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SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _____________________
COMMISSION FILE NO. 0-23817
NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 23-2900888
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
LIBERTY AND SECOND STREETS, WARREN, PENNSYLVANIA 16365
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(Address of Principal Executive Offices) Zip Code
(814) 726-2140
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the
Act: COMMON STOCK, PAR VALUE $.10 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
As of August 31, 2002, there were issued and outstanding 47,566,949
shares of the Registrant's Common Stock, including 35,366,218 shares held by
Northwest Bancorp, M.H.C., the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on August 31, 2002, as
reported by the Nasdaq National Market, was approximately $152.5 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2002 Annual Meeting of Stockholders of the
Registrant (Part III).
PART I
------
ITEM 1. BUSINESS
GENERAL
NORTHWEST BANCORP, INC.
Northwest Bancorp, Inc. is a Federal corporation formed on June 29,
2001, as the successor to a Pennsylvania corporation of the same name. Both the
Federal corporation and its Pennsylvania predecessor are referred to as the
"Company." The Company became the stock holding company of Northwest Savings
Bank (the "Bank") in a transaction (the "Two-Tier Reorganization") that was
approved by the Bank's stockholders in December of 1997, and completed in
February of 1998. In the Two-Tier Reorganization, each share of the Bank's
common stock was converted into and became a share of common stock of the
Company, par value $0.10 per share (the "Common Stock"), and the Bank became a
wholly-owned subsidiary of the Company. Northwest Bancorp, MHC (the "Mutual
Holding Company"), which owned a majority of the Bank's outstanding shares of
common stock immediately prior to completion of the Two-Tier Reorganization,
became the owner of the same percentage of the outstanding shares of Common
Stock of the Company immediately following the completion of the Two-Tier
Reorganization. As of June 30, 2002, the primary activity of the Company was the
ownership of all of the issued and outstanding common stock of the Bank and of
Jamestown Savings Bank ("Jamestown"). Jamestown was formed in November of 1995
as a de novo New York-chartered savings bank headquartered in Jamestown, New
York.
As of June 30, 2002, the Company, through the Bank and Jamestown,
operated 126 community banking offices throughout its market area in northwest,
southwest and central Pennsylvania, western New York, and eastern Ohio. The
Company, through the Bank and its wholly owned subsidiaries, also operates 47
consumer lending offices throughout Pennsylvania and two consumer lending
offices in New York. The Company has focused its lending activities primarily on
the origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. The Company, directly or through its subsidiaries, also
emphasizes the origination of consumer loans, including home equity, second
mortgage, education and other consumer loans. To a lesser extent, the Company
also originates multifamily residential and commercial real estate loans and
commercial business loans.
The Company's principal sources of funds are deposits, borrowed funds
and the principal and interest payments on loans and marketable securities. The
principal source of income is interest received from loans and marketable
securities. The Company's principal expenses are the interest paid on deposits
and the cost of employee compensation and benefits.
The Company's principal executive office is located at Liberty and
Second Streets, Warren, Pennsylvania, and its telephone number at that address
is (814) 726-2140.
NORTHWEST SAVINGS BANK
The Bank is a Pennsylvania-chartered stock savings bank headquartered
in Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through a subsidiary, consumer finance services. The Bank's mutual savings
bank predecessor was founded in 1896. The Bank in its current stock form was
established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure. At the time of the Reorganization, the Bank issued a majority of its
to-be outstanding shares of common stock to the Mutual Holding Company (which
was formed in connection with the Reorganization) and sold a minority of its
to-be outstanding shares to stockholders other than the Mutual Holding Company
in a stock offering conducted as part of the Reorganization.
The Bank's principal executive office is located at Liberty and Second
Streets, Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
2
JAMESTOWN SAVINGS BANK
Jamestown began operations on November 9, 1995 as a de novo New
York-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of 761,866
shares of common stock, including 400,000 shares that were purchased by the
Mutual Holding Company. The Mutual Holding Company continued to accumulate
additional ownership in Jamestown and in February 1998 sold its entire ownership
position, consisting of 490,050 shares, to the Company. On July 8, 1998 the
Company conducted a tender offer for the remaining shares of Jamestown, and
acquired 100% of the outstanding shares of Jamestown as of July 31, 1998.
As of June 30, 2002, Jamestown had six offices in western New York.
MARKET AREA
The Company has been, and intends to continue to be, an independent
community-oriented financial institution offering a wide variety of financial
services to meet the needs of the communities it serves. The Company is
headquartered in Warren, Pennsylvania which is located in the northwestern
region of Pennsylvania, and the Company has its highest concentration of
deposits and loans in the portion of its office network located in northwestern
Pennsylvania. Since the early 1990s, the Company has expanded, primarily through
acquisitions, into the southwestern and central regions of Pennsylvania. As of
June 30, 2002, the Company operated in Pennsylvania 116 community banking
offices and 47 consumer finance offices located in the counties of Allegheny,
Armstrong, Bedford, Berks, Blair, Butler, Cambria, Cameron, Centre, Chester,
Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Dauphin, Elk,
Erie, Fayette, Forest, Huntingdon, Indiana, Jefferson, Lancaster, Lawrence,
Lebanon, Luzerne, Lycoming, McKean, Mercer, Mifflin, Northumberland, Potter,
Schuylkill, Tioga, Venango, Warren, Washington, Westmoreland and York. These 41
counties, which comprise 66% of the counties in Pennsylvania, are primarily
experiencing a flat to declining growth rate in total population. In addition,
like most of Pennsylvania, approximately 40% of the total population is 45 years
old or older with approximately 25% of the population under the age of 18. Per
capita income in these counties averages approximately $20,500 and the median
house value is $74,500. Pennsylvania, like most of the nation, is experiencing
an economic slowdown with unemployment rising from 4.6% in May 2001 to 5.7% in
May 2002 which is slightly below the national average of approximately 5.8%.
Most of the communities the Company serves, while showing improvement, are still
dependent on the manufacturing sector which accounts for approximately 15.7% of
all Pennsylvania jobs compared to the national average of 13.5%. This sector has
been hardest hit by the downturn in the economy and has seen an increase in
foreign competition. Bankruptcy filings have also increased with 10.6 out of
every 1,000 people in Pennsylvania filing for bankruptcy protection which is
below the national average of 13.5 out of every 1,000 people. In addition, the
Company operated in Ohio four community banking offices located in the counties
of Ashtabula, Geauga and Lake. Through Jamestown, the Company operated in New
York six community banking offices located in the counties of Chautauqua, Erie
and Cattaraugus. The Company, through the Bank and its subsidiaries, also
operates two consumer finance offices in southwestern New York.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Company
has been the origination, for retention in its portfolio, of fixed-rate and, to
a lesser extent, adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located in its market area. To a lesser
extent, the Company also originates loans collateralized by multifamily
residential and commercial real estate, construction loans, commercial business
loans and consumer loans.
In an effort to manage interest rate risk, the Company has sought to
make its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The Company also purchases mortgage-backed securities
that generally have adjustable interest rates. Because the Company also
originates a substantial amount of long-term fixed-rate mortgage loans
collateralized by one- to four-family residential real estate, when possible,
such loans are originated and underwritten according to standards that allow the
Company to sell them in the secondary mortgage market for purposes of managing
interest-rate risk and liquidity. The Company currently sells in the secondary
market a limited amount of fixed-rate residential mortgage loans with maturities
of more than 15 years, and retains all adjustable-rate mortgage loans and
fixed-rate residential mortgage loans with maturities of 15 years or less. The
Company is primarily a portfolio lender and at any one time the Company holds
only a nominal amount of loans identified as available-for-sale. The Company
retains servicing on the mortgage loans it sells and realizes monthly service
fee income. The Company generally retains in its portfolio all consumer loans,
multifamily residential and commercial real estate loans, and commercial
business loans that it originates.
3
ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated.
AT JUNE 30,
------------------------------------------------------------------------------------
2002 2001 2000 1999
------------------ ----------------- ----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family .......... $2,056,105 66.9% $2,005,020 68.7% $1,836,154 70.9% $1,718,002 73.8%
Multifamily and commercial.... 304,456 9.9 249,049 8.5 192,897 7.5 152,466 6.6
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total real estate loans....... 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4 1,870,468 80.4
Consumer:
Automobile.................... 117,240 3.8 94,475 3.2 72,955 2.8 58,885 2.5
Home improvement.............. 293,865 9.6 260,169 8.9 212,049 8.2 129,960 5.6
Education loans............... 84,817 2.8 77,753 2.7 70,619 2.7 64,341 2.8
Loans on savings accounts..... 7,733 0.2 8,923 0.3 8,052 0.3 6,263 0.3
Other (1)..................... 113,570 3.7 134,023 4.6 147,267 5.7 156,034 6.7
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer loans ......... 617,225 20.1 575,343 19.7 510,942 19.7 415,483 17.9
Commercial business............. 95,968 3.1 89,784 3.1 49,992 1.9 40,039 1.7
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans receivable, gross 3,073,754 100.0% 2,919,196 100.0% 2,589,985 100.0% 2,325,990 100.0%
----- ----- ===== =====
Deferred loan fees.............. (2,938) (2,517) (1,829) (923)
Undisbursed loan proceeds....... (36,168) (39,808) (25,266) (23,056)
Allowance for loan losses
(real estate loans)........... (11,703) (11,629) (11,334) (10,619)
Allowance for loan losses
(other loans)................. (10,339) (8,661) (6,926) (6,154)
--------- ----------- ---------- ----------
Total loans receivable, net. $3,012,606 $2,856,581 $2,544,630 $2,285,238
========== ========== ========== ==========
AT JUNE 30,
-------------------
1998
------------------
AMOUNT PERCENT
------ -------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family .......... $1,368,736 69.4%
Multifamily and commercial.... 128,831 6.5
---------- -----
Total real estate loans....... 1,497,567 75.9
Consumer:
Automobile.................... 52,784 2.7
Home improvement.............. 152,036 7.7
Education loans............... 59,791 3.0
Loans on savings accounts..... 6,898 0.4
Other (1)..................... 81,586 4.1
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Total consumer loans ......... 353,095 17.9
Commercial business............. 123,188 6.2
---------- -----
Total loans receivable, gross 1,973,850 100.0%
=====
Deferred loan fees.............. (1,357)
Undisbursed loan proceeds....... (49,435)
Allowance for loan losses
(real estate loans)........... (8,103)
Allowance for loan losses
(other loans)................. (7,666)
----------
Total loans receivable, net. $1,907,289
==========
- ---------------------------------------
(1) Consist primarily of automobile loans and secured and unsecured
personal loans.
FIXED- AND ADJUSTABLE-RATE LOANS. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed-
and adjustable-rate loans at the dates indicated.
AT JUNE 30,
---------------------------------------------------------------------------------------
2002 2001 2000 1999
------------------ ----------------- ----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.................... $ 229,596 7.5% $ 170,054 5.8% $ 108,628 4.2% $ 99,029 4.3%
Fixed......................... 2,130,965 69.3 2,084,015 71.4 1,920,423 74.2 1,771,439 76.1
--------- ------ ---------- ------ ---------- ------- ---------- -------
Total real estate loans...... 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4 1,870,468 80.4
Other loans:
Adjustable.................... 225,889 7.3 197,403 6.8 151,177 5.8 132,873 5.7
Fixed......................... 487,304 15.9 467,724 16.0 409,757 15.8 322,649 13.9
--------- ------ ---------- ------ ---------- ------- ---------- -------
Total other loans............ 713,193 23.2 665,127 22.8 560,934 21.6 455,522 19.6
--------- ------ ---------- ------ ---------- ------- ---------- -------
$3,073,754 100.0% $2,919,196 100.0% $2,589,985 100.0% $2,325,990 100.0%
========== ====== ========== ====== ========== ======= ========== =======
AT JUNE 30,
-------------------
1998
------------------
AMOUNT PERCENT
Real estate loans:
Adjustable.................... $ 55,493 2.8%
Fixed......................... 1,442,074 73.1
---------- -------
Total real estate loans...... 1,497,567 75.9
Other loans:
Adjustable.................... 117,100 5.9
Fixed......................... 359,183 18.2
---------- -------
Total other loans............ 476,283 24.1
---------- -------
$1,973,850 100.0%
========== =======
4
LOAN MATURITY AND REPRICING SCHEDULE. The following table sets forth
the maturity or period of repricing of the Company's loan portfolio at June 30,
2002. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest rates are next
scheduled to adjust rather than in which they contractually mature, and
fixed-rate loans are included in the period in which the final contractual
repayment is due.
BEYOND
WITHIN 1-2 2-3 3-5 5
1 YEAR YEARS YEARS YEARS YEARS TOTAL
--------- --------- --------- -------- -------- ---------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential....... $ 113,050 $ 98,833 $ 91,506 $187,263 $1,529,285 $2,019,937
Multifamily and commercial............ 100,526 21,760 26,944 94,696 60,530 304,456
Consumer loans......................... 263,235 83,113 73,503 114,740 82,634 617,225
Commercial business loans.............. 51,269 7,347 8,938 11,070 17,344 95,968
--------- ---------- --------- -------- ---------- ----------
Total loans........................ $ 528,080 $ 211,053 $ 200,891 $407,769 $1,689,793 $3,037,586
========= ========== ========= ======== ========== ==========
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets
forth at June 30, 2002, the dollar amount of all fixed-rate and adjustable-rate
loans due after June 30, 2003. Adjustable- and floating-rate loans are included
in the table based on the contractual due date of the loan.
FIXED ADJUSTABLE TOTAL
---------- ---------- ---------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential................................. $1,877,706 $ 37,051 $1,914,757
Multifamily and commercial...................................... 108,153 127,323 235,476
Consumer.......................................................... 350,483 91,272 441,755
Commercial........................................................ 33,816 39,811 73,627
---------- ---------- ----------
Total............................................................. $2,370,158 $ 295,457 $2,665,615
========== ========== ==========
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 10 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate sensitivity position and loan
products offered by the Company's competitors. Therefore, even when management's
strategy is to increase the originations of adjustable-rate mortgage loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
The Company currently offers adjustable-rate mortgage loans with
initial interest rate adjustment periods of one, three and five years, based on
changes in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the
5
time the loan is originated. One- to four-family residential adjustable-rate
mortgage loans totaled $42.5 million, or 1.4% of the Company's gross loan
portfolio at June 30, 2002.
The primary purpose of offering adjustable-rate mortgage loans is to
make the Company's loan portfolio more interest rate sensitive. However, as the
interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans may not offer the Company as predictable cash flows
as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed-rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings bank may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are either performed by
the Company's in-house appraisal staff or by an appraiser who has been deemed
qualified by the Company's chief appraiser. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2002, the Company's portfolio of loans serviced by others totaled $1.0 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $2.056 billion of one- to four-family
residential real estate loans are construction loans of $53.7 million, or 1.7%
of the Company's total loan portfolio. The Company offers fixed-rate and
adjustable-rate residential construction loans primarily for the construction of
owner-occupied one- to four-family residences in the Company's market area to
builders or to owners who have a contract for construction. Construction loans
are generally structured to become permanent loans, and are originated with
terms of up to 30 years with an allowance of up to one year for construction.
During the construction phase the loans have a fixed interest rate and convert
into either a fixed-rate or an adjustable-rate mortgage loan at the end of the
construction period. Advances are made as construction is completed. In
addition, the Company originates loans within its market area that are secured
by individual unimproved or improved lots. Land loans are currently offered with
fixed-rates for terms of up to 10 years. The maximum loan-to-value ratio for the
Company's land loans is 75% of the appraised value, and the maximum
loan-to-value ratio for the Company's construction loans is 95% of the lower of
cost or appraised value.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
MULTIFAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Company's
multifamily residential real estate loans are secured by multifamily residences,
such as rental properties. The Company's commercial real estate loans are
secured by nonresidential properties such as hotels, church property, and retail
establishments. At June 30, 2002, a significant portion of the Company's
multifamily residential and commercial real estate loans were secured by
properties located within the Company's market area. The Company's largest
multifamily residential real estate loan relationship at June 30, 2002, had a
principal balance of $4.9 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. The Company's largest commercial real
estate loan relationship at June 30, 2002, had a principal
6
balance of $9.3 million and was collateralized by nursing home facilities in
northwestern, Pennsylvania. Multifamily residential and commercial real estate
loans are offered with both adjustable interest rates and fixed interest rates.
The terms of each multifamily residential and commercial real estate loan are
negotiated on a case-by-case basis. The Company generally makes multifamily
residential and commercial real estate loans up to 75% of the appraised value of
the property collateralizing the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
CONSUMER LOANS. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
home equity loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2002, the
disbursed portion of home equity lines of credit totaled $69.5 million, or
11.3%, of consumer loans, with $116.6 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
COMMERCIAL BUSINESS LOANS. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. The largest commercial business loan relationship had a
principal balance of $5.5 million, and was secured by commercial real estate and
inventory.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
7
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and walk-in customers. All of the Company's loan originators are salaried
employees, and the Company does not pay commissions in connection with loan
originations. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an in-house appraiser or an appraiser approved by the Company
appraises the real estate intended to secure the proposed loan. A loan processor
in the Company's loan department checks the loan application file for accuracy
and completeness, and verifies the information provided. The Company has a
formal loan policy which assigns lending limits to the Company's various loan
officers. Also, the Company has a Credit Committee which meets as needed to
review and verify that the assigned lending limits are being followed and to
monitor the Company's lending policies and the Company's loan activity. The
Company has a Senior Loan Committee which has lending authority as designated in
the Company's loan policy that is approved by the Board of Directors. Loans
exceeding the limits established for the Senior Loan Committee must be approved
by the Executive Committee of the Board of Directors or by the entire Board of
Directors. The Company's policy is to make no loans either individually or in
the aggregate to one entity in excess of $7.5 million without prior approval
from the Board of Directors. Fire and casualty insurance is required at the time
the loan is made and throughout the term of the loan, and upon request of the
Company, flood insurance may be required. After the loan is approved, a loan
commitment letter is promptly issued to the borrower. At June 30, 2002, the
Company had commitments to originate $74.6 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the
Company's originations of loans for the periods indicated.
YEARS ENDED JUNE 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Loans receivable, gross, at beginning of period................... $2,919,196 $2,589,985 $2,325,990
Originations...................................................... 974,413 776,001 629,104
Principal repayments.............................................. (697,427) (450,120) (408,837)
Loan purchases including acquisitions............................. 22,945 57,213 46,933
Loan sales and change in undisbursed loan proceeds................ (140,991) (50,503) (1,580)
Transfer to REO................................................... (4,382) (3,380) (1,625)
---------- ---------- ----------
Loans receivable, gross, at end of period..................... $3,073,754 $2,919,196 $2,589,985
========== ========== ==========
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned
on loans, the Company generally receives loan origination fees. To the extent
that loans are originated or acquired for the Company's portfolio, Statement of
Financial Accounting Standards No. 91 requires that the Company defer loan
origination fees and costs and amortize such amounts as an adjustment of yield
over the life of the loan by use of the level yield method. Fees deferred under
SFAS 91 are recognized into income immediately upon prepayment or the sale of
the related loan. At June 30, 2002 the Company had $2.9 million of net deferred
loan origination fees. Loan origination fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from operations of real estate owned ("REO"). The Company recognized fees and
service charges of $11.9 million, $10.0 million and $7.0 million, for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and
8
unimpaired surplus if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). At June 30,
2002, the largest aggregate amount loaned by the Company to one borrower totaled
$9.3 million and was secured by commercial real estate. The Company's second
largest lending relationship totaled $8.1 million and was secured by land and
real estate. The Company's third largest lending relationship totaled $5.9
million and was secured by commercial real estate. The Company's fourth largest
lending relationship was for $5.5 million and was secured by commercial real
estate and inventory. The Company's fifth largest lending relationship totaled
$5.2 million and was secured by real estate, marketable securities and business
personal property.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as REO until such time as it is sold.
When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss reserve allocations, the difference is charged against the allowance
for loan losses. Any subsequent write-down of REO is charged against earnings.
LOANS PAST DUE AND NONPERFORMING ASSETS. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. Effective November 1998, the Company changed
its policy so that a loan is considered past due if less than 90% of a
contractually due payment has been paid. Prior to this change, a loan was
considered past due only if no amount had been paid. As a result of this change,
the Company recorded a significant increase in the amount of loans which were 90
days or more past due as of June 30, 1999. When a loan is delinquent 90 days or
more, the Company fully reserves all accrued interest thereon and ceases to
accrue interest thereafter. For all the dates indicated, the Company did not
have any material restructured loans within the meaning of SFAS 15.
9
AT JUNE 30,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ --------- -------- -------- ---------
NUMBER BALANCE
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 59 days:
One- to four-family residential loans. 97 $ 4,068 $ 3,055 $2,030 $3,632 $4,842
Multifamily and commercial loans...... 16 1,278 1,184 806 320 79
Consumer loans........................ 780 3,243 3,439 2,108 3,491 3,632
Commercial business loans............. 8 165 418 535 -- 458
------- ------- ------- ------ ------ ------
Total loans past due 30 days to 59 days 901 $ 8,754 $ 8,096 $5,479 $7,443 $9,011
------- -------- ------- ------ ------ ------
Loans past due 60 days to 89 days:
One- to four-family residential loans. 70 $ 3,478 $ 3,001 $2,205 $4,895 $2,386
Multifamily and commercial loans...... 2 269 248 152 314 219
Consumer loans........................ 393 1,604 1,262 777 957 954
Commercial business loans............. 2 35 758 47 -- 841
------- ------- ------- ------ ------ ------
Total loans past due 60 days to 89 days 467 $ 5,386 $ 5,269 $3,181 $6,166 $4,400
------ ------- ------- ------ ------ ------
Loans past due 90 days or more (1):
One- to four-family residential loans. 163 $ 7,278 $ 6,874 $5,753 $8,623 $6,013
Multifamily and commercial loans...... 17 2,407 2,296 1,923 2,141 390
Consumer loans........................ 1,055 3,991 3,129 2,459 2,202 1,631
Commercial business loans............. 19 2,124 5,336 125 3,150 578
------- ------- ------- ------ ------ ------
Total loans past due 90 days or more. 1,254 $15,800 $17,635 $10,260 $16,116 $8,612
------- ------- ------- ------- ------- ------
Total loans 30 days or more past due.... 2,622 $29,940 $31,000 $18,920 $29,725 $22,023
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1) 1,254 $15,800 $17,635 $10,260 $16,116 $ 8,612
Total REO............................... 67 5,157 3,697 2,144 3,383 3,506
------- ------- ------- ------ ------ -------
Total loans 90 days or more past due and REO 1,321 $20,957 $21,332 $12,404 $19,499 $12,118
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable.................. 0.52% 0.62% 0.40% 0.71% 0.45%
Total loans 90 days or more past due
and REO to total assets............... 0.49% 0.55% 0.36% 0.63% 0.47%
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 2002, gross interest income of
approximately $1.2 million would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout the period. No
interest income on nonaccrual loans was included in income during such period.
CLASSIFICATION OF ASSETS. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible" so
that their continuance as assets without the establishment of a specific loss
reserve is not warranted. Assets that do not expose the savings institution to
risk sufficient to warrant classification in one of the aforementioned
categories, but which possess some weaknesses, are required to be designated
"special mention" by management. At June 30, 2002, the Company had 29 loans,
with an aggregate principal balance of $17.5 million, designated as special
mention.
The Company regularly reviews its asset portfolio to determine whether
any assets require classification in accordance with applicable regulations. The
Company's largest classified assets are also the Company's largest nonperforming
assets.
10
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
AT JUNE 30,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Substandard assets................................... $38,398 $ 35,011 $ 21,448
Doubtful assets...................................... 1,465 33 35
Loss assets.......................................... -- 160 20
------- -------- --------
Total classified assets........................... $39,863 $ 35,204 $ 21,503
======= ======== ========
ALLOWANCE FOR LOAN LOSSES. The loans that have been classified as
substandard or doubtful are reviewed by the Credit Review and Administration
("CRA") department for possible impairment under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan." A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments.
If an individual loan is deemed to be impaired the CRA department
determines the proper measurement of impairment for each loan based on one of
three methods as prescribed by SFAS No. 114: (1) the present value of expected
future cash flows discounted at the loan's effective interest rate; (2) the
loan's observable market price; or (3) the fair value of the collateral if the
loan is collateral dependent. If the measure of the impaired loan is more or
less than the recorded investment in the loan, the CRA department adjusts the
specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered to be individually
impaired, it is grouped with other loans that possess common characteristics for
impairment evaluation and analysis under the provisions of SFAS No. 5,
"Accounting for Contingencies." This segmentation is accomplished by grouping
loans of similar product types, risk characteristics and industry concentration
into homogeneous pools. Each pool is then analyzed based on historical
delinquency, charge-off and recovery trends adjusting for the current economic,
political, regulatory and interest rate environment. A range of losses is then
established that reflects the highest and lowest loss ratios in any one fiscal
year. This historical net charge-off amount as a percentage of loans outstanding
for each group is used to estimate the measure of impairment.
The individual impairment measures along with the estimated range of
losses for each homogeneous pool are consolidated into one summary document.
This summary schedule along with the support documentation used to establish
this schedule is presented to the Credit Committee by the Vice President of CRA
on a quarterly basis. The Credit Committee is comprised of members of Senior
Management from mortgage, consumer and commercial lending, appraising,
administration, finance and the President of the Company. The Credit Committee
reviews the processes and documentation presented, reviews the concentration of
credit by industry and customer, discusses lending products, activity,
competition and collateral values, as well as economic conditions in general and
in each market area of the Company. Based on this review and discussion the
appropriate range of the allowance for loan losses is estimated and any
adjustments to reconcile the actual allowance for loan losses with this estimate
is determined. In addition, the Credit Committee considers if any changes to the
methodology are needed. The Credit Committee also reviews and discusses the
Company's delinquency trends, nonperforming asset amounts and allowance for loan
losses levels and ratios with its peer group as well as state and national
statistics. Following the Credit Committee's review and approval, a similar
review is performed by the Board of Director's Risk Management Committee.
In addition to the reviews by the Credit Committee and the Risk
Management Committee, regulators from either the FDIC or State Department of
Banking perform an extensive review on an annual basis for the adequacy of the
allowance for loan losses and its conformity with regulatory guidelines and
pronouncements. The internal audit department also performs a regular review of
the detailed supporting schedules for accuracy and reports their findings to the
Audit Committee of the Board of Directors. Any recommendations or enhancements
from these independent parties are considered by management and the Credit
Committee and implemented accordingly.
Management acknowledges that this is a dynamic process and consists of
factors, many of which are external and out of management's control, that can
change often, rapidly and substantially. The adequacy of the allowance for loan
losses is based upon estimates using all the information previously discussed as
well as current and known circumstances and events. There is no assurance that
actual portfolio losses will not be substantially different than those that were
estimated.
11
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
YEARS ENDED JUNE 30,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Net loans receivable ................................... $ 3,012,606 $ 2,856,581 $ 2,544,630 $ 2,285,238 $ 1,907,289
Average loans outstanding .............................. 2,935,629 2,715,012 2,436,260 2,128,480 1,690,412
Allowance for loan losses balance at beginning of period 20,290 18,260 16,773 15,769
13,611
Provision for loan losses .............................. 6,360 5,347 4,149 3,629 4,072
Charge-offs:
Real estate loans .................................... (292) (176) (289) (514) (132)
Consumer loans ....................................... (4,452) (3,528) (2,987) (3,049) (2,384)
Commercial loans ..................................... (569) (158) -- (101) --
----------- ----------- ----------- ----------- -----------
Total charge-offs ................................... (5,313) (3,862) (3,276) (3,664) (2,516)
----------- ----------- ----------- ----------- -----------
Recoveries:
Real estate loans .................................... 63 32 75 367 --
Consumer loans ....................................... 382 453 481 470 393
Commercial loans ..................................... 23 60 33 61 --
----------- ----------- ----------- ----------- -----------
Total recoveries .................................... 468 545 589 898 393
Acquired through acquisition ........................... 237 -- 25 141 209
----------- ----------- ----------- ----------- -----------
Allowance for loan losses balance at end of period ... $ 22,042 $ 20,290 $ 18,260 $ 16,773 $ 15,769
=========== =========== =========== =========== ===========
Allowance for loan losses as a percentage of net
loans receivable ..................................... 0.73% 0.71% 0.72% 0.73% 0.83%
Net charge-offs as a percentage of average
loans outstanding .................................... 0.17% 0.12% 0.11% 0.13% 0.13%
Allowance for loan losses as a percentage of
nonperforming loans .................................. 139.51% 115.06% 177.97% 104.08% 183.10%
Allowance for loan losses as a percentage
of nonperforming loans and REO ....................... 105.18% 95.12% 147.21% 86.02% 130.13%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category at the dates
indicated.
AT JUNE 30,
---------------------------------------------------------------------------
2002 2001 2000
---------------------- --------------------- -----------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
------- --------- ------ -------- ------- ----------
Balance at end of period
applicable to:
Real estate loans ........... $11,703 76.8% $11,629 77.2% $11,334 78.4%
Consumer loans .............. 8,855 20.1 6,682 19.7 5,976 19.7
Commercial business loans ... 1,484 3.1 1,979 3.1 950 1.9
------- ----- ------- ----- ------- -----
Total allowance for loan loss $22,042 100.0% $20,290 100.0% $18,260 100.0%
======= ===== ======= ===== ======= =====
AT JUNE 30,
---------------------------------------------
1999 1998
----------------------- -------------------
% OF % OF
TOTAL TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1)
------- --------- ------ ---------
Balance at end of period
applicable to:
Real estate loans......... $ 10,619 80.4% $ 8,103 75.9%
Consumer loans............ 5,318 17.9 4,957 17.9
Commercial business loans. 836 1.7 2,709 6.2
-------- ----- ------- ------
Total allowance for loan loss $ 16,773 100.0% $ 15,769 100.0%
======== ====== ======== ======
- ------------------------------
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Company's investment portfolio comprises mortgage-backed
securities, investment securities, and cash and cash equivalents. In recent
years, the Company generally has increased both the percentage of its assets
held in its investment securities portfolio, and the percentage of assets held
in the mortgage-backed securities portfolio. This increase in investment
securities and mortgage-backed securities resulted from the Company leveraging
its capital by borrowing funds and investing the proceeds in marketable
securities in order to improve net interest income. In addition, any excess
funds resulting from the acquisition of branch offices, and the related
deposits, from other financial institutions is invested by the Company. Also,
the Company maintains a high percentage of its assets in marketable securities
and cash equivalents to assist in asset/liability management.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending
12
upon the yields on investment alternatives and upon management's judgment as to
the attractiveness of the yields then available in relation to other
opportunities and its expectation of the level of yield that will be available
in the future, as well as management's projections as to the short-term demand
for funds to be used in the Company's loan origination and other activities.
PURCHASES, SALES, AND REPAYMENTS OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
YEARS ENDED JUNE 30,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Mortgage-backed securities balance at beginning of period (1). $ 504,274 $ 420,177 $ 348,257
Purchases..................................................... 160,665 114,926 96,320
Sales......................................................... -- (11,127) --
Securities acquired by business combination................... -- -- --
Increase (decrease) in market value of securities available for sale 4,519 5,725 (5,308)
Principal payments and amortization of premiums and discounts. (144,857) (25,427) (19,092)
--------- --------- ---------
Mortgage-backed securities balance at end of period (1)....... $ 524,601 $ 504,274 $ 420,177
========= ========= =========
Investment securities balance at beginning of period (2)...... $ 226,636 $ 205,562 $ 240,230
Purchases..................................................... 177,778 68,982 26,108
Sales......................................................... (50,647) (3,985) (29,934)
Securities acquired by business combination................... -- -- --
Increase (decrease) in market value of securities available for sale 154 7,012 (6,075)
Writedowns.................................................... (400) -- --
Maturities and amortization of premiums and discounts......... (45,896) (50,935) (24,767)
--------- --------- ---------
Investment securities balance at end of period (2)............ $ 307,625 $ 226,636 $ 205,562
========= ========= =========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
AMORTIZED COST AND MARKET VALUE OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities
portfolio and mortgage-backed securities portfolio at the dates indicated.
13
AT JUNE 30,
-----------------------------------------------------------------
2002 2001 2000
------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Mortgage-backed securities held to maturity:
Fixed-rate pass through certificates .................. $ 3,663 $ 3,713 $ 3,379 $ 3,387 $ 1,298 $ 1,311
Variable-rate pass through certificates ............... 52,278 52,426 4,743 4,834 5,967 5,967
Fixed-rate collateralized mortgage obligations ("CMOs") 8,318 8,494 2,284 2,373 -- --
Variable-rate CMOs .................................... 199,601 200,179 198,934 194,356 132,901 128,197
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity ... 263,860 264,812 209,340 204,950 140,166 135,475
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates .................. $ 61,502 $ 63,974 $ 72,522 $ 74,038 $ 84,487 $ 82,772
Variable-rate pass through certificates ............... 12,958 13,040 15,148 15,252 30,670 29,862
Fixed-rate collateralized mortgage obligations ("CMOs") 35,315 35,685 3 3 8 8
Variable-rate CMOs .................................... 145,335 148,042 206,149 205,641 169,459 167,369
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale . 255,110 260,741 293,822 294,934 284,624 280,011
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities .................... 518,970 525,553 $503,162 $499,884 $424,790 $415,486
-------- -------- ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency ............................ $ 18,040 $ 20,156 $ 34,518 $ 35,819 $ 35,993 $ 34,588
Municipal securities .................................. 65,274 65,759 50,641 50,388 31,848 27,850
Corporate debt issues ................................. 49,329 48,164 44,832 42,215 29,749 24,451
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity ........ $132,643 $134,079 $129,991 $128,422 $ 97,590 $ 86,889
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ............................ $ 23,604 $ 23,952 $ 27,220 $ 27,793 $ 50,970 $ 50,593
Municipal securities .................................. 77,742 78,011 57,538 57,588 55,810 51,387
Corporate debt issues ................................. 1,476 1,333 986 905 985 949
Equity securities and mutual funds .................... 68,228 71,686 7,123 10,359 3,441 5,043
-------- -------- -------- -------- -------- --------
Total investment securities available for sale ...... $171,050 $174,982 $ 92,867 $ 96,645 $111,206 $107,972
======== ======== ======== ======== ======== ========
ISSUERS OF MORTGAGE-BACKED SECURITIES. The following table sets forth
information regarding the issuers and the carrying value of the Company's
mortgage-backed securities held to maturity and mortgage-backed securities
available for sale.
AT JUNE 30,
--------------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Mortgage-backed securities:
FNMA................................................................$ 193,814 $ 210,548 $ 149,780
GNMA........................................................... 76,412 91,535 103,537
FHLMC.......................................................... 235,344 181,500 146,309
Other (non-agency)............................................. 19,031 20,691 20,551
--------- --------- ---------
Total mortgage-backed securities............................. $ 524,601 $ 504,274 $ 420,177
========= ========= =========
14
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Company's investment securities and
mortgage-backed securities portfolios at June 30, 2002. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
AT JUNE 30, 2002
---------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS
---------------------- -----------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
--------- ---------- --------- ----------
Investment securities held to maturity:
U.S. Government and agency obligations ..................... $ -- --% $ -- --%
Municipal securities ....................................... -- -- 100 5.25
Corporate debt issues ...................................... -- -- 1,019 11.51
--------- ---------- --------- ----------
Total investment securities held
to maturity .......................................... $ -- --% $ 1,119 10.95%
Investment securities available for sale:
U.S. Government and agency obligations ..................... $ 5,501 6.08% $ 10,974 5.25%
Equity securities and mutual funds ......................... -- -- -- --
Municipal securities ....................................... 100 5.30 -- --
Corporate debt issues ...................................... -- -- -- --
--------- ---------- --------- ----------
Total investment securities available
for sale ............................................ $ 5,601 6.07% $ 10,974 5.25%
Mortgage-backed securities held to maturity:
Pass-through certificates .................................. $ 52,278 4.72% $ -- --%
CMOs ....................................................... 199,601 3.98 -- --
--------- ---------- --------- ----------
Total mortgage-backed securities held
to maturity .............................................. $251,879 4.13% $ -- --%
Mortgage-backed securities available for sale:
Pass through certificates .................................. $ 12,989 4.68% $ 1,873 6.86%
CMOs ....................................................... 145,335 4.22 1 10.15
--------- ---------- --------- ----------
Total mortgage-backed securities available
for sale .................................................. $158,324 4.26% $ 1,874 6.86%
--------- ---------- --------- ----------
Total investment securities and mortgage-backed
securities ................................................. $415,804 4.21% $ 13,967 5.92%
======== ==== ======== ====
AT JUNE 30, 2002
---------------------------------------------------
FIVE TO TEN YEARS MORE THAN TEN YEARS
----------------------- -----------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
----------- ---------- ---------- ----------
DOLLARS IN THOUSANDS
Investment securities held to maturity:
U.S. Government and agency obligations ..................... $ 10,013 7.14% $ 8,027 7.51%
Municipal securities ....................................... -- -- 65,174 5.08
Corporate debt issues ...................................... -- -- 48,310 8.15
-------- ----- -------- -----
Total investment securities held
to maturity .......................................... $ 10,013 7.14% $121,511 6.46%
Investment securities available for sale:
U.S. Government and agency obligations ..................... $ 7,129 5.18% $ -- --%
Equity securities and mutual funds ......................... -- -- 68,228 3.45
Municipal securities ....................................... 498 4.95 77,144 5.13
Corporate debt issues ...................................... -- -- 1,476 4.21
-------- ----- -------- -----
Total investment securities available
for sale ............................................ $ 7,627 5.16% $146,848 4.34%
Mortgage-backed securities held to maturity:
Pass-through certificates .................................. $ -- --% $ 3,663 6.95%
CMOs ....................................................... -- -- 8,318 5.61
-------- ----- -------- -----
Total mortgage-backed securities held
to maturity .............................................. $ -- --% $ 11,981 6.02%
Mortgage-backed securities available for sale:
Pass through certificates .................................. $ 1,184 6.02% $ 58,414 7.06%
CMOs ....................................................... 5,725 5.46 29,589 5.61
-------- ----- -------- -----
Total mortgage-backed securities available
for sale .................................................. $ 6,909 5.56% $ 88,003 6.57%
-------- ----- -------- -----
Total investment securities and mortgage-backed
securities ................................................. $ 24,549 6.08% $368,343 5.63%
======== ===== ======== =====
AT JUNE 30, 2002
----------------------------------
TOTAL
---------------------------------
ANNUALIZED
AMOR- WEIGHTED
TIZED MARKET AVERAGE
COST VALUE YIELD
------ ------- ----------
Investment securities held to maturity:
U.S. Government and agency obligations ..................... $ 18,040 $ 20,156 7.30%
Municipal securities ....................................... 65,274 65,759 5.08
Corporate debt issues ...................................... 49,329 48,164 8.22
-------- -------- ----
Total investment securities held
to maturity .......................................... $132,643 $134,079 6.55%
Investment securities available for sale:
U.S. Government and agency obligations ..................... $23,604 $ 23,952 5.42%
Equity securities and mutual funds ......................... 68,228 71,686 3.45
Municipal securities ....................................... 77,742 78,011 5.13
Corporate debt issues ...................................... 1,476 1,333 4.21
-------- -------- ----
Total investment securities available
for sale ............................................ $171,050 174,982 4.49%
Mortgage-backed securities held to maturity:
Pass-through certificates .................................. $ 55,941 $ 56,139 4.87%
CMOs ....................................................... 207,919 208,673 4.05
-------- -------- ----
Total mortgage-backed securities held
to maturity .............................................. $263,860 $264,812 4.22%
Mortgage-backed securities available for sale:
Pass through certificates .................................. $ 74,460 $ 77,014 6.62%
CMOs ....................................................... 180,650 183,727 4.49
-------- -------- ----
Total mortgage-backed securities available
for sale .................................................. $255,110 $260,741 5.11%
-------- -------- ----
Total investment securities and mortgage-backed
securities ................................................. $822,663 $834,614 4.93%
======== ======== ====
15
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Company's funds
for lending and other investment purposes. In addition to deposits, the Company
derives funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities, operations and, if needed,
borrowings from the FHLB. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
DEPOSITS. Consumer and commercial deposits are attracted
principally from within the Company's market area through the offering of a
broad selection of deposit instruments including checking accounts, savings
accounts, money market deposit accounts, term certificate accounts and
individual retirement accounts. While the Company accepts deposits of $100,000
or more, it does not offer substantial premium rates for such deposits. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. The Company regularly evaluates its internal cost of funds,
surveys rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers, nor does it
solicit funds outside its market area.
The following table sets forth the savings activities of the
Company for the periods indicated.
YEARS ENDED JUNE 30,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of period ........... $3,264,940 $2,886,509 $2,463,711
Net savings activity ..................... 88,883 131,763 18,222
Net checking activity .................... 49,913 2,019 43,240
Deposits acquired ........................ 84,960 137,941 270,810
---------- ---------- ----------
Net increase before interest credited 223,756 271,723 332,272
Interest credited ........................ 104,426 106,708 90,526
---------- ---------- ----------
Net increase in deposits ............ 328,182 378,431 422,798
---------- ---------- ----------
Balance at end of period ........ $3,593,122 $3,264,940 $2,886,509
========== ========== ==========
The following table sets forth the dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------------------------
2002 2001
------------------------------------------ -----------------------------------------
BALANCE PERCENT (1) RATE (2) BALANCE PERCENT (1) RATE (2)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Savings accounts .............. $ 698,336 19.44% 2.62% $ 455,031 13.94% 3.17%
Checking accounts ............. 605,582 16.85 0.86 522,580 16.00 0.96
Money market accounts ......... 407,974 11.35 2.71 208,220 6.38 3.69
Certificates of deposit:
Maturing within 1 year ... 1,046,783 29.14 3.80 1,691,033 51.79 6.02
Maturing 1 to 3 years .... 542,222 15.09 4.39 313,697 9.61 5.79
Maturing more than 3 years 292,225 8.13 5.02 74,379 2.28 6.02
---------- ---------- ---------- ---------- ---------- ----------
Total certificates ....... 1,881,230 52.36 4.16 2,079,109 63.68 5.99
---------- ---------- ---------- ---------- ---------- ----------
Total deposits ................ $3,593,122 100.00% 3.14% $3,264,940 100.00% 4.65%
========== ========== ========== ========== ========== ==========
AT JUNE 30,
---------------------------------------
2000
---------------------------------------
BALANCE PERCENT (1) RATE (2)
---------- ---------- ----------
Savings accounts .............. $ 432,908 15.00% 3.22%
Checking accounts ............. 470,183 16.29 0.93
Money market accounts ......... 183,257 6.35 3.63
Certificates of deposit:
Maturing within 1 year ... 1,042,401 36.11 5.24
Maturing 1 to 3 years .... 660,620 22.89 6.23
Maturing more than 3 years 97,140 3.36 5.93
---------- ---------- ----------
Total certificates ....... 1,800,161 62.36 5.64
---------- ---------- ----------
Total deposits ................ $2,886,509 100.00% 4.38%
========== ========== ==========
- ----------------------------------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
16
TIME DEPOSIT RATES. The following table sets forth the time deposits in
the Company classified by rates as of the dates indicated:
AT JUNE 30,
-----------------------------------------------
2002 2001 2000
------------ ----------- -----------
RATE (IN THOUSANDS)
Less than 2.00%............................... $ 24,433 $ -- $ --
2.00 - 2.99%.................................. 431,963 301 --
3.00 - 3.99%.................................. 410,835 79,616 4,485
4.00 - 4.99%.................................. 579,715 330,509 322,494
5.00 - 5.99%.................................. 233,925 428,362 911,908
6.00 - 6.99%.................................. 171,645 1,124,205 546,796
7.00 - 7.99%.................................. 28,653 116,052 14,417
8.00% or greater.............................. 64 64 61
------------ ----------- -----------
Total..................................... $ 1,881,230 $ 2,079,109 $ 1,800,161
============ =========== ===========
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 2002.
AMOUNT DUE
----------------------------------------------------------------------------
LESS THAN 1-2 2-3 AFTER 3
ONE YEAR YEARS YEARS YEARS TOTAL
---------- ---------- ---------- ---------- ----------
RATE
(IN THOUSANDS)
Less than 2.00% ....... $ 24,426 $ 7 $ -- $ -- $ 24,433
2.00 - 2.99% .......... 403,763 28,067 17 116 431,963
3.00 - 3.99% .......... 233,491 114,849 61,597 898 410,835
4.00 - 4.99% .......... 173,198 149,013 75,575 181,929 519,715
5.00 - 5.99% .......... 52,338 41,138 35,848 104,601 233,925
6.00 - 6.99% .......... 146,086 9,230 12,462 3,864 171,642
7.00 - 7.99% .......... 13,481 2,004 12,351 817 28,653
8.00% or greater ...... -- 64 -- -- 64
---------- ---------- ---------- ---------- ----------
Total ................. $1,046,783 $ 344,372 $ 197,850 $ 292,225 $1,881,230
========== ========== ========== ========== ==========
LARGE CERTIFICATES OF DEPOSIT MATURITIES. The following table indicates
the amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 2002.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
- --------------- ----------
(IN THOUSANDS)
Three months or less ................................ $ 59,864
Three through six months ............................ 46,989
Six through twelve months ........................... 52,134
Over twelve months .................................. 130,443
--------
Total .......................................... $289,430
========
BORROWINGS
Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company also relies upon borrowings from the FHLB to supplement
its supply of lendable funds and to meet deposit withdrawal requirements.
Borrowings from the FHLB typically are collateralized by the Bank's stock in the
FHLB and a portion of the Bank's first mortgage loans.
The FHLB functions as a central reserve bank providing credit
for the Bank and other member financial institutions. As a member, the Bank is
required to own capital stock in the FHLB and is authorized to apply for
borrowings on the security of such stock and certain of its first mortgage loans
and other assets (principally, securities that are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Borrowings are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of borrowings are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. All FHLB borrowings have fixed interest
rates and original maturities of between one day and twenty years.
17
DURING THE YEAR ENDED JUNE 30,
----------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
FHLB-Pittsburgh borrowings:
Average balance outstanding ......................... $237,907 $247,291 $264,130
Maximum outstanding at end of any month during period 243,547 304,583 411,370
Balance outstanding at end of period ................ 235,500 245,552 201,602
Weighted average interest rate during period ........ 5.47% 5.84% 5.53%
Weighted average interest rate at end of period ..... 5.35% 5.36% 5.90%
Reverse repurchase agreements:
Average balance outstanding ......................... $ 12,798 $ 24,059 $ 27,627
Maximum outstanding at end of any month during period 19,568 28,997 35,215
Balance outstanding at end of period ................ 17,166 24,165 31,463
Weighted average interest rate during period ........ 2.82% 6.14% 5.50%
Weighted average interest rate at end of period ..... 1.98% 4.47% 6.38%
Other borrowings:
Average balance outstanding ......................... $ 6,571 $ 7,208 $ 8,100
Maximum outstanding at end of any month during period 6,647 10,315 10,054
Balance outstanding at end of period ................ 6,594 6,495 6,876
Weighted average interest rate during period ........ 6.63% 7.03% 6.55%
Weighted average interest rate at end of period ..... 6.63% 6.65% 6.55%
Total borrowings:
Average balance outstanding ......................... $257,276 $278,558 $299,857
Maximum outstanding at end of any month during period 269,603 339,531 447,281
Balance outstanding at end of period ................ 259,260 276,212 239,941
Weighted average interest rate during period ........ 5.37% 5.90% 5.55%
Weighted average interest rate at end of period ..... 5.16% 5.31% 5.98%
COMPETITION
The Company's market area in Pennsylvania, western New York
and eastern Ohio has a large concentration of financial institutions, some of
which are significantly larger and have greater financial resources than the
Company, and all of which are competitors of the Company to varying degrees. As
a result, the Company encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes offices of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes
principally from commercial banks, mortgage banking companies, and other savings
institutions. This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Company's
market area as well as the increased efforts by commercial banks to expand
mortgage loan originations.
The Company competes for loans primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers, and builders. Factors that affect
competition include general and local economic conditions, current interest rate
levels, and volatility of the mortgage markets.
SUBSIDIARY ACTIVITIES
The Company has four subsidiaries: the Bank and Jamestown,
as well as Northwest Capital Trust I and Northwest Bancorp Trust I, all of which
are wholly-owned. The Bank has five wholly owned subsidiaries, Great Northwest
Corporation, Northwest Financial Services, Inc., Northwest Consumer Discount
Company, Inc., Allegheny Services, Inc., and Northwest Capital Group, Inc.
Jamestown has no subsidiaries. For financial reporting purposes all of these
companies are included in the consolidated financial statements of the Company.
18
During fiscal 2002 the Company formed two wholly owned Delaware
statutory business trusts, Northwest Capital Trust I and Northwest Bancorp
Statutory Trust I. These trusts were formed solely to issue preferred securities
to third parties for cash, issue common securities to the Company in exchange
for capitalization of the trusts, invest the proceeds from the sale of trust
securities in an equivalent amount of debentures of the Company and engage in
other activities that are incidental to those previously listed.
Northwest Capital Trust I is a wholly owned Delaware statutory business
trust. The sole activity of this Trust was the issuance of 2,760,000 of 8.75%
Cumulative Trust Preferred Securities through a public offering on November 30,
2001 (liquidation value of $25 per preferred security or $69,000,000) with a
stated maturity date of December 31, 2031. At June 30, 2002, the Company had an
equity investment in Northwest Capital Trust I of $2.1 million. For the fiscal
year ended June 30, 2002 Northwest Capital Trust I reported no net income.
Northwest Bancorp Statutory Trust I is the second wholly owned Delaware
statutory business trust formed by the Company during the 2002 fiscal year. The
sole activity of this Trust was the issuance of 30,000 Cumulative Trust
Preferred Securities to a pooled vehicle through a private transaction on
December 18, 2001 (liquidation value of $1,000 per preferred security or
$30,000,000) with a stated maturity date of December 23, 2031. At June 30, 2002,
the Company had an equity investment in Northwest Bancorp Statutory Trust I of
$928,000, and for the fiscal year ended June 30, 2002, Northwest Bancorp
Statutory Trust I reported no net income.
Great Northwest's sole activity is holding equity investments in
government-assisted low-income housing projects in various locations in the
Company's market area. At June 30, 2002, the Bank had an equity investment in
Great Northwest of $3.7 million. For the fiscal year ended June 30, 2002, Great
Northwest had net income of $548,000 generated primarily from federal low-income
housing tax credits.
Northwest Financial Services' principal activity is the operation of
retail brokerage activities for the Company. It also maintains an investment in
land acquired by foreclosure and the ownership of the common stock of several
financial institutions. In addition, Northwest Financial Services also holds an
equity investment in one government assisted low-income housing project and owns
100% of the stock in Rid-Fed, Inc. At June 30, 2002, the Bank had an equity
investment in Northwest Financial Services of $6.5 million, and for the fiscal
year ended June 30, 2002, Northwest Financial Services had net income of
$563,000.
Northwest Consumer Discount Company operates 47 consumer finance
offices throughout Pennsylvania and operates two consumer finance offices in New
York State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 2002, the Bank had an equity investment in Northwest
Consumer Discount Company of $15.1 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2002 was $1.8
million. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreation vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Allegheny Services, Inc. is a Delaware investment company that holds
mortgage loans originated through the Bank's wholesale lending business. In
addition, this Company has loans to both Northwest Savings Bank and Northwest
Consumer Discount Company. At June 30, 2002 the Bank had an equity investment in
Allegheny Services, Inc. of $466.1 million, and for the fiscal year ended June
30, 2002, Allegheny Services, Inc. had net income of $16.4 million.
Northwest Capital Group's principal activity is the development and
sale of a timeshare project in Honolulu, Hawaii which was acquired by deed in
lieu of foreclosure in 1997. At June 30, 2002 the Bank had an equity investment
of $26,000 in Northwest Capital Group and for the fiscal year ended June 30,
2002 Northwest Capital Group reported no net income.
19
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial
Services, has as its sole activity a commercial real estate loan to Northwest
Capital Group. At June 30, 2002 Northwest Financial Services had an equity
investment of $1.1 million in Rid-Fed, Inc. and for the fiscal year ended June
30, 2002 Rid-Fed, Inc. reported no net income.
Northwest Finance Company, Inc. is a wholly owned subsidiary of
Northwest Consumer Discount Company. Northwest Finance Company operates two
consumer finance offices in Jamestown and Fredonia, New York. As of June 30,
2002, Northwest Consumer Discount Company's equity investment in Northwest
Finance Company was $(119,000). For the year ended June 30, 2002, Northwest
Finance Company had a net loss of $19,000.
Federal regulations require SAIF-insured institutions to provide 30
days advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings association,
or is inconsistent with the purposes of federal banking law. Upon the making of
such a determination, the FDIC may order the savings association to divest the
subsidiary or take other actions.
PERSONNEL
As of June 30, 2002, the Company and its wholly owned subsidiaries had
1,227 full-time and 289 part-time employees. None of the Company's employees is
represented by a collective bargaining group. The Company believes its
relationship with its employees to be good.
REGULATION
GENERAL
The Company is a Federal corporation, and the Mutual Holding Company is
a Federal mutual holding company. The Company and the Mutual Holding Company are
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS.
The Bank is a Pennsylvania-chartered savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Bank is subject to extensive regulation by the Department of Banking of the
Commonwealth of Pennsylvania (the "Department"), as its chartering agency, and
by the FDIC, as the deposit insurer. The Bank must file reports with the
Department and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions including, but not limited to, mergers with or acquisitions of
other savings institutions. There are periodic examinations by the Department
and the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the FDIC insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and with their examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department or the FDIC could have a
material adverse impact on the Company, the Mutual Holding Company, the Bank and
their operations.
PENNSYLVANIA SAVINGS BANK LAW
The Pennsylvania Banking Code of 1965, as amended (the "Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees, and depositors,
as well as corporate powers, savings and investment operations and other aspects
of the Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
20
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws as well as other state,
federal and foreign laws. A Pennsylvania savings bank may locate or change the
location of its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the current
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney, or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from 0% to .27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. In addition, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are paid jointly by Bank
Insurance Fund ("BIF") insured institutions and SAIF-insured institutions. Since
January 1, 2000, the FICO interest payments have been paid pro rata by banks and
thrifts based on approximately 2.1 basis point of deposits.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
During each of the fiscal years 1999, 2000, 2001 and 2002, the Company
recaptured into taxable income approximately $1.3 million of the post-1987 bad
debt reserves. At June 30, 2002, the Company had a balance of approximately $2.6
21
million of bad debt reserves in retained income that is subject to recapture
equally over the next two years under this legislation.
CAPITAL REQUIREMENTS
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the FDIC. Such actions could include
a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on an institution's operations, termination of
federal deposit insurance, and the appointment of a conservator or receiver.
Certain actions are required by law. The FDIC's capital regulation provides that
such actions, through enforcement proceedings or otherwise, could require one or
more of a variety of corrective actions.
The Bank is also subject to more stringent capital guidelines of the
Department. Although not adopted in regulation form, the Department utilizes
capital standards of 6% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
LOANS-TO-ONE BORROWER LIMITATION
Under federal regulations, with certain limited exceptions, a
Pennsylvania chartered savings bank may lend to a single or related group of
borrowers on an "unsecured" basis an amount equal to 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but
generally does not include real estate. The Company's internal policy, however,
is to make no loans either individually or in the aggregate to one entity in
excess of $7.5 million without prior approval from the Board of Directors.
PROMPT CORRECTIVE ACTION
Under federal regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution to
comply with supervisory actions as if it were in the next lower category (except
that the FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of June 30, 2002, the Bank and Jamestown were
"well-capitalized institutions" for this purpose.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not, directly or indirectly, acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary; (ii) investing as a
limited partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation, or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets; (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees', and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions; and (iv) acquiring
or retaining the voting shares of a depository institution if certain
requirements are met.
22
THE USA PATRIOT ACT
In response to the events of September 11th, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
- Section 326 of the Act authorizes the Secretary of the
Department of Treasury, in conjunction with other bank
regulators, to issue regulations by October 26, 2002 that
provide for minimum standards with respect to customer
identification at the time new accounts are opened.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking
accounts or correspondence accounts in the United States for
non-United States persons or their representatives (including
foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to
detect and report money laundering.
- Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any
country), and will be subject to certain record keeping
obligations with respect to correspondent accounts of foreign
banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
HOLDING COMPANY REGULATION
Generally. Federal law allows a state savings bank, such as the Bank,
that qualifies as a "Qualified Thrift Lender," discussed below, to elect to be
treated as a savings association for purposes of the savings and loan company
provisions of the HOLA. Such election results in its holding company being
regulated as a savings and loan holding company by the OTS rather than as a bank
holding company by the Federal Reserve Board. The Company and the Mutual Holding
Company have made such election by converting from a Pennsylvania corporation
and a Pennsylvania mutual holding company to a Federal corporation and Federal
mutual holding company, respectively, effective June 30, 2001. The Company and
the Mutual Holding Company are savings and loan holding companies within the
meaning of the HOLA. As such, the Company and the Mutual Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and the Mutual Holding Company and any nonsavings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. As federal
23
corporations, the Company and the Mutual Holding Company are generally not
subject to state business organizations laws.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered
mid-tier holding company, such as the Company, may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act,
unless the Director of the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies; or (B) in which multiple
savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock
acquired in connection with a qualified stock issuance if the purchase of such
stock by such savings and loan holding company is approved by the Director. In
addition, a Federal mutual holding company may engage in any activities
permissible for a financial holding company under Section 4(k) of the Bank
Holding Company Act and regulations of the Federal Reserve Board thereunder,
including underwriting debt and equity securities, insurance agency and
underwriting, and merchant banking. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and has a period of two years to cease any
nonconforming activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of more than 5% of the voting stock of another
savings institution or savings and loan holding company without the prior
approval of the OTS, and from acquiring or retaining control of an any
depository institution that is not FDIC-insured. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.
The Company is regulated as a multiple savings and loan holding company
for interstate acquisition purposes by virtue of its ownership of the Bank and
Jamestown Savings Bank. The OTS is prohibited from approving any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies, and (ii) the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Qualified Thrift Lender Test. To be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), both the Bank and Jamestown Savings bank must qualify as a
Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, each of the
Bank and Jamestown Savings Bank must maintain compliance with the test for a
"domestic building and loan association," as defined in the Internal Revenue
Code, or with the Qualified Thrift Lender test. Under the Qualified Thrift
Lender test, a savings institution is required to maintain at least 65% of its
"portfolio assets" (total assets less: (1) specified liquid assets up to 20% of
total assets; (2) intangibles, including goodwill; and (3) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and related securities) in at least 9 months out of each 12-month period. As of
June 30, 2002 the Bank and Jamestown Savings Bank met the Qualified Thrift
Lender test.
Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends. The OTS reviews dividend
24
waiver notices on a case-by-case basis. Since the Mutual Holding Company
converted to a federal charter it has waived all dividends paid by the Company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to issue from the mutual to the stock form of
ownership (a "Conversion Transaction"). There can be no assurance when, if ever,
a Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company. Based upon
current OTS policy, in a Conversion Transaction, each share of Common Stock held
by the Company's public stockholders ("Minority Stockholders") would be
automatically converted into a number of shares of common stock of the New
Holding Company determined pursuant an exchange ratio that ensures that after
the Conversion Transaction, subject to any adjustment to reflect the receipt of
cash in lieu of fractional shares, the percentage of the to-be outstanding
shares of the New Holding Company issued to Minority Stockholders in exchange
for their Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority Stockholders immediately prior to the
Conversion Transaction. The total number of shares held by Minority Stockholders
after the Conversion Transaction would also be affected by any purchases by such
persons in the offering that would be conducted as part of the Conversion
Transaction.
FEDERAL SECURITIES LAWS
Shares of the Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Many of the provisions
became effective immediately while other provisions become effective over a
period of 30 to 270 days and are subject to rulemaking by the Securities and
Exchange Commission. Although the Company anticipates that it will incur
additional expense in complying with the provisions of the Sarbanes-Oxley Act
and the resulting regulations, management does not expect that such compliance
will have a material impact on the Company's results of operations or financial
condition.
REGULATORY ENFORCEMENT AUTHORITY
Federal law provides federal banking regulators with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
DIVIDENDS
The Company's ability to pay dividends depends, to a large extent, upon
the Bank's ability to pay dividends to the Company. The Banking Code of the
Commonwealth of Pennsylvania states, in part, that dividends may be declared and
paid by the Bank only out of accumulated net earnings and may not be declared or
paid unless surplus (retained earnings) is at least equal to capital. The Bank
has not declared or paid any dividends which
25
caused the Bank's retained earnings to be reduced below the amount required.
Finally, dividends may not be declared or paid if the Bank is in default in
payment of any assessment due to the FDIC. At June 30, 2002, the Bank's retained
earnings exceeded required capital by $146.7 million and the Bank was not in
default of any assessment due the FDIC.
In addition, the Bank is required to notify the OTS prior to paying a
dividend to the Company, and receive the nonobjection of the OTS to any such
dividend.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company files a
consolidated federal income tax return with its wholly owned subsidiaries on a
fiscal year basis. The applicable federal income tax expense or benefit is
properly allocated to each subsidiary based upon taxable income or loss
calculated on a separate company basis. The Mutual Holding Company is not
permitted to file a consolidated federal income tax return with the Company, and
must pay Federal income tax on 20% of the dividends received from the Company.
Because the Mutual Holding Company has nominal assets other than the stock of
the Company, it does not have material federal income tax liability other than
the tax due on the dividends received from the Company.
In April 1992, the FASB issued SFAS 109. The Company currently is
accounting for income taxes in accordance with SFAS 109. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws. SFAS 109 was implemented by
the Bank effective July 1, 1993.
The statute of limitations is open for potential examinations by the
Internal Revenue Service for the tax years ended June 30, 1999 through June 30,
2002.
STATE TAXATION. The Company is subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends
received from the Bank qualify for a 100% dividends received deduction and are
not subject to Corporate Net Income Tax. In addition, the Company's investments
in its subsidiaries qualify as exempt intangible assets and greatly reduce the
amount of Capital Stock Tax assessed.
The Bank is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Bank's financial net income determined
in accordance with generally accepted accounting principles with certain
adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of interest expense incurred to carry the obligations is
disallowed as a deduction.
The subsidiaries of the Bank are subject to the Corporate Net Income
Tax and the Capital Stock Tax of the Commonwealth of Pennsylvania and other
applicable taxes in the states where they conduct business.
ITEM 2. PROPERTIES
As of June 30, 2002, the Company conducted its business through its
main office located in Warren, Pennsylvania, 115 other full-service offices
throughout its market area in northwest, southwest and central Pennsylvania, six
offices in southwestern New York, and four offices in eastern Ohio. The Company
and its wholly owned subsidiaries also operated 47 consumer finance offices
located throughout Pennsylvania and two consumer lending office in New York. At
June 30, 2002, the Company's premises and equipment had an aggregate net book
value of approximately $55.4 million.
Listed below is the location of each of the Company's community banking
offices.
PENNSYLVANIA
Austin, Potter Co.
-- 21 Turner Street
Bellefonte, Centre Co.
-- 117 North Allegheny Street
26
Bradford (4), McKean Co.
-- Bradford Mall - 1001 E. Main Street
-- 33 Main Street
-- 85 West Washington Street
-- 950 E. Main Street
Bridgeville, Allegheny Co.
-- 431 Washington Avenue
Butler, Butler Co.
-- 151 Pittsburgh Road
Canonsburg, Washington Co.
-- 148 West Pike Street
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue
Clarion (2), Clarion Co.
-- 601 Main Street
-- 97 West Main Street
Clearfield, Clearfield Co.
-- 1200 Old Town Road
Columbia, Lancaster Co.
-- 350 Locust Street
Coudersport, Potter Co.
-- 302 N. East Street
Corry, Erie Co.
-- 150 North Center Street
Cranberry, Venango Co.
-- Cranberry Mall
Ebensburg, Cambria Co.
-- 176 Lovell Avenue
Edinboro, Erie Co.
-- Walmart, 108 Washington Towne Blvd
Elizabethtown, Lancaster Co.
-- 2296 South Market Street
Emporium, Cameron Co.
-- 2 East Fourth Street
Erie (11), Erie Co.
-- 2256 West 8th Street
-- K-Mart Plaza West
2863 West 26th Street
-- K-Mart Plaza East
4423 Buffalo Road
-- Millcreek Mall
-- 3805 Peach Street
-- 5624 Peach Street
-- 401 State Street
-- 121 West 26th Street
-- K-Mart Plaza South
1328 East Grandview Blvd.
-- 1945 Douglas Parkway
-- 800 State Street
Franklin, Venango Co.
-- 1301 Liberty Street
Fredericktown, Washington Co.
-- Front Street
Galeton, Potter Co.
-- 30 West Street
Gibsonia, Allegheny Co.
-- The Village of St. Barnabus
5850 Meridian Road
Greenville, Mercer Co.
-- Walmart, 45 Williamson Road
Grove City, Mercer Co.
-- 200 S. Center Street
Hanover, York Co.
-- 1 Center Square
Harborcreek, Erie Co.
-- 4270 East Lake Road
Hershey, Dauphin Co.
-- 10 West Chocolate Avenue
Johnsonburg (2), Elk Co.
-- 553 Market Street
-- Johnsonburg Plaza, Route 219
Johnstown(2), Cambria Co.
-- 225 Franklin Street
-- 475 Theatre Drive
Kane, McKean Co.
-- 56 Fraley Street
27
Kittanning (2), Armstrong Co.
-- Franklin Village Mall
-- 165 Butler Road
Lake City, Erie Co.
-- 2102 Rice Avenue
Lancaster(3), Lancaster County
-- 24 West Orange Street
-- 922 Columbia Avenue
-- 1195 Manheim Pike
Lawrenceville, Tioga Co.
-- 53 Main Street
Lebanon (2), Lebanon Co.
-- 770 Cumberland Street
-- 547 South 10th Street
Lewistown, Mifflin County
-- 51 West Market Street
Lititz, Lancaster Co.
-- 744 South Broad Street
Lock Haven, Clinton Co.
-- 104 East Main Street
Loyalsock, Lycoming Co.
-- 815 Westminster Drive
Mansfield, Tioga Co.
-- 50 South Main Street
Marianna, Washington Co.
-- 1784 Main Street
Marienville, Forest Co.
-- Walnut & West Spruce Street
McDonald, Washington Co.
-- 101 East Lincoln Avenue
Meadville (3), Crawford Co.
-- 932 Diamond Park
-- 1073 Park Avenue
-- 880 Park Avenue
Mount Joy, Lancaster Co.
-- 24 East Main Street
Myerstown, Lebanon Co.
-- 1 West Main Avenue
New Bethlehem, Clarion Co.
-- 301 Broad Street
New Holland, Lancaster Co.
-- 201 West Main Street
North East, Erie Co.
-- 35 East Main Street
Oil City (3), Venango Co.
-- One East First Street
-- 301 Seneca Street
-- 259 Seneca Street
Palmyra, Lebanon Co.
-- 1048 East Main Street
Pleasantville, Venango Co.
-- 102 East State Street
Pottsville, Schuylkill Co.
-- 104 North Centre Street
Ridgway, Elk Co.
-- Main & Mill Streets
Rimersburg, Clarion Co.
-- 629 Main Street
Sarver, Butler Co.
-- 737 South Pike Road
Schaefferstown, Lebanon Co.
-- Dutch-Way Shopping Mall
Route 501 North
Sheffield, Warren Co.
-- 101 South Main Street
Shinglehouse, Potter Co.
-- 105 West Academy Street
Sligo, Clarion Co.
-- 1613 Bald Eagle Street
Smethport, McKean Co.
-- 428 Main Street
Smithfield, Huntingdon Co.
-- Fairgrounds Road & Pennsylvania Avenue
Springboro, Crawford Co.
-- 105 South Main Street
St. Marys (2), Elk Co.
-- 39 South St. Marys Street
-- St. Mary's Plaza
824 Million Dollar Highway
28
State College (3), Centre Co.
-- 201 West Beaver Avenue
-- 611 University Drive
-- 1524 West College Avenue
Sykesville, Jefferson Co.
-- Main and Park Street
Tidioute, Warren Co.
-- 5 Buckingham Street
Tionesta, Forest Co.
-- 221 Elm Street
Titusville, Crawford Co.
-- Spring & Franklin Street
Union City (2), Erie Co.
-- 22 North Main Street
-- 4 Perry Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Volant, Lawrence Co.
-- Main Street
Wampum, Lawrence Co.
-- 342 Main Street
Warren (3), Warren Co.
-- Warren Mall
1666 Market Street Ext.
-- 125 Ludlow Street
-- Liberty Street at Second Avenue
Washington (2), Washington Co.
-- Walmart, 30 Trinity Point Drive
-- Shop-n-Save, 125 West Beau Street
Wattsburg, Erie Co.
-- 14457 Main Street
Weedville, Elk Co.
-- Bennetts Valley, Rt. 555
Wellsboro (2), Tioga Co.
-- 61 Main Street
-- 16 Main Street
Westfield, Tioga Co.
-- 100 East Main Street
Westmont, Cambria Co.
-- Lyter and Entrance Drive
Wrightsville, York Co.
-- 120 North 4th Street
York (3), York Co.
-- Queensgate Shopping Center
2220 South Queens Street
-- Stonybrook Plaza
3649 East Market Street
-- 1700 Roosevelt Avenue
NEW YORK
Jamestown (2) Chautauqua Co. NY
-- 23 West Third Street
-- 768 Foote Avenue
Lakewood, Chautauqua Co. NY
-- 311 East Fairmount Avenue
Mayville, Chautauqua Co. NY
-- 29 S. Erie Street
Olean, Cattaraugus Co. NY
-- 2513 West State Street
Williamsville, Erie Co. NY
-- Eastern Hills Mall
4545 Transit Road
OHIO
Chardon, Geauga Co. OH
-- 325 Center Street
Geneva, Ashtabula Co. OH
-- 30 East Main Street
Madison, Lake Co. OH
-- 1903 Hubbard Road
Painesville, Lake Co. OH
-- 70 Richmond Street
29
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions
arising in the normal course of business. In the opinion of management, the
resolution of these legal actions is not expected to have a material adverse
effect on the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of the fiscal year covered by this report,
the Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "NWSB." As of June 30, 2002, the Company had 19 registered
market makers, 4,174 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
47,549,659 shares outstanding. As of such date, the Mutual Holding Company held
35,366,218 shares of common stock and stockholders other than the Mutual Holding
Company held 12,183,441 shares. The following table sets forth market price and
dividend information for the Company's common stock. Information is presented
for each quarter of the previous two fiscal years.
FISCAL YEAR ENDED CASH DIVIDENDS
JUNE 30, 2002 HIGH LOW DECLARED
------------------ ------------- ------------- -------------
First quarter $ 12.100 $ 9.700 $ 0.06
Second quarter 11.940 9.700 0.06
Third quarter 12.800 10.981 0.06
Fourth quarter 14.950 11.800 0.06
FISCAL YEAR ENDED CASH DIVIDENDS
JUNE 30, 2001 HIGH LOW DECLARED
------------------ ------------- ------------- -------------
First quarter $ 9.000 $ 6.500 $ 0.04
Second quarter 10.375 6.938 0.04
Third quarter 13.000 8.000 0.04
Fourth quarter 11.500 8.820 0.04
Payment of dividends on the Common Stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the payment
of dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data of
the Company. For additional information about the Company, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
30
AT JUNE 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: (IN THOUSANDS)
Total assets..................................... $4,301,246 $3,852,831 $3,407,292 $3,078,832 $2,562,584
Investment securities held-to-maturity........... 132,643 129,991 97,590 118,307 83,021
Investment securities available-for-sale......... 174,982 96,645 107,972 121,923 121,192
Mortgage-backed securities held-to-maturity...... 263,860 209,340 140,166 135,557 110,241
Mortgage-backed securities available-for-sale.... 260,741 294,934 280,011 212,700 195,523
Loans receivable net:
Real estate................................. 2,309,752 2,200,115 1,990,622 1,835,870 1,449,428
Consumer.................................... 608,370 568,661 504,966 410,165 348,096
Commercial.................................. 94,484 87,805 49,042 39,203 109,765
Total loans receivable, net............... 3,012,606 2,856,581 2,544,630 2,285,238 1,907,289
Deposits....................................... 3,593,122 3,264,940 2,886,509 2,463,711 2,022,503
Advances from FHLB and other borrowed funds.... 259,260 276,212 239,941 348,915 289,706
Shareholders' equity........................... 312,351 275,713 247,888 233,657 217,879
YEARS ENDED JUNE 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- ---------- --------- --------- --------
SELECTED CONSOLIDATED OPERATING DATA: (IN THOUSANDS)
Total interest income............................ $ 274,500 $ 269,430 $ 239,724 $ 206,593 $ 175,762
Total interest expense........................... 147,255 157,322 132,099 114,911 95,203
---------- ---------- ---------- ---------- ---------
Net interest income........................... 127,245 112,108 107,625 91,682 80,559
Provision for loan losses........................ 6,360 5,347 4,149 3,629 4,072
---------- ---------- ---------- ---------- ---------
Net interest income after provision
for loan losses 120,885 106,761 103,476 88,053 76,487
---------- ---------- ---------- ---------- ---------
Noninterest income............................... 18,173 15,054 11,271 6,010 7,947
Noninterest expense.............................. 91,671 82,339 73,634 63,110 50,318
---------- ---------- ---------- ---------- ---------
Income before income tax expense and cumulative
effect of accounting change.................. 47,387 39,476 41,113 30,953 34,116
Income tax expense............................... 13,742 12,699 13,910 10,914 12,995
Minority interest in net loss of subsidiary...... -- -- -- 3 201
---------- ---------- ---------- ---------- ---------
Income before cumulative effect of
accounting change............................. 33,645 26,777 27,203 20,042 21,322
Cumulative effect of accounting change........... 2,237 -- -- -- --
---------- ---------- ---------- ---------- ---------
Net income.................................. $ 35,882 $ 26,777 $ 27,203 $ 20,042 $ 21,322
========== ========== ========== ========== =========
Basic per share amounts:
Income before cumulative effect of
accounting change........................ $ 0.71 0.57 0.58 0.42 0.46
Cumulative effect of accounting change...... 0.05 -- -- -- --
---------- ---------- ---------- ---------- ---------
Net income.................................. $ 0.76 $ 0.57 $ 0.58 $ 0.42 $ 0.46
========== ========== ========== ========== =========
Diluted per share amounts:
Income before cumulative effect of
accounting change......................... $ 0.70 $ 0.56 $ 0.57 $ 0.42 $ 0.45
Cumulative effect of accounting change...... 0.05 -- -- -- --
---------- ---------- ---------- ---------- ---------
Net income.................................. $ 0.75 $ 0.56 $ 0.57 $ 0.42 $ 0.45
========== ========== ========== ========== =========
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
KEY FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (net income divided
by average total assets)...................... 0.88% 0.75% 0.83% 0.71% 0.94%
Return on average equity (net income divided by
average equity)............................... 12.24 10.25 11.39 8.86 10.29
Average capital to average assets................ 7.19 7.27 7.29 8.01 9.14
Capital to total assets.......................... 7.26 7.16 7.28 7.59 8.50
Net interest rate spread (average yield on
interest-earning assets less average cost
of interest-bearing liabilities)............ 3.08 2.97 3.26 3.20 3.34
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.38 3.35 3.54 3.49 3.72
Noninterest expense to average assets ........... 2.25 2.29 2.25 2.23 2.22
Net interest income to noninterest expense....... 1.39x 1.36x 1.46x 1.45x 1.60x
Nonperforming loans to net loans receivable...... 0.52 0.62 0.40 0.71 0.45
Nonperforming assets to total assets............. 0.49 0.55 0.36 0.63 0.47
Allowance for loan losses to nonperforming loans. 139.51 115.06 177.97 104.08 183.10
Allowance for loan losses to net loans receivable 0.73 0.71 0.72 0.73 0.83
Average interest-earning assets to average
interest-bearing liabilities.................. 1.08x 1.08x 1.07x 1.07x 1.09x
Number of:
Full-service offices.......................... 126 118 106 94 71
Consumer finance offices...................... 49 45 43 36 34
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains
forward-looking statements. The forward-looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward-looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including quarterly reports on Form
10-Q and current reports filed on Form 8-K.
FINANCIAL CONDITION
GENERAL. Total assets increased by $448.4 million, or 11.6%, to $4.301
billion at June 30, 2002 from $3.853 billion at June 30, 2001. This increase was
funded primarily by a $328.2 million increase in deposits, the issuance of $99.0
million of trust preferred securities and net income of $35.9 million. Total
assets increased by $445.5 million, or 13.1%, to $3.853 billion at June 30, 2001
from $3.407 billion at June 30, 2000. This increase was funded primarily by a
$378.4 million increase in deposits, a $36.3 million increase in borrowed funds
and net income of $26.8 million. The additional funds received in both fiscal
years 2002 and 2001 were used to increase loans receivable and marketable
securities.
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS.
Interest-earning deposits in other financial institutions increased by $108.1
million to $153.1 million at June 30, 2002 from $45.0 million at June 30, 2001.
This increase is due to the Company increasing its liquidity position as part of
its asset and liability management strategy in preparation for possible rising
interest rates. Interest-earning deposits in other financial institutions
increased by $36.5 million to $45.0 million at June 30, 2001 from $8.5 million
at June 30, 2000 as a result of significant deposit activity during the last
several weeks of the fiscal year. The balances in these accounts fluctuate daily
based on the net cash flow from the Company's activities.
INVESTMENT SECURITIES. Investment securities increased by $81.0
million, or 35.7%, to $307.6 million at June 30, 2002 from $226.6 million at
June 30, 2001. This increase resulted from the investment of funds received from
the growth in deposits as well as the proceeds received from the trust preferred
offerings. Investment securities increased by $21.0 million, or 10.2%, to $226.6
million at June 30, 2001 from $205.6 million at June 30, 2000. This increase was
primarily due to the investment of funds received from both internal deposit
growth and branch acquisitions.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased by
$20.3 million, or 4.0%, to $524.6 million at June 30, 2002 from $504.3 million
at June 30, 2001. This increase resulted from the investment of funds received
from the growth in deposits as well as the proceeds received from the trust
preferred offerings. Mortgage-backed securities increased by $84.1 million, or
20.0%, to $504.3 million at June 30, 2001 from $420.2 million at June 30, 2000.
This increase was primarily due to the investment of funds received from both
internal deposit growth and branch acquisitions.
LOANS RECEIVABLE. Net loans receivable increased by $156.0 million, or
5.5%, to $3.013 billion at June 30, 2002 from $2.857 billion at June 30, 2001.
This increase resulted primarily from loan growth across the Company's market
area as well as the purchase of approximately $21.9 million of loans as part of
the acquisition of four retail offices during the current fiscal year. Net loans
receivable increased by $312.0 million, or 12.3%, to $2.857 billion at June 30,
2001 from $2.545 billion at June 30, 2000. This increase also resulted primarily
from strong loan demand throughout the Company's market area as well as the
purchase of approximately $57.2 million of loans as part of the November 2000
purchase of nine retail offices.
32
BANK-OWNED LIFE INSURANCE. In June 2002, the Company purchased $50.0
million of insurance on the lives of a certain group of key employees. The
investment returns from such policies will be used to offset the increase in
employee benefit costs such as healthcare. The cash surrender value of these
policies is included in other assets on the consolidated statements of financial
condition and any increases in the cash surrender value are recorded as other
noninterest income on the consolidated statements of income.
DEPOSITS. Deposits increased by $328.2 million, or 10.1%, to $3.593
billion at June 30, 2002 from $3.265 billion at June 30, 2001. This increase was
primarily due to deposit growth throughout the Company's market area as well as
the successful integration and strong growth of de novo offices opened during
the year. In addition, the acquisition of four retail offices during the current
fiscal year contributed deposits of approximately $85.0 million. Deposits
increased by $378.4 million, or 13.1%, to $3.265 billion at June 30, 2001 from
$2.887 billion at June 30, 2000. This increase was primarily due to normal
deposit growth in existing offices as well as the successful integration and
growth of recently opened offices. In addition, the acquisition of nine retail
offices in November 2000 contributed deposits of approximately $138.0 million.
BORROWINGS. Borrowings decreased by $16.9 million, or 6.1%, to $259.3
million at June 30, 2002 from $276.2 million at June 30, 2001, as the Company
utilized a portion of the aforementioned deposit growth to replace retail
repurchase agreements and reduce its borrowings from the Federal Home Loan Bank
of Pittsburgh. Borrowings increased by $36.3 million, or 15.1%, to $276.2
million at June 30, 2001 from $239.9 million at June 30, 2000. This increase
resulted from the Company utilizing its borrowing relationship with the FHLB to
fund asset growth in an effort to increase net interest income.
TRUST PREFERRED SECURITIES. During the quarter ended December 31, 2001,
the Company issued $99.0 million of Trust Preferred Securities in two separate
offerings through its newly formed and wholly owned Delaware statutory business
trusts, Northwest Capital Trust I and Northwest Bancorp Statutory Trust I. The
first involved the issuance of $69.0 million of 8.75% Cumulative Trust Preferred
Securities through a public offering on November 30, 2001 (liquidation amount
$25 per preferred security). This security trades on the Nasdaq Stock Market
under the symbol NWSBP. The second offering of $30.0 million was sold in a
private transaction to a pooled investment vehicle on December 18, 2001 with a
floating rate of interest equal to three month LIBOR plus 3.60%, reset
quarterly. The trust-preferred securities qualify as regulatory Tier 1 capital
and the cash distributions are tax deductible. The Company will use the proceeds
from these issues for general corporate purposes, including capital
contributions to its banking subsidiaries to support their growth strategies.
SHAREHOLDERS' EQUITY. Shareholders' equity increased by $36.7 million,
or 13.3%, to $312.4 million at June 30, 2002 from $275.7 million at June 30,
2001. This increase was primarily due to net income of $35.9 million which was
partially offset by the declaration of common stock dividends in the amount of
$2.9 million. The remaining net increase was the result of the Company recording
a net unrealized gain in the value of securities available for sale of $3.0
million due to the decrease in short-term market interest rates. Shareholders'
equity increased by $27.8 million, or 11.2%, to $275.7 million at June 30, 2001
from $247.9 million at June 30, 2000. This increase was primarily due to net
income of $26.8 million which was partially offset by the declaration of common
stock dividends in the amount of $7.6 million. The remaining net increase was
the result of the Company recording a net unrealized gain in the value of
securities available for sale of $8.3 million due to the decrease in short-term
market interest rates.
RESULTS OF OPERATIONS
GENERAL. The earnings of the Company depend primarily on its level of
net interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans,
mortgage-backed securities and other investment securities, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits, borrowed
funds, and trust-preferred securities. Net interest income is a function of the
Company's interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. Also
contributing to the Company's earnings is noninterest income which consists
primarily of service charges, fees related to insurance and investment
management and trust services, and gains and losses on sale of assets. Interest
income and noninterest income are offset by a provision for loan losses, general
administrative and other expenses, including employee compensation and benefits,
occupancy and equipment costs, as well as by state and federal income tax
expense.
33
For the fiscal year ended June 30, 2002 net income was $35.9 million,
or $.75 per diluted share, and was significantly enhanced by the adoption of
Statement of Financial Accounting Standards No. 141, "Business Combinations."
This pronouncement required that the Company's remaining negative goodwill of
approximately $2.2 million be taken into income as a one-time cumulative change
in accounting principle. Excluding the effects of this one-time item, net income
for the current fiscal year would have been $33.6 million, or $.70 per diluted
share, an increase of $6.8 million, or 25.4%, from $26.8 million, or $.56 per
diluted share, for the prior fiscal year ended June 30, 2001. This increase in
net income resulted primarily from a $15.1 million, or 13.5%, increase in net
interest income and a $3.1 million, or 20.5%, increase in noninterest income
partially offset by an increase in noninterest expense of $9.4 million, or
11.4%, and an increase in the provision for loan losses of $1.1 million, or
20.8%. Net income for the fiscal year ended June 30, 2001 was $26.8 million, or
$.56 per diluted share, a decrease of $426,000, or 1.6%, from $27.2 million, or
$.57 per diluted share, for the prior fiscal year ended June 30, 2000. This
decrease in net income resulted from an increase in noninterest expense of $8.7
million, or 11.8%, and an increase in the provision for loan losses of $1.2
million, or 29.3% partially offset by a $4.5 million, or 4.2%, increase in net
interest income and a $3.8 million, or 33.6%, increase in noninterest income.
INTEREST INCOME. Total interest income increased by $5.8 million, or
2.1%, on a taxable equivalent basis, to $277.8 million for the fiscal year ended
June 30, 2002 from $272.0 million for the fiscal year ended June 30, 2001. This
increase was primarily due to an increase in average interest earning assets of
$434.4 million, or 12.7%, to $3.859 billion from $3.424 billion, which was
partially offset by a decrease in the yield on average interest earning assets
to 7.20% from 7.94%. The increase in average interest earning assets was
primarily due to the continued strong internal growth of the Company's existing
funding sources along with the investment of funds received from acquisitions
and new office openings. The yield on average interest earning assets decreased
as a result of the aforementioned growth occurring during a period of declining
market interest rates and the repricing of variable rate assets at these lower
interest rates. Total interest income increased by $30.0 million, or 12.4%, on a
taxable equivalent basis, to $272.0 million for the fiscal year ended June 30,
2001 from $242.0 million for the fiscal year ended June 30, 2000. This increase
in interest income was primarily attributable to a $320.5 million, or 10.3%,
increase in average interest-earning assets to $3.424 billion from $3.104
billion. Also contributing to this increase in interest income was an increase
in the taxable equivalent yield on average interest-earning assets to 7.94% from
7.80%. The increase in average interest-earning assets was primarily due to
strong internal growth and the investment of funds received from the acquisition
of retail offices with average deposits of approximately $150.0 million. The
increase in the overall yield on interest earning assets resulted primarily from
the aforementioned growth occurring during a period of higher long-term interest
rates which increased the yields on both fixed rate mortgages and long-term
fixed rate investment securities.
Interest income on loans receivable increased by $5.6 million, or 2.5%,
to $228.3 million for the year ended June 30, 2002 from $222.7 million for the
year ended June 30, 2001. This increase resulted primarily because average loans
outstanding increased by $220.6 million, or 8.1%, to $2.936 billion from $2.715
billion, which was partially offset by a decrease in the average yield on loans
to 7.78% from 8.20%. Average loans outstanding increased because of strong loan
demand throughout the Company's market area as well as the aforementioned
acquisition of four retail offices with loans of approximately $21.9 million.
The decrease in average yield resulted primarily from the repricing of variable
rate loans and the refinancing of fixed rate loans in a declining interest rate
environment along with the growth in the Company's loan portfolio over the past
year at interest rate levels lower than the existing average portfolio rate.
Interest income on loans receivable increased by $26.1 million, or 13.3%, to
$222.7 million for the year ended June 30, 2001 from $196.6 million for the year
ended June 30, 2000. This increase was primarily due to a $278.8 million, or
11.4%, increase in average loans outstanding to $2.715 billion from $2.436
billion. Also contributing to the increase in loan interest income was an
increase in the yield on average loans to 8.20% from 8.07%. Average loans
receivable increased primarily because of strong loan demand throughout the
Company's market area as well as the acquisition of retail offices over the past
twelve months with average loans of approximately $48.0 million. The increase in
average yield resulted primarily from the growth in the Company's loan portfolio
at interest rate levels higher than the existing average portfolio rate.
Interest income on mortgage-backed securities decreased by $2.7
million, or 9.2%, to $26.5 million for the year ended June 30, 2002 from $29.2
million for the year ended June 30, 2001. This decrease occurred primarily
because of a decrease in the average yield to 5.18% from 6.58% which was
partially offset by an increase in the average balance of $69.0 million, or
15.6%, to $512.0 million from $443.0 million. The average yield on
mortgage-backed securities, approximately 86% of which are variable rate,
decreased in response to the significant reduction in short-
34
term market interest rates during calendar 2001. The average balance increased
primarily as a result of investing the funds from the aforementioned deposit
growth. Interest income on mortgage-backed securities increased by $2.0 million,
or 7.4%, to $29.2 million for the year ended June 30, 2001 from $27.2 million
for the year ended June 30, 2000. This increase was primarily due to an increase
in the average balance of mortgage-backed securities of $28.5 million, or 6.9%,
to $443.0 million from $414.5 million, combined with an increase in the average
yield to 6.58% from 6.57%. The average balance increased primarily as a result
of investing the funds received from the aforementioned acquisition of retail
offices. The slight change in the average yield on mortgage-backed securities,
86% of which are variable rate, reflects the increase in short-term market
interest rates during the first six months of the fiscal year ended June 30,
2001.
Interest income on investment securities increased by $574,000, or
3.2%, on a taxable equivalent basis, to $18.3 million for the year ended June
30, 2002 from $17.7 million for the year ended June 30, 2001. This increase
resulted primarily because the average balance of investment securities
increased by $42.1 million, or 18.4%, to $270.6 million from $228.5 million,
which was partially offset by a decrease in the taxable equivalent yield to
6.76% from 7.76%. The increase in the average balance of investment securities
was primarily due to the investment of funds generated from the aforementioned
deposit growth. The decrease in the taxable equivalent yield was primarily a
result of purchasing investment securities in a lower yielding rate environment.
Interest income on investment securities increased by $1.8 million, or 11.3%, on
a taxable equivalent basis, to $17.7 million for the year ended June 30, 2001
from $15.9 million for the year ended June 30, 2000. This increase resulted
primarily from an increase in the average taxable equivalent yield to 7.76% from
7.24% combined with a $9.4 million, or 4.3%, increase in the average balance of
investment securities to $228.5 million from $219.1 million. These increases
resulted from the investment of the proceeds received from the aforementioned
acquisition of retail offices and from maturing bonds primarily into higher
yielding municipal bonds and trust preferred securities of other institutions.
Interest income on interest-earning deposits increased by $2.6 million,
or 298.2%, to $3.5 million for the year ended June 30, 2002 from $877,000 for
the year ended June 30, 2001. This increase occurred primarily because the
average balance of interest-earning deposits increased by $101.4 million to
$117.8 million from $16.4 million, which was partially offset by a decrease in
the average yield to 2.96% from 5.36%. The increase in average balance is
primarily because the proceeds from the $99.0 million of Trust Preferred
Securities issued by the Company are currently invested in overnight federal
funds. The Company has increased its liquidity position as part of its asset and
liability management strategy to be able to take advantage of possible rising
interest rates. The decrease in the average yield is a result of the sharp
decline in short-term market interest rates over the last eighteen months.
Interest income on interest-earning deposits decreased by $3,000, or 0.3%, to
$877,000 for the year ended June 30, 2001 from $880,000 for the year ended June
30, 2000. This decrease resulted primarily from a decrease in the average yield
to 5.36% from 6.54% partially offset by an increase in the average balance of
interest-earning deposits by $2.9 million, or 21.5%, to $16.4 million from $13.5
million. The volatility in the average yield and average balance is largely
influenced by the timing as to when the Company begins to earn interest on its
daily deposits and the float experienced on checks issued.
INTEREST EXPENSE. Total interest expense decreased by $10.0 million, or
6.4%, to $147.3 million for the fiscal year ended June 30, 2002 from $157.3
million for the year ended June 30, 2001. This decrease was primarily due to a
decrease in the average cost of interest-bearing liabilities to 4.12% from 4.97%
which was partially offset by an increase in the average balance of
interest-bearing liabilities by $411.0 million, or 13.0%, to $3.575 billion from
$3.164 billion. The decrease in the cost of funds resulted from the Company's
deposit accounts and borrowing relationships repricing at much lower rates in
response to the significant decreases in short-term market interest rates during
calendar 2001. Partially offsetting the decrease in short-term interest rates
was the effect of the newly issued Trust Preferred Securities which had a
weighted average cost of 7.81%. The increase in the average balance of
interest-bearing liabilities resulted primarily from an increase of $375.5
million, or 13.0%, in the average balance of deposits, attributed primarily to
the growth of existing offices along with new office openings and acquisitions.
In addition, the Company issued $99.0 million of Trust Preferred Securities in
two separate offerings during the second fiscal quarter which increased average
interest-bearing liabilities outstanding by $56.7 million. Partially offsetting
these increases in average balances was a decrease in average borrowed funds of
$21.3 million, or 7.6%, to $257.3 million from $278.6 million as the Company
replaced retail repurchase agreements and FHLB borrowings with deposits. Total
interest expense increased by $25.2 million, or 19.1%, to $157.3 million for the
year ended June 30, 2001 from $132.1 million for the year ended June 30, 2000.
This increase resulted primarily from an increase in the average balance of
interest-bearing liabilities by $254.9 million, or 8.8%, to $3.164 billion for
the year ended June 30, 2001 from $2.909 billion for the year ended June 30,
2000. In addition, the average cost of interest-bearing liabilities increased to
4.97% from 4.54%. The increase in average interest-bearing liabilities resulted
from an increase of $276.2 million, or 10.6%, in the average balance of
35
deposits, attributed primarily to the acquisition and opening of new offices
along with the internal growth of existing offices. Partially offsetting this
increase in deposits was a decrease in average borrowed funds of $21.3 million,
or 7.1%, to $278.8 million for the year ended June 30, 2001 from $299.9 million
for the year ended June 30, 2000. The Company utilized a portion of its deposit
growth to repay borrowed funds. The overall increase in the average cost of
funds resulted primarily from increases in the interest rates on term deposits
over the last two years in response to significant increases in short-term
market interest rates during that time period. These deposits had not yet
repriced in response to recent decreases in short-term market interest rates. In
addition, the average cost of borrowings increased to 5.90% from 5.55% as these
fixed-rate fixed-term borrowings were not affected by the decreases experienced
in short-term market interest rates over the last six months of the Company's
fiscal year ended June 30, 2001.
NET INTEREST INCOME. Net interest income increased by $15.9 million, or
13.9%, on a taxable equivalent basis, to $130.6 million for the fiscal year
ended June 30, 2002 compared to $114.7 million for the fiscal year ended June
30, 2001. As previously summarized, this increase in net interest income was
attributable to the significant increase in net interest earning assets over the
past twelve months coupled with a favorable increase in the Company's net
interest margin. The Company was also able to improve its net interest rate
spread as the cost of funds on short-term interest bearing liabilities decreased
by more than the yield on interest earning assets in response to lower market
interest rates. Net interest income increased by $4.8 million, or 4.4%, on a
taxable equivalent basis, to $114.7 million for the year ended June 30, 2001
from $109.9 million for the year ended June 30, 2000. This increase in net
interest income was attributable to the significant increase in net interest
earning assets as the Company's interest rate spread decreased to 2.97% from
3.26% in response to higher short-term market interest rates and an inverted
yield curve during the fiscal year ended June 30, 2001.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$1.0 million, or 18.9%, to $6.4 million for the year ended June 30, 2002 from
$5.3 million for the year ended June 30, 2001. Management analyzes the allowance
for loan losses as described in the section "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, current economic conditions and historical loss
experience. As part of this analysis, management considered the increase in net
charge-offs of $1.5 million, or 46.1%, to $4.8 million for the year ended June
30, 2002 from $3.3 million for the year ended June 30, 2001. In addition,
management considered the growth in the total loan portfolio for the current
year of approximately $156 million and the increase in classified assets of
approximately $4.7 million, or 13.2%, to $39.9 million for the year ended June
30, 2002 from $35.2 million for the year ended June 30, 2001. The provision for
loan losses increased by $1.2 million, or 29.3%, to $5.3 million for the year
ended June 30, 2001 from $4.1 million for the year ended June 30, 2000. In
recording this provision, management considered the increase in net charge-offs
of $630,000, or 23.4%, to $3.3 million for the year ended June 30, 2001 from
$2.7 million for the year ended June 30, 2000. In addition, management
considered the growth in the total loan portfolio of approximately $312 million
and the increase in nonperforming loans of $7.4 million, or 71.9%, to $17.6
million for the year ended June 30, 2001 from $10.3 million for the year ended
June 30, 2000.
NONINTEREST INCOME. Noninterest income increased by $3.1 million, or
20.5%, to $18.2 million for the fiscal year ended June 30, 2002 from $15.1
million for the fiscal year ended June 30, 2001. This increase in noninterest
income was primarily related to the increase in service charges and fees
associated with the Company's growth both internally and through acquisitions.
In addition, trust income increased by $1.4 million, or 301.9%, to $1.9 million
for the current fiscal year from $465,000 the prior year as a result of the
acquisition of Heritage Trust Company in April 2001. Other operating income
increased by $678,000, or 56.6%, to $1.9 million for the year ended June 30,
2002 from $1.2 million for the year ended June 30, 2001. This increase is
primarily attributable to an increase in brokerage fee income of approximately
$230,000 and an increase of approximately $144,000 in the cash surrender value
of bank-owned life insurance. Partially offsetting these increases was a
decrease in insurance commission income of $390,000, or 20.4%, to $1.5 million
for the current fiscal year from $1.9 million the prior year. This decrease in
insurance commissions occurred primarily at Northwest Consumer Discount Company
as a result of a decrease in both loan originations and outstandings, which is
typical in the current low interest rate environment. In addition, the Company
incurred a $400,000 loss due to the write-down of two trust-preferred securities
of other financial institutions that it maintains in its "held-to-maturity"
investment portfolio. This write-down to market value of these "non-rated"
securities occurred primarily because of deteriorating financial performance of
the issuers. Noninterest income increased by $3.8 million, or 33.6%, to $15.1
million for the year ended June 30, 2001 from $11.3 million for the year ended
June 30, 2000. Of this increase, approximately $1.8 million was attributable to
increases in fee income relating to
36
the Company's growth in loans and deposits as well as an increase in overdraft
charges. In addition, debit card transaction income and surcharges for foreign
ATM use contributed an increase of approximately $672,000 while the investment
management and trust and brokerage lines of business added additional income of
approximately $560,000 primarily related to the additional fees generated by
Heritage Trust Company which was acquired in April 2001. Also occurring in the
current fiscal year was the sale of approximately $61.0 million of long-term
fixed-rate mortgage loans from the wholesale lending business for a net gain of
$478,000. These higher fixed coupon loans were sold in response to the decrease
in market interest rates which typically results in an acceleration of
prepayments.
NONINTEREST EXPENSE. Noninterest expense increased by $9.4 million, or
11.4%, to $91.7 million for the fiscal year ended June 30, 2002 from $82.3
million for the fiscal year ended June 30, 2001. All major expense categories,
except the amortization expense of intangible assets, experienced an increase in
the current year. Compensation and employee benefit expense increased by $4.6
million, or 10.6%, to $48.2 million; premises and occupancy costs increased by
$1.3 million, or 12.3%, to $11.9 million; processing expenses, which includes
data processing, check processing and ATM processing, increased by $666,000, or
10.3%, to $7.1 million; and other operating expenses increased by $1.4 million,
or 16.1%, to $10.1 million. These increases were primarily a result of the
significant growth of the Company including the growth of its retail network of
offices, the expansion of its investment management, trust and brokerage
services as well as the addition of new products and services. The amortization
of intangibles decreased slightly for the year because the Company adopted SFAS
142 "Goodwill and Other Intangible Assets", on July 1, 2001 and as a result
discontinued the scheduled amortization of goodwill. Adoption of this
pronouncement eliminated approximately $1.0 million of goodwill amortization in
the current year. This expense reduction was, however, almost completely offset
by the additional amortization of other intangibles created from the acquisition
of retail offices from other institutions over the past eighteen months.
Noninterest expense increased by $8.7 million, or 11.8%, to $82.3 million for
the year ended June 30, 2001 from $73.6 million for the year ended June 30,
2000. This increase resulted primarily from a $5.6 million, or 14.7%, increase
in compensation and employee benefit expense to $43.6 million for the year ended
June 30, 2001 from $38.0 million for the year ended June 30, 2000. This increase
in compensation and employee benefit expense resulted from the growth of the
Company's network of community banking and consumer finance offices, along with
the expansion of its investment management, trust and brokerage lines of
business. Occupancy costs as well as data processing and check processing
expenses also increased by $1.5 million, or 16.5%, $331,000, or 12.4%, and
$187,000, or 5.7%, respectively, as a result of the aforementioned increases in
the Company's network of offices. In addition, the expense for the amortization
of intangibles increased by $1.6 million, or 27.6%, to $7.4 million for the year
ended June 30, 2001 from $5.8 million for the year ended June 30, 2000. This was
primarily a result of the additional intangible recorded for the acquisition of
nine retail offices in November of 2000. Partially offsetting these increases in
expense was a decrease in the deposit insurance expense of $313,000, or 35.0%,
as a result of the last of a series of scheduled decreases in the FICO debt
assessment rate. This rate was reduced on January 1, 2000 to $.21 from $.58 for
every $1,000 in deposits.
INCOME TAXES. Income tax expense increased by $1.0 million, or 8.2%, to
$13.7 million for the year ended June 30, 2002 from $12.7 million for the year
ended June 30, 2001. This increase was primarily due to an increase in net
income before tax which was partially offset by a decrease in the effective tax
rate to 29.0% for the year ended June 30, 2002 from 32.2% for the year ended
June 30, 2001. This decrease in effective tax rate was primarily due to an
increase in the Company's portfolio of tax-exempt assets as well as the
incorporation of a Delaware investment company which decreased state income tax
expense. Income tax expense decreased by $1.2 million, or 8.6%, to $12.7 million
for the year ended June 30, 2001 from $13.9 million for the year ended June 30,
2000. This decrease was primarily due to a decrease in net income before tax as
well as a decrease in the effective tax rate to 32.2% for the year ended June
30, 2001 from 33.8% for the year ended June 30, 2000. The decrease in the
effective tax rate was due to an increase in the Company's portfolio of
tax-exempt assets.
37
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Company's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from monthly averages.
YEARS ENDED JUNE 30
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------ -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- ------- ---------- --------- ------- ---------- --------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1)(2)...... $2,935,629 $ 228,333 7.78% $2,715,012 $ 222,740 8.20% $2,436,260 $ 196,596 8.07%
Mortgage-backed securities (3) 511,965 26,531 5.18 442,985 29,161 6.58 414,548 27,236 6.57
Investment securities(3)(4)(5) 270,647 18,307 6.76 228,503 17,733 7.76 219,073 15,861 7.24
FHLB stock................... 22,773 1,151 5.05 21,521 1,506 7.00 20,578 1,420 6.90
Interest-earning deposits.... 117,795 3,492 2.96 16,361 877 5.36 13,450 880 6.54
---------- --------- ---------- --------- ---------- ---------
Total interest-earning assets 3,858,809 277,814 7.20 3,424,382 272,017 7.94 3,103,909 241,993 7.80
Noninterest-earning assets(6).. 216,002 169,737 171,675
---------- ---------- ----------
Total assets................ $4,074,811 $3,594,119 $3,275,584
========== ========== ==========
Interest-bearing liabilities:
Savings accounts............. $ 564,448 15,473 2.74 $ 425,583 13,501 3.17 $ 418,871 13,650 3.26
NOW accounts................. 393,616 4,747 1.21 351,883 4,612 1.31 335,775 4,559 1.36
Money market demand accounts. 314,455 9,019 2.87 187,823 6,929 3.69 185,261 6,855 3.70
Certificate accounts......... 1,988,489 99,765 5.02 1,920,171 115,839 6.03 1,669,375 90,386 5.41
Borrowed funds(7)............ 257,276 13,821 5.37 278,558 16,441 5.90 299,857 16,649 5.55
Guaranteed preferred
beneficial interests in the
Company's junior
subordinated debentures..... 56,736 4,430 7.81 -- -- -- -- -- --
----------- --------- ---------- --------- ---------- ---------
Total interest-bearing
liabilities................. 3,575,020 147,255 4.12 3,164,018 157,322 4.97 2,909,139 132,099 4.54
Noninterest-bearing liabilities 206,629 168,925 127,596
----------- ---------- ----------
Total liabilities............ 3,781,649 3,332,943 3,036,735
Shareholders' equity........... 293,162 261,176 238,849
----------- ---------- ----------
Total liabilities and equity. $4,074,811 $3,594,119 $3,275,584
========== ========== ==========
Net interest income............ $ 130,559 $ 114,695 $ 109,894
========= ========= =========
Net interest rate spread(8).... 3.08% 2.97% 3.26%
==== ==== ====
Net interest-earning assets.... $ 283,789 $ 260,364 $ 194,770
========== ========== ==========
Net interest margin(9)......... 3.38% 3.35% 3.54%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities. 1.08x 1.08x 1.07x
========== ========== ==========
- -------------
(1) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(2) Interest income includes accretion/amortization of deferred loan
fees/expenses.
(3) Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(4) Interest income on tax-free investment securities is presented on a taxable
equivalent basis.
(5) Average balances include FNMA and FHLMC stock.
(6) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(7) Average balances include FHLB advances, securities sold under agreements to
repurchase and other borrowings.
(8) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
RATE/VOLUME ANALYSIS. Net interest income can also be analyzed in terms
of the impact of changes in interest rates on interest-earning assets and
interest-bearing liabilities and changes in the volume or amount of these assets
and liabilities. The following table represents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (change
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume), (iii) changes in rate-volume
(changes in rate multiplied by changes in volume), and (iv) the net change.
38
YEARS ENDED JUNE 30,
--------------------------------------------------------------------------------------------
2002 VS. 2001 2001 VS. 2000
--------------------------------------------- --------------------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
------------------------------- -------------------------------
TOTAL TOTAL
RATE/ INCREASE RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
--------- -------- --------- ---------- -------- -------- -------- ----------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable .................. $(11,566) $ 18,099 $ (940) $ 5,593 $ 3,275 $ 22,494 $ 375 $ 26,144
Mortgage-backed securities ........ (6,205) 4,541 (966) (2,630) 53 1,868 4 1,925
Investment securities ............. (2,277) 3,271 (420) 574 1,140 683 49 1,872
FHLB stock ........................ (418) 88 (25) (355) 20 65 1 86
Interest-earning deposits ......... (392) 5,437 (2,430) 2,615 (159) 190 (34) (3)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets ... (20,858) 31,436 (4,781) 5,797 4,329 25,300 395 30,024
Interest-bearing liabilities:
Savings accounts .................. (1,835) 4,405 (598) 1,972 (362) 219 (6) (149)
NOW accounts ...................... (367) 547 (44) 136 (159) 219 (8) 52
Money market demand accounts ...... (1,542) 4,672 (1,040) 2,090 (21) 95 -- 74
Certificate accounts .............. (19,502) 4,121 (694) (16,075) 10,324 13,579 1,551 25,454
Borrowed funds .................... (1,477) (1,256) 113 (2,620) 1,050 (1,183) (75) (208)
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures ......... -- -- 4,430 4,430 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities (24,723) 12,489 2,167 (10,067) 10,832 12,929 1,462 25,223
Net change in net interest income $ 3,865 $ 18,947 $ (6,948) $ 15,864 $ (6,503) $ 12,371 $ (1,067) $ 4,801
======== ======== ======== ======== ======== ======== ======== ========
REGULATORY CAPITAL REQUIREMENTS. The FDIC's capital regulations
establish a minimum 3.0% Tier I leverage capital requirement for the most
highly-rated state-chartered, non-member banks, with an additional cushion of at
least 100 to 200 basis points for all other state-chartered, non-member banks,
which effectively will increase the minimum Tier I leverage ratio for such other
banks to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization, rated composite
1 under the Uniform Financial Institutions Rating System. Leverage or core
capital is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit card relationships.
39
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2002, the
Company's banking subsidiaries each exceeded its capital requirements.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could be subject to a cease-and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The following table summarizes the actual and minimum regulatory
capital requirements of the Bank and Jamestown at June 30, 2002 and June 30,
2001.
JUNE 30, 2002
-----------------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
---------------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- -------- -------- -------- ---------
Total capital (to risk weighted assets):
Northwest Savings Bank................. $ 276,565 12.49% $177,174 8.00% $221,467 10.00%
Jamestown Savings Bank................. 14,727 11.04 10,673 8.00 13,341 10.00
Tier I capital (to risk weighted assets):
Northwest Savings Bank................. $ 253,937 11.47% $ 88,587 4.00% $132,880 6.00%
Jamestown Savings Bank................. 13,765 10.32 5,336 4.00 8,004 6.00
Tier I capital (leverage) (to average assets):
Northwest Savings Bank................. $ 253,937 6.47% $117,767 3.00%* $196,279 5.00%
Jamestown Savings Bank................. 13,765 5.87 7,035 3.00* 11,725 5.00
40
JUNE 30, 2001
-----------------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
---------------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Total capital (to risk weighted assets):
Northwest Savings Bank................. $ 214,670 10.39% $165,364 8.00% $206,705 10.00%
Jamestown Savings Bank................. 8,232 10.72 6,142 8.00 7,678 10.00
Tier I capital (to risk weighted assets):
Northwest Savings Bank................. $ 193,570 9.36% $ 82,682 4.00% $124,023 6.00%
Jamestown Savings Bank................. 7,596 9.89 3,071 4.00 4,607 6.00
Tier I capital (leverage) (to average assets):
Northwest Savings Bank................. $ 193,570 5.33% $108,916 3.00%* $181,526 5.00%
Jamestown Savings Bank................. 7,596 5.96 3,821 3.00 * 6,368 5.00
- ------------
* The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3%, and all other
institutions will be required to maintain an additional capital cushion of
100 to 200 basis points. As of June 30, 2002, the Company had not been
advised of any additional requirements in this regard.
The Bank is also subject to Pennsylvania Department of Banking
("Department") capital guidelines. Although not adopted in regulation form, the
Department utilizes capital standards of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
LIQUIDITY AND CAPITAL RESOURCES. The Bank and Jamestown are required to
maintain a sufficient level of liquid assets, as determined by management and
defined and reviewed for adequacy by the FDIC during their regular examinations.
The FDIC, however, does not prescribe by regulation a minimum amount or
percentage of liquid assets. The FDIC allows any marketable security, whose sale
would not impair the capital adequacy of the Company, to be eligible for
liquidity. Liquidity is quantified through the use of a standard liquidity ratio
of liquid assets to short-term borrowings plus deposits. Using this formula, the
Bank's and Jamestown's liquidity ratios were 22.2% and 53.5%, respectively, as
of June 30, 2002. The Bank and Jamestown adjust their liquidity levels in order
to meet funding needs of deposit outflows, repayment of borrowings and loan
commitments. The Company also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
In addition to deposits, the Company's primary sources of funds are the
amortization and repayment of loans and mortgage-backed securities, maturities
of investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on loans
and mortgage-backed securities are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rate levels, economic conditions, and competition. The Company manages the
pricing of its deposits to maintain a desired deposit balance. In addition, the
Company invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term
interest-earning deposits with the FHLB of Pittsburgh amounted to $153.1 million
at June 30, 2002. Other assets qualifying for liquidity outstanding at June 30,
2002, amounted to $812.5 million. For additional information about cash flows
from the Company's operating, financing, and investing activities, see
Statements of Cash Flows included in the Consolidated Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 2002, the Company had $235.5 million in advances
from the FHLB. The Company borrows from the FHLB to reduce interest rate risk
and to provide liquidity when necessary.
At June 30, 2002, the Company's customers had $116.6 million of unused
lines of credit available and $74.6 million in loan commitments. This amount
does not include the unfunded portion of loans in process. Certificates of
deposit scheduled to mature in less than one year at June 30, 2002, totaled
$1.047 billion. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Company.
41
The major sources of the Company's cash flows are the areas of loans,
marketable securities, deposits and borrowed funds.
Deposits are the Company's primary source of externally generated
funds. The level of deposit inflows during any given period is heavily
influenced by factors outside of management's control, such as the general level
of short-term and long-term interest rates in the economy, as well as higher
alternative yields that investors may obtain on competing investments such as
money market mutual funds. Financial institutions, such as the Company, are also
subject to deposit outflows. The Company's net deposits excluding interest
credits and acquisitions, increased by $138.8 million, $133.8 million and $61.5
for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
Similarly, the amount of principal repayments on loans and the amount
of new loan originations is heavily influenced by the general level of interest
rates in the economy. Funds received from principal payments on loans for the
fiscal years ended in June 30, 2002, 2001 and 2000 were $697.4 million, $450.1
million and $408.8 million, respectively. Loan originations for the years ended
June 30, 2002, 2001 and 2000 were $974.4 million, $776.0 million and $629.1
million, respectively. The Company also sells a portion of the loans it
originates and the cash flows from such sales for the fiscal years ended June
30, 2002, 2001 and 2000 were $132.5 million, $61.4 million and $1.1 million,
respectively.
The Company also experiences significant cash flows from its portfolio
of marketable securities as principal payments are received on mortgage-backed
securities and as investment securities mature. During recent years, the Company
has utilized cash to increase its portfolio of marketable securities. Cash flow
from the repayment of principal and the maturity of marketable securities for
the fiscal years ended June 30, 2002, 2001 and 2000 were $193.1 million, $77.9
million and $44.4 million, respectively. During the fiscal years ended June 30,
2002, 2001 and 2000, the company utilized cash to purchase marketable securities
in the amount of $338.4 million, $183.9 million and $122.4 million,
respectively.
The Company utilizes borrowings as a source of liquidity, when
necessary, and as a source of funds for long term investment when market
conditions permit. The net cash flow from the receipt and repayment of
borrowings was a net decrease of $17.0 million for the fiscal year ended June
30, 2002, a net increase of $36.3 million for the fiscal year ended June 30,
2001 and a net decrease of $109.0 million for the fiscal year ended June 30,
2000. In addition, during the current fiscal year the Company issued trust
preferred securities in two separate offerings raising $99.0 million in cash to
be used for general corporate purposes, including capital contributions to its
banking subsidiaries to support their growth strategies.
Other activity with respect to cash flow was the payment of cash
dividends on common stock in the amount of $2.9 million, $7.6 million and $7.6
million for the fiscal years ended June 30 2002, 2001 and 2000, respectively.
The current fiscal year ended June 30, 2002 was the first year in which
Northwest Bancorp, MHC waived its right to receive cash dividends from the
Company. Dividends paid to Northwest Bancorp, MHC during the fiscal years ended
June 30, 2002, 2001 and 2000 were $0, $5,640,000 and $5,533,000, respectively.
IMPACT OF INFLATION AND CHANGING PRICES. The Consolidated Financial
Statements of the Company and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
On July 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 141 "Business Combinations"("SFAS 141"). SFAS 141 addresses
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations", and FASB Statement No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises". This statement
effectively eliminates the use of the pooling method of accounting for business
combinations and states that all business combinations in the scope of this
statement are to be accounted for using only the purchase method. The provisions
of this statement apply to all business
42
combinations initiated after June 30, 2001 and to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. Because the Company has generally used purchase
accounting for its business combinations, this statement has not materially
changed its ongoing operations.
Also on July 1, 2001, and concurrently with SFAS 141, the company
adopted SFAS 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". This
statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. This statement, among other things, eliminates the regularly
scheduled amortization of goodwill and replaces this method with a two-step
process for testing the impairment of goodwill on at least an annual basis. This
approach could cause more volatility in the Company's reported net income
because impairment losses, if any, could occur irregularly and in varying
amounts. Immediately upon adoption, and as required by SFAS 141 and SFAS 142,
existing negative goodwill of $2.2 million was recorded in income as a
cumulative effect of a change in accounting principle and the Company stopped
amortizing the remaining goodwill of $11.3 million. In addition, the Company
performed its initial impairment analysis of goodwill and other intangible
assets noting that the estimated fair value exceeded the carrying amount.
SFAS 142 does not change, however, the accounting prescribed in FASB
Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" (paragraphs 4-7). The FASB affirmed in an Action Alert "that
paragraph 5 of FASB Statement No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, applies to all acquisitions of financial
institutions (or branches thereof) whether `troubled' or not, in which the fair
value of liabilities assumed exceeds the fair value of tangible and intangible
assets acquired." As a result, the Company continues to amortize intangible
assets of $55.4 million which meet the requirements of FASB Statement No. 72.
The Company notes that the FASB has decided to undertake a limited-scope project
to reconsider part of the guidance, specifically paragraphs 5 and 6, of
Statement No. 72.
On July 5, 2001, the FASB released SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. This statement
is effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The impact of adopting this statement is not expected to
have a material effect on the financial statements of the Company.
On October 3, 2001, the FASB released SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). This statement replaces
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of" and replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business." The provisions of SFAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. Early application is encouraged. The Company will be
using this statement to recognize and measure the impairment, if any, of its
intangible assets that are subject to amortization and does not anticipate a
material change from the methods currently used under SFAS No. 121.
On April 30, 2002, the FASB released SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement updates, clarifies and simplifies existing
accounting pronouncements. The provisions of this statement are effective for
fiscal years beginning after May 15, 2002. The impact of adopting this statement
is not expected to have a material effect on the financial statements of the
Company.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
new requirements are effective prospectively for exit or disposal activities
after December 31, 2002. Earlier adoption is encouraged. A company may not
restate its previously issued financials. The new statement grandfathers the
accounting for liabilities that a company had previously recorded under EITF
Issue 94-3. The impact of adopting this statement is not expected to have a
material effect on the financial statements of the Company.
43
SUBSEQUENT BUSINESS ACQUISITIONS
In September 2002, the Company completed its previously announced
acquisition of Prestige Bancorp, Inc., and its subsidiary Prestige Bank, a
Federal Savings Bank. Prestige Bank had four offices in the South Hills area of
Pittsburgh, Pennsylvania and assets of approximately $190 million, deposits of
approximately $122 million and shareholders' equity of approximately $11.7
million. Under terms of the agreement, shareholders received $13.75 in cash for
each share of Prestige Bancorp, resulting in a cash payment of approximately
$14.7 million and intangible assets of approximately $5.0 million.
Also as previously announced on August 16, 2001 and reported on Form
8-K, the Company had entered into an agreement to acquire Leeds Federal
Bankshares, Inc. The transaction is subject to the approval of the OTS and
Northwest's application is currently on file with the OTS pending approval. The
parties have twice agreed to extend the date upon which the transaction must be
completed to provide additional time to review the application of SFAS 141 and
142, which has been the primary reason for the delay in completing the
application process. On August 28, 2002, the parties extended the date for
completion of the merger to December 31, 2002. The parties also agreed to amend
the merger agreement to modify the structure of the transaction in which Leeds
Federal Savings Bank will become a wholly-owned subsidiary of Northwest Bancorp,
MHC and will not be part of the Northwest Bancorp, Inc. consolidated group
immediately after the merger as previously proposed. The $32.00 per share cash
consideration to be paid to the public stockholders of Leeds Federal Bankshares,
Inc. and all other terms and conditions of the merger remain generally
unchanged.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS. The
matching of assets and liabilities may be analyzed by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. Similarly,
during a period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by increasing the interest rate
sensitivity of its interest-earning assets. The Company (i) emphasizes the
origination of short-term, fixed-rate consumer loans, and at June 30, 2002, such
loans constituted $452.6 million, or 14.7%, of the Company's total loan
portfolio; (ii) emphasizes the origination of one- to four-family residential
mortgage loans with terms of 15 years or less, and purchases shorter term or
adjustable-rate investment securities and mortgage-backed securities; and (iii)
originates adjustable-rate mortgage loans, adjustable-rate consumer loans, and
adjustable-rate commercial loans, which at June 30, 2002, totaled $455.5 million
or 14.8% of the Company's total loan portfolio. Of the Company's $4.023 billion
of interest-earning assets at June 30, 2002, $1.022 billion, or 25.4%, consisted
of assets with adjustable rates of interest. The Company also attempts to reduce
interest rate risk by lengthening the maturities of its interest-bearing
liabilities by using FHLB advances as a source of long-term fixed-rate funds,
and by promoting longer term certificates of deposit.
At June 30, 2002, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $236.2 million, representing a cumulative
negative one-year gap ratio of 5.5%. The Company has an Asset/Liability
Committee with members consisting of various individuals from Senior Management.
This committee meets monthly in an effort to effectively manage the Company's
balance sheet and to monitor activity and set pricing. The Company also has a
Risk Management Committee comprised of certain members of the Board of Directors
which is responsible for reviewing the Company's asset and liability management
policies. The Committee meets quarterly and, as part of their risk management
assessment, reviews
44
interest rate risks and trends, the Company's interest sensitivity position and
the liquidity and market value of the Company's investment portfolio.
The following table sets forth, on an amortized cost basis, the amounts
of interest-earning assets and interest-bearing liabilities outstanding at June
30, 2002, which are expected to reprice or mature, based upon certain
assumptions, in each of the future time periods shown. Except as stated below,
the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the term of
repricing or the contractual term of the asset or liability. Management believes
that these assumptions approximate the standards used in the savings industry
and considers them appropriate and reasonable. For information regarding the
contractual maturities of the Company's loans, investments and deposits, see
"Business of the Company--Lending Activities," "--Investment Activities" and
"--Sources of Funds."
AMOUNTS MATURING OR REPRICING
---------------------------------------------------------------------------------------------
WITHIN 1-3 3-5 5-10 10-20 OVER 20
1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Rate-sensitive assets:
Interest-earning deposits ........ $ 153,067 $ -- $ -- $ -- $ -- $ -- $ 153,067
Mortgage-backed securities:
Fixed ........................... 22,123 33,921 20,664 31,354 3,578 -- 111,640
Variable ........................ 412,961 -- -- -- -- -- 412,961
Investment securities ............ 42,410 32,602 14,401 17,963 200,249 -- 307,625
Real estate loans:
Adjustable-rate ................. 28,547 13,919 -- -- -- -- 42,466
Fixed-rate ...................... 340,809 476,551 389,443 634,969 135,699 -- 1,977,471
Home equity lines of credit ...... 65,671 1,607 1,175 1,071 -- -- 69,524
Education loans .................. 84,817 -- -- -- -- -- 84,817
Other consumer loans ............. 266,968 195,904 12 -- -- -- 462,884
Commercial loans ................. 210,987 109,607 70,140 9,690 -- -- 400,424
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total rate-sensitive assets .... $ 1,628,360 $ 864,111 $ 495,835 $ 695,047 $ 339,526 $ -- $ 4,022,879
=========== =========== =========== =========== =========== =========== ===========
Rate-sensitive liabilities:
Fixed maturity deposits .......... $ 1,046,783 $ 542,222 $ 283,249 $ 8,801 $ 175 $ -- $ 1,881,230
Money market deposit accounts .... 299,207 48,412 60,355 -- -- -- 407,974
Savings accounts ................. 300,317 80,000 -- -- 318,019 -- 698,336
Checking accounts ................ 135,000 -- -- -- 36,781 433,801 605,582
FHLB advances .................... 34,200 25,150 -- 175,000 1,150 -- 235,500
Other borrowings ................. 19,013 2,109 2,638 -- -- -- 23,760
Trust Preferred Securities ....... 30,000 -- -- -- -- 69,000 99,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total rate-sensitive liabilities $ 1,864,520 $ 697,893 $ 346,242 $ 183,801 $ 356,125 $ 502,801 $ 3,951,382
=========== =========== =========== =========== =========== =========== ===========
Interest sensitivity gap per period ($ 236,160) $ 166,218 $ 149,593 $ 511,246 ($ 16,599) ($ 507,801) $ 71,497
=========== =========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap ($ 236,160) ($ 69,942) $ 79,651 $ 590,897 $ 574,298 $ 71,497 $ 71,497
=========== =========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap
as a percentage of total assets .. (5.49%) (1.63%) 1.85% 13.74% 13.35% 1.66% 1.66%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities ..... 87.33% 97.27% 102.74% 119.11% 116.65% 101.81% 101.81%
When assessing the interest rate sensitivity of the company, analysis
of historical trends indicates that loans will prepay at various speeds (or
annual rates) depending on the variance between the weighted average portfolio
rates and the current market rates. In preparing the table above, it has been
assumed market rates will remain constant at current levels and as a result, the
Company's loans will be affected as follows: (i) adjustable-rate mortgage loans
will prepay at an annual rate of 20%; (ii) fixed-rate mortgage loans will prepay
at an annual rate of 10% to 15%; (iii) commercial loans will prepay at an annual
rate of 15%; (iv) consumer loans held by the Bank will prepay at an annual rate
of 25%; and (v) consumer loans held by Northwest Consumer will prepay at an
annual rate of 60% to 65%. In regards to the Company's deposits, it has been
assumed that (i) fixed maturity deposits will not be withdrawn prior to
maturity; (ii) money market accounts will gradually reprice over the next five
years; and (iii) savings accounts and checking accounts will reprice either when
the rates on such accounts reprice as interest rate levels change, or when
deposit holders withdraw funds from such accounts and select other types of
deposit accounts, such as certificate accounts, which may have higher interest
rates. For purposes of this analysis, management has estimated, based on
historical trends, that only $135 million of the Company's checking accounts and
$300 million of the Company's
45
savings accounts are interest sensitive and will reprice in one year or less,
and that the remainder will reprice over longer time periods.
The above assumptions utilized by management are annual percentages
based on remaining balances and should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced by the Company.
Moreover, certain shortcomings are inherent in the analysis presented by the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as some
adjustable-rate loans, have features that restrict changes in interest rates on
a short-term basis and over the life of the asset. Moreover, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
In an effort to assess the market risk, the Company utilizes a
simulation model to determine the effect of immediate incremental increases or
decreases in interest rates on net interest income and the market value of the
Company's equity. Certain assumptions are made regarding loan prepayments and
decay rates of passbook and NOW accounts. Because it is difficult to accurately
project the market reaction of depositors and borrowers, the effects of actual
changes in interest on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming
interest rate risk:
- NET INCOME SIMULATION. Given a parallel shift of 2% in interest
rates, the estimated net income may not decrease by more than 20%
within a one-year period.
- MARKET VALUE OF EQUITY SIMULATION. The market value of the
Company's equity is the net present value of the Company's assets
and liabilities. Given a parallel shift of 2% in interest rates,
equity may not decrease by more than 50% of total shareholder's
equity.
The following table illustrates the simulated impact of a 1% or 2%
upward or downward movement in interest rates on net income, return on average
equity, diluted earnings per share and market value of equity. This analysis was
prepared assuming that interest-earning asset levels at June 30, 2002 remain
constant. The impact of the rate movements was computed by simulating the effect
of an immediate and sustained shift in interest rates over a twelve-month period
from the June 30, 2002 levels.
MOVEMENTS IN INTEREST RATES FROM
JUNE 30, 2002 RATES
-----------------------------------------------
INCREASE DECREASE
--------------------- ----------------------
1% 2% 1% 2%
--------- -------- -------- ---------
Simulated impact over the next 12 months
compared with June 30, 2002:
Percentage increase/(decrease) in net income...... (2.9)% (6.4)% 4.1% (4.1)%
Increase/(decrease) in return on average equity... (0.1)% (0.6)% 0.7% (0.3)%
Increase/(decrease) in diluted earnings per share. $(0.03) $(0.06) $0.04 $(0.04)
Percentage increase/(decrease) in market
value of equity................................. (7.4)% (22.7)% 6.2% 7.3%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are included in Part III, Item 14 of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for the Company's 2002 Annual Meeting of Stockholders
(the "2002 Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The "Proposal I--Election of Directors" section of the Company's 2002
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The "Proposal I--Election of Directors" section of the Company's 2002
Proxy Statement is incorporated herein by reference.
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Transactions with Certain Related Persons" section of the
Company's 2002 Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following documents are filed as part of this Form 10-K.
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition - at June
30, 2002 and 2001
(C) Consolidated Statements of Income - Years ended June 30,
2002, 2001 and 2000
(D) Consolidated Statements of Changes in Shareholders' Equity
- Years ended June 30, 2002, 2001 and 2000
(E) Consolidated Statements of Cash Flows - Years ended June
30, 2002, 2001 and 2000
(F) Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
(b) REPORTS ON FORM 8-K
On May 10, 2002 the Company filed a current report on Form 8-K stating
that the Company, its mutual holding company, Northwest Bancorp, MHC,
and its subsidiary savings bank Northwest Savings Bank (collectively
"Northwest") entered into an Agreement with Leeds Federal Bankshares,
Inc., its mutual holding company, Leeds Federal Bankshares, MHC, and
its subsidiary savings bank Leeds Federal Savings Bank (collectively
"Leeds") extending the deadline for Northwest to acquire Leeds until
August 28, 2002. Also included as exhibits were the original agreement
and plan of merger dated August 16, 2001 (incorporated by reference to
Exhibit 2.1 to the Registrant's Form 8-K filed on August 24, 2001), the
agreement by Northwest and Leeds dated April 30, 2002 to extend the
deadline for closing the acquisition until August 28, 2002, and the
joint press release dated April 30, 2002 announcing the agreement.
(c) EXHIBITS
47
(a) (3) EXHIBITS:
- -----------------
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Hereto
- ---------------------- -------------------------------------------- ---------------------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Articles of Incorporation and Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Restated Deferred Compensation Plan for *
Directors
10.2 Retirement Plan for Outside Directors *
10.3 Northwest Savings Bank Nonqualified *
Supplemental Retirement Plan
10.4 Employee Stock Ownership Plan *
10.5 Employee Severance Compensation Plan *
10.6 Employment Agreement for William J. Wagner 10.6
10.7 Form of Senior Vice President
Employment Agreement 10.7
11 Statement re: computation of per share None
earnings
12 Statement re: computation or ratios Not required
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
99.1 Certification pursuant to 18 U.S.C. 99.1
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
- ------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-31687), originally filed with the SEC on July
21, 1997, as amended on October 9, 1997 and November 4, 1997.
48
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Northwest Bancorp, Inc. and subsidiaries as of June 30, 2002 and 2001 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northwest Bancorp,
Inc. and subsidiaries as of June 30, 2002 and 2001 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the consolidated financial statements, effective July
1, 2001, the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and certain provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets," as required for goodwill
and intangible assets resulting from business combinations consummated after
June 30, 2001.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
July 19, 2002
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 2002 and 2001
(Amounts in thousands, excluding share data)
ASSETS 2002 2001
---------- ----------
Cash and cash equivalents $ 64,687 50,958
Interest-earning deposits in other financial
institutions 153,067 45,008
Marketable securities available-for-sale
(amortized cost of $426,160 and $386,689) 435,723 391,579
Marketable securities held-to-maturity
(market value of $398,891 and $333,372) 396,503 339,331
Loans receivable, net of allowance for estimated
losses of $22,042 and $20,290 3,012,606 2,856,581
Accrued interest receivable 19,738 18,795
Real estate owned, net 5,157 3,697
Federal Home Loan Bank stock, at cost 23,702 22,499
Premises and equipment, net 55,374 46,767
Other intangible assets 55,424 55,012
Goodwill 11,268 9,031
Other assets 67,997 13,573
---------- ----------
Total assets $4,301,246 3,852,831
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $3,593,122 3,264,940
Borrowed funds 259,260 276,212
Advances by borrowers for taxes and insurance 21,065 21,832
Accrued interest payable 5,169 3,720
Other liabilities 11,279 10,414
Guaranteed preferred beneficial interests in Company's
junior subordinated deferrable interest debentures 99,000 --
---------- ----------
Total liabilities 3,988,895 3,577,118
Shareholders' equity
Common stock, $0.10 par value. Authorized 100,000,000
shares; issued and outstanding 47,549,659 and
47,426,755 shares at June 30, 2002 and 2001,
respectively 4,755 4,743
Paid-in capital 71,838 71,283
Retained earnings, substantially restricted 229,542 196,566
Accumulated other comprehensive income, net 6,216 3,178
Unearned recognition and retention plan shares -- (57)
---------- ----------
Total shareholders' equity 312,351 275,713
---------- ----------
Total liabilities and shareholders' equity $4,301,246 3,852,831
========== ==========
See accompanying notes to consolidated financial statements.
2
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
2002 2001 2000
--------- --------- ---------
Interest income:
Loans receivable $ 228,333 222,740 196,596
Mortgage-backed securities 26,531 29,161 27,236
Taxable investment securities 9,710 11,630 10,608
Tax-free investment securities 6,434 5,022 4,404
Interest-earning deposits 3,492 877 880
--------- --------- ---------
Total interest income 274,500 269,430 239,724
Interest expense:
Deposits 129,004 140,881 115,450
Borrowed funds 18,251 16,441 16,649
--------- --------- ---------
Total interest expense 147,255 157,322 132,099
--------- --------- ---------
Net interest income 127,245 112,108 107,625
Provision for loan losses 6,360 5,347 4,149
--------- --------- ---------
Net interest income after provision
for loan losses 120,885 106,761 103,476
Noninterest income:
Service charges and fees 11,910 10,030 7,020
Trust income 1,869 465 155
Insurance commission income 1,523 1,913 2,135
Gain on sale of marketable securities, net 73 368 397
Gain (loss) on sale of loans 730 478 (74)
Gain on sale of real estate owned 592 602 621
Writedown of investment securities (400) -- --
Other operating income 1,876 1,198 1,017
--------- --------- ---------
Total noninterest income 18,173 15,054 11,271
3 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
2002 2001 2000
------- ------- -------
Noninterest expense:
Compensation and employee benefits $48,176 43,569 38,028
Premises and occupancy costs 11,869 10,570 9,138
Office operations 7,148 5,639 4,983
Processing expenses 7,108 6,442 5,924
Amortization of intangibles 7,306 7,371 5,831
Other expenses 10,064 8,748 9,730
------- ------- -------
Total noninterest expense 91,671 82,339 73,634
------- ------- -------
Income before income taxes and
cumulative effect of
accounting change 47,387 39,476 41,113
Provision for income taxes:
Federal 12,199 10,488 11,263
State 1,543 2,211 2,647
------- ------- -------
Total provision for income taxes 13,742 12,699 13,910
------- ------- -------
Income before cumulative effect
of accounting change 33,645 26,777 27,203
Cumulative effect of accounting change 2,237 -- --
------- ------- -------
Net income $35,882 26,777 27,203
======= ======= =======
Basic per share amounts:
Income before cumulative effect of
accounting change $ 0.71 0.57 0.58
Cumulative effect of accounting change 0.05 -- --
------- ------- -------
Net income $ 0.76 0.57 0.58
======= ======= =======
Diluted per share amounts:
Income before cumulative effect of
accounting change $ 0.70 0.56 0.57
Cumulative effect of accounting change 0.05 -- --
------- ------- -------
Net income $ 0.75 0.56 0.57
======= ======= =======
See accompanying notes to consolidated financial statements.
4 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
ACCUMULATED UNEARNED UNEARNED
OTHER EMPLOYEE RECOGNITION
COMPREHENSIVE STOCK AND TOTAL
COMMON PAID-IN RETAINED INCOME OWNERSHIP RETENTION SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS), NET PLAN SHARES PLAN SHARES EQUITY
----- ------- -------- ------------- ----------- ------------ -------------
Balance at June 30, 1999 $ 4,736 70,374 157,745 1,978 (561) (615) 233,657
Comprehensive income:
Net income -- -- 27,203 -- -- -- 27,203
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- (7,082) -- -- (7,082)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 27,203 (7,082) -- -- 20,121
Exercise of stock options -- 20 -- -- -- -- 20
Tax benefit for excess of fair value above
cost of stock option and retention plans -- 162 -- -- -- -- 162
ESOP shares released -- 393 -- -- 561 -- 954
RRP shares released -- -- -- -- -- 551 551
Dividends declared -- -- (7,577) -- -- -- (7,577)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 4,736 70,949 177,371 (5,104) -- (64) 247,888
Comprehensive income:
Net income -- -- 26,777 -- -- -- 26,777
Change in unrealized loss on securities,
net of tax and reclassification adjustment -- -- -- 8,282 -- -- 8,282
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 26,777 8,282 -- -- 35,059
Exercise of stock options 7 301 -- -- -- -- 308
Tax benefit for excess of fair value above
cost of stock option plans -- 33 -- -- -- -- 33
RRP shares released -- -- -- -- -- 7 7
Dividends declared -- -- (7,582) -- -- -- (7,582)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2001 4,743 71,283 196,566 3,178 -- (57) 275,713
5 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
ACCUMULATED UNEARNED UNEARNED
OTHER EMPLOYEE RECOGNITION
COMPREHENSIVE STOCK AND TOTAL
COMMON PAID-IN RETAINED INCOME OWNERSHIP RETENTION SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS), NET PLAN SHARES PLAN SHARES EQUITY
-------- -------- -------- ------------- ----------- ------------ -------------
Comprehensive income:
Net income $ -- -- 35,882 -- -- -- 35,882
Change in unrealized gain on securities,
net of tax and reclassification adjustment -- -- -- 3,038 -- -- 3,038
-------- -------- -------- -------- ---- -------- --------
Total comprehensive income -- -- 35,882 3,038 -- -- 38,920
Exercise of stock options 12 420 -- -- -- -- 432
Tax benefit for excess of fair value above
cost of stock option plans -- 135 -- -- -- -- 135
RRP shares released -- -- -- -- -- 57 57
Dividends declared -- -- (2,906) -- -- -- (2,906)
-------- -------- -------- -------- ---- -------- --------
Balance at June 30, 2002 $ 4,755 71,838 229,542 6,216 -- -- 312,351
======== ======== ======== ======== ==== ======== ========
See accompanying notes to consolidated financial statements.
6 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
2002 2001 2000
--------- -------- ---------
Operating activities:
Net income $ 35,882 26,777 27,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,360 5,347 4,149
Net gain on sales of assets (1,395) (1,448) (944)
Proceeds from sale of marketable
securities, trading -- -- 8,822
Amortization of goodwill and other
intangible assets 7,306 7,371 5,831
Net depreciation, amortization and
accretion 5,892 5,449 4,002
Decrease (increase) in other assets (5,474) (6,080) 1,080
Increase (decrease) in other liabilities 1,998 3,011 (3,682)
Net accretion of discounts on marketable
securities (2,491) (1,839) (541)
Noncash compensation expense related
to stock benefit plans 57 7 1,145
Noncash writedown of investment
securities 400 -- --
Noncash cumulative change in accounting
principle (2,237) -- --
Other -- 26 --
--------- -------- ---------
Net cash provided by operating
activities 46,298 38,621 47,065
--------- -------- ---------
Investing activities:
Purchase of marketable securities
held-to-maturity (129,047) (126,420) (9,252)
Purchase of marketable securities
available-for-sale (209,396) (57,488) (113,176)
Proceeds from maturities and principal
reductions of marketable securities
held-to-maturity 72,144 25,662 25,514
Proceeds from maturities and principal
reductions of marketable securities
available-for-sale 120,960 52,291 18,884
Proceeds from sales of marketable securities
available-for-sale 50,720 15,477 21,616
Purchase of bank-owned life insurance (50,000) -- --
Loan originations (974,413) (776,001) (629,104)
Proceeds from loan maturities and principal
reductions 697,427 450,120 408,837
Proceeds from loan sales 132,464 61,365 1,137
Purchase of Federal Home Loan Bank stock (1,203) (1,230) (3,112)
Proceeds from sale of real estate owned 3,514 2,429 3,473
Sale of real estate owned for investment 32 97 534
Purchase of premises and equipment (13,184) (8,166) (8,282)
Acquisitions, net of cash received 53,443 59,681 203,319
--------- -------- ---------
Net cash used by investing activities (246,539) (302,183) (79,612)
--------- -------- ---------
7 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
(Amounts in thousands, excluding share data)
2002 2001 2000
--------- --------- ---------
Financing activities:
Increase in deposits, net $ 243,222 240,490 151,988
Proceeds from long-term borrowings 1,041 116,963 37,112
Repayments of long-term borrowings (17,294) (31,217) (33,607)
Net decrease in short-term borrowings (699) (49,475) (112,479)
Increase (decrease) in advances by
borrowers for taxes and insurance (767) (725) 3,603
Proceeds from issuance of guaranteed
preferred beneficial interests in
Company's junior subordinated debentures 99,000 -- --
Cash dividends paid (2,906) (7,582) (7,577)
Proceeds from options exercised 432 308 20
--------- --------- ---------
Net cash provided by financing
activities 322,029 268,762 39,060
--------- --------- ---------
Net increase in cash and
cash equivalents 121,788 5,200 6,513
--------- --------- ---------
Cash and cash equivalents at beginning
of period 95,966 90,766 84,253
Net increase in cash and cash equivalents 121,788 5,200 6,513
--------- --------- ---------
Cash and cash equivalents at end of period $ 217,754 95,966 90,766
========= ========= =========
Cash paid during the year for:
Interest on deposits and borrowings
(including interest credited to deposit
accounts of $104,426, $106,708, and
$90,526, respectively) $ 145,806 155,954 133,445
Income taxes 14,689 15,808 13,926
Noncash activities:
Business acquisitions:
Fair value of assets acquired $ 32,566 79,253 68,643
Net cash received 53,443 59,681 203,319
--------- --------- ---------
Liabilities assumed $ 86,009 138,934 271,962
========= ========= =========
Loan foreclosures and repossessions $ 4,382 3,380 1,625
Sale of real estate owned financed by
the Company $ 838 315 536
See accompanying notes to consolidated financial statements.
8 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
The Northwest group of companies is organized in a two-tier
holding company structure. Northwest Bancorp, MHC is a federal
mutual holding company and owns approximately 74% of the
outstanding shares of common stock of Northwest Bancorp, Inc. (the
Company). The current fiscal year ended June 30, 2002 was the
first fiscal year in which Northwest Bancorp, MHC applied for, and
received, approval from the Office of Thrift Supervision (OTS),
its primary regulator, to waive its right to receive cash
dividends from the Company. Dividends paid to Northwest Bancorp,
MHC during June 30, 2002, 2001 and 2000 were $-0-, $5,640,000 and
$5,533,000, respectively.
Northwest Bancorp, Inc., which is headquartered in Warren,
Pennsylvania, is a federal savings and loan holding company for
its wholly owned subsidiaries Northwest Savings Bank (Northwest)
and Jamestown Savings Bank (Jamestown). These retail oriented
financial institutions offer traditional deposit and loan products
through their 116 banking locations in Pennsylvania, six banking
locations in southwestern New York and four banking locations in
eastern Ohio. The Company and its subsidiaries also offer loan
products through 47 consumer finance offices in Pennsylvania and
two in New York. The majority of the Company's real estate loans
are in Pennsylvania.
(b) CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all
intercompany accounts and transactions.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other financial
institutions.
(d) MARKETABLE SECURITIES
The Company classifies marketable securities at the time of their
purchase as either held-to-maturity, available-for-sale or trading
securities. Securities for which management has the intent and the
Company has the ability to hold until their maturity are
classified as held-to-maturity and are carried on the Company's
books at cost, adjusted for amortization of premium and accretion
of discount on a level yield basis. If it is management's intent
at the time of purchase to hold securities for an indefinite
period of time and/or to use such securities as part of its
asset/liability management strategy, the securities are classified
as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from net earnings and
reported as accumulated other comprehensive income, a separate
component of shareholders' equity, net of tax. Securities
available-for-sale include securities which may be sold in
response to changes in interest rates, resultant prepayment risk
or other market factors. Securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading and are reported at fair value, with
unrealized gains and losses included in earnings. The cost of
securities sold is determined on a specific identification basis.
9 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Federal law requires a member institution of the Federal Home Loan
Bank (FHLB) system to hold stock of its district FHLB according to
a predetermined formula. This stock is recorded at cost and may be
pledged to secure FHLB advances.
(e) LOANS RECEIVABLE
Loans are stated at their unpaid principal balance net of any
deferred origination fees or costs and the allowance for estimated
loan losses. Interest income on loans is credited to income as
earned. Interest earned on loans for which no payments were
received during the month is accrued at month end. Interest
accrued on loans more than ninety days delinquent is offset by a
reserve for uncollected interest, and such loans are placed on
nonaccrual status.
The Company has identified certain residential loans which will be
sold prior to maturity. These loans are recorded at the lower of
amortized cost or market value and are not significant as of June
30, 2002 and 2001.
Loan fees and certain direct loan origination costs are deferred,
and the net deferred fee or cost is then recognized using the
level-yield method over the contractual life of the loan as an
adjustment to interest income.
(f) PROVISION FOR LOAN LOSSES
Provisions for estimated losses on the loan portfolios, in
addition to those specifically identified, are charged to earnings
in an amount that results in a loss allowance sufficient, in
management's judgment, to cover losses based on past experience
and economic conditions. Estimated losses on specific loans are
charged to the allowance for loan losses when, in the opinion of
management, a significant decline reduces the estimated fair value
of the underlying collateral to less than the loan's current
carrying value.
Management considers a loan to be impaired when it is probable
that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Nonaccrual loans are deemed to be impaired unless fully secured
with liquid collateral. In evaluating whether a loan is impaired,
management considers not only the amount that the Company expects
to collect but also the timing of collection. Generally, if a
delay in payment is insignificant (e.g., less than 30 days), a
loan is not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment
is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of the collateral if the loan is
collateral dependent. Loans are evaluated individually for
impairment. Smaller balance, homogeneous loans (e.g., primarily
consumer and residential mortgages) are evaluated collectively for
impairment. Impairment losses are included in the allowance for
loan losses. Impaired loans are charged off when management
believes that the ultimate collectibility of a loan is not likely.
Interest income on impaired loans is recognized using the cash
basis method. Such interest ultimately collected is credited to
income in the period of recovery or applied to reduce principal if
there is
10 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
sufficient doubt about the collectibility of principal. Interest
on impaired loans that are contractually past due ninety days and
over is reserved.
(g) REAL ESTATE OWNED
Real estate owned is comprised of property acquired through
foreclosure or voluntarily conveyed by delinquent borrowers. These
assets are recorded on the date acquired at the lower of the
related loan balance or market value of the collateral, as
determined by an appraisal. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or
the current market value, less estimated disposition costs. Gains
or losses realized from the disposition of such property are
credited or charged to noninterest income.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is accumulated on a
straight-line basis over the estimated useful lives of the related
assets. Estimated lives range from three to thirty years.
Amortization of leasehold improvements is accumulated on a
straight-line basis over the terms of the related leases or the
useful lives of the related assets, whichever is shorter.
(i) GOODWILL AND OTHER INTANGIBLES
On July 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 141 "Business Combinations" (SFAS 141).
SFAS 141 addresses financial accounting and reporting for business
combinations and supercedes APB Opinion No. 16, "Business
Combinations", and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." This
statement effectively eliminates the use of the pooling method of
accounting for business combinations and states that all business
combinations in the scope of this statement are to be accounted
for using only the purchase method. The provisions of this
statement apply to all business combinations initiated after June
30, 2001 and to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001,
or later. Because the Company has generally used purchase
accounting for its business combinations, this statement has not
materially changed its ongoing operations.
Also on July 1, 2001, and concurrently with SFAS 141, the Company
adopted SFAS 142 "Goodwill and Other Intangible Assets" (SFAS
142). SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supercedes APB
Opinion No. 17, "Intangible Assets." This statement addresses how
goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements.
This statement, among other things, eliminates the regularly
scheduled amortization of goodwill and replaces this method with a
two-step process for testing the impairment of goodwill on at
least an annual basis. This approach could cause more volatility
in the Company's reported net income because impairment losses, if
any, could occur irregularly and in varying amounts. Immediately
upon adoption, and as required by SFAS 141 and SFAS 142, existing
negative goodwill of $2.2 million was recorded in income as a
cumulative effect of a change in accounting principle and the
Company stopped amortizing the remaining goodwill of $11.3
million. There was no tax effect associated with the recognition
of negative goodwill of $2.2 million as such amount arose in a
tax-free reorganization. In addition, the Company performed its
initial impairment
11 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
analysis of goodwill and other intangible assets noting that the
estimated fair value exceeded the carrying amount.
SFAS 142 does not change, however, the accounting prescribed in
FASB Statement No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" (paragraphs 4-7). The FASB
affirmed in an Action Alert "that paragraph 5 of FASB Statement
No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, applies to all acquisitions of financial
institutions (or branches thereof) whether 'troubled' or not, in
which the fair value of liabilities assumed exceeds the fair value
of tangible and intangible assets acquired." As a result, the
Company continues to amortize intangible assets of $55.4 million
which meet the requirements of FASB Statement No. 72. The Company
notes that the FASB has decided to undertake a limited-scope
project to reconsider part of the guidance, specifically
paragraphs 5 and 6, of Statement No. 72.
Prior to adopting SFAS 141 and SFAS 142, the Company amortized
goodwill and other intangible assets using the straight-line
method over the estimated benefit period of ten years.
(j) CORE DEPOSIT INTANGIBLES
Upon acquiring another financial institution, or branches thereof,
the Company engages an independent third party of experts to
analyze and prepare a core deposit study. This study reflects the
cumulative present value benefit of acquiring deposits versus an
alternative source of funding. Based upon this analysis, the
amount of the premium related to the core deposits of the business
purchased is calculated along with the estimated life of the
acquired deposits. The core deposit intangible is then amortized
to expense on a level yield basis over an approximate life of 7 to
10 years.
(k) BANK-OWNED LIFE INSURANCE
In June 2002, the Company purchased $50 million of insurance on
the lives of a certain group of key employees. The policies were
purchased to help offset the cost of increases in various fringe
benefit plans including healthcare. The cash surrender value of
these policies is included in other assets on the consolidated
statements of financial condition and any increases in the cash
surrender value are recorded as other noninterest income on the
consolidated statements of income. In the event of the death of an
insured individual under these policies, the Company would receive
a death benefit which would be recorded as noninterest income.
(l) DEPOSITS
Interest on deposits is accrued and charged to expense monthly and
is paid or credited in accordance with the terms of the accounts.
(m) PENSION PLAN
The Company has noncontributory defined benefit pension plans. The
net periodic pension cost has been calculated in accordance with
Statement of Financial Accounting Standards No. 87, Employers'
Accounting for Pensions.
12 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(n) INCOME TAXES
The Company joins with its wholly owned subsidiaries, Northwest
and Jamestown, in filing a consolidated federal income tax return.
The Company accounts for income taxes using the asset and
liability method. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the
Company's assets and liabilities based on enacted tax rates
expected to be in effect when such amounts are realized or
settled.
(o) TRUST PREFERRED SECURITIES
During the quarter ended December 31, 2001, the Company issued $99
million of Trust Preferred Securities in two separate offerings.
The first offering involved the issuance of $69 million of 8.75%
Cumulative Trust Preferred Securities (liquidation amount $25 per
preferred security) of Northwest Capital Trust I, a Delaware
business trust and newly formed subsidiary of the Company. This
security trades on the NASDAQ Stock Market under the symbol NWSBP.
The second offering of $30 million was also issued through a
special purpose business trust formed by the Company and was sold
in a private transaction to a pooled investment vehicle with a
floating rate of interest equal to LIBOR plus 3.60%, reset
quarterly.
(p) RECLASSIFICATION OF PRIOR YEARS' STATEMENTS
Certain items previously reported have been reclassified to
conform with the current year's reporting format.
(q) OFF-BALANCE-SHEET INSTRUMENTS
In the normal course of business, the Company extends credit in
the form of loan commitments, undisbursed lines of credit and
standby letters of credit. These off-balance-sheet instruments
involve, to various degrees, elements of credit and interest rate
risk not reported in the consolidated statement of financial
condition.
(r) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(2) CHARTER CONVERSION
Effective June 29, 2001, the Company converted its charter from a
Pennsylvania corporation to a Federal corporation as approved by its
stockholders at the annual meeting held on December 20, 2000. In
addition, Northwest Bancorp, MHC, the Company's Mutual Holding Company,
also changed its charter from a Pennsylvania mutual holding company to a
federal mutual holding company. As a result of this conversion, the
primary regulator(s) also changed from the current Board of Governors of
the Federal Reserve System
13 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
and the Pennsylvania Department of Banking to the Office of Thrift
Supervision. The Company's savings bank subsidiaries, however, have both
retained their state savings bank charters.
(3) BUSINESS COMBINATIONS
On December 14, 2001, the Company completed the acquisition of two retail
banking offices located in the Pennsylvania communities of Johnsonburg
and Emporium. The acquisition included approximately $55 million in
deposits, $22 million in loans and the related fixed assets. This cash
purchase created intangible assets of approximately $5.7 million.
On November 16, 2001, the Company purchased a retail banking office in
Ebensburg, Pennsylvania. The acquisition included approximately $26
million of deposits and the related fixed assets. This cash purchase
created intangible assets of approximately $2.0 million.
On October 26, 2001, the Company purchased a retail banking office
located within the Shop n' Save supermarket in Washington, Pennsylvania.
The acquisition included approximately $4.5 million in deposits and the
related fixed assets. This cash purchase created intangible assets of
approximately $91,000.
On April 27, 2001, the Company completed its acquisition of Heritage
Trust Company, an independent investment management and trust company
headquartered in Erie, Pennsylvania. With assets under management of
almost $300 million, Heritage provides a wide range of investment
management and trust services for individuals, businesses and charitable
organizations throughout northwestern Pennsylvania. The transaction was
accounted for using the purchase method of accounting resulting in
goodwill of approximately $4,170,000.
On January 31, 2001, the Company completed its purchase of a retail
brokerage office in Warren, Pennsylvania, through its subsidiary,
Northwest Financial Services, Inc. The new office provides financial
consulting and full service brokerage to the greater Warren area. The
transaction was accounted for using the purchase method of accounting
resulting in goodwill of approximately $50,000.
On November 3, 2000, the Company acquired nine retail banking offices in
Potter and Tioga counties in north central Pennsylvania. The acquisition
included approximately $138 million in deposits and $57 million in
consumer and business loans, along with the related fixed assets. The
transaction was accounted for using the purchase method of accounting and
resulted in recording an intangible asset of approximately $15,325,000.
In September 1999, the Company purchased eight retail banking offices
located in various communities in Western Pennsylvania. This acquisition
included approximately $270,000,000 in deposits, $47,000,000 in consumer
and business loans and the related office facilities and equipment. The
acquisition was accounted for using the purchase method of accounting and
resulted in an intangible asset of approximately $20,400,000.
14 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(4) MARKETABLE SECURITIES
Marketable securities at June 30, 2002, are as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------------- --------------- -------------- --------------
Held-to-maturity:
U.S. government and agencies:
Due in five years - ten years $ 10,013 676 -- 10,689
Due after ten years 8,027 1,440 -- 9,467
Municipal securities:
Due in one year - five years 100 6 -- 106
Due after ten years 65,174 1,166 (687) 65,653
Corporate debt issues:
Due in one year - five years 1,019 31 -- 1,050
Due after ten years 48,310 275 (1,471) 47,114
Mortgage-backed securities:
Fixed rate pass-through 3,663 64 (14) 3,713
Variable rate pass-through 52,278 186 (38) 52,426
Fixed rate CMO 8,318 176 -- 8,494
Variable rate CMO 199,601 1,668 (1,090) 200,179
------------ ------------ ------------ ------------
Total mortgage-
backed securities 263,860 2,094 (1,142) 264,812
------------ ------------ ------------ ------------
Total securities
held-to-maturity $ 396,503 5,688 (3,300) 398,891
============ ============ ============ ============
15 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------------- --------------- -------------- --------------
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 5,501 38 -- 5,539
Due in one year - five years 10,974 92 -- 11,066
Due in five years - ten years 7,129 218 -- 7,347
Equity securities and mutual funds 68,228 3,500 (42) 71,686
Municipal securities:
Due in one year or less 100 3 -- 103
Due in five years - ten years 498 5 -- 503
Due after ten years 77,144 678 (417) 77,405
Corporate debt issues:
Due after ten years 1,476 -- (143) 1,333
Mortgage-backed securities:
Fixed rate pass-through 61,502 2,472 -- 63,974
Variable rate pass-through 12,958 89 (7) 13,040
Fixed rate CMO 35,315 395 (25) 35,685
Variable rate CMO 145,335 2,882 (175) 148,042
------------ ------------ ------------ ------------
Total mortgage-
backed securities 255,110 5,838 (207) 260,741
------------ ------------ ------------ ------------
Total securities
available-for-sale $ 426,160 10,372 (809) 435,723
============ ============ ============ ============
16 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 2002, are as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------------- --------------- -------------- --------------
Held-to-maturity:
U.S. government and agencies:
Due in five years - ten years $ 13,744 690 -- 14,434
Due after ten years 20,774 620 (9) 21,385
Municipal securities:
Due in five years - ten years 100 5 -- 105
Due after ten years 50,541 811 (1,069) 50,283
Corporate debt issues:
Due in five years - ten years 1,027 -- (47) 980
Due after ten years 43,805 82 (2,652) 41,235
Mortgage-backed securities:
Fixed rate pass-through 3,379 38 (30) 3,387
Variable rate pass-through 4,743 115 (24) 4,834
Fixed rate CMO 2,284 89 -- 2,373
Variable rate CMO 198,934 772 (5,350) 194,356
------------ ------------ ------------ ------------
Total mortgage-
backed securities 209,340 1,014 (5,404) 204,950
------------ ------------ ------------ ------------
Total securities
held-to-maturity $ 339,331 3,222 (9,181) 333,372
============ ============ ============ ============
17 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------------- --------------- -------------- --------------
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 13,976 229 -- 14,205
Due in one year - five years 5,516 140 -- 5,656
Due in five years - ten years 1,494 7 -- 1,501
Due after ten years 6,234 197 -- 6,431
Equity securities 7,123 3,236 -- 10,359
Municipal securities:
Due in one year or less 450 3 -- 453
Due in one year - five years 445 9 -- 454
Due in five years - ten years 497 7 -- 504
Due after ten years 56,146 354 (323) 56,177
Corporate debt issues:
Due after ten years 986 -- (81) 905
Mortgage-backed securities:
Fixed rate pass-through 72,522 1,620 (104) 74,038
Variable rate pass-through 15,148 109 (5) 15,252
Fixed rate CMO 3 -- -- 3
Variable rate CMO 206,149 1,912 (2,420) 205,641
------------ ------------ ------------ ------------
Total mortgage-
backed securities 293,822 3,641 (2,529) 294,934
------------ ------------ ------------ ------------
Total securities
available-for-sale $ 386,689 7,823 (2,933) 391,579
============ ============ ============ ============
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations.
The following table presents information regarding the issuers and the
carrying value of the Company's mortgage-backed securities:
JUNE 30
----------------------------------
2002 2001
---------------- ---------------
Mortgage-backed securities:
FNMA $ 193,814 210,548
GNMA 76,412 91,535
FHLMC 235,344 181,500
Other (nonagency) 19,031 20,691
------------ ------------
Total mortgage-backed securities $ 524,601 504,274
============ ============
18 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Marketable securities having a carrying value of $111,824,000 at June 30,
2002, were pledged under collateral agreements. During the fiscal years
2002, 2001, and 2000, the Company sold marketable securities classified
as either available-for-sale or trading for $50,720,000, $15,477,000, and
$30,438,000, respectively. The gross pretax profit on these sales was
$73,000, $368,000, and $397,000. In addition, during fiscal 2002, the
Company experienced other than temporary declines in its held-to-maturity
portfolio resulting in write-downs of $400,000.
(5) LOANS RECEIVABLE
Loans receivable at June 30, 2002 and 2001, are summarized in the table
below:
2002 2001
------------------- -------------------
Real estate loans:
One- to four-family $ 2,056,105 2,005,020
Multi-family and commercial 304,456 249,049
-------------- --------------
Total real estate loans 2,360,561 2,254,069
Consumer loans:
Automobile 117,240 94,475
Home improvement 293,865 260,169
Education 84,817 77,753
Loans on savings accounts 7,733 8,923
Other 113,570 134,023
-------------- --------------
Total consumer loans 617,225 575,343
Commercial loans 95,968 89,784
-------------- --------------
Total loans receivable, gross 3,073,754 2,919,196
Deferred loan fees (2,938) (2,517)
Allowance for loan losses (22,042) (20,290)
Undisbursed loan proceeds (real estate loans) (36,168) (39,808)
-------------- --------------
Total loans receivable, net $ 3,012,606 2,856,581
============== ==============
At June 30, 2002 and 2001, the Company serviced loans for others
approximating $214,269,000 and $110,700,000, respectively. These loans
serviced for others are not assets of the Company and are appropriately
excluded from the Company's financial statements.
At June 30, 2002, approximately 93% of the Company's loan portfolio was
secured by properties located in Pennsylvania. The Company does not
believe it has significant concentrations of credit risk to any one group
of borrowers given its underwriting and collateral requirements.
Loans receivable at June 30, 2002, include $455,485,000 of adjustable
rate loans and $2,618,269,000 of fixed rate loans.
19 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Loans receivable at June 30, 2001, include $367,457,000 of adjustable
rate loans and $2,551,739,000 of fixed rate loans.
The Company's exposure to credit loss in the event of nonperformance by
the other party to off-balance-sheet financial instruments is represented
by the contract amount of the financial instrument. The Company uses the
same credit policies in making commitments for off-balance-sheet
financial instruments as it does for on-balance-sheet instruments.
Financial instruments with off-balance-sheet risk as of June 30, 2002 and
2001, are presented in the following table:
JUNE 30
---------------------------
2002 2001
---------------------------
Loan commitments $ 74,581 43,764
Undisbursed lines of credit 116,559 100,302
Standby letters of credit 6,058 4,742
-------------- -----------
$ 197,198 148,808
============== ===========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the Company upon extension
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies but generally may include cash, marketable
securities and property.
Outstanding mortgage loan commitments at June 30, 2002, for fixed rate
loans, are $55,605,000. The interest rates on these commitments
approximate market rates at June 30, 2002. Outstanding mortgage loan
commitments at June 30, 2002, for adjustable rate loans are $18,976,000.
The fair value of these commitments are affected by fluctuations in
market rates of interest.
The Company automatically places loans on nonaccrual status when they
become more than 90 days contractually delinquent or when the paying
capacity of the obligor becomes inadequate to meet the requirements of
the contract. When a loan is placed on nonaccrual, all previously accrued
and uncollected interest is reversed against current period interest
income. Nonaccrual loans at June 30, 2002, 2001 and 2000 were
$15,800,000, $17,635,000 and $10,260,000, respectively.
A loan is considered to be impaired, as defined by SFAS No. 114
"Accounting by Creditors for Impairment of a Loan," when, based on
current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of
the loan agreement including both contractual principal and interest
payments. The amount of impairment is required to be measured using one
of the three methods prescribed by SFAS 114: (1) the present value of
expected future cash flows discounted at the loan's effective interest
rate; (2) the loan's observable market price; or (3) the fair value of
collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than the recorded investment in the loan a specific
reserve is allocated for the impairment. Impaired loans at June 30, 2002,
2001, and 2000 were $15,327,000, $16,043,000, and $6,002,000,
respectively. Average
20 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
impaired loans during fiscal 2002, 2001 and 2000 were $16,152,000,
$12,979,000 and $13,886,000, respectively.
There were no commitments to lend additional funds to debtors on
nonaccrual status.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of June 30, 2002 and 2001, is presented in
the following table:
JUNE 30
--------------------------------
2002 2001
--------------------------------
Investment securities $ 3,764 3,318
Mortgage-backed securities 1,987 2,027
Loans receivable 13,987 13,450
-------------- ------------
$ 19,738 18,795
============== ============
(7) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for losses on loans receivable for the years
ended June 30, 2002, 2001, and 2000, are presented in the following
table:
2002 2001 2000
------------------- ---------------- ---------------
Balance, beginning of fiscal year $ 20,290 18,260 16,773
Provision 6,360 5,347 4,149
Charge-offs (5,313) (3,862) (3,276)
Acquisitions 237 -- 25
Recoveries 468 545 589
-------------- -------------- --------------
Balance, end of fiscal year $ 22,042 20,290 18,260
============== ============== ==============
Management believes that the allowance for estimated loan losses is
appropriate as of June 30, 2002. While management uses available
information to provide for losses, future additions to the allowance may
be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
(8) FEDERAL HOME LOAN BANK STOCK
The Company's banking subsidiaries are members of the Federal Home Loan
Bank system. As a member, Northwest maintains an investment in the
capital stock of the Federal Home Loan Bank of Pittsburgh, at cost, in an
amount not less than 1% of its outstanding home loans or 1/20 of its
outstanding notes payable to the Federal Home Loan Bank, whichever is
greater.
21 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2002 and 2001, are summarized by major
classification in the following table:
2002 2001
---------------- -------------
Land and land improvements $ 5,329 3,726
Office buildings and improvements 47,574 40,228
Furniture, fixtures, and equipment 35,704 31,350
Leasehold improvements 5,303 4,660
-------------- -------------
Total, at cost 93,910 79,964
Less accumulated depreciation and amortization 38,536 33,197
-------------- -------------
Premises and equipment, net $ 55,374 46,767
============== =============
Depreciation and amortization expense for the years ended June 30, 2002,
2001, and 2000, was $5,339,000, $4,517,000, and $3,840,000, respectively.
Premises used by certain of the Company's branches and offices are
occupied under formal operating lease arrangements. The leases expire on
various dates through 2021. Minimum annual rentals by fiscal year are
summarized in the following table:
2003 $ 1,955
2004 1,729
2005 1,414
2006 1,124
2007 881
Thereafter 3,698
--------------
$ 10,801
==============
Rental expense for the years ended June 30, 2002, 2001, and 2000, was
$2,535,000, $2,237,000, and $1,962,000, respectively.
(10) DEPOSITS
Deposit balances at June 30, 2002 and 2001, are shown in the table below:
2002 2001
------------------- ----------------
Savings accounts $ 698,336 455,031
Interest-bearing checking accounts 429,339 378,334
Noninterest-bearing checking accounts 176,243 144,246
Money market deposit accounts 407,974 208,220
Certificates of deposit 1,881,230 2,079,109
-------------- --------------
$ 3,593,122 3,264,940
============== ==============
22 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $289,430,000 at June 30, 2002
and $300,709,000 at June 30, 2001.
The following table summarizes the contractual maturity of the
certificate accounts:
2002 2001
-------------- --------------
Due within 12 months $ 1,046,783 1,691,033
Due between 12 and 24 months 344,372 243,675
Due between 24 and 36 months 197,850 70,022
Due between 36 and 48 months 179,749 47,690
Due between 48 and 60 months 103,500 16,191
After 60 months 8,976 10,498
-------------- --------------
$ 1,881,230 2,079,109
============== ==============
The following table summarizes the interest expense incurred on the
respective deposits:
YEARS ENDED JUNE 30
---------------------------------------------------
2002 2001 2000
---------------- -------------- ---------------
Savings accounts $ 15,473 13,501 13,650
Interest-bearing checking accounts 4,747 4,612 4,559
Money market deposit accounts 9,019 6,929 6,855
Certificate accounts 99,765 115,839 90,386
-------------- -------------- --------------
$ 129,004 140,881 115,450
============== ============== ==============
23 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(11) BORROWED FUNDS
Borrowed funds at June 30, 2002 and 2001, are presented in the following
table:
2002 2001
------------------------- -------------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- -------- ---------- --------
Term notes payable to the FHLB of Pittsburgh:
Due within one year $ 34,200 % 6.04 $ 8,000 % 6.15
Due between one and two years 150 4.00 34,200 6.04
Due between two and three years 25,000 6.05 150 4.00
Due between three and four years -- -- 25,000 6.05
Due between four and five years -- --
Due between five and ten years 175,000 5.13 175,000 5.13
Due between ten and twenty years 1,150 2.75 1,202 2.75
----------- -----------
235,500 5.35 243,552 5.37
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh -- -- 2,000 4.11
Other borrowings due between
one and two years 180 10.00 180 10.00
Investor notes payable, due
various dates through 2006 6,414 6.53 6,315 6.55
Securities sold under agreement to
Repurchase, due various dates
through fiscal 2003 17,166 1.98 24,165 4.47
----------- -----------
Total borrowed funds $ 259,260 $ 276,212
=========== ===========
Borrowings from the Federal Home Loan Bank of Pittsburgh are secured by
the Company's investment securities, mortgage-backed securities and
qualifying residential first mortgage loans. Certain of these borrowings
are subject to restrictions or penalties in the event of prepayment.
The revolving line of credit with the Federal Home Loan Bank of
Pittsburgh carries a commitment of $175,000,000 maturing on January 2,
2003. The rate is adjusted daily by the Federal Home Loan Bank and any
borrowings on this line may be repaid at any time without penalty.
The securities sold under agreements to repurchase are collateralized by
various securities held in safekeeping by the Federal Home Loan Bank of
Pittsburgh. The market value of such securities exceeds the value of the
securities sold under agreements to repurchase. The average amount of
agreements outstanding in fiscal years 2002 and 2001 was $14,841,000 and
$24,059,000, respectively. The maximum amount of security repurchase
agreements outstanding during fiscal years 2002 and 2001 was $19,568,000
and $28,997,000, respectively.
24 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(12) INCOME TAXES
Total income tax was allocated for the years ended June 30, 2002, 2001,
and 2000, as follows:
2002 2001 2000
---------------- --------------- ---------------
Income before income taxes $ 13,742 12,699 13,910
Shareholders' equity for unrealized gain/
(loss) on securities available-for-sale 1,636 4,455 (3,951)
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (135) (33) (162)
-------------- -------------- --------------
$ 15,243 17,121 9,797
============== ============== ==============
Income tax expense (benefit) applicable to income before taxes consists
of:
YEARS ENDED JUNE 30
-----------------------------------------------------
2002 2001 2000
-------------- --------------- ----------------
Current $ 14,430 14,002 15,601
Deferred (688) (1,303) (1,691)
-------------- -------------- --------------
$ 13,742 12,699 13,910
============== ============== ==============
The significant components of deferred income tax expense (benefit) are
as follows:
JUNE 30
-----------------------------------------------------
2002 2001 2000
-------------- --------------- ----------------
Deferred income tax benefit $ (1,249) (1,473) (1,768)
NOL carryforward 561 170 77
-------------- -------------- --------------
$ (688) (1,303) (1,691)
============== ============== ==============
A reconciliation from the expected federal statutory income tax rate to
the effective rate, expressed as a percentage of pretax income, is as
follows:
YEARS ENDED JUNE 30
-----------------------------------------------------
2002 2001 2000
-------------- --------------- ----------------
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (5.6) (5.5) (4.4)
State income tax, net of federal benefit 2.1 3.6 4.2
Valuation allowance (1.1) (0.3) (0.1)
Other (1.4) (0.6) (0.9)
-------------- -------------- --------------
Effective tax rate $ 29.0 32.2 33.8
============== ============== ==============
25 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2002 and 2001, are presented below:
2002 2001
---------------- ---------------
Deferred tax assets:
Deferred fee income $ 837 907
Deferred compensation expense 1,372 1,221
Net operating loss carryforwards 36 597
Bad debts 5,173 4,880
Accrued postretirement benefit cost 406 447
Pension expense 567 517
Other 2,833 2,100
-------------- --------------
11,224 10,669
Valuation allowance -- (492)
-------------- --------------
11,224 10,177
Deferred tax liabilities:
Marketable securities available-for-sale 3,347 1,711
Other 894 536
-------------- --------------
4,241 2,247
-------------- --------------
Net deferred tax asset $ 6,983 7,930
============== ==============
The Company has revised the valuation allowance on the net operating loss
carryforward related to Jamestown. The Company has determined that no
valuation allowance is necessary for the deferred tax assets because it
is more likely that these assets will be realized through carryback to
taxable income in prior years, future reversals of existing temporary
differences and, to a lesser extent, through future taxable income. The
Company will continue to review the criteria related to the recognition
of deferred tax assets on a quarterly basis.
Under provisions of the Internal Revenue Code, Northwest has
approximately $101,000 of net operating losses which expire in years 2006
through 2020.
(13) SHAREHOLDERS' EQUITY
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require Northwest and
Jamestown to maintain certain statutory reserves. Northwest and Jamestown
may not pay dividends on or repurchase any of their common stock if the
effect thereof would reduce retained earnings below the level of adequate
capitalization as defined by federal and state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the
Internal Revenue Code (the Code), to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. Bad debt deductions for income tax purposes are included in
taxable income of later years only
26 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
if the bad debt reserve is used subsequently for purposes other than to
absorb bad debt losses. Because Northwest does not intend to use the
reserve for purposes other than to absorb losses, no deferred income
taxes have been provided prior to fiscal 1987. Retained earnings at June
30, 2002, includes approximately $28,293,000 representing such bad debt
deductions for which no deferred income taxes have been provided.
(14) 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. The computation of basic and diluted earnings per share is shown
in the table below:
YEARS ENDED JUNE 30
----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Reported net income $ 35,882 26,777 27,203
Deduct cumulative effect of accounting change 2,237 -- --
-------------- -------------- --------------
Net income before cumulative effect of
accounting change $ 33,645 26,777 27,203
============== ============== ==============
Weighted average common shares outstanding 47,479 47,392 47,305
Common stock equivalents due to effect of stock
options 511 357 268
-------------- -------------- --------------
Total weighted average common
shares and equivalents 47,990 47,749 47,573
============== ============== ==============
Basic earnings per share:
Reported net income $ 0.76 0.57 0.58
Deduct cumulative effect of accounting change 0.05 -- --
-------------- -------------- --------------
Net income before cumulative effect of
accounting change $ 0.71 0.57 0.58
============== ============== ==============
Diluted earnings per share:
Reported net income $ 0.75 0.56 0.57
Deduct cumulative effect of accounting change 0.05 -- --
-------------- -------------- --------------
Net income before cumulative effect of
accounting change $ 0.70 0.56 0.57
============== ============== ==============
(15) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
The Company maintains noncontributory defined benefit pension
plans covering substantially all employees and the members of its
board of directors. Retirement benefits are based on certain
compensation levels, age, and length of service. Contributions are
based on an actuarially determined amount to fund not only
benefits attributed to service to date but also for those expected
to be earned
27 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
in the future. In addition, the Company has an unfunded
Supplemental Executive Retirement Plan (SERP) to compensate those
executive participants eligible for the Company's defined benefit
pension plan whose benefits are limited by Section 415 of the Code
of the Internal Revenue Service.
The Company also sponsors a retirement savings plan in which
substantially all employees participate. The Company provides a
matching contribution of 50% of each employee's contribution to a
maximum of 6% of the employee's compensation.
Total expense for all retirement plans, including defined benefit
pension plans, was approximately $3,186,000, $2,652,000, and
$2,310,000 for the years ended June 30, 2002, 2001, and 2000,
respectively. Net periodic pension cost for the Company's defined
benefit pension plans consist of the following:
YEARS ENDED JUNE 30
---------------------------------------------------
2002 2001 2000
--------------- -------------- -------------
Service cost $ 2,195 1,913 1,625
Interest cost 1,940 1,693 1,444
Expected return on plan assets (1,800) (1,698) (1,491)
Net amortization and deferral 109 60 55
------------- -------------- -------------
Net periodic pension cost $ 2,444 1,968 1,633
============== ============== =============
28 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The following table sets forth, for the Company's defined benefit
pension plans, the plans' funded status and amounts recognized in
the Company's consolidated statements of financial condition at
June 30, 2002 and 2001:
2002 2001
--------------- --------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 27,953 24,407
Service cost 2,195 1,913
Interest cost 1,940 1,693
Actuarial loss 1,758 394
Benefits paid (626) (454)
------------ ------------
Benefit obligation at end of year $ 33,220 27,953
============ ============
Change in plan assets:
Fair value of plan assets at beginning of year 22,736 21,454
Actual return on plan assets (67) (216)
Employer contribution 2,202 1,952
Benefits paid (626) (454)
------------ ------------
Fair value of plan assets at end of year $ 24,245 22,736
============ ============
Funded status (8,975) (5,217)
Unrecognized transition asset (218) (258)
Unrecognized prior service cost 518 612
Unrecognized net actuarial loss 7,079 3,510
Adjustment to recognize minimum liability (158) (151)
------------ ------------
Accrued benefit cost $ (1,754) (1,504)
============ ============
The following table sets forth the assumptions used to develop the
preceding information for the net pension cost and benefits:
Years ended June 30
---------------------------------------------
2002 2001 2000
-------------- ------------- ------------
Discount rate % 6.75 7.00 7.00
Expected long-term rate of return on assets 8.00 8.00 8.00
Rate increase in compensation levels 4.00 4.00 4.00
Assets of the Company's qualified noncontributory defined benefit
plan consists primarily of equity and fixed income securities.
(b) POSTRETIREMENT HEALTHCARE PLAN
In addition to pension benefits, the Company provides
postretirement healthcare benefits for certain employees who were
employed by the Company as of October 1, 1993, and were at least
55 years of age on that date. The Company accounts for these
benefits in accordance with Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement
Benefits Other than
29 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Pensions (SFAS 106). SFAS 106 requires the accrual method of accounting
for postretirement benefits other than pensions.
Net periodic cost for the Company's postretirement healthcare benefits
consist of the following:
YEARS ENDED JUNE 30
----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Service cost $ 7 12 32
Interest cost 56 65 72
Recognized actuarial gain (178) (48) --
-------------- -------------- --------------
Net periodic (benefit) cost $ (115) 29 104
============== ============== ==============
The following table sets forth the funded status of the Company's
postretirement healthcare benefit plan and the amounts recognized
in the Company's consolidated statements of financial condition at
June 30, 2002 and 2001:
2002 2001
------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 837 968
Service cost 7 12
Interest cost 56 65
Actuarial (gain) loss 214 (166)
Benefits paid (121) (42)
------------ ------------
Benefit obligation at end of year 993 837
Fair value of plan assets at end of year -- --
------------ ------------
Funded status (993) (837)
Unrecognized net actuarial (gain) loss 130 (262)
------------ ------------
Accrued benefit cost $ (863) (1,099)
============ ============
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
YEARS ENDED JUNE 30
------------------------------------------------
2002 2001 2000
-------------- ------------ ---------------
Discount rate % 6.75 7.00 7.00
Monthly cost of healthcare insurance
per beneficiary $ 141.41 117.31 134.26
Annual rate of increase in healthcare costs $ 4.00 4.00 4.00
If the assumed rate of increase in healthcare costs was increased by one
percentage point to 5% from the level of 4% presented above, the service
and interest cost components of net periodic
30 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
postretirement healthcare benefit cost would increase by $6,109, in the
aggregate, and the accumulated postretirement benefit obligation for
healthcare benefits would increase by $88,172.
(c) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has continued its previously leveraged employee stock
ownership plan (ESOP) for employees who have attained age 21 and who have
completed a 12-month period of employment with the Company during which
they worked at least 1,000 hours. The Company now makes annual
contributions to the ESOP at the board's discretion based on current year
earnings. Company shares are then purchased periodically in the open
market and allocated to employee accounts based on each employee's
relative portion of the Company's total eligible compensation recorded
during the year.
ESOP compensation expense was $871,000, $831,000, and $909,000 for the
fiscal years ended June 30, 2002, 2001, and 2000, respectively.
(d) RECOGNITION AND RETENTION PLAN
On November 21, 1995, the Company established a Recognition and Retention
Plan for Employees and Outside Directors (RRP). The objective of the RRP
was to enable the Company to provide directors, officers and employees
with a proprietary interest in the Company as an incentive to contribute
to its success. The number of common shares issued and granted under the
RRP was 552,000 (total market value of $3,243,000 at issuance date).
Shares of common stock granted pursuant to the RRP were in the form of
restricted stock and generally are payable over a five-year period at the
rate of 20% per year, commencing on the date of the award grant.
Compensation expense, in the amount of the fair market value of the
common stock at the date of the grant, was recognized pro rata over the
five years during which the shares were payable. The recipients are
entitled to all voting and other shareholder rights, except that the
shares, while restricted, may not be sold, pledged or otherwise disposed
of and are required to be held in a trust.
(e) STOCK OPTION PLAN
On November 21, 1995, the Company adopted the 1995 Stock Option Plan. The
objective of the Stock Option Plan is to provide an additional
performance incentive to the Company's employees and outside directors.
The Stock Option Plan authorized the grant of stock options and limited
stock appreciation rights for 1,380,000 shares of the Company's common
stock. On December 20, 1995, the Company granted 242,000 nonstatutory
stock options to its outside directors at an exercise price of $5.58 per
share (95% of the Company's common stock fair market value per share at
grant date) and 923,200 incentive stock options to employees at an
exercise price of $5.875 per share. On March 22, 1996, the Company
granted 122,800 incentive stock options to employees at an exercise price
of $5.625 per share. On December 16, 1998, the Company granted 15,086
incentive stock options to employees at an exercise price of $9.875 per
share. On October 20, 1999, the Company granted 57,700 incentive stock
options to employees at an exercise price of $7.812 per share. On June
21, 2000, the Company granted the remaining 19,214 incentive stock
options as well as 9,186 previously forfeited options at an exercise
price of $6.875 per share. On November 17, 2000, the Company adopted the
2000 Stock Option Plan. This Plan authorized the grant of stock options
and limited stock rights for 800,000 shares of the Company's common
stock. On October 17, 2001 the
31 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Company granted 94,000 nonstatutory stock options to its outside
directors and 143,845 incentive stock options to employees at an exercise
price of $9.780 per share. These options are exercisable for a period of
ten years from the grant date with each recipient vesting at the rate of
20% per year commencing with the grant date.
The following table summarizes the activity in the Company's Option Plan
during the periods ending June 30:
2002 2001 2000
------------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ------------ ---------- ---------- ---------- ----------
Balance at
beginning of year 1,132,716 $ 6.00 1,228,331 $ 5.98 1,155,951 $ 5.86
Granted 237,845 9.78(a) -- -- 86,100 7.50(a)
Exercised (166,569) 5.86 (84,815) 5.68 (11,480) 5.84
Forfeited (7,712) 8.15 (10,800) 5.91 (2,240) 5.68
---------- ---------- ----------
Balance at end of year 1,196,280 6.76 1,132,716 6.00 1,228,331 5.98
========== ========== ==========
Exercisable at end
of year 975,119 6.15 1,046,750 5.86 904,925 5.84
(a) Weighted average fair value of options at grant date: $2.48 and
$2.70, respectively.
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE PRICE PRICE PRICE PRICE TOTAL
$5.580 $5.625 $5.875 $6.875 $7.812 $9.780 $9.875 $6.760
-------- --------- -------- -------- -------- -------- -------- ---------
Options outstanding:
Number of options 83,200 61,860 724,509 25,860 52,480 233,585 14,786 1,196,280
Weighted average
remaining contract
life (years) 3.50 3.75 3.50 8.00 7.25 9.25 6.50 4.93
Options exercisable:
Number of options 83,200 61,860 724,509 15,516 31,488 46,717 11,829 975,119
32 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation costs for the Stock Option
Plan been determined consistent with the fair value method of SFAS 123,
Accounting for Stock-Based Compensation, which permits entities to
expense an estimated fair value of employee stock options granted, the
Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
2002 2001 2000
--------------- -------------- ----------------
Net income:
As reported $ 35,882 26,777 27,203
Pro forma 35,756 26,580 26,899
Basic earnings per share:
As reported 0.76 0.57 0.58
Pro forma 0.75 0.56 0.57
Diluted earnings per share:
As reported 0.75 0.56 0.57
Pro forma 0.75 0.56 0.57
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: (1) dividend yields ranging from 1.60% to 2.50%; (2)
expected volatility of 18% to 33%; (3) risk-free interest rates ranging
from 4.50% to 6.50%; and (4) expected lives of seven years. The effects
of applying SFAS No. 123 may not be representative of the effects on
reported net income in future years.
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure about Fair Value of Financial Instruments (SFAS
107), requires disclosure of fair value information about financial
instruments whether or not recognized in the consolidated statement of
financial condition. SFAS 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company. The carrying amounts reported in the
consolidated statement of financial condition approximate fair value for
the following financial instruments: cash on hand and interest-earning
deposits in other institutions, accrued interest receivable, accrued
interest payable, marketable securities available-for-sale, and variable
rate borrowings.
33 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The following table sets forth the carrying amount and estimated fair
value of the Company's financial instruments included in the consolidated
statement of financial condition as of June 30:
2002 2001
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash and equivalents $ 217,754 217,754 95,966 95,966
Securities available-for-sale 435,723 435,723 391,579 391,579
Securities held-to-maturity 396,503 398,891 339,331 333,372
Loans receivable 3,037,586 3,148,632 2,879,388 2,954,451
Accrued interest receivable 19,738 19,738 18,795 18,795
FHLB stock 23,702 23,702 22,499 22,499
---------- ---------- ---------- ----------
Total financial assets $4,131,006 4,244,440 3,747,558 3,816,662
========== ========== ========== ==========
Financial liabilities:
Savings and checking accounts $1,711,892 1,711,892 1,185,831 1,185,831
Time deposits 1,881,230 1,898,987 2,079,109 2,108,189
Borrowed funds 259,260 270,360 276,212 268,606
Trust-preferred securities 99,000 101,496 -- --
Accrued interest payable 5,169 5,169 3,720 3,720
---------- ---------- ---------- ----------
Total financial liabilities $3,956,551 3,987,904 3,544,872 3,566,346
========== ========== ========== ==========
Fair value estimates are made at a point-in-time, based on relevant
market data and information about the instrument. The following methods
and assumptions were used in estimating the fair value of financial
instruments at June 30, 2002 and 2001.
MARKETABLE SECURITIES
Estimated market values are based on quoted market prices, dealer quotes
and prices obtained from independent pricing services. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities. Refer to note 4 of the consolidated
financial statements for the detail of type of investment products.
LOANS RECEIVABLE
Loans with comparable characteristics including collateral and repricing
structures were segregated for valuation purposes. Each loan pool was
separately valued utilizing a discounted cash flow analysis. Projected
monthly cash flows were discounted to present value using a market rate
for comparable loans. Characteristics of comparable loans included
remaining term, coupon interest and estimated prepayment speeds.
Delinquent loans were evaluated separately given the impact delinquency
has on the projected future cash flow of the loan and the approximate
discount or market rate.
34 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
DEPOSIT LIABILITIES
SFAS 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits, money market and other savings
accounts, to be the amount payable on demand. Although market premiums
paid for depository institutions reflect an additional value for these
low-cost deposits, SFAS 107 prohibits adjusting fair value for any value
expected to be derived from retaining those deposits for a future period
of time or from the benefit that results from the ability to fund
interest-earning assets with these deposit liabilities. The fair value
estimates of deposit liabilities do not include the benefit that results
from the low-cost funding provided by these deposits compared to the cost
of borrowing funds in the market. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies
contractual cost currently being offered in the existing portfolio to
current market rates being offered locally for deposits of similar
remaining maturities. The valuation adjustment for the portfolio consists
of the present value of the difference of these two cash flows,
discounted at the assumed market rate of the corresponding maturity.
BORROWED FUNDS
Variable rate borrowings were estimated to approximate their carrying
amounts. The fixed rate advances were valued by comparing their
contractual cost to the prevailing market cost.
TRUST-PREFERRED SECURITIES
The fair value of fixed rate trust-preferred securities is based on the
closing trade price on the last day of the fiscal year. The variable rate
trust-preferred securities are calculated using the discounted cash flows
at the prevailing rate of interest.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
These financial instruments generally are not sold or traded, and
estimated fair values are not readily available. However, the fair value
of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar
agreements. Commitments to extend credit issued by the Company are
generally short-term in nature and, if drawn upon, are issued under
current market terms. At June 30, 2002 and 2001, there was no significant
unrealized appreciation or depreciation on these financial instruments.
(17) REGULATORY CAPITAL REQUIREMENTS
The Company's banking subsidiaries are subject to various regulatory
capital requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
the regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, specific
capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices must be met. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
35 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Quantitative measures established by regulation to ensure capital
adequacy require the Company's banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). At June
30, 2002 and 2001, the Company's banking subsidiaries exceed all capital
adequacy requirements to which they are subject.
As of June 14, 2002, the most recent notification from the FDIC
categorized Northwest and Jamestown as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized," the banks must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the banks' categories.
The actual, required and well capitalized levels as of June 30, 2002 and
2001, are as follows: (in thousands)
JUNE 30, 2002
----------------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ----------- -------- ---------- ---------
Total capital (to risk weighted assets):
Northwest Savings Bank $ 276,565 12.49% $ 177,174 8.00% $ 221,467 10.00%
Jamestown Savings Bank 14,727 11.04 10,673 8.00 13,341 10.00
Tier I capital (to risk weighted assets):
Northwest Savings Bank 253,937 11.47 88,587 4.00 132,880 6.00
Jamestown Savings Bank 13,765 10.32 5,336 4.00 8,004 6.00
Tier I capital (leverage) (to average assets):
Northwest Savings Bank 253,937 6.47 117,767 3.00* 196,279 5.00
Jamestown Savings Bank 13,765 5.87 7,035 3.00* 11,725 5.00
36 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
JUNE 30, 2001
----------------------------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
--------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ----------- -------- ---------- ---------
Total capital (to risk weighted assets):
Northwest Savings Bank $ 214,670 10.39% $ 165,364 8.00% $ 206,705 10.00%
Jamestown Savings Bank 8,232 10.72 6,142 8.00 7,678 10.00
Tier I capital (to risk weighted assets):
Northwest Savings Bank 193,570 9.36 82,682 4.00 124,023 6.00
Jamestown Savings Bank 7,596 9.89 3,071 4.00 4,607 6.00
Tier I capital (leverage) (to average assets):
Northwest Savings Bank 193,570 5.33 108,916 3.00* 181,526 5.00
Jamestown Savings Bank 7,596 5.96 3,821 3.00* 6,368 5.00
* The FDIC has indicated that the most highly rated institutions which
meet certain criteria will be required to maintain a ratio of 3%, and
all other institutions will be required to maintain an additional
capital cushion of 100 to 200 basis points. As of June 30, 2002, the
Company had not been advised of any additional requirements in this
regard.
(18) CONTINGENT LIABILITIES
The Company and its subsidiaries are subject to a number of asserted and
unasserted claims encountered in the normal course of business.
Management believes that the aggregate liability, if any, that may result
from such potential litigation will not have a material adverse effect on
the Company's financial statements.
37 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE
30 31 31 30
---------- ---------- ---------- ----------
(In thousands, except per share data)
Fiscal 2002:
Interest income $ 69,657 68,657 68,783 67,403
Interest expense 41,202 38,231 34,491 33,331
---------- ---------- ---------- ----------
Net interest income 28,455 30,426 34,292 34,072
Provision for loan losses 1,418 1,473 1,664 1,805
Noninterest income 4,663 4,757 3,741 5,012
Noninterest expenses 21,496 22,707 23,443 24,025
---------- ---------- ---------- ----------
Income before
income taxes and
cumulative effect of
accounting change 10,204 11,003 12,926 13,254
Income taxes 3,026 3,242 3,957 3,517
---------- ---------- ---------- ----------
Income before
cumulative effect of
accounting change 7,178 7,761 8,969 9,737
Cumulative effect of accounting
change 2,237 -- -- --
---------- ---------- ---------- ----------
Net income $ 9,415 7,761 8,969 9,737
========== ========== ========== ==========
Basic per share amounts:
Income before cumulative effect
of accounting change $ 0.15 0.16 0.19 0.21
Cumulative effect of accounting
change 0.05 -- -- --
---------- ---------- ---------- ----------
Net income $ 0.20 0.16 0.19 0.21
========== ========== ========== ==========
Diluted per share amounts:
Income before cumulative effect
of accounting change $ 0.15 0.16 0.19 0.20
Cumulative effect of accounting
change 0.05 -- -- --
---------- ---------- ---------- ----------
Net income $ 0.20 0.16 0.19 0.20
========== ========== ========== ==========
38 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE
30 31 31 30
---------- ---------- ---------- ----------
(In thousands, except per share data)
Fiscal 2001:
Interest income $ 64,266 67,499 68,544 69,121
Interest expense 36,435 39,762 40,143 40,982
---------- ---------- ---------- ----------
Net interest income 27,831 27,737 28,401 28,139
Provision for loan losses 1,295 1,135 1,249 1,668
Noninterest income 3,198 3,460 3,391 5,005
Noninterest expenses 19,415 20,440 20,766 21,718
---------- ---------- ---------- ----------
Income before
income taxes 10,319 9,622 9,777 9,758
Income taxes 3,529 3,179 3,140 2,851
---------- ---------- ---------- ----------
Net income $ 6,790 6,443 6,637 6,907
========== ========== ========== ==========
Basic earnings per share $ 0.14 0.14 0.14 0.15
========== ========== ========== ==========
Diluted earnings per share $ 0.14 0.14 0.14 0.14
========== ========== ========== ==========
(20) COMPONENTS OF COMPREHENSIVE INCOME
For the year ended June 30:
2002 2001 2000
--------------- --------------- --------------
Unrealized gain (loss) on marketable
securities available-for-sale $ 4,674 12,502 (10,852)
Tax (expense) benefit (1,636) (4,373) 4,047
Reclassification adjustment for (gains) losses
included in net income, net of tax
of $-0-, $(82), and $149, respectively -- 153 (277)
-------------- -------------- --------------
Net unrealized gain (loss) $ 3,038 8,282 (7,082)
============== ============== ==============
39 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(21) NORTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
Statements of Financial Condition
(Amounts in thousands)
JUNE 30
---------------------------------------
ASSETS 2002 2001
----------------- --------------
Cash and cash equivalents $ 63,871 393
Marketable securities available-for-sale 4,231 4,192
Investment in bank subsidiaries 341,688 268,562
Goodwill 2,138 2,138
Other assets 4,133 441
-------------- --------------
Total assets $ 416,061 275,726
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures payable $ 102,062 --
Other liabilities 1,648 13
-------------- --------------
Total liabilities 103,710 13
Shareholders' equity 312,351 275,713
-------------- --------------
Total liabilities and shareholders' equity $ 416,061 275,726
============== ==============
40 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Statements of Income
YEARS ENDED JUNE 30
----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Income:
Interest income $ 1,313 212 256
Dividends from bank subsidiary 1,250 6,500 6,350
Undistributed earnings from equity
investment in bank subsidiaries 36,915 20,367 20,779
Gain on sale of marketable securities
available-for-sale -- 142 39
Other income 8 351 869
-------------- -------------- --------------
Total income 39,486 27,572 28,293
Expense:
Compensation and benefits 302 462 674
Goodwill amortization -- 304 307
Other expense 77 29 34
Interest expense 4,567 -- --
-------------- -------------- --------------
Total expense 4,946 795 1,015
-------------- -------------- --------------
Net income before taxes 34,540 26,777 27,278
Federal and state income taxes (1,342) -- 75
-------------- -------------- --------------
Net income $ 35,882 26,777 27,203
============== ============== ==============
41 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
YEARS ENDED JUNE 30
----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Operating activities:
Net income $ 35,882 26,777 27,203
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Undistributed earnings of subsidiaries (36,915) (20,367) (20,779)
Depreciation and amortization (1) 304 325
Noncash compensation expense related to
stock benefit plans 57 7 1,145
Gain on sale of marketable securities
available-for-sale -- (142) (39)
Net change in other assets and liabilities (2,071) 432 (454)
-------------- -------------- --------------
Net cash provided (used) by operating
activities (3,048) 7,011 7,401
-------------- -------------- --------------
Investing activities:
Additional investment in subsidiaries (33,062) -- --
Principal payments on loans -- -- (561)
Purchase of marketable securities available-for-sale -- (69) (497)
Proceeds from sale of marketable securities
available-for-sale -- 538 1,261
-------------- -------------- --------------
Net cash provided (used) by investing
activities (33,062) 469 203
----------------------------------------------------
Financing activities:
Cash dividends paid (2,906) (7,582) (7,577)
Proceeds from issuance of debentures 102,062 -- --
Proceeds from options exercised 432 308 20
-------------- -------------- --------------
Net cash provided (used) by financing
activities 99,588 (7,274) (7,557)
-------------- -------------- --------------
Net increase in cash and cash
equivalents $ 63,478 206 47
============== ============== ==============
Cash and cash equivalents at beginning of year 393 187 140
Net increase (decrease) in cash and cash equivalents 63,478 206 47
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 63,871 393 187
============== ============== ==============
42 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
(22) BUSINESS SEGMENTS
The Company has identified two reportable business segments based upon
the operating approach currently used by management. The Community Banks
segment includes the two savings bank subsidiaries of the Company,
Northwest Savings Bank and Jamestown Savings Bank, as well as the
subsidiaries of the savings banks that provide similar products and
services. The savings banks are community-oriented institutions that
offer a full array of traditional deposit and loan products, including
mortgage, consumer and commercial loans, as well as trust, investment
management, actuarial and benefit plan administration, and brokerage
services typically offered by a full service financial institution. The
Consumer Finance segment is comprised of Northwest Consumer Discount
Company, a subsidiary of Northwest Savings Bank, that operates
forty-seven offices in Pennsylvania and two in southwestern New York.
This subsidiary compliments the services of the banks by offering
personal installment loans for a variety of consumer and real estate
products. This activity is funded primarily through its intercompany
borrowing relationship with Northwest Savings Bank. Net income is
primarily used by management to measure segment performance. The
following tables provide financial information for these segments. The
All Other column represents the parent company, other nonbank
subsidiaries, and elimination entries necessary to reconcile to the
consolidated amounts presented in the financial statements.
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
June 30, 2002 ($ in 000's) BANKS FINANCE OTHER* CONSOLIDATED
------------------------------------- --------------- ------------- ----------- -------------
External interest income $ 255,014 19,274 212 274,500
Intersegment interest income 6,710 -- (6,710) --
Interest expense 143,273 7,234 (3,252) 147,255
Provision for loan losses 3,180 3,180 -- 6,360
Noninterest income 16,921 1,252 -- 18,173
Noninterest expense 84,272 7,020 379 91,671
Income tax expense (benefit) 13,799 1,285 (1,342) 13,742
Cumulative effect of accounting change 2,237 -- -- 2,237
Net income 36,358 1,807 (2,283) 35,882
Total assets 4,161,316 129,608 10,322 4,301,246
43 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
June 30, 2001 ($ in 000's) BANKS FINANCE OTHER* CONSOLIDATED
------------------------------------- ------------- ------------ ----------- -------------
External interest income $ 248,957 20,253 220 269,430
Intersegment interest income 10,605 -- (10,605) --
Interest expense 156,850 11,084 (10,612) 157,322
Provision for loan losses 2,580 2,767 -- 5,347
Noninterest income 13,336 1,576 142 15,054
Noninterest expense 75,467 6,413 459 82,339
Income tax expense (benefit) 11,988 711 -- 12,699
Net income 26,013 854 (90) 26,777
Total assets 3,709,253 137,151 6,427 3,852,831
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
June 30, 2000 ($ in 000's) BANKS FINANCE OTHER* CONSOLIDATED
------------------------------------- ------------- ------------ ----------- -------------
External interest income $ 220,925 18,547 252 239,724
Intersegment interest income 9,334 -- (9,334) --
Interest expense 131,659 9,784 (9,344) 132,099
Provision for loan losses 2,031 2,118 -- 4,149
Noninterest income 9,562 1,670 39 11,271
Noninterest expense 67,936 5,545 153 73,634
Income tax expense (benefit) 12,640 1,195 75 13,910
Net income 25,555 1,575 73 27,203
Total assets 3,267,069 133,501 6,722 3,407,292
* Eliminations consist of intercompany interest income and interest
expense.
(23) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES)
During fiscal 2002 the Company formed two wholly owned Delaware statutory
business trusts, Northwest Capital Trust I and Northwest Bancorp
Statutory Trust I (the Trusts). These trusts were formed solely to issue
preferred securities to third parties for cash, issue common securities
to the Company in exchange for capitalization of the trusts, invest the
proceeds from the sale of trust securities in an equivalent amount of
debentures of the Company and engage in other activities that are
incidental to those previously listed.
44 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
Northwest Capital Trust I issued 2,760,000 of 8.75% Cumulative Trust
Preferred Securities through a public offering on November 30, 2001
(liquidation value of $25 per preferred security or $69,000,000) with a
stated maturity of December 31, 2031. The securities trade on the Nasdaq
Stock Market under the symbol NWSBP. Northwest Bancorp Statutory Trust I
issued 30,000 Cumulative Trust Preferred Securities in a private
transaction to a pooled investment vehicle on December 18, 2001
(liquidation value of $1,000 per preferred security or $30,000,000) with
a stated maturity of December 23, 2031 and a floating rate of interest,
which is reset quarterly, equal to three month LIBOR plus 3.60%. The
trust-preferred securities qualify as regulatory Tier I capital and the
cash distributions are tax deductible. For financial reporting purposes,
the trusts are included in the consolidated financial statements of the
Company. The trust-preferred securities are presented as a separate line
item on the Consolidated Statements of Financial Condition and the
distributions are included with interest expense on borrowed funds on the
Consolidated Statements of Income.
The Trusts have invested the proceeds of the offerings in junior
subordinated deferrable interest debentures issued by the Company. The
structure of these debentures mirror the structure of the trust-preferred
securities. Northwest Capital Trust I holds $71,134,025 of the Company's
8.75% junior subordinated debentures, due December 31, 2031. Northwest
Bancorp Statutory Trust I holds $30,928,000 of the Company's junior
subordinated debentures due December 23, 2031 with a floating rate of
interest, reset quarterly, of three-month LIBOR plus 3.60%. The rate in
effect at June 30, 2002 was 5.48%. These subordinated debentures are the
sole assets of the trusts. The Company will use the proceeds from the
sale of the debentures for general corporate purposes, including capital
contributions to its banking subsidiaries to support their growth
strategies.
Cash distributions on the trust securities are made on a quarterly basis
to the extent interest on the debentures is received by the trusts. The
Company has the right to defer payment of interest on the subordinated
debentures at any time, or from time-to-time, for periods not exceeding
five years. If interest payments on the subordinated debentures are
deferred, the distributions on the trust securities also are deferred.
Interest on the subordinated debentures and distributions on the trust
securities is cumulative. The Company obligation constitutes a full,
irrevocable and unconditional guarantee on a subordinated basis of the
obligations of the trust under the preferred securities.
The trusts must redeem the preferred securities when the debentures are
paid at maturity or upon an earlier redemption of the debentures to the
extent the debentures are redeemed. All or part of the debentures may be
redeemed at any time on or after December 31, 2006. Also, the debentures
may be redeemed at any time if existing laws or regulations, or the
interpretation or application of these laws or regulations, change,
causing:
- the interest on the debentures to no longer be deductible by the
Company for federal income tax purposes;
- the trust to become subject to federal income tax or to certain
other taxes or governmental charges;
- the trust to register as an investment company;
- the Company to become subject to capital requirements and the
preferred securities do not qualify as Tier I capital.
45 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
In addition, all or part of the debentures may be redeemed on or after
December 31, 2003 and prior to December 31, 2006 in the unlikely event of
a mutual-to-stock conversion of Northwest Bancorp, MHC (the mutual
holding company of Northwest Bancorp, Inc.). Under such circumstances the
debentures may be redeemed at a price equal to the accrued and unpaid
interest to the date fixed for redemption plus 107% of the principal
amount, thereof, and holders of the preferred securities will receive
107% of the liquidation amount of $25 per preferred security plus any
accrued and unpaid distributions to the date of redemption.
The Company may, at any time, dissolve the trust and distribute the
debentures to the trust security holders, subject to receipt of any
required regulatory approval(s).
(24) GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of adopting SFAS 141 and SFAS 142 as described in footnote
1(i), remaining negative goodwill at June 30, 2001 of $2.2 million was
recorded in income as a cumulative effect of a change in accounting
principle. The following table shows the effect on net income and
earnings per share as a result of adopting SFAS No. 141 and 142:
FOR THE FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Reported net income $ 35,882 26,777 27,203
Deduct: Cumulative effect of accounting change 2,237 -- --
Add back: Goodwill amortization -- 1,031 1,011
------------ ------------ ------------
Adjusted net income $ 33,645 27,808 28,214
============ ============ ============
Basic earnings per share:
Reported net income % 0.76 0.57 0.58
Deduct: Cumulative effect of accounting change 0.05 -- --
Add back: Goodwill amortization -- 0.02 0.02
------------ ------------ ------------
Adjusted net income % 0.71 0.59 0.60
============ ============ ============
Diluted earnings per share:
Reported net income 0.75 0.56 0.57
Deduct: Cumulative effect of accounting change 0.05 -- --
Add back: Goodwill amortization -- 0.02 0.02
------------ ------------ ------------
Adjusted net income % 0.70 0.58 0.59
============ ============ ============
46 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The following table provides information for intangible assets subject to
amortization for the periods indicated:
JUNE 30
------------------------------
2002 2001
------------ ------------
Amortized intangible assets:
Core deposit intangibles - gross $ 3,655 1,510
Less: accumulated amortization (1,052) (769)
------------ ------------
Core deposit intangibles - net $ 2,603 741
============ ============
Other unidentifiable intangible assets - gross 73,918 68,222
Less: accumulated amortization (21,097) (13,951)
------------ ------------
Other unidentifiable intangible assets - net $ 52,821 54,271
============ ============
The following information shows the actual aggregate amortization expense
for the current and prior fiscal years as well as the estimated aggregate
amortization expense for each of the five succeeding fiscal years:
For the fiscal year ended 6/30/00 $ 5,831
For the fiscal year ended 6/30/01 7,371
For the fiscal year ended 6/30/02 7,306
For the fiscal year ended 6/30/03 8,100
For the fiscal year ended 6/30/04 8,220
For the fiscal year ended 6/30/05 8,220
For the fiscal year ended 6/30/06 8,220
For the fiscal year ended 6/30/07 8,220
47 (Continued)
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(All dollar amounts presented in tables are in thousands)
The following table provides information for the changes in the carrying
amount of goodwill:
COMMUNITY CONSUMER
BANKS FINANCE TOTAL
----------------- --------------- ---------------
Balance at June 30, 2000 $ 4,831 1,011 5,842
Goodwill acquired 4,220 -- 4,220
Amortization (Pre-SFAS 142) (913) (118) (1,031)
Impairment losses -- -- --
-------------- -------------- --------------
Balance at June 30, 2001 8,138 893 9,031
Goodwill acquired -- -- --
Amortization (Post-SFAS 142) -- -- --
Impairment losses -- -- --
Negative goodwill write-off 2,237 -- 2,237
-------------- -------------- --------------
Balance at June 30, 2002 $ 10,375 893 11,268
============== ============== ==============
(25) SUBSEQUENT EVENTS (UNAUDITED)
In September 2002, the Company completed its previously announced
acquisition of Prestige Bancorp, Inc., and its subsidiary Prestige Bank.
Prestige Bank was a federal savings bank with four offices in the South
Hills of Pittsburgh, Pennsylvania, and assets of approximately $190
million, deposits of approximately $122 million, and shareholders' equity
of approximately $11.7 million. Under terms of the agreement,
shareholders received $13.75 for each share of Prestige Bancorp,
resulting in a cash payment of approximately $14.7 million and intangible
assets of approximately $5 million.
Also, as previously announced on August 16, 2001 and reported on Form
8-K, the Company has entered into an agreement to acquire Leeds Federal
Bankshares, Inc. The transaction is subject to the approval of the OTS
and Northwest's application is currently on file with the OTS pending
approval. The parties have twice agreed to extend the date upon which the
transaction must be completed. On August 28, 2002, the parties extended
the date for completion of the merger to December 31, 2002. The parties
also agreed to amend the merger agreement to modify the structure of the
transaction in which Leeds Federal Savings Bank will become a
wholly-owned subsidiary of Northwest Bancorp, MHC and will not be part of
the Northwest Bancorp, Inc. consolidated group immediately after the
merger as previously proposed. The $32.00 per share cash consideration to
be paid to the public stockholders of Leeds Federal Bankshares, Inc. and
all other terms and conditions of the merger remain generally unchanged.
48 (Continued)
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST BANCORP, INC.
Date: September 25, 2002 By: /s/ William J. Wagner
-----------------------------------
William J. Wagner, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John O. Hanna By: /s/ William J. Wagner
---------------------------- ------------------------------------
John O. Hanna, Chairman William J. Wagner, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: September 25, 2002 Date: September 25, 2002
By: /s/ John M. Bauer By: /s/ Richard L. Carr
----------------------------- ------------------------------------
John M. Bauer, Director Richard L. Carr, Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Richard E. McDowell By: /s/ Thomas K. Creal, III
----------------------------- ------------------------------------
Richard E. McDowell, Director Thomas K. Creal, III, Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ Joseph T. Stadler By: /s/ Joseph F. Long
----------------------------- ------------------------------------
Joseph T. Stadler, Director Joseph F. Long, Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ A. Paul King By: /s/ Robert G. Ferrier
----------------------------- ------------------------------------
A. Paul King, Director Robert G. Ferrier, Director
Date: September 25, 2002 Date: September 25, 2002
By: /s/ William W. Harvey, Jr.
------------------------------------
William W. Harvey, Jr.
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
Date: September 25, 2002
49
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William J. Wagner, President and Chief Executive Officer of Northwest
Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report.
September 25, 2002 /s/ William J. Wagner
- ------------------ -------------------------------------
Date William J. Wagner
President and Chief Executive Officer
50
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William W. Harvey, Senior Vice President, Finance of Northwest Bancorp, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report.
September 25, 2002 /s/ William W. Harvey
- ------------------ ------------------------------
Date William W. Harvey
Senior Vice President, Finance
(Chief Financial Officer)
51