impaired loans at December 31, 2003 and June 30, 2003 were $32.4 million and
$32.6 million, respectively.
17
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 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 Credit
Review 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 Credit Review 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 Credit Review 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 Credit Review 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 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 on this review and
18
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. 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.
19
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND
2002
Net income for the three months ended December 31, 2003 was $12.0 million, or
$.25 per diluted share, an increase of $1.7 million, or 16.5%, from $10.3
million, or $.21 per diluted share, for the same quarter last year. This
increase resulted from an increase in net interest income of $6.9 million, a
decrease in the provision for loan losses of $426,000 and an increase in
noninterest income of $302,000. Partially offsetting these changes was an
increase in noninterest expense of $5.5 million and an increase in income tax
expense of $436,000.
Net income for the three months ended December 31, 2003 represents a return on
average equity and return on average assets of 10.00% and .82%, respectively,
compared to 12.33% and .84% for the same quarter last year.
INTEREST INCOME
Total interest income, on a taxable equivalent basis, increased by $3.4 million,
or 4.7%, to $74.9 million primarily due to a $901.3 million, or 19.7%, increase
in average interest earning assets to $5.469 billion for the three months ended
December 31, 2003, from $4.568 billion for the three months ended December 31,
2002. The effect of this increase in average interest earning assets was
partially offset by a decrease in the average yield on interest earning assets
to 5.48% from 6.27%. The decrease in the average yield on interest earning
assets resulted from the continued effect of the historically low 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, on a taxable equivalent basis, increased by
$183,000, or less than 1%, to $58.5 million due to an increase in the average
balance outstanding of $446.4 million, or 14.0%, to $3.643 billion. The effect
of this increase was partially offset by a decrease in the average rate to 6.43%
from 7.30%. Average loans outstanding increased primarily as a result of
internal loan growth as well as from the acquisition of Bell. The acquisition of
Bell included $224.5 million of net loans receivable. The decrease in the
average yield resulted primarily from the repricing of variable rate loans and
the refinancing of fixed rate loans in the current interest rate environment.
Interest income on mortgage-backed securities increased by $365,000, or 5.6%, to
$6.9 million primarily because of an increase in the average balance of $235.3
million, or 36.2%, to $885.3 million from $650.0 million. The effect of the
increase in average balance was partially offset by a decrease in the average
yield to 3.11% from 4.01%. The average yield on mortgage-backed securities, of
which approximately 65% are variable rate, decreased primarily as a result of a
decrease in short-term market interest rates. The average balance increased
primarily as a result of the acquisition of Bell as well as the transfer of
funds from overnight funds to mortgage-backed securities.
Interest income on investment securities, on a taxable-equivalent basis,
increased by $3.8 million, or 71.5%, to $9.0 million due primarily to an
increase in the average balance of $417.1 million, or 127.4%, to $744.5 million
from $327.4 million. The effect of the increase in average balance was partially
offset by a decrease in the average taxable equivalent yield to 4.83% from
6.41%. 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 decrease in the taxable
equivalent yield is a result of the purchase of a substantial amount of
securities during the low interest rate environment that has prevailed over the
past eighteen months.
Interest income on interest-earning deposits decreased by $845,000, or 69.5%,
because the average yield decreased to 0.92% from 1.32% and the average balance
decreased $207.0 million, or 56.4%, to $160.2 million from $367.2 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 decrease in average
balance resulted primarily from the Company's deployment of overnight funds into
other interest earning assets which typically provide higher yields.
20
INTEREST EXPENSE
Total interest expense decreased by $4.2 million, or 11.7%, to $31.7 million
from $35.9 million, due to a decrease in the average cost of interest-bearing
liabilities to 2.47% from 3.30%. The effect of this decrease was partially
offset by an increase in the average balance of $788.2 million, or 18.2%, to
$5.130 billion from $4.342 billion. The decrease in the cost of funds resulted
primarily from a reduction in the interest rates paid on deposits as a result of
lower market interest rates. In addition, the increase in deposits of $822.9
million, or 21.9%, occurred primarily in savings, checking and money market
products which have no term and generally lower interest rates. The increase in
the average balance of deposits was mainly attributed to the growth of existing
offices along with new office openings and acquisitions. The Bell acquisition
added deposits of $609.4 million.
NET INTEREST INCOME
Net interest income, on a taxable equivalent basis, increased by $7.6 million,
or 21.2%, to $43.3 million from $35.7 million for the prior year period. This
increase in net interest income was primarily attributable to the overall growth
in the Company's balance sheet but was also augmented by an increase in net
interest margin to 3.16% from 3.13%.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $426,000, or 19.7%, 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 net charge-offs for the period of $1.1 million, the
growth in the loan portfolio, the level of nonperforming loans during the period
and any changes in economic conditions. Management believes, to the best of
their knowledge, that all known losses as of the balance sheet dates have been
recorded.
NONINTEREST INCOME
Noninterest income increased by $302,000, or 4.3%, to $7.3 million for the
current quarter from $7.0 million for the same period in the prior year. Trust
and other financial services income increased by $134,000, or 16.6%, to $941,000
for the quarter primarily as a result of an increase in assets under management
of $100.0 million and the expansion of services provided by Boetger &
Associates. Insurance commission income decreased $178,000, or 48.1%, to
$192,000 primarily as a result of the Company no longer offering single premium
life insurance related to consumer loans as dictated by HOEPA regulations. The
Company's gain on sale of loans decreased by $594,000, or 83.8%, to $115,000 as
the Company held the majority of loans originated through its wholesale lending
department. The gain on sale of REO increased $372,000 over the prior year as
the Company was able to liquidate some larger parcels of real estate that it had
been holding for a considerable period of time. Income from bank owned life
insurance increased $186,000, or 21.3%, due to addition of approximately $22.8
million of bank owned life insurance acquired with the acquisition of Bell.
NONINTEREST EXPENSE
Noninterest expense increased by $5.5 million, or 22.5%, to $30.0 million from
$24.5 million for the same quarter in the prior year. The Company noted that
compensation and employee benefits expense increased by $3.1 million, or 23.2%,
to $16.7 million for the current quarter from $13.6 million the prior year. In
addition to the Company's growth, it recognized higher than usual benefit
claims, approximately $1.5 million, in the Company's self-funded medicare plan
that are not expected to be recurring in nature. In addition, compensation also
21
increased over the prior year due to lower loan demand and therefore, a
decrease in the amount of loan origination costs deferred in accordance with
SFAS 91. Other expenses increased by $2.0 million, or 85.0%, to $4.3 million
primarily as a result of amortization expense of approximately $1.3 million
related to the core deposit premium generated by the Bell acquisition.
Management believes that despite these increases in operating expense, progress
has been made in controlling expenses as the ratio of operating expense to
average assets has remained at approximately 2.0%.
INCOME TAXES
The provision for income taxes for the three months ended December 31, 2003
increased by $436,000, or 9.9%, 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 $2.2 million, or 14.7%, to $16.9 million from $14.7 million.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND
2002
Net income for the six months ended December 31, 2003 was $24.5 million, or $.51
per diluted share, an increase of $2.8 million, or 12.6%, from $21.7 million, or
$.45 per diluted share, for the same period last year. This increase resulted
from an increase in net interest income of $7.2 million, and an increase in
noninterest income of $3.4 million, offset by an increase in noninterest expense
of $7.7 million.
Net income for the six months ended December 31, 2003 represents a return on
average equity and return on average assets of 10.91% and .86%, respectively,
compared to 13.25% and .93% for the same period last year.
INTEREST INCOME
Total interest income, on a taxable equivalent basis, increased by $2.5 million,
or 1.7%, to $144.4 million due primarily to an increase in average interest
earning assets of $983.2 million, or 22.6%, to $5.339 billion from $4.355
billion. The effect of the increase in interest earning assets was offset by a
decrease in the yield on interest earning assets to 5.41% from 6.52%. The
increase in average interest earning assets resulted from strong internal
deposit growth and the acquisition of Bell. The decrease in the overall yield on
interest earning assets year over year resulted from the repricing of variable
rate assets, as well as the substantial growth in interest earning assets,
during a period of declining interest rates.
Interest income on loans receivable decreased by $1.5 million, or 1.2%, on a
taxable equivalent basis, to $114.8 million due to a decrease in taxable
equivalent yield to 6.54% from 7.43%. This decrease was partially offset by an
increase in average loans outstanding of $384.0 million, or 12.3%, to $3.512
billion from $3.128 billion. Average loans outstanding increased because of
continued loan demand throughout the Company's market area as well as the
aforementioned acquisition of Bell. The decrease in average yield resulted
primarily from the repricing of variable rate loans and the refinancing of fixed
rate loans in a relatively low interest rate environment along with the growth
in the Company's loan portfolio over the past eighteen months at interest rate
levels lower than the existing average portfolio rate.
Interest income on mortgage-backed securities decreased by $1.2 million, or
9.6%, to $11.6 million. This decrease in interest income is attributed to the
decrease in average yield to 2.59% from 4.30%. The decrease in yield was
partially offset by an increase in average balance of $297.8 million, or 49.7%,
to $897.0 million from $599.2 million. The average yield on mortgage-backed
securities, of which approximately 65% have variable rates, decreased in
response to the continued low level of short-term market interest rates. The
average balance increased primarily as a result of the Company choosing to
invest additional funds in these securities as well as the acquisition of Bell
which had a substantial portfolio of mortgage-backed securities.
Interest income on investment securities increased by $6.4 million, or 61.7%, on
a taxable equivalent basis, to $16.6 million from $10.2 million. This increase
is primarily a result of an increase in the average balance of $349.5 million,
or 111.1%, to $664.1 million from $314.6 million. The effect of the increase in
average
22
balance was partially offset by a decrease in the average yield to 4.99% from
6.51%. The increase in the average balance of investment securities was
primarily due to the investment of available funds generated from deposit growth
and the securities acquired with the acquisition of Bell. The decrease in the
taxable equivalent yield is a result of purchasing investment securities in the
current low interest rate environment.
Interest income on interest-earning deposits decreased by $1.1 million, or
50.6%, to $ 1.0 million from $2.1 million. This decrease is the result of a
decline in both the average balance of interest earning deposits and the yield
earned on these overnight funds. The average balance of interest-earning
deposits decreased $60.2 million, or 20.9%, to $228.1 million from $288.3
million. The average yield decreased to .90% from 1.45%. The decrease in average
balance is a result of the Company deploying the funds into other investments,
which generate a higher rate of return, while the decrease in average yield is a
result of the decline in market rates for overnight funds.
INTEREST EXPENSE
Total interest expense decreased by $5.9 million, or 8.4%, to $64.6 million from
$70.5 million, primarily due to a decrease in the average cost of
interest-bearing liabilities to 2.57% from 3.42%. The effect of the decrease in
the average cost of interest-bearing liabilities was partially offset by an
increase in the average balance of interest-bearing liabilities of $906.8
million, or 22.0%, to $5.025 billion from $4.118 billion. The decrease in the
cost of funds resulted primarily from the Company's deposit accounts repricing
at much lower rates in response to the significant decrease in short-term
interest rates. The increase in the average balance of interest-bearing
liabilities resulted primarily from an increase of $823.2 million, or 22.7%, in
the average balance of deposits, mainly attributed to the growth of existing
offices along with new office openings and acquisitions.
NET INTEREST INCOME
Net interest income increased by $8.4 million, or 11.7%, on a taxable equivalent
basis, to $79.8 million from $71.4 million. This increase in net interest income
was attributable to the growth of the Company as the Company's net interest
margin decreased to 2.99% from 3.28%.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $366,000, or 9.6%, to $3.5 million
from $3.8 million in the same period last year. 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
judgement, 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
net charge-offs for the period, the average growth of the loan portfolio and the
level of nonperforming loans. Management believes, to the best of their
knowledge, that all known losses as of the balance sheet dates have been
recorded.
NONINTEREST INCOME
Noninterest income increased by $3.4 million, or 24.8%, to $17.1 million from
$13.7 million in the same period last year. Fee income associated with loans and
deposits decreased by $157,000, or 2.3%, to $6.7 million from $6.9 million.
Trust and other financial services income increased by $189,000, or 11.4%, to
$1.8 million from $1.7 million primarily as a result of the fee income
contributed by Boetger & Associates, our actuarial and retirement plan services
company, and increased trust fee income. The Company's gain on sale of loans
decreased by $817,000 as the Company held most of the fixed-rate mortgage loans
originated through its wholesale lending business during the current year. The
gain on sale of investments increased $3.4 million as a result of the sale of
municipal securities acquired with the acquisition of Bell. These long-term,
fixed rate securities were sold in conjunction with the repayment of Bell's
long-term fixed rate borrowings which were originally used to fund the purchase
of the securities that were sold. Gain on sale of REO increased $878,000 over
the prior year as the Company successfully
23
liquidated some larger parcels of real estate that it had been holding for a
considerable period of time. Income from bank owned life insurance increased by
$319,000 due to the addition of $22.8 million of bank owned life insurance
acquired as part of the Bell acquisition.
NONINTEREST EXPENSE
Noninterest expense increased by $7.7 million, or 16.3%, to $54.9 million as all
major expense categories, except marketing, increased primarily as a result of
the significant growth of the Company's retail banking network, the expansion of
its investment management, trust and brokerage services, and the addition of new
products and services, in addition to the factors discussed in the three month
analysis. The Company has added 10 retail offices to its network over the past
twelve months through new office openings and acquisitions. Management believes,
however, that despite these substantial increases in expenses, progress has been
made in controlling operating expense.
INCOME TAXES
The provision for income taxes for the six months ended December 31, 2003
increased by $555,000, or 5.8%, compared to the same period last year. This
increase is primarily due to an increase in income before income taxes of $3.3
million, or 10.5% which was partially offset by a decrease in the effective tax
rate to 29.3% from 30.7% due to the increased investment in tax-free assets.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46, "Consolidation of Variable Interest Entities"
revised December 2003 ("FIN 46(R)"). FIN 46(R) requires that companies
consolidate a variable interest entity if it is subject to a majority of the
risk of loss from the variable interest entity's activities, or is entitled to
receive a majority of the entity's residual returns, or both. The provisions of
FIN 46(R) currently are required to be applied no later that the first reporting
period ending after March 15, 2004 for variable interest entities in which the
Company holds a variable interest that it acquired on or before January 31,
2003. Companies that acquired a variable interest after January 31, 2003,
continue to apply the provisions of FIN 46 (prior to the December 2003 revision)
or apply FIN 46(R) beginning December 31, 2003. Companies that hold a variable
interest in a special purpose entity, as defined, are required to apply either
FIN 46 or FIN 46(R) no later than the end of the first reporting period that
ends after December 15, 2003. FIN 46 (R) was applied to the Company's two
statutory business trusts that previously issued Trust-Preferred Securities. The
statutory business trusts, which are special purpose entities, were
deconsolidated as of December 31, 2003, since the Company is not the primary
beneficiary. The structure of the statutory business trusts has not changed,
since they were established in 2001, and the Company reclassified outstanding
junior subordinated debentures payable to the statutory business trusts as
"Junior subordinated deferrable interest debentures held by trusts that issued
guaranteed capital debt securities," on the Consolidated Statements of Financial
Condition.
In December 2003, the FASB issued Statement of Financial Accounting Standards
No. 132 (revised 2003, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits, and amendment of FASB Statements No. 87, 88 and 106"
(SFAS 132(R)"). SFAS 132(R) retains the disclosure requirements contained in
SFAS No. 132 prior to amendment, but requires additional disclosures about plan
assets, benefit obligations, cash flows and net periodic cost of defined benefit
plans and other post-retirement plans. The Company will be required to adopt the
new annual disclosure requirements effective June 30, 2004. SFAS 132(R) also
amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting"
to require interim-period disclosure of the components of net periodic benefit
cost and, if significantly different from previously disclosed amounts, the
amounts of contributions and projected contributions to fund pension plans and
other post-retirement benefit plans. The Company is required to adopt the
interim-period disclosure requirements of SFAS 132(R) effective March 31, 2004.
Because SFAS 132(R) pertains only to disclosure provisions, the Company's
adoption of SFAS 132(R) will not have an impact on the Company's financial
condition, results of operations or cash flows.
24
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 December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance Yield/ Balance Yield/
Cost Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
- -------
Interest earning assets:
Loans receivable (a)(b)(d) $3,643,172 $58,547 6.43% $3,196,734 $58,364 7.30%
Mortgage-backed securities (c) $ 885,309 $ 6,877 3.11% $ 649,968 $ 6,512 4.01%
Investment securities (c)(d)(e) $ 744,473 $ 8,997 4.83% $ 327,351 $ 5,246 6.41%
FHLB stock $ 36,049 $ 117 1.30% $ 26,675 $ 220 3.30%
Other interest earning deposits $ 160,175 $ 370 0.92% $ 367,193 $ 1,215 1.32%
---------- ------- ---- ---------- ------- ----
Total interest earning assets $5,469,178 $74,908 5.48% $4,567,921 $71,557 6.27%
Noninterest earning assets (f) $ 371,813 $ 330,315
---------- ----------
TOTAL ASSETS $5,840,991 $4,898,236
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Interest bearing liabilities:
Savings accounts $ 976,196 $ 3,150 1.29% $ 775,107 $ 4,448 2.30%
Now accounts $ 684,854 $ 1,330 0.78% $ 527,397 $ 1,838 1.39%
Money market demand accounts $ 767,036 $ 3,048 1.59% $ 489,163 $ 2,992 2.45%
Certificate accounts $2,146,891 $17,041 3.18% $1,960,375 $19,119 3.90%
Borrowed funds (g) $ 453,173 $ 5,153 4.55% $ 491,018 $ 5,543 4.52%
Debentures $ 102,062 $ 1,931 7.57% $ 99,000 $ 1,916 7.74%
---------- ------- ---- ---------- ------- ----
Total interest bearing liabilities $5,130,212 $31,653 2.47% $4,342,060 $35,856 3.30%
Noninterest bearing liabilities $ 230,179 $ 222,542
---------- ----------
Total liabilities $5,360,391 $4,564,602
Shareholders' equity $ 480,600 $ 333,634
---------- ----------
TOTAL LIABILITIES AND EQUITY $5,840,991 $4,898,236
========== ==========
Net interest income/Interest rate spread $43,255 3.01% $35,701 2.97%
Net interest earning assets/Net interest margin $ 338,966 3.16% $ 225,861 3.13%
Ratio of interest earning assets to
interest bearing liabilities 1.07X 1.05X
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
25
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 December 31, 2003 and 2002
- --------------------------------------------------------------------------------------
NET
RATE VOLUME CHANGE
- --------------------------------------------------------------------------------------
Interest earning assets:
Loans receivable $ (7,968) $ 8,151 $ 183
Mortgage-backed securities $ (1,993) $ 2,358 $ 365
Investment securities $ (2,934) $ 6,685 $ 3,751
FHLB stock $ (180) $ 77 $ (103)
Other interest-earning deposits $ (263) $ (582) $ (845)
-------- -------- -------
Total interest-earning assets $(13,338) $ 16,689 $ 3,351
Interest-bearing liabilities:
Savings accounts $ (2,452) $ 1,154 $(1,298)
Now accounts $ (1,057) $ 549 $ (508)
Money market demand accounts $ (1,643) $ 1,699 $ 56
Certificate accounts $ (3,897) $ 1,819 $(2,078)
Borrowed funds $ 40 $ (430) $ (390)
Debentures $ (44) $ 59 $ 15
-------- -------- -------
Total interest-bearing liabilities $ (9,053) $ 4,850 $(4,203)
-------- -------- -------
Net change in net interest income $ (4,285) $ 11,839 $ 7,554
======== ======== =======
26
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.
Six Months Ended December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg.
Balance Yield/ Balance Yield/
Cost Cost
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
- -------
Interest earning assets:
Loans receivable (a)(b)(d) $3,511,865 $114,830 6.54% $3,127,902 $116,264 7.43%
Mortgage-backed securities (c) $ 897,016 $ 11,627 2.59% $ 599,216 $ 12,867 4.30%
Investment securities (c)(d)(e) $ 664,146 $ 16,565 4.99% $ 314,643 $ 10,246 6.51%
FHLB stock $ 37,377 $ 307 1.64% $ 25,203 $ 417 3.31%
Other interest earning deposits $ 228,128 $ 1,029 0.90% $ 288,327 $ 2,085 1.45%
---------- -------- ----- ---------- -------- -----
Total interest earning assets $5,338,532 $144,358 5.41% $4,355,291 $141,879 6.52%
Noninterest earning assets (f) $ 357,998 $ 307,404
---------- ----------
TOTAL ASSETS $5,696,530 $4,662,695
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Interest bearing liabilities:
Savings accounts $ 997,190 $ 6,998 1.40% $ 747,813 $ 9,199 2.46%
Now accounts $ 686,507 $ 3,076 0.90% $ 480,355 $ 3,147 1.31%
Money market demand accounts $ 689,516 $ 5,633 1.63% $ 455,793 $ 5,818 2.55%
Certificate accounts $2,070,530 $ 34,591 3.34% $1,936,550 $ 38,836 4.01%
Borrowed funds (g) $ 480,392 $ 10,476 4.36% $ 398,404 $ 9,631 4.84%
Debentures $ 100,531 $ 3,798 7.56% $ 99,000 $ 3,845 7.77%
---------- -------- ----- ---------- -------- -----
Total interest bearing liabilities $5,024,666 $ 64,572 2.57% $4,117,915 $ 70,476 3.42%
Noninterest bearing liabilities $ 223,124 $ 216,682
---------- ----------
Total liabilities $5,247,790 $4,334,597
Shareholders' equity $ 448,740 $ 328,098
---------- ----------
TOTAL LIABILITIES AND EQUITY $5,696,530 $4,662,695
---------- ----------
Net interest income/Interest rate spread $ 79,786 2.84% $ 71,403 3.10%
Net interest earning assets/Net interest margin $ 313,866 2.99% $ 237,376 3.28%
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.
27
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.
Six months ended December 31, 2003 and 2002
- ----------------------------------------------------------------------------------
NET
RATE VOLUME CHANGE
- ----------------------------------------------------------------------------------
Interest earning assets:
Loans receivable $(15,706) $ 14,272 $(1,434)
Mortgage-backed securities $ (7,635) $ 6,395 $(1,240)
Investment securities $ (5,062) $ 11,381 $ 6,319
FHLB stock $ (311) $ 201 $ (110)
Other interest-earning deposits $ (703) $ (353) $(1,056)
-------- -------- -------
Total interest-earning assets $(29,417) $ 31,896 $ 2,479
Interest-bearing liabilities:
Savings accounts $ (5,269) $ 3,068 $(2,201)
Now accounts $ (1,422) $ 1,351 $ (71)
Money market demand accounts $ (3,168) $ 2,983 $ (185)
Certificate accounts $ (6,932) $ 2,687 $(4,245)
Borrowed funds $ (1,137) $ 1,982 $ 845
Debentures $ (106) $ 59 $ (47)
-------- -------- -------
Total interest-bearing liabilities $(18,034) $ 12,130 $(5,904)
-------- -------- -------
Net change in net interest income $(11,383) $ 19,766 $ 8,383
======== ======== =======
- ---------------------------------------------------------------------------------
28
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 December 31, 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 December 31,
2003 levels.
29
- -----------------------------------------------------------------------------------------------------------------------
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 18.6% 22.8% 4.2% NM
Projected increase/(decrease) in return on average equity 1.6% 2.0% 0.3% NM
Projected increase/(decrease) in earnings per share $0.18 $0.23 $0.04 NM
Projected percentage increase/(decrease) in market value of equity 0.2% (3.0)% (2.2)% 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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on November
19, 2003
(b) The name of each director elected at the Annual Meeting is as
follows:
Richard L. Carr
John M. Bauer
The name of each director whose term of office continued after
the Annual Meeting is as follows:
Robert G. Ferrier
Richard E. McDowell
Joseph F. Long
William J. Wagner
Thomas K. Creal, III
A. Paul King
(c) The following matters were voted upon at the Annual Meeting:
(i) Election of three directors of the Company:
For Withheld
---------------- ----------------
Richard L. Carr 42,934,507 206,066
John M. Bauer 42,949,225 191,348
(ii) Ratification of the appointment of KPMG LLP as
the Company's independent auditors for the
fiscal year ending June 30, 2004.
For Against Withheld
----------------- ------------------ -----------------
42,887,741 189,370 63,462
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.
31
(B) REPORTS ON FORM 8-K
During the second fiscal quarter, the Company filed or furnished the following
Current Reports on Form 8-K:
(1) A report dated October 21, 2003, which included, under Items 7 and 12, the
Company's press release announcing first quarter earnings.
32
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: February 9, 2004 By: /s/ William J. Wagner
------------------------------ ------------------------------------
William J. Wagner
President and Chief Executive Officer
Date: February 9, 2004 By: /s/ William W. Harvey, Jr.
------------------------------ -------------------------------------
William W. Harvey, Jr.
Senior Vice President and
Chief Financial Officer
33