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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 MARCH 31, 2004
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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) 47,946,805 shares outstanding as of April
30, 2004.
NORTHWEST BANCORP, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2004 and June 30, 2003 1
Consolidated Statements of Income for the three months and
nine months ended March 31, 2004 and 2003 2
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended March 31, 2004 and 2003 3
Consolidated Statements of Changes in Shareholders' Equity for
the nine months ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the three months and
nine months ended March 31, 2004 and 2003 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 30
Item 4. Controls and Procedures 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Certifications
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, June 30,
2004 2003
---------- ----------
Assets
Cash and due from banks $ 67,663 75,563
Interest-earning deposits in other financial institutions 203,859 244,437
Marketable securities available-for-sale (amortized cost of $971,673 and $884,667) 983,437 896,631
Marketable securities held-to-maturity (market value of $480,430 and $486,922) 470,340 477,821
---------- ----------
Total cash, interest-earning deposits and marketable securities 1,725,299 1,694,452
Mortgage loans - one- to four- family 2,305,253 2,064,181
Commercial real estate loans 429,425 377,507
Consumer loans 857,214 701,561
Commercial business loans 125,281 130,115
---------- ----------
Total loans receivable 3,717,173 3,273,364
Allowance for loan losses (29,162) (26,593)
---------- ----------
Loans receivable, net 3,688,011 3,246,771
Federal Home Loan Bank stock, at cost 32,676 33,764
Accrued interest receivable 21,750 18,714
Real estate owned, net 2,961 3,664
Premises and equipment, net 75,569 63,190
Bank owned life insurance 89,158 63,397
Goodwill 126,705 76,206
Other intangible assets 16,514 3,530
Other assets 22,889 18,679
---------- ----------
Total assets $5,801,532 $5,222,367
========== ==========
Liabilities and Shareholder' Equity
Liabilities:
Noninterest-bearing demand deposits 208,708 190,987
Interest-bearing demand deposits 636,665 670,935
Savings deposits 1,795,854 1,488,885
Time deposits 2,071,813 1,912,749
---------- ----------
Total deposits 4,713,040 4,263,556
Borrowed funds 446,476 465,750
Advances by borrowers for taxes and insurance 20,224 21,319
Accrued interest payable 3,991 4,101
Other liabilities 11,795 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 5,297,588 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, 47,933,545 and
47,693,981 issued and outstanding, respectively 4,793 4,769
Paid-in capital 187,120 72,787
Retained earnings 304,384 271,599
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale, net of income taxes 7,647 7,777
---------- ----------
503,944 356,932
---------- ----------
Total liabilities and shareholders' equity $5,801,532 $5,222,367
========== ==========
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 Nine months ended
March 31, March 31,
2004 2003 2004 2003
-------- -------- -------- --------
Interest income:
Loans receivable $ 58,565 56,679 172,714 172,254
Mortgage-backed securities 6,929 7,099 18,556 19,966
Taxable investment securities 3,749 2,421 11,574 7,178
Tax-free investment securities 3,110 2,179 8,991 6,076
Interest-earning deposits 342 889 1,371 2,974
-------- ------ ------- -------
Total interest income 72,695 69,267 213,206 208,448
Interest expense:
Deposits 23,309 26,405 73,607 83,405
Borrowed funds 6,925 7,405 21,199 20,881
-------- ------ ------- -------
Total interest expense 30,234 33,810 94,806 104,286
Net interest income 42,461 35,457 118,400 104,162
Provision for loan losses 1,659 2,294 5,119 6,120
-------- ------ ------- -------
Net interest income after provision for loan losses 40,802 33,163 113,281 98,042
Noninterest income:
Service charges and fees 3,434 3,187 10,173 10,083
Trust and other financial services income 1,091 931 2,940 2,591
Insurance commission income 183 208 542 963
Gain on sale of marketable securities, net 1,210 176 5,107 720
Gain on sale of loans, net (93) 340 308 1,558
Gain on sale of real estate owned, net 245 132 1,305 314
Income from bank owned life insurance 1,032 787 2,975 2,411
Other operating income 758 642 1,581 1,443
-------- ------ ------- -------
Total noninterest income 7,860 6,403 24,931 20,083
Noninterest expense:
Compensation and employee benfits 16,091 13,811 47,151 40,431
Premises and occupancy costs 4,282 3,474 11,778 9,972
Office operations 2,678 2,486 8,047 7,545
Processing expenses 2,370 1,957 6,842 6,160
Advertising 820 1,113 1,952 2,399
Amortization of intangible assets 1,360 207 3,168 519
Other expenses 2,219 2,370 5,788 5,608
-------- ------ ------- -------
Total noninterest expense 29,820 25,418 84,726 72,634
-------- ------ ------- -------
Income before income taxes 18,842 14,148 53,486 45,491
Federal and state income taxes 5,366 3,952 15,533 13,564
-------- ------ ------- -------
Net income $ 13,476 10,196 37,953 31,927
======== ====== ======= =======
Basic earnings per share $ 0.28 0.21 0.79 0.67
======== ====== ======= =======
Diluted earnings per share $ 0.28 0.21 0.78 0.66
======== ====== ======= =======
See accompanying notes to unaudited consolidated financial statements
2
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2003
Accum.
Common Stock Other Total
---------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ------- -------- ------------- -------------
Beginning balance at December 31, 2002 47,639,626 $ 4,764 72,321 253,606 6,457 $ 337,148
Comprehensive income:
Net income - - - 10,196 - 10,196
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 220 220
---------- ---------- ------ ------- ----- -------------
Total comprehensive income - - - 10,196 220 10,416
Exercise of stock options 20,307 2 102 - - 104
Dividends paid ($.08 per share) - - - (983) - (983)
---------- ---------- ------ ------- ----- -------------
Ending balance at March 31, 2003 47,659,933 $ 4,766 72,423 262,819 6,677 $ 346,685
========== ========== ====== ======= ===== =============
THREE MONTHS ENDED MARCH 31, 2004
Accum.
Common Stock Other Total
---------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ------- -------- ------------- -------------
Beginning balance at December 31, 2003 47,788,950 $ 4,779 185,975 292,878 6,433 $ 490,065
Comprehensive income:
Net income - - - 13,476 - 13,476
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 1,214 1,214
---------- ---------- ------ ------- ----- -------------
Total comprehensive income - - - 13,476 1,214 14,690
Exercise of stock options 144,595 14 450 - - 464
Tax benefit for excess of fair value above
cost of stock option plans - - 695 - - 695
Dividends paid ($.10 per share) - - - (1,970) - (1,970)
---------- ---------- ------- ------- ----- -------------
Ending balance at March 31, 2004 47,933,545 $ 4,793 187,120 304,384 7,647 $ 503,944
========== ========== ======= ======= ===== =============
See accompanying notes to unaudited consolidated financial statements
3
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2003
Accum.
Common Stock Other Total
---------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ------- -------- ------------- -------------
Beginning balance at June 30, 2003 47,549,659 $ 4,755 71,838 233,831 6,216 $ 316,640
Comprehensive income:
Net income - - - 31,927 - 31,927
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 461 461
---------- ---------- ------ ------- ----- -------------
Total comprehensive income - - - 31,927 461 32,388
Exercise of stock options 110,274 11 585 - - 596
Dividends paid ($.24 per share) - - - (2,939) - (2,939)
---------- ---------- ------ ------- ----- -------------
Ending balance at March 31, 2003 47,659,933 $ 4,766 72,423 262,819 6,677 $ 346,685
========== ========== ====== ======= ===== =============
THREE MONTHS ENDED MARCH 31, 2004
Accum.
Common Stock Other Total
---------------------- Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income Equity
---------- ---------- ------- -------- ------------- -------------
Beginning balance at June 30, 2003 47,693,981 $ 4,769 72,787 271,599 7,777 $ 356,932
Comprehensive income:
Net income - - - 37,953 - 37,953
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - (130) (130)
---------- ---------- ------- ------- ----- -------------
Total comprehensive income - - - 37,953 (130) 37,823
Exercise of stock options 239,564 24 834 - - 858
Tax benefit for excess of fair value above
cost of stock option plans - - 695 695
Proceeds from incremental stock offering,
net of related expenses of $2,196 - - 112,804 - - 112,804
Dividends paid ($.30 per share) - - - (5,168) - (5,168)
---------- ---------- ------- ------- ----- -------------
Ending balance at March 31, 2004 47,933,545 $ 4,793 187,120 304,384 7,647 $ 503,944
========== ========== ======= ======= ===== =============
See accompanying notes to unaudited consolidated financial statements
4
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
--------- -------- -------- --------
OPERATING ACTIVITIES:
Net Income $ 13,476 10,196 37,953 31,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,659 2,294 5,119 6,120
Net loss (gain) on sale of assets (1,362) (648) (6,720) (2,592)
Net depreciation, amortization and accretion 6,638 2,611 11,399 7,444
Decrease (increase) in other assets 2,679 1,614 17,405 (7,133)
Increase (decrease) in other liabilities 2,905 (847) (9,953) (1,919)
Net amortization (accretion) of premium/ discount on
marketable securities 791 111 6,557 (424)
--------- -------- -------- --------
Net cash provided by operating activities 26,786 15,331 61,760 33,423
INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity (78,862) (211,133) (78,862) (476,280)
Purchase of marketable securities available-for-sale (53,999) (276,984) (546,620) (438,984)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 52,619 102,231 314,137 229,398
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 123,572 53,004 497,529 148,675
Proceeds from sales of marketable securities, available-for-sale 62,235 25,019 280,792 82,999
Loan originations (233,909) (306,736) (974,341) (921,465)
Proceeds from loan maturities and principal reductions 177,157 255,785 682,717 683,265
Proceeds from loan sales 19,972 50,517 68,458 166,415
Sale (purchase) of FHLB stock 475 (3,393) 13,868 (8,321)
Proceeds from sale of real estate owned 1,470 1,456 4,797 4,035
Net (purchase) sale of real estate owned for investment (380) 159 (226) 77
Purchase of premises and equipment (7,198) (1,736) (16,989) (7,942)
Acquisitions, net of cash received - - (95,167) 2,619
--------- -------- -------- --------
Net cash provided (used) by investing activities 63,152 (311,811) 150,093 (535,509)
5
NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
--------- -------- -------- -------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net $ 15,078 177,409 (159,903) 454,039
Proceeds from long-term borrowings - - - 180,000
Repayments of long-term borrowings (343) (4,214) (203,050) (15,684)
Net increase (decrease) in short-term borrowings (5,019) (1,195) (2,148) 4,010
Increase (decrease) in advances by borrowers for
taxes and insurance (1,500) (69) (3,724) (3,738)
Cash dividends paid (1,970) (983) (5,168) (2,939)
Proceeds from stock offering, net - - 112,804 -
Proceeds from stock options exercised 464 104 858 596
--------- -------- -------- -------
Net cash provided (used) by financing activities 6,710 171,052 (260,331) 616,284
Net increase (decrease) in cash and cash equivalents 96,648 (125,428) (48,478) 114,198
========= ======== ======== =======
Cash and cash equivalents at beginning of period 174,874 457,380 320,000 217,754
Net increase (decrease) in cash and cash equivalents 96,648 (125,428) (48,478) 114,198
--------- -------- -------- -------
Cash and cash equivalents at end of period 271,522 331,952 271,522 331,952
========= ======== ======== =======
Cash and cash equivalents:
Cash and due from banks 67,663 47,456 67,663 47,456
Interest-earning deposits in other financial institutions 203,859 284,496 203,859 284,496
--------- -------- -------- -------
Total cash and cash equivalents 271,522 331,952 271,522 331,952
========= ======== ======== =======
Cash paid during the period for:
Interest on deposits and borrowings (including interest
credited to deposit accounts of $19,853, $22,407
$64,577 and $69,924, respectively) 30,250 34,086 94,916 105,627
========= ======== ======== =======
Income taxes 85 1,950 2,879 10,829
========= ======== ======== =======
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 750 702 2,789 2,149
========= ======== ======== =======
Sale of real estate owned financed by the Company - 280 317 584
========= ======== ======== =======
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"). The Company is a federal corporation and is
organized as a savings and loan holding company and is regulated by the Office
of Thrift Supervision ("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 nine months
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
(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.
7
AS OF OR FOR THE THREE MONTHS ENDED:
Community Consumer
MARCH 31, 2004 ($ IN 000'S) Banks Finance All Other* Consolidated
- ---------------------------- ---------- -------- ---------- ------------
External interest income $ 68,153 4,393 149 72,695
Intersegment interest income 1,118 - (1,118) -
Interest expense 28,331 1,195 708 30,234
Provision for loan losses 1,010 649 - 1,659
Noninterest income 7,548 254 58 7,860
Noninterest expense 27,328 2,041 451 29,820
Income tax expense (benefit) 5,781 315 (730) 5,366
Net income 14,369 447 (1,340) 13,476
---------- ------- ------ ---------
Total assets $5,657,354 121,692 22,486 5,801,532
Community Consumer
MARCH 31, 2003 ($ IN 000'S) Banks Finance All Other* Consolidated
- ---------------------------- ---------- -------- ---------- ------------
External interest income $ 64,603 4,513 151 69,267
Intersegment interest income 1,243 - (1,243) -
Interest expense 32,101 1,343 366 33,810
Provision for loan losses 1,794 500 - 2,294
Noninterest income 6,107 296 - 6,403
Noninterest expense 23,278 1,930 210 25,418
Income tax expense (benefit) 4,123 429 (600) 3,952
Net income 10,657 607 (1,068) 10,196
---------- ------- ------ ---------
Total assets $4,987,757 123,236 20,310 5,131,303
* Eliminations consist of intercompany interest income and interest expense.
AS OF OR FOR THE NINE MONTHS ENDED:
Community Consumer
MARCH 31, 2004 ($ IN 000'S) Banks Finance All Other* Consolidated
- ---------------------------- ---------- -------- ---------- ------------
External interest income $ 199,530 13,224 452 213,206
Intersegment interest income 3,401 - (3,401) -
Interest expense 89,241 3,636 1,929 94,806
Provision for loan losses 3,115 2,004 - 5,119
Noninterest income 23,943 804 184 24,931
Noninterest expense 77,730 5,973 1,023 84,726
Income tax expense (benefit) 16,546 1,002 (2,015) 15,533
Net income 40,242 1,413 (3,702) 37,953
---------- ------- ------ ---------
Total assets $5,657,354 121,692 22,486 5,801,532
8
Community Consumer
MARCH 31, 2003 ($ IN 000'S) Banks Finance All Other* Consolidated
- ---------------------------- ---------- -------- ---------- ------------
External interest income $ 194,634 13,558 256 208,448
Intersegment interest income 4,089 - (4,089) -
Interest expense 99,377 4,404 505 104,286
Provision for loan losses 4,189 1,931 - 6,120
Noninterest income 19,284 799 - 20,083
Noninterest expense 66,607 5,620 407 72,634
Income tax expense (benefit) 14,281 996 (1,713) 13,564
Net income 33,553 1,406 (3,032) 31,927
Total assets $4,987,757 123,236 20,310 5,131,303
* Eliminations consist of intercompany interest income and interest expense.
(4) BUSINESS COMBINATION
On August 31, 2003, the Company completed the previously announced acquisition
of First Bell Bancorp, Inc., and its subsidiary Bell Federal Savings and Loan
Association of Bellevue (collectively "Bell"), both headquartered in Bellevue,
Pennsylvania. The acquisition included the seven offices of Bell, assets of
$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 non-tax
deductible core deposit intangible with an estimated life of seven years and a
tax deductible 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:
MARCH 31, JUNE 30,
2004 2003
--------- --------
Amortizable intangible assets:
Core deposit intangibles - gross $ 19,503 4,401
Less: accumulated amortization (4,202) (1,621)
-------- ------
Core deposit intangibles - net $ 15,301 2,780
======== ======
Customer and Contract intangible assets - gross 1,881 831
Less: accumulated amortization (668) (81)
-------- ------
Customer and Contract intangible assets - net $ 1,213 750
======== ======
9
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 March 31, 2004 $ 125,537 1,168 126,705
========= ===== =======
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 3/31/03 $ 207
For the three months ended 3/31/04 1,360
For the nine months ended 3/31/03 519
For the nine months ended 3/31/04 3,168
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.
10
The credit risk associated with standby letters of credit is essentially the
same as that involved in extending loans to customers and is subject to normal
credit policies. Collateral may be obtained based on management's credit
assessment of the customer. The maximum potential amount of future payments the
Company could be required to make under these standby letters of credit is $11.6
million, of which $11.2 million is fully collateralized. At March 31, 2004, the
Company had a liability of $25,000 related to standby letters of credit. 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.
Had compensation costs for the Company's 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
---------- ------ ------ ------
Net income:
As reported $ 13,476 10,196 37,953 31,927
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (52) (70) (237) (193)
---------- ------ ------ ------
Pro forma 13,424 10,126 37,716 31,734
========== ====== ====== ======
Basic earnings per share:
As reported 0.28 0.21 0.79 0.67
Pro forma 0.28 0.21 0.79 0.67
Diluted earnings per share:
As reported 0.28 0.21 0.78 0.66
Pro forma 0.28 0.21 0.78 0.66
There was no stock-based employee compensation expense related to the Company's
stock option plan included in reported net income during the three or nine
months ended March 31, 2004 or 2003.
11
(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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
------- ------ ------ ------
Reported net income $13,476 10,196 37,953 31,927
Weighted average common shares outstanding 47,848 47,651 47,773 47,608
Common stock equivalents due to effect of stock
options 637 547 597 521
------- ------ ------ ------
Total weighted average common
shares and equivalents 48,485 48,198 48,370 48,129
======= ====== ====== ======
Basic earnings per share: $ 0.28 0.21 0.79 0.67
======= ====== ====== ======
Diluted earnings per share: $ 0.28 0.21 0.78 0.66
======= ====== ====== ======
12
(9) PENSION AND POST-RETIREMENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST
Three months ended March 31,
Pension Benefits Other Post-retirement Benefits
2004 2003 2004 2003
------- ------- ------- --------
Service cost $ 817 631 - -
Interest cost 642 552 19 16
Expected return on plan assets 552 477 - -
Amortization of transition asset (10) (10) - -
Amortization of prior service cost 24 24 - -
Amortization of the net (gain) loss 189 74 6 1
------- --- -- --
Net periodic benefit cost $ 1,110 794 25 17
======= === == ==
Nine months ended March 31,
Pension Benefits Other Post-retirement Benefits
2004 2003 2004 2003
------- ------- ------- --------
Service cost $ 2,450 1,894 - 1
Interest cost 1,926 1,655 57 48
Expected return on plan assets 1,656 1,432 - -
Amortization of transition asset (30) (30) - -
Amortization of prior service cost 71 71 - -
Amortization of the net (gain) loss 568 222 17 2
------- ----- -- --
Net periodic benefit cost $ 3,329 2,380 74 51
======= ===== == ==
Contributions - As of March 31, 2004, the Company has made no contribution to
its pension plans. The Company made an annual contribution of $3.5 million on
April 30, 2004.
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.
Overview of Critical Accounting Policies Involving Estimates
The Company has only one critical accounting policy that 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. This policy relates to the
allowance for loan losses.
In originating loans, the Company recognizes that losses will be experienced on
loans and that the risk of loss will vary with, among other things, the type of
loan, the creditworthiness of the borrower, general economic conditions and, the
quality of the security for the loan. The Company maintains an allowance for
loan losses to absorb losses inherent in the loan portfolio. The allowance for
loan losses represents management's estimate of probable losses based on
information available as of the date of the financial statements. The allowance
for loan losses is based on management's evaluation of the collectibility of the
loan portfolio, including past loan loss experience, known and inherent losses,
information about specific borrower situations and estimated collateral values,
and current economic conditions. The loan portfolio and other credit exposures
are regularly reviewed by management in its determination of the allowance for
loan losses. The methodology for assessing the appropriateness of the allowance
includes a review of historical losses, peer group comparisons, industry data
and economic conditions. As an integral part of their examination process,
regulatory agencies periodically review the Company's allowance for loan losses
and may require the Company to make additional provisions for estimated losses
based upon judgments different from those of management. In establishing the
allowance for loan losses, loss factors are applied to various pools of
outstanding loans. Loss factors are derived using the Company's historical loss
experience and may be adjusted for factors that affect the collectibility of the
portfolio as of the evaluation date. Commercial loans over a certain dollar
amount are evaluated individually to determine the required allowance for loan
losses and to evaluate the potential impairment of such loans under SFAS 114,
"Accounting by Creditors for Impairment of a Loan". Although management believes
that it uses the best information available to establish the allowance for loan
losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if 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.
14
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 2003 TO DECEMBER 31,
2003
ASSETS
At March 31, 2004 the Company had total assets of $5.802 billion, an increase of
$580.0 million, or 11.1%, 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 due from banks, interest-earning deposits and marketable securities
totaled $1.725 billion at March 31, 2004, an increase of $30.8 million, or 1.8%,
from $1.694 billion at June 30, 2003. Net loans receivable increased by $441.2
million, or 13.6%, to $3.688 billion at March 31, 2004 from $3.247 billion 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 $449.5 million, or 10.5%, to $4.713 billion at March 31,
2004 from $4.264 billion at June 30, 2003. This increase resulted primarily from
the acquisition of Bell, which included deposits of $609.4 million which was
partially offset by a net loss of deposits as the Company's depositors withdrew
funds in reaction to changing conditions in the equity and fixed-income markets.
Borrowed funds decreased by $19.3 million, or 4.1%, to $446.5 million at March
31, 2004 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 March 31, 2004 was $503.9 million, an increase of
$147.0 million, or 41.2%, from $356.9 million at June 30, 2003. This increase
was primarily attributable to the completion of an incremental stock offering
during August 2003, 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 nine-month period of $38.0 million, which was partially offset by the
payment of cash dividends of $5.2 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
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.
15
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).
March 31, 2004
Minimum Capital Well Capitalized
Actual Requirements Requirements
---------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
Total Capital (to risk weighted assets):
Northwest Savings Bank $416,747 14.65% $227,611 8.00% $284,513 10.00%
Jamestown Savings Bank $ 23,254 11.14% $ 16,693 8.00% $ 20,867 10.00%
Tier I Capital (to risk weighted assets):
Northwest Savings Bank $388,107 13.64% $113,805 4.00% $170,708 6.00%
Jamestown Savings Bank $ 21,296 10.21% $ 8,347 4.00% $ 12,520 6.00%
Tier I Capital (leverage) (to average assets):
Northwest Savings Bank $388,107 7.38% $157,801 3.00%* $263,002 5.00%
Jamestown Savings Bank $ 21,296 5.74% $ 11,132 3.00%* $ 18,553 5.00%
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 March 31, 2004, the Company had not been advised of
any additional requirements in this regard.
16
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
ratios at March 31, 2004 were 27.5% and 44.5% 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 $5.2 million in cash dividends during the first nine months of
the current fiscal year, compared with $2.9 million in the same 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 35.7% in the three-month period
ended March 31, 2004 on a dividend of $0.10 compared with 38.1% in the
three-month period ended March 31, 2003 on a dividend of $0.08 per share.
Because Northwest Bancorp, MHC waived the receipt of its dividends, the actual
dividends paid were 14.6% and 9.6% of net income for the three months ended
March 31, 2004 and 2003, respectively. In response to its need for additional
liquidity, Northwest Bancorp, MHC intends to accept payment of the next
quarterly dividend, which will be paid on May 14, 2004, in the amount of $2.8
million.
As a result of the incremental stock offering during 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
dividends.
17
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 increased by $669,000, or 1.8%, to $36.9
million at March 31, 2004 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: March 31, 2004 June 30, 2003
- -----------------------------------------------------------------------------------
One-to four- family residential loans $12,381 $11,140
- --------------------------------------------------------------------------------
Multifamily and commercial real estate loans 13,797 11,975
- --------------------------------------------------------------------------------
Consumer loans 5,017 4,896
- --------------------------------------------------------------------------------
Commercial business loans 2,790 4,602
- --------------------------------------------------------------------------------
Total $33,985 $32,613
- --------------------------------------------------------------------------------
Total nonperforming loans as a percentage of
net loans receivable .92% 1.00%
- --------------------------------------------------------------------------------
Total real estate acquired through foreclosure
and other real estate owned $ 2,961 $ 3,664
- --------------------------------------------------------------------------------
Total nonperforming assets $36,946 $36,277
- --------------------------------------------------------------------------------
Total nonperforming assets as a percentage of
total assets .64% .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 March 31, 2004 and June 30, 2003 were $34.0 million and $32.6
million, respectively.
18
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
19
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.
20
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003
Net income for the three months ended March 31, 2004 was $13.5 million, or $.28
per diluted share, an increase of $3.3 million, or 32.2%, from $10.2 million, or
$.21 per diluted share, for the same quarter last year. This increase resulted
from an increase in net interest income of $7.0 million, a decrease in the
provision for loan losses of $635,000 and an increase in noninterest income of
$1.5 million. Partially offsetting these changes was an increase in noninterest
expense of $4.4 million and an increase in income tax expense of $1.4 million.
Net income for the three months ended March 31, 2004 represents a return on
average equity and return on average assets of 10.88% and .93%, respectively,
compared to 11.94% and .81% for the same quarter last year.
INTEREST INCOME
Total interest income, on a fully taxable equivalent basis, increased by $3.9
million, or 5.6%, to $74.7 million primarily due to a $656.8 million, or 13.9%,
increase in average interest earning assets to $5.379 billion for the three
months ended March 31, 2004, from $4.722 billion for the three months ended
March 31, 2003. The effect of this increase in average interest earning assets
was partially offset by a decrease in the average fully taxable yield on
interest earning assets to 5.55% from 5.99%. 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 fully taxable equivalent basis,
increased by $1.9 million, or 3.2%, to $58.9 million due to an increase in the
average balance outstanding of $492.4 million, or 15.3%, to $3.701 billion. The
effect of this increase was partially offset by a decrease in the average rate
to 6.36% from 7.11%. 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 decreased by $170,000, or 2.4%, to
$6.9 million primarily because of a decrease in the average yield to 3.37% from
3.52%. The effect of the decrease in average yield was partially offset by an
increase in the average balance of $16.1 million, or 2.0%, to $822.4 million
from $806.3 million. The average yield on mortgage-backed securities, of which
approximately 66% 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 fully taxable equivalent basis,
increased by $3.0 million, or 55.7%, to $8.5 million due primarily to an
increase in the average balance of $327.4 million, or 92.9%, to $679.9 million
from $352.5 million. The effect of the increase in average balance was partially
offset by a decrease in the average fully taxable equivalent yield to 4.99% from
6.18%. 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 $547,000, or 61.5%, as
the average yield decreased to 0.96% from 1.11% and the average balance
decreased $177.7 million, or 55.4%, to $143.1 million from $320.8 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.
21
INTEREST EXPENSE
Total interest expense decreased by $3.6 million, or 10.6%, to $30.2 million
from $33.8 million, due to a decrease in the average cost of interest-bearing
liabilities to 2.40% from 3.02%. The effect of this decrease was partially
offset by an increase in the average balance of $564.7 million, or 12.6%, to
$5.045 billion from $4.480 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 average
interest-bearing deposits of $598.1 million, or 15.4%, occurred primarily in
savings, checking and money market products that have no term and generally
lower interest rates. The increase in the average balance of deposits was mainly
attributed to the acquisition of Bell along with growth of existing offices and
new office openings.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased by $7.5
million, or 20.4%, to $44.4 million from $36.9 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 3.30% from 3.13%.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $635,000, or 27.7%, 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 $942,000, 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 $1.5 million, or 22.8%, to $7.9 million for the
current quarter from $6.4 million for the same period in the prior year. Trust
and other financial services income increased by $160,000, or 17.2%, to $1.1
million for the quarter primarily as a result of an increase in assets under
management and the expansion of services provided by the Company's actuarial and
benefit consulting subsidiary, Boetger & Associates. The Company's gain on sale
of loans decreased by $433,000, or 127.4%, to a loss of $93,000 as the Company
retained the majority of loans originated through its wholesale lending
department. The gain on sale of marketable securities increased by $1.0 million,
to $1.2 million for the quarter primarily as a result of securities being called
during the period. Income from bank owned life insurance increased $245,000, or
31.1%, 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 $4.4 million, or 17.3%, to $29.8 million from
$25.4 million for the same quarter in the prior year. The Company noted that
compensation and employee benefits expense increased by $2.3 million, or 16.5%,
to $16.1 million for the current quarter from $13.8 million the prior year. The
increase in compensation and employee benefits expense is primarily due to the
growth of the Company during the past year as well as lower loan demand and
therefore, a decrease in the amount of loan origination costs deferred in
accordance with SFAS 91. Premises and occupancy costs, office operations and
processing expense have all increased as a result of the growth of the Company.
Amortization of intangible assets increased by $1.2 million, to $1.4 million as
a result of the amortization of core deposit and non-compete intangibles
associated with the Bell acquisition along with the amortization of contract
intangible assets
22
associated with the Boetger acquisition. Management believes that despite these
increases in operating expenses, progress has been made in controlling expenses
as the ratio of operating expense to average assets has remained around 2.0%.
INCOME TAXES
The provision for income taxes for the three-month period ended March 31, 2004
increased by $1.4 million, or 35.8%, compared to last year. This increase in
income tax expense is primarily due to an increase in income before income taxes
of $4.7 million, or 33.2%, to $18.8 million from $14.1 million.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND
2003
Net income for the nine months ended March 31, 2004 was $38.0 million, or $0.78
per diluted share, an increase of $6.1 million, or 18.9%, from $31.9 million, or
$0.66 per diluted share, for the same period last year. This increase resulted
from an increase in net interest income of $14.2 million, a decrease in the
provision for loan losses of $1.0 million, and an increase in noninterest income
of $4.8 million, offset by an increase in noninterest expense of $12.1 million.
Net income for the nine months ended March 31, 2004 represents a return on
average equity and return on average assets of 10.90% and 0.88%, respectively,
compared to 12.80% and 0.89% for the same period last year.
INTEREST INCOME
Total interest income, on a fully taxable equivalent basis, increased by $6.4
million, or 3.0%, to $219.0 million due primarily to an increase in average
interest earning assets of $874.6 million, or 19.5%, to $5.352 billion from
$4.478 billion. The effect of the increase in interest earning assets was offset
by a decrease in the yield on interest earning assets to 5.46% from 6.33%. 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 resulted from the repricing of variable rate assets, as
well as the growth in interest earning assets, during the current interest rate
environment.
Interest income on loans receivable increased by $416,000, or less than 1.0%, on
a fully taxable equivalent basis, to $173.7 million due to an increase in
average loans outstanding of $420.1 million, or 13.3%, to $3.575 billion from
$3.155 billion. This increase was partially offset by a decrease in the fully
taxable equivalent yield to 6.48% from 7.32%. 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 lower 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 $1.4 million, or
7.1%, to $18.6 million. This decrease in interest income is primarily attributed
to the decrease in average yield to 2.84% from 3.98%. The decrease in yield was
partially offset by an increase in average balance of $203.9 million, or 30.5%,
to $872.1 million from $668.2 million. The average yield on mortgage-backed
securities, of which approximately 66% 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 $9.4 million, or 59.6%, on
a fully taxable equivalent basis, to $25.1 million from $15.7 million. This
increase is primarily a result of an increase in the average balance of $342.2
million, or 104.6%, to $669.5 million from $327.3 million. The effect of the
increase in average balance was partially offset by a decrease in the average
yield to 4.99% from 6.39%. The increase in the average balance of investment
securities was primarily due to the investment of available funds generated
23
from deposit growth and the securities acquired with the acquisition of Bell.
The decrease in the fully 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 $1.6 million, or
53.9%, to $ 1.4 million from $3.0 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 $99.3 million, or 33.2%, to $199.8 million from $299.1
million. The average yield decreased to 0.92% from 1.33%. 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 $9.5 million, or 9.1%, to $94.8 million from
$104.3 million, primarily due to a decrease in the average cost of
interest-bearing liabilities to 2.51% from 3.28%. 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 $792.7
million, or 18.7%, to $5.031 billion from $4.239 billion. The decrease in the
cost of funds resulted primarily from the Company's deposit accounts repricing
at lower rates in response to the decrease in short-term interest rates. The
increase in the average balance of interest-bearing liabilities resulted
primarily from an increase of $748.2 million, or 20.2%, in the average balance
of deposits, mainly attributed to the acquisition of Bell along with growth of
existing offices and new office openings.
NET INTEREST INCOME
Net interest income increased by $15.9 million, or 14.7%, on a fully taxable
equivalent basis, to $124.2 million from $108.3 million. This increase in net
interest income was attributable to the growth of the Company as the Company's
net interest margin decreased to 3.09% from 3.23%.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $1.0 million, or 16.4%, to $5.1
million from $6.1 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, which were $3.5 million, 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 $4.8 million, or 24.1%, to $24.9 million from
$20.1 million in the same period last year. Trust and other financial services
income increased by $349,000, or 13.5%, to $2.9 million from $2.6 million
primarily as a result of the fee income contributed by Boetger & Associates, our
actuarial and benefits consulting subsidiary, and increased trust fee income as
a result of growth in assets under management. The Company's gain on sale of
loans decreased by $1.3 million 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 $4.4 million as a result
of the sale of municipal securities acquired with the acquisition of Bell along
with the redemption of securities that were called by the issuer at prices in
excess of the Company's carrying value. The gain on sale of REO increased
$991,000 over the prior year as the Company successfully liquidated some larger
parcels of foreclosed real estate. Income from bank owned
24
life insurance increased by $564,000 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 $12.1 million, or 16.6%, to $84.7 million as
all major expense categories, except marketing, increased primarily as a result
of significant growth in the Company's retail banking network, the expansion of
its investment management, trust and brokerage services, and the addition of new
products and services. The Company has added nine retail offices to its network
during the past twelve months through new office openings and acquisitions.
Management believes, however, that despite this increase in expenses, progress
has been made in reducing operating expense to a level below 2.0% of average
assets.
INCOME TAXES
The provision for income taxes for the nine-month period ended March 31, 2004
increased by $2.0 million, or 14.5%, compared to the same period last year. This
increase is primarily due to the increase in income before income taxes of $8.0
million, or 17.6% which was partially offset by a decrease in the effective tax
rate to 29.1% from 29.8% due to the increased investment in tax-free assets.
RECENTLY ISSUED ACCOUNTING STANDARDS
No new accounting standards were issued during the current quarter.
25
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 March 31,
2004 2003
------------------------------- -------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- --------- ------ ------------ --------- ------
ASSETS:
Interest earning assets:
Loans receivable (a) (b) (d) $ 3,701,017 $ 58,871 6.36% $ 3,208,639 $ 57,021 7.11%
Mortgage-backed securities (c) $ 822,395 $ 6,929 3.37% $ 806,267 $ 7,099 3.52%
Investment securities (c) (d) (e) $ 679,890 $ 8,485 4.99% $ 352,514 $ 5,448 6.18%
FHLB stock $ 32,712 $ 50 0.61% $ 34,116 $ 273 3.20%
Other interest earning deposits $ 143,084 $ 342 0.96% $ 320,795 $ 889 1.11%
----------- --------- ---- ------------ --------- ----
Total interest earning assets $ 5,379,098 $ 74,677 5.55% $ 4,722,331 $ 70,730 5.99%
Noninterest earning assets (f) $ 419,041 $ 312,065
----------- ------------
TOTAL ASSETS $ 5,798,139 $ 5,034,396
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Savings accounts $ 994,755 $ 3,415 1.37% $ 847,522 $ 4,424 2.09%
Now accounts $ 637,644 $ 1,081 0.68% $ 595,551 $ 1,737 1.17%
Money market demand accounts $ 792,942 $ 3,193 1.61% $ 530,539 $ 2,761 2.08%
Certificate accounts $ 2,068,746 $ 15,620 3.02% $ 1,922,331 $ 17,482 3.64%
Borrowed funds (g) $ 448,429 $ 4,996 4.46% $ 484,935 $ 5,518 4.55%
Debentures $ 102,062 $ 1,929 7.56% $ 99,000 $ 1,888 7.63%
----------- --------- ---- ------------ --------- ----
Total interest bearing liabilities $ 5,044,578 $ 30,234 2.40% $ 4,479,878 $ 33,810 3.02%
Noninterest bearing liabilities $ 257,926 $ 212,872
----------- ------------
Total liabilities $ 5,302,504 $ 4,692,750
Shareholders' equity $ 495,635 $ 341,646
----------- ------------
TOTAL LIABILITIES AND EQUITY $ 5,798,139 $ 5,034,396
=========== ============
Net interest income/ Interest rate spread $ 44,443 3.15% $ 36,920 2.97%
Net interest earning assets/ Net interest margin $ 334,520 3.30% $ 242,453 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.
26
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 March 31, 2004 and 2003
NET
RATE VOLUME CHANGE
-------- -------- --------
Interest earning assets:
Loans receivable $ (6,900) $ 8,750 $ 1,850
Mortgage-backed securities $ (312) $ 142 $ (170)
Investment securities $ (2,022) $ 5,059 $ 3,037
FHLB stock $ (216) $ (7) $ (223)
Other interest-earning deposits $ (89) $ (458) $ (547)
-------- -------- --------
Total interest-earning assets $ (9,539) $ 13,486 $ 3,947
Interest-bearing liabilities:
Savings accounts $ (1,777) $ 768 $ (1,009)
Now accounts $ (778) $ 122 $ (656)
Money market demand accounts $ (934) $ 1,366 $ 432
Certificate accounts $ (3,194) $ 1,332 $ (1,862)
Borrowed funds $ (110) $ (412) $ (522)
Debentures $ (18) $ 59 $ 41
-------- -------- --------
Total interest-bearing liabilities $ (6,811) $ 3,235 $ (3,576)
-------- -------- --------
Net change in net interest income $ (2,728) $ 10,251 $ 7,523
======== ======== ========
27
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.
Nine Months Ended March 31,
2004 2003
------------------------------- -------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- --------- ------ ----------- --------- ------
ASSETS:
Interest earning assets:
Loans receivable (a) (b) (d) $ 3,574,916 $ 173,701 6.48% $ 3,154,814 $ 173,285 7.32%
Mortgage-backed securities (c) $ 872,142 $ 18,556 2.84% $ 668,233 $ 19,966 3.98%
Investment securities (c) (d) (e) $ 669,539 $ 25,050 4.99% $ 327,267 $ 15,694 6.39%
FHLB stock $ 35,822 $ 357 1.33% $ 28,174 $ 690 3.27%
Other interest earning deposits $ 199,780 $ 1,371 0.92% $ 299,149 $ 2,974 1.33%
----------- --------- ---- ----------- --------- ----
Total interest earning assets $ 5,352,199 $ 219,035 5.46% $ 4,477,637 $ 212,609 6.33%
Noninterest earning assets (f) $ 378,139 $ 308,897
----------- -----------
TOTAL ASSETS $ 5,730,338 $ 4,786,534
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Savings accounts $ 996,378 $ 10,413 1.39% $ 781,049 $ 13,623 2.33%
Now accounts $ 670,219 $ 4,157 0.83% $ 518,754 $ 4,884 1.26%
Money market demand accounts $ 723,992 $ 8,826 1.63% $ 480,709 $ 8,579 2.38%
Certificate accounts $ 2,069,935 $ 50,211 3.23% $ 1,931,810 $ 56,318 3.89%
Borrowed funds (g) $ 469,738 $ 15,472 4.39% $ 427,248 $ 15,149 4.73%
Debentures $ 101,041 $ 5,727 7.56% $ 99,000 $ 5,733 7.72%
----------- --------- ---- ----------- --------- ----
Total interest bearing liabilities $ 5,031,303 $ 94,806 2.51% $ 4,238,570 $ 104,286 3.28%
Noninterest bearing liabilities $ 234,725 $ 215,412
----------- -----------
Total liabilities $ 5,266,028 $ 4,453,982
Shareholders' equity $ 464,310 $ 332,552
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 5,730,338 $ 4,786,534
=========== ===========
Net interest income/ Interest rate spread $ 124,229 2.95% $ 108,323 3.05%
Net interest earning assets/ Net interest margin $ 320,896 3.09% $ 239,067 3.23%
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.
28
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.
Nine months ended March 31, 2004 and 2003
NET
RATE VOLUME CHANGE
-------- -------- --------
Interest earning assets:
Loans receivable $(22,659) $ 23,075 $ 416
Mortgage-backed securities $ (7,503) $ 6,093 $ (1,410)
Investment securities $ (7,058) $ 16,414 $ 9,356
FHLB stock $ (520) $ 187 $ (333)
Other interest-earning deposits $ (768) $ (835) $ (1,603)
-------- -------- --------
Total interest-earning assets $(38,508) $ 44,934 $ 6,426
Interest-bearing liabilities:
Savings accounts $ (6,966) $ 3,756 $ (3,210)
Now accounts $ (2,153) $ 1,426 $ (727)
Money market demand accounts $ (4,095) $ 4,342 $ 247
Certificate accounts $(10,134) $ 4,027 $ (6,107)
Borrowed funds $ (1,184) $ 1,507 $ 323
Debentures $ (124) $ 118 $ (6)
-------- -------- --------
Total interest-bearing liabilities $(24,656) $ 15,176 $ (9,480)
-------- -------- --------
Net change in net interest income $(13,852) $ 29,758 $ 15,906
======== ======== ========
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a thrift 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, among other things,
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 March 31, 2004 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 March 31, 2004
levels.
30
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 13.3% 16.7% (7.2)% NM
Projected increase/ (decrease) in return on average equity 1.1% 1.4% (0.6)% NM
Projected increase/ (decrease) in earnings per share $0.13 $0.16 $(0.07) NM
Projected percentage increase/ (decrease) in market value of equity 1.2% 3.9% (9.7)% 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.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of the Company's Chief Executive Officer pursuant to
Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief Financial Officer pursuant to
Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
During the third fiscal quarter, the Company filed or furnished the following
Current Reports on Form 8-K:
(1) A report dated January 22, 2004, which included, under Items 7 and 12, the
Company's press release announcing second quarter earnings.
(2) A report dated March 9, 2004, which included, under items 5 and 7, the
Company's press release announcing Northwest Bancorp, Inc.'s intention to
acquire Leeds Federal Savings Bank from Northwest Bancorp, MHC.
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: May 10, 2004 By: /s/ William J. Wagner
---------------------------------------
William J. Wagner
President and Chief Executive Officer
Date: May 10, 2004 By: /s/ William W. Harvey, Jr.
---------------------------------------
William W. Harvey, Jr.
Senior Vice President and
Chief Financial Officer
33