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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, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from --------------- to ---------------------
COMMISSION FILE NO. 0-23817
NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 23-2900888
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 SECOND AVENUE, WARREN, PENNSYLVANIA 16365
--------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(814) 726-2140
--------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.10 PER SHARE
--------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ].
As of August 31, 2004, there were issued and outstanding 47,970,661 shares
of the Registrant's Common Stock, including 28,110,698 shares held by Northwest
Bancorp, MHC, the Registrant's mutual holding company.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, computed by reference to the last sale
price on December 31, 2003, as reported by the Nasdaq National Market, was
approximately $1.020 billion.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2004 Annual Meeting of Stockholders of the
Registrant (Part III).
PART I
ITEM 1. BUSINESS
GENERAL
NORTHWEST BANCORP, INC.
Northwest Bancorp, Inc. is a Federal corporation formed on June 29, 2001,
as the successor to a Pennsylvania corporation of the same name. Both the
Federal corporation and its Pennsylvania predecessor are referred to as the
"Company." The Company became the stock holding company of Northwest Savings
Bank (the "Bank") in a transaction (the "Two-Tier Reorganization") that was
approved by the Bank's stockholders in December of 1997, and completed in
February of 1998. In the Two-Tier Reorganization, each share of the Bank's
common stock was converted into and became a share of common stock of the
Company, par value $0.10 per share (the "Common Stock"), and the Bank became a
wholly-owned subsidiary of the Company. Northwest Bancorp, MHC (the "Mutual
Holding Company"), which owned a majority of the Bank's outstanding shares of
common stock immediately prior to completion of the Two-Tier Reorganization,
became the owner of the same percentage of the outstanding shares of Common
Stock of the Company immediately following the completion of the Two-Tier
Reorganization. On August 25, 2003, the Company completed an incremental stock
offering whereby the Company cancelled 7,255,520 shares of the Company's stock
owned by the Mutual Holding Company and the Company sold the same number of
shares in a subscription offering. After the subscription offering, the Mutual
Holding Company owned approximately 59% of the Company's outstanding shares.
For the past three fiscal years the Mutual Holding Company has received
approval from the Office of Thrift Supervision ("OTS") to waive its right to
receive cash dividends from the Company in the amount of $9,159,000,
$11,317,000 and $8,488,000, respectively. However, as a result of additional
liquidity needs, the Mutual Holding Company will not waive its right to receive
future quarterly dividends until the transfer of both Leeds Federal Savings
Bank ("Leeds") and First Carnegie Deposit ("First Carnegie") to Northwest
Bancorp, Inc. has been completed. After such transfers have occurred, the
Mutual Holding Company will seek regulatory approval to resume waiving
dividends. As of June 30, 2004, 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. On September 10, 2004 the Company received regulatory approval to acquire
Leeds from the Mutual Holding Company in a transaction accounted for as an
exchange of shares between entities under common control. On July 6, 2004 the
Company filed an application with the OTS to transfer ownership of First
Carnegie from the Mutual Holding Company in a manner similar to the Leeds
transaction.
As of June 30, 2004, the Company, through the Bank and Jamestown, operated
147 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 301 Second Avenue,
Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
The Company's website (www.northwestsavingsbank.com) contains a direct
link to the Company's filings with the Securities and Exchange Commission,
including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to these filings. Copies may also be
obtained, without charge, by written request to Shareholder Relations, 301
Second Avenue, Warren, Pennsylvania 16365.
NORTHWEST SAVINGS BANK
The Bank is a Pennsylvania-chartered stock savings bank headquartered in
Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through a subsidiary, consumer finance services. The Bank's mutual savings
bank predecessor was founded in 1896. The Bank in its current stock form was
established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure. At the time of the Reorganization, the Bank issued a majority of its
to-be outstanding shares of common stock to the Mutual Holding Company (which
was formed in connection with the Reorganization) and sold a minority of its
to-be outstanding shares to stockholders other than the Mutual Holding Company
in a stock offering conducted as part of the Reorganization.
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The Bank's principal executive office is located at 301 Second Avenue,
Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
JAMESTOWN SAVINGS BANK
Jamestown began operations on November 9, 1995 as a de novo New
York-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of 761,866
shares of common stock, including 400,000 shares that were purchased by the
Mutual Holding Company. The Mutual Holding Company continued to accumulate
additional ownership in Jamestown and in February 1998 sold its entire ownership
position, consisting of 490,050 shares, to the Company. On July 8, 1998 the
Company conducted a tender offer for the remaining shares of Jamestown, and
acquired 100% of the outstanding shares of Jamestown as of July 31, 1998.
As of June 30, 2004, Jamestown had ten 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, 2004, the Company operated in Pennsylvania 132 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 $18,000 and the median
house value is $82,200. Pennsylvania, like most of the nation, is experiencing
an economic slowdown with unemployment rising from 4.6% in July 2001 to 5.3% in
July 2004, which is slightly below the national average of approximately 5.5%.
Most of the communities the Company serves, while showing improvement, are still
dependent on the manufacturing sector, which accounts for approximately 16% of
all Pennsylvania jobs compared to the national average of 18%. This sector has
been hardest hit by the downturn in the economy and has seen an increase in
foreign competition. Bankruptcy filings have also decreased with 5 out of every
1,000 people in Pennsylvania filing for bankruptcy protection, but are still
below the national average of 6 out of every 1,000 people. In addition, the
Company operated in Ohio five community banking offices located in the counties
of Ashtabula, Geauga and Lake. Through Jamestown, the Company operated in New
York ten community banking offices located in the counties of Chautauqua, Erie
and Cattaraugus. The Company, through the Bank and its subsidiaries, also
operates two consumer finance offices in southwestern New York.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Company has
been the origination, for retention in its portfolio, of fixed-rate and, to a
lesser extent, adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located in its market area. To a lesser
extent, the Company also originates loans collateralized by multifamily
residential and commercial real estate, construction loans, commercial business
loans and consumer loans.
In an effort to manage interest rate risk, the Company has sought to make
its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The
3
Company also purchases mortgage-backed securities that generally have adjustable
interest rates. Because the Company also originates a substantial amount of
long-term fixed-rate mortgage loans collateralized by one- to four-family
residential real estate, when possible, such loans are originated and
underwritten according to standards that allow the Company to sell them in the
secondary mortgage market for purposes of managing interest-rate risk and
liquidity. The Company currently sells in the secondary market a limited amount
of fixed-rate residential mortgage loans with maturities of more than 15 years,
and retains all adjustable-rate mortgage loans and fixed-rate residential
mortgage loans with maturities of 15 years or less. The Company is primarily a
portfolio lender and at any one time the Company holds only a nominal amount of
loans identified as available-for-sale. The Company retains servicing on the
mortgage loans it sells and realizes monthly service fee income. The Company
generally retains in its portfolio all consumer loans, multifamily residential
and commercial real estate loans, and commercial business loans that it
originates.
4
ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
AT JUNE 30,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------ ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family .......... $2,372,352 61.2% $2,112,811 63.6% $2,056,105 66.9% $2,005,020 68.7% $1,836,154 70.9%
Multifamily and commercial.... 440,864 11.4 377,507 11.4 304,456 9.9 249,049 8.5 192,897 7.5
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total real estate loans....... 2,813,216 72.6 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4
Consumer:
Automobile.................... 120,887 3.1 118,120 3.6 117,240 3.8 94,475 3.2 72,955 2.8
Home improvement.............. 575,644 14.9 378,341 11.4 293,865 9.6 260,169 8.9 212,049 8.2
Education loans............... 95,599 2.4 90,485 2.7 84,817 2.8 77,753 2.7 70,619 2.7
Loans on savings accounts..... 6,646 0.2 7,132 0.2 7,733 0.2 8,923 0.3 8,052 0.3
Other (1)..................... 111,612 2.9 107,483 3.2 113,570 3.7 134,023 4.6 147,267 5.7
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total consumer loans ......... 910,388 23.5 701,561 21.1 617,225 20.1 575,343 19.7 510,942 19.7
Commercial business............. 149,509 3.9 130,115 3.9 95,968 3.1 89,784 3.1 49,992 1.9
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total loans receivable,
gross..................... 3,873,113 100.0% 3,321,994 100.0% 3,073,754 100.0% 2,919,196 100.0% 2,589,985 100.0%
Deferred loan fees.............. (6,805) (7,409) (2,938) (2,517) (1,829)
Undisbursed loan proceeds....... (48,049) (41,221) (36,168) (39,808) (25,266)
Allowance for loan losses
(real estate loans)........... (14,132) (13,087) (11,703) (11,629) (11,334)
Allowance for loan losses
(other loans)................. (15,557) (13,506) (10,339) (8,661) (6,926)
---------- ---------- ---------- ---------- ----------
Total loans receivable,
net....................... $3,788,570 $3,246,771 $3,012,606 $2,856,581 $2,544,630
========== ========== ========== ========== ==========
- ------------------------------------
(1) Consist primarily of secured and unsecured personal loans.
FIXED- AND ADJUSTABLE-RATE LOANS. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed-
and adjustable-rate loans at the dates indicated.
AT JUNE 30,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------ ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.................... $ 511,324 13.2% $ 404,164 12.2% $ 229,596 7.5% $ 170,054 5.8% $ 108,628 4.2%
Fixed......................... 2,301,892 59.4 2,086,154 62.8 2,130,965 69.3 2,084,015 71.4 1,920,423 74.2
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans...... 2,813,216 72.6 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4
Other loans:
Adjustable.................... 200,961 5.2 186,561 5.6 225,889 7.3 197,403 6.8 151,177 5.8
Fixed......................... 858,936 22.2 645,115 19.4 487,304 15.9 467,724 16.0 409,757 15.8
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans............ 1,059,897 27.4 831,676 25.0 713,193 23.2 665,127 22.8 560,934 21.6
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$3,873,113 100.0% $3,321,994 100.0% $3,073,754 100.0% $2,919,196 100.0% $2,589,985 100.0%
========== ====== ========== ====== ========== ===== ========== ====== ========== ======
5
LOAN MATURITY AND REPRICING SCHEDULE. The following table sets forth the
maturity or period of repricing of the Company's loan portfolio at June 30,
2004. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest rates are next
scheduled to adjust rather than in which they contractually mature, and
fixed-rate loans are included in the period in which the final contractual
repayment is due.
WITHIN 1 BEYOND 5
YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS YEARS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential........ $ 177,599 $ 144,730 $ 113,613 $ 247,811 $1,688,599 $2,372,352
Multifamily and commercial............. 145,174 53,841 47,817 141,404 52,628 440,864
Consumer loans............................ 388,060 98,824 90,769 143,933 188,802 910,388
Commercial business loans................. 49,233 18,259 16,216 47,954 17,847 149,509
---------- ---------- ---------- ---------- ---------- ----------
Total loans............................... $ 760,066 $ 315,654 $ 268,415 $ 581,102 $1,947,876 $3,873,113
========== ========== ========== ========== ========== ==========
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 2004, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 2005. 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.......... $ 2,286,517 $ 40,765 $ 2,327,282
Multifamily and commercial............... 92,396 284,960 377,356
Consumer loans.............................. 413,401 201,029 614,430
Commercial business loans................... 39,054 17,271 56,325
----------- ----------- -----------
Total loans................................. $ 2,831,368 $ 544,025 $ 3,375,393
=========== =========== ===========
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 15 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate sensitivity position and loan
products offered by the Company's competitors. Therefore, even when management's
strategy is to increase the originations of adjustable-rate mortgage loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
The Company currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one, three and five years, based on changes
in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totaled $42.7 million, or
1.1% of the Company's gross loan portfolio at June 30, 2004.
6
The primary purpose of offering adjustable-rate mortgage loans is to make
the Company's loan portfolio more interest rate sensitive. However, as the
interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans may not offer the Company as predictable cash flows
as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed-rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are either performed by
the Company's in-house appraisal staff or by an appraiser who has been deemed
qualified by the Company's chief appraiser. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2004, the Company's portfolio of loans serviced by others totaled $7.3 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $2.372 billion portfolio of one- to four-family
residential real estate loans are construction loans of $24.2 million, or 0.6%
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, 2004, 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, 2004, had a
principal balance of $6.0 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. This loan was performing in
accordance with its terms as of June 30, 2004. The Company's largest commercial
real estate loan relationship at June 30, 2004, had a principal balance of $12.6
million and was collateralized by nursing homes in northwestern Pennsylvania.
This loan was performing in accordance with its terms as of June 30, 2004.
Multifamily residential and commercial real estate loans are offered with both
adjustable interest rates and fixed
7
interest rates. The terms of each multifamily residential and commercial real
estate loan are negotiated on a case-by-case basis. The Company generally makes
multifamily residential and commercial real estate loans up to 75% of the
appraised value of the property collateralizing the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
CONSUMER LOANS. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
home equity loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2004, the
disbursed portion of home equity lines of credit totaled $150.7 million, or
16.6%, of consumer loans, with $205.2 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
COMMERCIAL BUSINESS LOANS. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. The largest commercial business loan relationship was a loan
to the Mutual Holding Company which had a principal balance of $22.0 million,
and was secured by all of the assets of the Mutual Holding Company. The primary
assets of the Mutual Holding Company are its ownership of two subsidiary banks,
Leeds Federal and First Carnegie Deposit.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and
8
walk-in customers. All of the Company's loan originators are salaried employees,
and the Company does not pay commissions in connection with loan originations.
Upon receiving a loan application, the Company obtains a credit report and
employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real
estate loan, an in-house appraiser or an appraiser approved by the Company
appraises the real estate intended to secure the proposed loan. A loan processor
in the Company's loan department checks the loan application file for accuracy
and completeness, and verifies the information provided. The Company has a
formal loan policy which assigns lending limits to the Company's various loan
officers. Also, the Company has a Credit Committee which meets as needed to
review and verify that the assigned lending limits are being followed and to
monitor the Company's lending policies and the Company's loan activity. The
Company has a Senior Loan Committee which has lending authority as designated in
the Company's loan policy that is approved by the Board of Directors. Loans
exceeding the limits established for the Senior Loan Committee must be approved
by the Executive Committee of the Board of Directors or by the entire Board of
Directors. The Company's policy is to make no loans either individually or in
the aggregate to one entity in excess of $7.5 million. Exceptions to this policy
are permitted with the 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, 2004, the Company had commitments to
originate $144.9 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,
------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Loans receivable, gross, at beginning of period............. $3,321,994 $3,073,754 $2,919,196
Originations................................................ 1,307,118 1,301,263 974,413
Principal repayments........................................ (891,957) (948,781) (697,427)
Loan purchases including acquisitions....................... 224,532 130,631 22,945
Loan sales and change in undisbursed loan proceeds.......... (83,927) (231,820) (140,991)
Transfer to REO............................................. (4,647) (3,053) (4,382)
---------- ---------- ----------
Loans receivable, gross, at end of period................ $3,873,113 $3,321,994 $3,073,754
========== ========== ==========
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 ("SFAS 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, 2004 the Company had $6.8 million of
net deferred loan origination fees. Loan origination fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments made
and purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from operations of real estate owned ("REO"). The Company recognized fees and
service charges of $13.8 million, $13.4 million and $11.9 million, for the
fiscal years ended June 30, 2004, 2003 and 2002, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which restrict loans to
one borrower to an amount equal to 15% of unimpaired capital and unimpaired
surplus on an unsecured basis, and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At June 30, 2004, the largest aggregate amount loaned by the
Company to one borrower totaled $22.0 million and was secured by
9
all of the assets of the Mutual Holding Company. The Company's second largest
lending relationship totaled $12.6 million and was secured by commercial
property. The Company's third largest lending relationship totaled $8.4 million
and was secured by land and real estate. The Company's fourth largest lending
relationship was for $7.5 million and was secured by commercial real estate. The
Company's fifth largest lending relationship totaled $7.5 million and was
secured by commercial real estate.
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. When a loan is delinquent 90 days or more,
the Company fully reserves all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Company did not have any
material restructured loans within the meaning of SFAS 15.
10
AT JUNE 30,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------- ------- ------- ------- -------
NUMBER BALANCE
------ -------
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 59 days:
One- to four-family residential loans .......... 74 $ 3,487 $ 2,665 $ 4,068 $ 3,055 $ 2,030
Multifamily and commercial loans ............... 19 2,201 1,291 1,278 1,184 806
Consumer loans ................................. 868 4,778 3,705 3,243 3,439 2,108
Commercial business loans ...................... 9 782 308 165 418 535
----- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days ....... 970 $11,248 $ 7,969 $ 8,754 $ 8,096 $ 5,479
----- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans .......... 92 $ 4,855 $ 2,890 $ 3,478 $ 3,001 $ 2,205
Multifamily and commercial loans ............... 12 1,023 873 269 248 152
Consumer loans ................................. 440 2,011 1,903 1,604 1,262 777
Commercial business loans ...................... 6 309 159 35 758 47
----- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days ....... 550 $ 8,198 $ 5,825 $ 5,386 $ 5,269 $ 3,181
----- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans .......... 222 $10,880 $11,140 $ 7,278 $ 6,874 $ 5,753
Multifamily and commercial loans ............... 43 13,823 11,975 2,407 2,296 1,923
Consumer loans ................................. 1,055 4,536 4,896 3,991 3,129 2,459
Commercial business loans ...................... 26 2,824 4,602 2,124 5,336 125
----- ------- ------- ------- ------- -------
Total loans past due 90 days or more .......... 1,346 $32,063 $32,613 $15,800 $17,635 $10,260
----- ------- ------- ------- ------- -------
Total loans 30 days or more past due ............. 2,866 $51,509 $46,407 $29,940 $31,000 $18,920
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due (1) ......... 1,346 $32,063 $32,613 $15,800 $17,635 $10,260
Total REO ........................................ 70 3,845 3,664 5,157 3,697 2,144
----- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO...... 1,416 $35,908 $36,277 $20,957 $21,332 $12,404
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable ........................... 0.84% 1.00% 0.52% 0.62% 0.40%
Total loans 90 days or more past due
and REO to total assets ........................ 0.62% 0.69% 0.49% 0.55% 0.36%
- -------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 2004, gross interest income of
approximately $2.5 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, 2004, the Company had 84 loans,
with an aggregate principal balance of $23.0 million, designated as special
mention.
The Company regularly reviews its asset portfolio to determine whether any
assets require classification in accordance with applicable regulations. The
Company's largest classified assets are also the Company's largest nonperforming
assets.
11
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
AT JUNE 30,
-------------------------------------
2004 2003 2002
------- -------- --------
(IN THOUSANDS)
Substandard assets........................... $58,402 $ 47,278 $ 38,398
Doubtful assets.............................. 5,055 3,256 1,465
Loss assets.................................. 259 -- --
------- -------- --------
Total classified assets................... $63,716 $ 50,534 $ 39,863
======= ======== ========
ALLOWANCE FOR LOAN LOSSES. Loans that have been classified as substandard
or doubtful are reviewed by the Credit Review and Administration ("Credit
Review") 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 Credit Review
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 Credit Review 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 with consideration given to 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 supporting documentation used to establish
this schedule is presented to the Credit Committee on a quarterly basis by the
Credit Review department. 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 necessary 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 compares the
Company's delinquency trends, nonperforming asset amounts and allowance for loan
losses levels to its peer group and to state and national statistics. A similar
review is also 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. 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
12
and events. There is no assurance that actual portfolio losses will not be
substantially different than those that were estimated.
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,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Net loans receivable ................................... $ 3,788,570 $ 3,246,771 $ 3,012,606 $ 2,856,581 $ 2,544,630
Average loans outstanding .............................. 3,621,858 3,169,180 2,935,629 2,715,012 2,436,260
Allowance for loan losses balance at beginning of
period ............................................... 26,593 22,042 20,290 18,260 16,773
Provision for loan losses .............................. 6,842 8,431 6,360 5,347 4,149
Charge-offs:
Real estate loans .................................... (176) (239) (292) (176) (289)
Consumer loans ....................................... (5,097) (4,281) (4,452) (3,528) (2,987)
Commercial loans ..................................... (461) (1,258) (569) (158) --
----------- ----------- ----------- ----------- -----------
Total charge-offs ................................... (5,734) (5,778) (5,313) (3,862) (3,276)
----------- ----------- ----------- ----------- -----------
Recoveries:
Real estate loans .................................... -- 47 63 32 75
Consumer loans ....................................... 561 527 382 453 481
Commercial loans ..................................... 502 123 23 60 33
----------- ----------- ----------- ----------- -----------
Total recoveries .................................... 1,063 697 468 545 589
Acquired through acquisition ........................... 925 1,201 237 -- 25
----------- ----------- ----------- ----------- -----------
Allowance for loan losses balance at end of period ... $ 29,689 $ 26,593 $ 22,042 $ 20,290 $ 18,260
=========== =========== =========== =========== ===========
Allowance for loan losses as a percentage of net
loans receivable ..................................... 0.78% 0.82% 0.73% 0.71% 0.72%
Net charge-offs as a percentage of average
loans outstanding .................................... 0.13% 0.16% 0.17% 0.12% 0.11%
Allowance for loan losses as a percentage of
nonperforming loans .................................. 92.60% 81.54% 139.51% 115.06% 177.97%
Allowance for loan losses as a percentage
of nonperforming loans and REO ....................... 82.68% 73.31% 105.18% 95.12% 147.21%
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,
---------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------ ------------------ --------------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
--------- -------- --------- -------- -------- -------- --------- -------- --------- --------
Balance at end of period
applicable to:
Real estate loans........... $ 14,132 72.6% $ 13,087 75.0% $ 11,703 76.8% $ 11,629 77.2% $ 11,334 78.4%
Consumer loans.............. 11,790 23.5 10,965 21.1 8,855 20.1 6,682 19.7 5,976 19.7
Commercial business loans... 3,767 3.9 2,541 3.9 1,484 3.1 1,979 3.1 950 1.9
--------- ----- --------- ----- --------- ----- --------- ------ --------- -----
Total allowance for loan
loss...................... $ 29,689 100.0% $ 26,593 100.0% $ 22,042 100.0% $ 20,290 100.0% $ 18,260 100.0%
========= ===== ========= ===== ========= ===== ========= ====== ========= =====
- ----------
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Company's investment portfolio is comprised of mortgage-backed
securities, investment securities, and cash and cash equivalents. In recent
years, the Company generally has increased both the percentage of its assets
held in its investment securities portfolio, and the percentage of assets held
in the mortgage-backed securities portfolio. This increase in investment
securities and mortgage-backed securities resulted from the Company's efforts to
protect its net interest margin in the event that interest rates rise. This was
accomplished by controlling the increase of long-term fixed rate mortgage loans
and by deploying more funds to the investment portfolio. In addition to interest
sensitivity concerns, the Company is maintaining more of its funds in marketable
securities because of concerns that some of the rapid deposit growth over the
last several years could be funds that will eventually leave the Company for
alternative investments.
13
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 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,
-------------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Mortgage-backed securities balance at beginning of period (1).......... $ 907,035 $ 524,601 $ 504,274
Purchases.............................................................. 374,637 947,546 160,665
Sales.................................................................. (5,484) (2,879) --
Securities acquired by business combination............................ 298,920 15,632 --
Increase (decrease) in market value of securities available
for sale............................................................. (6,036) (2,863) 4,519
Principal payments and amortization of premiums and discounts.......... (781,989) (575,002) (144,857)
----------- ----------- -----------
Mortgage-backed securities balance at end of period (1)................ $ 787,083 $ 907,035 $ 524,601
=========== =========== ===========
Investment securities balance at beginning of period (2)............... $ 467,417 $ 307,625 $ 226,636
Purchases.............................................................. 517,777 278,406 177,778
Sales.................................................................. (275,900) (79,991) (50,647)
Securities acquired by business combination............................ 219,029 12,390 --
Increase (decrease) in market value of securities available
for sale............................................................. (12,709) 5,264 154
Writedowns............................................................. -- -- (400)
Maturities and amortization of premiums and discounts.................. (315,564) (56,277) (45,896)
----------- ----------- -----------
Investment securities balance at end of period (2)..................... $ 630,050 $ 467,417 $ 307,625
=========== =========== ===========
- ----------------------------------
(1) Includes mortgage-backed securities available for sale and held to
maturity.
(2) Includes investment securities available for sale and held to maturity.
AMORTIZED COST AND MARKET VALUE OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. The following table sets forth certain information regarding the
amortized cost and market values of the Company's investment securities
portfolio and mortgage-backed securities portfolio at the dates indicated.
14
AT JUNE 30,
-------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
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 ...................... $ 5,080 $ 5,079 $ 8,297 $ 8,417 $ 3,663 $ 3,713
Variable-rate pass through certificates ................... 197,511 195,967 57,988 58,162 52,278 52,426
Fixed-rate collateralized mortgage obligations ("CMOs") ... 7,519 7,444 24,651 24,596 8,318 8,494
Variable-rate CMOs ........................................ 169,667 170,753 258,466 259,966 199,601 200,179
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity........ 379,777 379,243 349,402 351,141 263,860 264,812
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates ...................... $ 89,141 $ 88,659 $ 43,449 $ 45,461 $ 61,502 $ 63,974
Variable-rate pass through certificates ................... 87,237 86,502 128,528 129,486 12,958 13,040
Fixed-rate CMOs ........................................... 141,485 137,866 191,911 190,167 35,315 35,685
Variable-rate CMOs ........................................ 92,710 94,279 190,978 192,519 145,335 148,042
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale...... 410,573 407,306 554,866 557,633 255,110 260,741
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ........................ 790,350 786,549 904,268 908,774 518,970 525,553
-------- -------- -------- -------- -------- --------
Investment securities held to maturity:
U.S. Government and agency ................................ $ 52,500 $ 52,871 $ 17,032 $ 19,209 $ 18,040 $ 20,156
Municipal securities ...................................... 114,849 113,755 65,556 68,905 65,274 65,759
Corporate debt issues ..................................... 41,178 42,497 45,831 47,667 49,329 48,164
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity ............ $208,527 $209,123 $128,419 $135,781 $132,643 $134,079
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ................................ $165,752 $162,679 $ 41,900 $ 43,703 $ 23,604 $ 23,952
Municipal securities ...................................... 144,802 142,469 119,796 123,654 77,742 78,011
Corporate debt issues ..................................... 27,441 27,438 27,502 27,581 1,476 1,333
Equity securities and mutual funds ........................ 87,042 88,937 140,603 144,060 68,228 71,686
-------- -------- -------- -------- -------- --------
Total investment securities available for sale........... $425,037 $421,523 $329,801 $388,998 $171,050 $174,982
======== ======== ======== ======== ======== ========
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,
------------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Mortgage-backed securities:
FNMA..................................... $ 388,195 $ 355,722 $ 193,814
GNMA..................................... 177,490 58,834 76,412
FHLMC.................................... 179,166 426,753 235,344
Other (non-agency)....................... 42,232 65,726 19,031
----------- ----------- -----------
Total mortgage-backed securities....... $ 787,083 $ 907,035 $ 524,601
=========== =========== ===========
15
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Company's investment securities and
mortgage-backed securities portfolios at June 30, 2004. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
AT JUNE 30, 2004
---------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
---------------------- ----------------------- ----------------------
ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations ...... $ -- --% $ 12,518 3.03% $ 39,982 5.07%
Municipal securities ........................ -- -- -- -- 2,568 3.75
Corporate debt issues ....................... -- -- -- -- -- --
---------- ----- ---------- ---- ---------- ----
Total investment securities held to
maturity ................................ $ -- --% $ 12,518 3.03% $ 42,550 4.99%
Investment securities available for sale:
U.S. Government and agency obligations ...... $ -- --% $ 18,290 3.00% $ 37,490 3.62%
Equity securities and mutual funds .......... -- -- -- -- -- --
Municipal securities ........................ -- -- -- -- 915 4.03
Corporate debt issues ....................... 3,018 4.58 -- -- 15,000 2.22
---------- ----- ---------- ---- ---------- ----
Total investment securities available
for sale ................................ $ 3,018 4.58% $ 18,290 3.00% $ 53,405 3.24%
Mortgage-backed securities held to maturity:
Pass-through certificates ................... $ 197,511 3.16% $ 397 3.08% $ 917 4.47%
CMOs ........................................ 169,667 2.77 -- -- 7,132 2.41
---------- ----- ---------- ---- ---------- ----
Total mortgage-backed securities held
to maturity ............................. $ 367,178 2.98% $ 397 3.08% $ 8,049 2.64%
Mortgage-backed securities available for sale:
Pass through certificates ................... $ 87,237 2.31% $ 2,583 4.10% $ 41,819 4.48%
CMOs ........................................ 92,710 2.75 -- -- 24,205 2.58
---------- ----- ---------- ---- ---------- ----
Total mortgage-backed securities
available for sale ...................... $ 179,947 2.54% $ 2,583 4.10% $ 66,024 3.78%
---------- ----- ---------- ---- ---------- ----
Total investment securities and
mortgage-backed securities .................. $ 550,143 2.84% $ 33,788 3.10% $ 170,028 3.86%
========== ===== ========== ==== ========== ====
MORE THAN TEN YEARS TOTAL
---------------------- ------------------------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
---------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations ...... $ -- --% $ 52,500 $ 52,871 4.58%
Municipal securities ........................ 112,281 4.71 114,849 113,755 4.69
Corporate debt issues ....................... 41,178 8.00 41,178 42,497 8.00
---------- ---- ---------- ---------- ----
Total investment securities held to
maturity ................................ $ 153,459 5.59% $ 208,527 $ 209,123 5.31%
Investment securities available for sale:
U.S. Government and agency obligations ...... $ 109,972 2.76% $ 165,752 $ 162,679 2.98%
Equity securities and mutual funds .......... 87,042 2.98 87,042 88,937 2.98
Municipal securities ........................ 143,887 4.65 144,802 142,469 4.65
Corporate debt issues ....................... 9,423 3.49 27,441 27,438 2.92
---------- ---- ---------- ---------- ----
Total investment securities available
for sale ................................ $ 350,324 3.61% $ 425,037 $ 421,523 3.54%
Mortgage-backed securities held to maturity:
Pass-through certificates ................... $ 3,766 5.10% $ 202,591 $ 201,046 3.20%
CMOs ........................................ 387 5.99 177,186 178,197 2.76
---------- ---- ---------- ---------- ----
Total mortgage-backed securities held
to maturity ............................. $ 4,153 5.19% $ 379,777 $ 379,243 3.00%
Mortgage-backed securities available for sale:
Pass through certificates ................... $ 44,739 5.04% $ 176,378 $ 175,161 3.55%
CMOs ........................................ 117,280 3.70 234,195 232,145 3.21
---------- ---- ---------- ---------- ----
Total mortgage-backed securities
available for sale ...................... $ 162,019 4.07% $ 410,573 $ 407,306 3.35%
---------- ---- ---------- ---------- ----
Total investment securities and
mortgage-backed securities .................. $ 669,955 4.18% $1,423,914 $1,417,195 3.60%
========== ==== ========== ========== ====
16
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities, operations and, if needed,
borrowings from the FHLB. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including checking accounts, savings accounts, money market
deposit accounts, term certificate accounts and individual retirement accounts.
While the Company accepts deposits of $100,000 or more, it does not offer
substantial premium rates for such deposits. Deposit account terms vary
according to the minimum balance required, the period of time during which the
funds must remain on deposit, and the interest rate, among other factors. The
Company regularly executes changes in its deposit rates based upon its internal
cost of funds, cash flow requirements, general market interest rates,
competition and liquidity requirements. The Company does not obtain funds
through brokers, nor does it solicit funds outside its market area.
The following table sets forth the deposit activities of the Company for
the periods indicated.
YEARS ENDED JUNE 30,
---------------------------------------------
2004 2003 2002
------------ ------------ ------------
(IN THOUSANDS)
Balance at beginning of period....................... $ 4,263,556 $ 3,593,122 $ 3,264,940
Net savings activity................................. (196,427) 226,656 88,883
Net checking activity................................ (75,201) 227,648 49,913
Deposits acquired.................................... 609,387 121,754 84,960
------------ ------------ ------------
Net increase before interest credited............. 337,759 576,058 223,756
Interest credited.................................... 84,337 94,376 104,426
------------ ------------ ------------
Net increase in deposits.......................... 422,095 670,434 328,182
------------ ------------ ------------
Balance at end of period........................ $ 4,685,652 $ 4,263,556 $ 3,593,122
============ ============ ============
The following table sets forth the dollar amount of deposits in the
various types of savings accounts offered by the Company between the dates
indicated.
AT JUNE 30,
-------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- -------------------------------- ------------------------------
PERCENT PERCENT PERCENT
BALANCE (1) RATE (2) BALANCE (1) RATE (2) BALANCE (1) RATE (2)
---------- ------- -------- ------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Savings accounts............... $1,024,244 21.9% 1.38% $ 920,721 21.60% 1.67% $ 698,336 19.44% 2.62%
Checking accounts.............. 862,724 18.4 0.49 861,922 20.21 0.86 605,582 16.85 0.86
Money market accounts.......... 751,355 16.0 1.60 568,164 13.33 2.06 407,974 11.35 2.71
Certificates of deposit:
Maturing within 1 year...... 977,019 20.9 2.61 845,985 19.84 2.93 1,046,783 29.14 3.80
Maturing 1 to 3 years....... 812,784 17.3 3.69 719,909 16.88 4.01 542,222 15.09 4.39
Maturing more than 3 years.. 257,526 5.5 4.19 346,855 8.14 4.55 292,225 8.13 5.02
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total certificates.......... 2,047,329 43.7 3.24 1,912,749 44.86 3.63 1,881,230 52.36 4.16
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total deposits................. $4,685,652 100.00% 2.05% $4,263,556 100.00% 2.44% $3,593,122 100.00% 3.14%
========== ====== ==== ========== ====== ==== ========== ====== ====
- -------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
17
TIME DEPOSIT RATES. The following table sets forth the time deposits in
the Company classified by rates as of the dates indicated:
AT JUNE 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
RATE (IN THOUSANDS)
Less than 2.00%.................... $ 604,565 $ 317,502 $ 24,433
2.00 - 2.99%....................... 365,811 354,304 431,963
3.00 - 3.99%....................... 406,926 421,431 410,835
4.00 - 4.99%....................... 436,243 559,407 579,715
5.00 - 5.99%....................... 171,507 211,408 233,925
6.00 - 6.99%....................... 40,005 32,140 171,642
7.00 - 7.99%....................... 22,203 16,487 28,653
8.00% or greater................... 69 70 64
------------ ------------ ------------
Total........................... $ 2,047,329 $ 1,912,749 $ 1,881,230
============ ============ ============
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 2004.
AMOUNT DUE
--------------------------------------------------------------------
LESS THAN AFTER 3
RATE ONE YEAR 1-2 YEARS 2-3 YEARS YEARS TOTAL
---- ---------- ---------- --------- ---------- ----------
(IN THOUSANDS)
Less than 2.00%........................... $ 494,781 $ 104,894 $ 4,676 $ 214 $ 604,565
2.00 - 2.99%.............................. 149,663 122,177 82,705 11,266 365,811
3.00 - 3.99%.............................. 164,804 59,502 67,662 114,958 406,926
4.00 - 4.99%.............................. 87,587 145,165 102,767 100,724 436,243
5.00 - 5.99%.............................. 39,214 50,894 58,939 22,460 171,507
6.00 - 6.99%.............................. 19,898 9,120 3,147 7,840 40,005
7.00 - 7.99%.............................. 21,003 1,063 73 64 22,203
8.00% or greater.......................... 69 -- -- -- 69
---------- ---------- ---------- ---------- ----------
Total.................................. $ 977,019 $ 492,815 $ 319,969 $ 257,526 $2,047,329
========== ========== ========== ========== ==========
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, 2004.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
- --------------- --------------
(IN THOUSANDS)
Three months or less........................ $ 45,205
Three through six months.................... 38,012
Six through twelve months................... 55,097
Over twelve months.......................... 185,597
-----------
Total..................................... $ 323,911
===========
BORROWINGS
Deposits are the primary source of funds for the Company's lending and
investment activities and for its general business purposes. The Company also
relies upon borrowings from the FHLB to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Borrowings from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans.
The FHLB functions as a central reserve bank providing credit for the Bank
and other member financial institutions. As a member, the Bank is required to
own capital stock in the FHLB and is authorized to apply for borrowings on the
security of such stock and certain of its first mortgage loans and other assets
(principally, securities that are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been met.
Borrowings are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of borrowings are based either on a fixed percentage
of a member institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. All of the Company's current FHLB borrowings
have fixed interest rates and original maturities of between one day and twelve
years.
18
DURING THE YEAR ENDED JUNE 30,
----------------------------------------
2004 2003 2002
-------- -------- --------
(DOLLARS IN THOUSANDS)
FHLB-Pittsburgh borrowings:
Average balance outstanding $428,591 $412,817 $237,907
Maximum outstanding at end of any month during
period 519,631 471,416 243,547
Balance outstanding at end of period 412,981 430,014 235,500
Weighted average interest rate during period 4.62% 4.78% 5.47%
Weighted average interest rate at end of period 4.65% 4.89% 5.35%
Reverse repurchase agreements:
Average balance outstanding $ 29,364 $ 20,791 $ 12,798
Maximum outstanding at end of any month during
period 32,097 29,226 19,568
Balance outstanding at end of period 29,902 29,226 17,166
Weighted average interest rate during period 1.27% 1.80% 2.82%
Weighted average interest rate at end of period 1.29% 1.27% 1.98%
Other borrowings:
Average balance outstanding $ 6,253 $ 6,603 $ 6,571
Maximum outstanding at end of any month during 6,322 6,696 6,647
period
Balance outstanding at end of period 6,264 6,510 6,594
Weighted average interest rate during period 5.10% 6.50% 6.63%
Weighted average interest rate at end of period 4.99% 5.12% 6.63%
Total borrowings:
Average balance outstanding $464,208 $440,211 $257,276
Maximum outstanding at end of any month during 554,257 496,026 269,603
period
Balance outstanding at end of period 449,147 465,750 259,260
Weighted average interest rate during period 4.41% 4.66% 5.37%
Weighted average interest rate at end of period 4.43% 4.66% 5.16%
COMPETITION
The Company's market area in Pennsylvania, western New York and eastern
Ohio has a large concentration of financial institutions. 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 competes for deposits by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
SUBSIDIARY ACTIVITIES
The Company has four subsidiaries: the Bank and Jamestown as well as
Northwest Capital Trust I and Northwest Bancorp Statutory Trust I. The Bank has
six wholly owned subsidiaries, Great Northwest Corporation, Northwest Financial
Services, Inc., Northwest Consumer Discount Company, Inc., Allegheny Services,
Inc., Boetger and Associates, 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, except for the
two Delaware statutory trusts which have been deconsolidated according to
Fin-46R.
19
Northwest Capital Trust I is a wholly owned Delaware statutory business
trust. The sole activity of this Trust was the issuance of 2,760,000 of 8.75%
Cumulative Trust Preferred Securities through a public offering on November 30,
2001 (liquidation value of $25 per preferred security or $69,000,000) with a
stated maturity date of December 31, 2031. At June 30, 2004, the Company had an
equity investment in Northwest Capital Trust I of $2.1 million. For the fiscal
year ended June 30, 2004 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, 2004,
the Company had an equity investment in Northwest Bancorp Statutory Trust I of
$928,000, and for the fiscal year ended June 30, 2004, 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, 2004, the Bank had an equity investment in
Great Northwest of $4.7 million. For the fiscal year ended June 30, 2004, Great
Northwest had net income of $501,000 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 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, 2004, the Bank had an equity investment in Northwest Financial Services of
$6.8 million, and for the fiscal year ended June 30, 2004, Northwest Financial
Services had net income of $108,000.
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, 2004, the Bank had an equity investment in Northwest
Consumer Discount Company of $18.9 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2004 was $1.9
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.
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, 2004 the Bank had an equity investment in
Allegheny Services, Inc. of $499.0 million, and for the fiscal year ended June
30, 2004, Allegheny Services, Inc. had net income of $15.3 million.
Boetger and Associates, Inc. is an actuarial services firm that was
acquired on July 1, 2002. At June 30, 2004 the Bank had an equity investment of
$1.1 million in Boetger and Associates and for the fiscal year ended June 30,
2004 Boetger and Associates had net income of $21,000.
Northwest Capital Group's principal activity is to own, operate and
ultimately divest of properties that were acquired in foreclosure. At June 30,
2004 the Bank had an equity investment of $383,000 in Northwest Capital Group
and for the fiscal year ended June 30, 2004 Northwest Capital Group reported net
income of $357,000.
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, 2004 Northwest Financial Services had an equity investment of
$1.1 million in Rid-Fed, Inc. and for the fiscal year ended June 30, 2004
Rid-Fed, Inc. reported no net income.
20
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, 2004,
Northwest Consumer Discount Company's equity investment in Northwest Finance
Company was $(104,000). For the year ended June 30, 2004, Northwest Finance
Company had net income of $8,000.
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, 2004, the Company and its wholly owned subsidiaries had
1,453 full-time and 318 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.
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
21
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 0.27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. In addition, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are paid jointly by Bank
Insurance Fund ("BIF") insured institutions and SAIF-insured institutions. The
FICO interest payments are paid pro rata by banks and thrifts based on
approximately 2.1 basis point of deposits.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
During each of the fiscal years from 1999 through 2004, the Company
recaptured into taxable income approximately $1.3 million of the post-1987 bad
debt reserves.
CAPITAL REQUIREMENTS
22
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.
However, in special circumstances this limit may be exceeded subject to the
approval of 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, 2004, 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.
23
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 that provide for minimum standards with respect to
customer identification at the time new accounts are opened. On July
23, 2002, the federal bank regulators jointly issued proposed rules
to implement Section 326. The proposed rules require financial
institutions to establish a program specifying procedures for
obtaining identifying information from customers seeking to open new
accounts. This identifying information would be essentially the same
information currently obtained by most financial institutions for
individual customers.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts
or correspondence accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish appropriate,
specific, and, where necessary, enhanced due diligence policies,
procedures, and controls designed to detect and report money
laundering.
- Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be subject
to certain record keeping obligations with respect to correspondent
accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
HOLDING COMPANY REGULATION
Generally. Federal law allows a state savings bank, such as the Bank, that
qualifies as a "Qualified Thrift Lender," discussed below, to elect to be
treated as a savings association for purposes of the savings and loan company
provisions of the HOLA. Such election results in its holding company being
regulated as a savings and loan holding company by the OTS rather than as a bank
holding company by the Federal Reserve Board. The Company and the Mutual Holding
Company have made such election by converting from a Pennsylvania corporation
and a Pennsylvania mutual holding company to a Federal corporation and Federal
mutual holding company, respectively, effective June 30, 2001. The Company and
the Mutual Holding Company are savings and loan holding companies within the
meaning of the HOLA. As such, the Company and the Mutual Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and the Mutual Holding Company and any nonsavings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. As federal
24
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, 2004 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
25
waiver notices on a case-by-case basis. From the time the Mutual Holding Company
converted to a federal charter it waived all dividends paid by the Company until
May, 2004. The Mutual Holding Company anticipates that it will apply to waive
dividends in March, 2005.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to convert 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
The Sarbanes-Oxley Act of 2002 (the "Act") provides for corporate
governance, disclosure and accounting reforms intended to address corporate and
accounting fraud. The Act establishes a new accounting oversight board that will
enforce auditing, quality control and independence standards, and will be funded
by fees from all publicly traded companies. The Act also places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, the Act makes certain changes to the requirements for
audit partner rotation after a period of time. The Act also requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the Securities and Exchange
Commission, subject to civil and criminal penalties if they knowingly or
willingly violate this certification requirement. In addition, under the Act,
counsel will be required to report to the chief executive officer or chief legal
officer of the company, evidence of a material violation of the securities laws
or a breach of fiduciary duty by a company and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restating a company's financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory
26
fees from the public company. In addition, companies must disclose whether at
least one member of the committee is a "financial expert" (as such term will be
defined by the Securities and Exchange Commission) and if not, why not. Under
the Act, a company's registered public accounting firm will be prohibited from
performing statutorily mandated audit services for a company if such company's
chief executive officer, chief financial officer, controller, chief accounting
officer or any person serving in equivalent positions had been employed by such
firm and participated in the audit of such company during the one-year period
preceding the audit initiation date. The Act prohibits any officer or director
of a company or any other person acting under their direction from taking any
action to fraudulently influence, coerce, manipulate or mislead any independent
accountant engaged in the audit of the company's financial statements for the
purpose of rendering the financial statements materially misleading. The Act
also requires the Securities and Exchange Commission to prescribe rules
requiring inclusion of any internal control report and assessment by management
in the annual report to shareholders. The Act requires the company's registered
public accounting firm that issues the audit report to attest to and report on
management's assessment of the company's internal controls.
Although we will incur additional expense in complying with the provisions
of the Sarbanes-Oxley Act and the resulting regulations, management does not
expect that such compliance will have a material impact on our results of
operations or financial condition.
REGULATORY ENFORCEMENT AUTHORITY
Federal law provides federal banking regulators with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
DIVIDENDS
The Company's ability to pay dividends depends, to a large extent, upon
the Bank's ability to pay dividends to the Company. The Banking Code of the
Commonwealth of Pennsylvania states, in part, that dividends may be declared and
paid by the Bank only out of accumulated net earnings and may not be declared or
paid unless surplus (retained earnings) is at least equal to capital. The Bank
has not declared or paid any dividends which caused the Bank's retained earnings
to be reduced below the amount required. Finally, dividends may not be declared
or paid if the Bank is in default in payment of any assessment due to the FDIC.
At June 30, 2004, the Bank's retained earnings exceeded required capital by
$120.5 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.
The Company accounts 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.
27
The statute of limitations is open for potential examinations by the
Internal Revenue Service for the tax years ended June 30, 2001 through June 30,
2004.
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, 2004, the Company conducted its business through its main
office located in Warren, Pennsylvania, 132 other full-service offices
throughout its market area in northwest, southwest and central Pennsylvania, 10
offices in southwestern New York, and five 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, 2004, the Company's premises and equipment had an aggregate net book
value of approximately $79.8 million.
28
Listed below is the location of each of the Company's community banking
offices.
PENNSYLVANIA
Austin, Potter Co.
-- 21 Turner Street
Bellefonte, Centre Co.
-- 117 North Allegheny Street
Bellevue, Allegheny Co.
-- 532 Lincoln Avenue
Bethel Park, Allegheny Co.
-- 6284 Library Road
Bennetts Valley, Elk Co.
-- 499 River Road
Bradford (4), McKean Co.
-- Bradford Mall - 1001 E. Main Street
-- 33 Main Street
-- 85 West Washington Street
-- 950 E. Main Street
Bridgeville, Allegheny Co.
-- 431 Washington Avenue
Butler, Butler Co.
-- 151 Pittsburgh Road
Canonsburg, Washington Co.
-- 148 West Pike Street
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue
Clarion (2), Clarion Co.
-- 601 Main Street
-- 97 West Main Street
Clearfield, Clearfield Co.
-- 1200 South Second Street
Columbia, Lancaster Co.
-- 350 Locust Street
Coudersport, Potter Co.
-- 302 N. East Street
Corry, Erie Co.
-- 150 North Center Street
Cranberry, Venango Co.
-- Cranberry Mall
Ebensburg, Cambria Co.
-- 176 Lovell Avenue
Edinboro, Erie Co.
-- Walmart, 108 Washington Towne Blvd
Elizabeth, Allegheny Co.
-- 603 Scenery Drive
Elizabethtown, Lancaster Co.
-- 2296 South Market Street
Emporium, Cameron Co.
-- 2 East Fourth Street
Erie (11), Erie Co.
-- 2256 West 8th Street
-- K-Mart Plaza West
2863 West 26th Street
-- K-Mart Plaza East
4423 Buffalo Road
-- Millcreek Mall
-- 3407 Liberty 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
Fairview, Erie Co.
-- 7512 West Ridge Road
Franklin, Venango Co.
-- 1301 Liberty Street
Fredericktown, Washington Co.
-- 520 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
29
Hanover (2), York Co.
-- 1 Center Square
-- 1055 Baltimore Street
Harborcreek, Erie Co.
-- 4270 East Lake Road
Hershey (2), Dauphin Co.
-- 10 West Chocolate Avenue
-- 370 West Governor Road
Johnsonburg (2), Elk Co.
-- 553 Market Street
-- Johnsonburg Plaza, Route 219
Johnstown(2), Cambria Co.
-- 225 Franklin Street
-- 475 Theatre Drive
Kane (2), McKean Co.
-- 56 Fraley Street
-- 355 Biddle Street
Kittanning, Armstrong Co.
-- 22 Franklin Village Mall
Lake City, Erie Co.
-- 2102 Rice Avenue
Lancaster(2), Lancaster County
-- 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.
-- 999 South Main Street
-- 73 Park Avenue
-- 730 North Main Street
Mount Joy, Lancaster Co.
-- 24 East Main Street
Mt. Lebanon, Allegheny Co.
-- 300 Cochran Road
Myerstown, Lebanon Co.
-- 1 West Main Avenue
New Bethlehem, Clarion Co.
-- 301 Broad Street
New Holland, Lancaster Co.
-- 201 West Main Street
North East, Erie Co.
-- 35 East Main Street
Oil City (3), Venango Co.
-- One East First Street
-- 301 Seneca Street
-- 259 Seneca Street
Palmyra, Lebanon Co.
-- 1048 East Main Street
Pittsburgh (5), Allegheny Co.
-- 543 Brownsville Road
-- 710 Old Clairton Road
-- 300 6th Avenue
-- 201 North Craig Street
-- 7709 McKnight Road
Pleasantville, Venango Co.
-- 102 East State Street
Pottsville, Schuylkill Co.
-- 104 North Centre Street
30
Red Lion, York Co.
-- 3140 Cape Hern Road
Ridgway (2), Elk Co.
-- 170 Main Street
-- 125 Main Street
Rimersburg, Clarion Co.
-- 629 Main Street
Sarver, Butler Co.
-- Monroe Road and Route 356
Schaefferstown, Lebanon Co.
-- Dutch-Way Shopping Mall
Route 501 North
Sewickley, Allegheny Co.
-- 414 Beaver Street
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.
-- 100 Fairgrounds Road
Springboro, Crawford Co.
-- 105 South Main Street
St. Marys (2), Elk Co.
-- 39 South St. Marys Street
-- St. Mary's Plaza
824 Million Dollar Highway
State College (3), Centre Co.
-- 201 West Beaver Avenue
-- 611 University Drive
-- 1524 West College Avenue
Sykesville, Jefferson Co.
-- Main and Park Street
Tidioute, Warren Co.
-- 5 Buckingham Street
Tionesta, Forest Co.
-- 221 Elm Street
Titusville (2), Crawford Co.
-- Spring & Franklin Street
-- 319 West Central Avenue
Union City (2), Erie Co.
-- 22 North Main Street
-- 4 Perry Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Volant, Lawrence Co.
-- Main Street
Wampum, Lawrence Co.
-- 342 Main Street
Warren (3), Warren Co.
-- 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
Wellsboro (2), Tioga Co.
-- 61 Main Street
-- 16 Main Street
Westfield, Tioga Co.
-- 100 East Main Street
Westmont, Cambria Co.
-- 1740 Lyter Drive
Wexford, Allegheny Co.
-- 10533 Perry Highway
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
31
NEW YORK
Amherst, Erie Co.
-- 3150 Sheridan Drive
Buffalo, Erie Co.
-- 295 Main Street
Jamestown (3) Chautauqua Co.
-- 23 West Third Street
-- 768 Foote Avenue
-- 7 West Third Street
Kenmore, Erie Co.
-- 2981 Delaware Avenue
Lakewood, Chautauqua Co.
-- 311 East Fairmount Avenue
Mayville, Chautauqua Co.
-- 29 S. Erie Street
Olean, Cattaraugus Co.
-- 2513 West State Street
Williamsville, Erie Co.
-- 4545 Transit Road
OHIO
Ashtabula, Ashtabula Co.
-- 1040 Lake Avenue
Chardon, Geauga Co.
-- 325 Center Street
Geneva, Ashtabula Co.
-- 30 East Main Street
Madison, Lake Co.
-- 1903 Hubbard Road
Painesville, Lake Co.
-- 70 Richmond Street
32
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions
arising in the normal course of business. In the opinion of management, the
resolution of these legal actions is not expected to have a material adverse
effect on the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of the fiscal year covered by this report, the
Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is listed on the Nasdaq National Market under
the symbol "NWSB." As of June 30, 2004, the Company had 25 registered market
makers, 7,334 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
47,960,287 shares outstanding. As of such date, the Mutual Holding Company held
28,110,698 shares of common stock and stockholders other than the Mutual Holding
Company held 19,849,589 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.
CASH
FISCAL YEAR ENDED DIVIDENDS
JUNE 30, 2004 HIGH LOW DECLARED
- ----------------------- ----------- ----------- -----------
First quarter $ 18.57 $ 15.75 $ 0.10
Second quarter 22.24 18.14 0.10
Third quarter 26.67 20.16 0.10
Fourth quarter 25.75 19.85 0.10
CASH
FISCAL YEAR ENDED DIVIDENDS
JUNE 30, 2003 HIGH LOW DECLARED
- ----------------------- ----------- ----------- -----------
First quarter $ 14.41 $ 9.98 $ 0.08
Second quarter 15.80 12.17 0.08
Third quarter 16.51 13.55 0.08
Fourth quarter 16.99 15.15 0.08
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.
There were no sales of unregistered securities during the past three
years.
There were no issuer repurchases of securities during the past three
years.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Company. For additional information about the Company, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
33
AT JUNE 30,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: (IN THOUSANDS)
Total assets..................................... $ 5,778,623 $ 5,222,367 $ 4,305,535 $ 3,852,831 $ 3,407,292
Investment securities held-to-maturity........... 208,527 128,419 132,643 129,991 97,590
Investment securities available-for-sale......... 421,523 338,998 174,982 96,645 107,972
Mortgage-backed securities held-to-maturity...... 379,777 349,402 263,860 209,340 140,166
Mortgage-backed securities available-for-sale.... 407,306 557,633 260,741 294,934 280,011
Loans receivable net:
Real estate................................... 2,744,230 2,428,601 2,309,752 2,200,115 1,990,622
Consumer...................................... 898,598 690,596 608,370 568,661 504,966
Commercial.................................... 145,742 127,574 94,484 87,805 49,042
Total loans receivable, net................. 3,788,570 3,246,771 3,012,606 2,856,581 2,544,630
Deposits......................................... 4,685,652 4,263,556 3,593,122 3,264,940 2,886,509
Advances from FHLB and other borrowed funds...... 449,147 465,750 259,260 276,212 239,941
Shareholders' equity............................. 499,979 356,932 316,640 275,713 247,888
YEARS ENDED JUNE 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
SELECTED CONSOLIDATED OPERATING DATA: (IN THOUSANDS)
Total interest income ..................................... $ 284,459 $ 275,619 $ 274,500 $ 269,430 $ 239,724
Total interest expense .................................... 124,925 137,638 147,255 157,322 132,099
---------- ---------- ---------- ---------- ----------
Net interest income .................................... 159,534 137,981 127,245 112,108 107,625
Provision for loan losses ................................. 6,842 8,431 6,360 5,347 4,149
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses .... 152,692 129,550 120,885 106,761 103,476
---------- ---------- ---------- ---------- ----------
Noninterest income ........................................ 31,940 26,735 18,173 15,054 11,271
Noninterest expense ....................................... 114,001 98,007 84,524 82,339 73,634
Income before income tax expense and cumulative effect
of accounting change ................................... 70,631 58,278 54,534 39,476 41,113
Income tax expense ........................................ 20,103 16,587 16,600 12,699 13,910
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of accounting change ...... 50,528 41,691 37,934 26,777 27,203
Cumulative effect of accounting change .................... -- -- 2,237 -- --
---------- ---------- ---------- ---------- ----------
Net income ........................................... $ 50,528 $ 41,691 $ 40,171 $ 26,777 $ 27,203
========== ========== ========== ========== ==========
Basic per share amounts:
Income before cumulative effect of accounting change ... $ 1.05 $ 0.88 $ 0.80 0.57 0.58
Cumulative effect of accounting change ................. -- -- 0.05 -- --
---------- ---------- ---------- ---------- ----------
Net income ............................................. $ 1.05 $ 0.88 $ 0.85 $ 0.57 $ 0.58
========== ========== ========== ========== ==========
Diluted per share amounts:
Income before cumulative effect of accounting change ... $ 1.04 $ 0.87 $ 0.79 $ 0.56 $ 0.57
Cumulative effect of accounting change ................. -- -- 0.05 -- --
---------- ---------- ---------- ---------- ----------
Net income ............................................. $ 1.04 $ 0.87 $ 0.84 $ 0.56 $ 0.57
========== ========== ========== ========== ==========
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------------
2004 2003 2002 2001 2000
----- ----- ------ ------ ------
KEY FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (net income divided
by average total assets) .................................. 0.88% 0.85% 0.99% 0.75% 0.83%
Return on average equity (net income divided by
average equity) ........................................... 10.66 12.36 13.61 10.25 11.39
Average capital to average assets ............................ 8.24 6.89 7.24 7.27 7.29
Capital to total assets ...................................... 8.65 6.84 7.35 7.16 7.28
Net interest rate spread (average yield on interest-earning
assets less average cost of interest-bearing liabilities).. 2.96 2.97 3.11 2.97 3.26
Net interest margin (net interest income as a
percentage of average interest-earning assets) ............ 3.11 3.14 3.42 3.35
3.54
Noninterest expense to average assets ........................ 1.98 2.00 2.07 2.29 2.25
Net interest income to noninterest expense ................... 1.40x 1.41x 1.51x 1.36x 1.46x
Dividend payout ratio ........................................ 38.46 36.78 28.57 28.57 28.07
Nonperforming loans to net loans receivable .................. 0.84 1.00 0.52 0.62 0.40
Nonperforming assets to total assets ......................... 0.62 0.69 0.49 0.55 0.36
Allowance for loan losses to nonperforming loans ............. 92.60 81.54 139.51 115.06 177.97
Allowance for loan losses to net loans receivable ............ 0.78 0.82 0.73 0.71 0.72
Average interest-earning assets to average
interest-bearing liabilities .............................. 1.07x 1.06x 1.08x 1.08x 1.07x
Number of:
Full-service offices ...................................... 147 137 126 118 106
Consumer finance offices .................................. 49 47 49 45 43
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains
forward-looking statements. The forward-looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward-looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including quarterly reports on Form
10-Q and current reports filed on Form 8-K.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policy involves accounting estimates
that: a) require assumptions about highly uncertain matters, and b) could vary
sufficiently to cause a material effect on the Company's financial condition or
results of operations.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Company recognizes
that losses will be experienced on loans and that the risk of loss will vary
with, among other things, the type of loan, the creditworthiness of the
borrower, general economic conditions and, the quality of the security for the
loan. The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management in its determination of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes a review
of historical losses, peer group comparisons, industry data and economic
conditions. As an integral part of their examination process, regulatory
agencies periodically review the Company's allowance for loan losses and may
require the Company to make additional provisions for estimated losses based
upon judgments different from those of management. In establishing the allowance
for loan losses, loss factors are applied to various pools of outstanding loans.
Loss factors are derived using the Company's historical loss experience and may
be adjusted for factors that affect the collectibility of the portfolio as of
the evaluation date. Commercial loans over a certain dollar amount are evaluated
individually to determine the required allowance for loan losses and to evaluate
for potential impairment of such loans under SFAS 114. Although management
believes that it uses the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and results of operations could be adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect the Company's
financial condition and results of operations. The allowance review methodology
is based on information known at the time of the review. Changes in factors
underlying the assessment could have a material impact on the amount of the
allowance that is necessary and the amount of provision to be charged against
earnings. Such changes could impact future results.
FINANCIAL CONDITION
GENERAL. Total assets increased by $556.3 million, or 10.7%, to $5.779
billion at June 30, 2004 from $5.222 billion at June 30, 2003. This increase was
funded primarily by a $422.1 million increase in deposits and net income of
$50.5 million. Total assets increased by $916.8 million, or 21.3%, to $5.222
billion at June 30, 2003 from $4.306 billion at June 30, 2002. This increase was
funded primarily by a $670.4 million increase in deposits, a $206.5 million
increase in borrowed funds and net income of $41.7 million.
35
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS.
Interest-earning deposits in other financial institutions decreased by $121.4
million to $123.0 million at June 30, 2004 from $244.4 million at June 30, 2003.
This decrease was due to the Company investing funds in loans and securities as
part of its asset and liability management strategy. Interest-earning deposits
in other financial institutions increased by $91.3 million to $244.4 million at
June 30, 2003 from $153.1 million at June 30, 2002. The balances in these
accounts fluctuate daily based on the net cash flow from the Company's
activities.
INVESTMENT SECURITIES. Investment securities increased by $162.7 million,
or 34.8%, to $630.1 million at June 30, 2004 from $467.4 million at June 30,
2003. This increase resulted from the Company investing excess funds in
investments which provide higher yields in an effort to increase interest
income while staying within its established risk profile. Investment securities
increased by $159.8 million, or 51.9%, to $467.4 million at June 30, 2003 from
$307.6 million at June 30, 2002. This increase resulted from the Company
deploying deposits received into variable rate securities in anticipation of
rising interest rates.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by $119.9
million, or 13.2%, to $787.1 million at June 30, 2004 from $907.0 million at
June 30, 2003. This decrease resulted from repayments and prepayments on
mortgage-backed securities, the proceeds of which were used to purchase other
variable rate investment securities. Mortgage-backed securities increased by
$382.4 million, or 72.9%, to $907.0 million at June 30, 2003 from $524.6 million
at June 30, 2002. This increase resulted from the Company purchasing variable
rate mortgage-backed securities to position itself for rising interest rates.
LOANS RECEIVABLE. Net loans receivable increased by $541.8 million, or
16.7%, to $3.789 billion at June 30, 2004 from $3.247 billion at June 30, 2003.
The increase is primarily a result of the acquisition of Bell Federal Savings
and Loan Association, which had net loans of $224.5 million, and loans
originated as a result of the Company's introduction of a new, variable rate
home equity product. Net loans receivable increased by $234.2 million, or 7.8%,
to $3.247 billion at June 30, 2003 from $3.013 billion at June 30, 2002. This
increase, which was low by historic standards, was controlled by the Company in
an effort to control its exposure to rising interest rates. Contributing to this
increase was the acquisition of Prestige Bank, a federal savings bank, which had
net loans of $130.6 million.
BANK-OWNED LIFE INSURANCE. In June 2002 the Company purchased $50.0
million, and during September 2002 the Company purchased an additional $10.0
million, of insurance policies on the lives of a 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 Company acquired an additional
$22.8 million of such policies with the acquisition of Bell Federal. The cash
surrender value of these policies is included in the consolidated statements of
financial condition as other assets and any increase in the cash surrender value
is recorded as other noninterest income on the consolidated statements of
income. The appreciation in cash surrender value is not taxable for federal
taxes and reduced the Company's effective tax rate by approximately 2.0%. As of
June 30, 2004, the Company had $90.2 million of bank-owned life insurance,
including $7.4 million of appreciation in value.
DEPOSITS. Deposits increased by $422.1 million, or 9.9%, to $4.686 billion
at June 30, 2004 from $4.264 billion at June 30, 2003. This increase was
primarily due to the acquisition of Bell Federal, which had deposits of $609.4
million, offset by some deposit runoff of the Bell Federal deposits and the loss
of rate-sensitive municipal deposits. Deposits increased by $670.4 million, or
18.7%, to $4.264 billion at June 30, 2003 from $3.593 billion at June 30, 2002.
This increase was primarily due to strong internal growth throughout the
Company's market area and the acquisition of Prestige Bank, which had deposits
of $122.3 million.
BORROWINGS. Borrowings decreased by $16.7 million, or 3.6%, to $449.1
million at June 30, 2004 from $465.8 million at June 30, 2003. This decrease
resulted from scheduled maturities and scheduled amortization of Federal Home
Loan Bank of Pittsburgh ("FHLB") advances. During the 2004 fiscal year, the
Company acquired $186.7 million of Borrowings from the acquisition of Bell
Federal and simultaneously prepaid all of the amount acquired. This prepayment
transaction was completed in an effort to reduce the Company's exposure to
rising interest rates. Borrowings increased by $206.5 million, or 79.7%, to
$465.8 million at June 30, 2003 from $259.3 million at June 30, 2002. This
increase resulted from the Company's interest-rate risk management strategy of
borrowing long-term fixed-rate funds from the FHLB and purchasing floating rate
investment securities.
SHAREHOLDERS' EQUITY. Shareholders' equity increased by $143.1, or 40.1%,
to $500.0 million at June 30, 2004 from $356.9 million at June 30, 2003. This
increase is primarily attributable to the Company's incremental stock
36
offering, where the Company sold 7,255,520 shares of common stock to the public
and cancelled an equal number of shares owned by Northwest Bancorp, MHC. The
offering raised $112.8 million in net proceeds. Also increasing retained
earnings was net income of $50.5 million, offset by dividends paid of $10.0
million. Shareholders' equity increased by $40.3 million, or 12.7%, to $356.9
million at June 30, 2003 from $316.6 million at June 30, 2002. This increase was
primarily due to net income of $41.7 million, which was partially offset by the
payment of common stock dividends in the amount of $3.9 million. The majority of
the remaining net increase was the result of the Company recording a net
unrealized gain in the value of securities available for sale of $1.6 million.
RESULTS OF OPERATIONS
GENERAL. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans,
mortgage-backed securities and other investment securities, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits, borrowed
funds, and trust-preferred securities. Net interest income is a function of the
Company's interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. Also
contributing to the Company's earnings is noninterest income which consists
primarily of service charges, fees related to insurance and investment
management and trust services, and gains and losses on sale of assets. Interest
income and noninterest income are offset by a provision for loan losses, general
administrative and other expenses, including employee compensation and benefits,
occupancy and equipment costs, as well as by state and federal income tax
expense.
Net income for the fiscal year ended June 30, 2004 was $50.5 million, or
$1.04 per diluted share, an increase of $8.8 million, or 21.2%, from $41.7
million for the prior fiscal year. This increase in net income is primarily the
result of the Company's continued growth, including the acquisition of Bell
Federal. Net income for the fiscal year ended June 30, 2003 was $41.7 million,
or $0.87 per diluted share, an increase of $1.5 million, or 3.8%, from $40.2
million, or $0.84 per diluted share, for the fiscal year ended June 30, 2002.
This increase in net income resulted from increases in net interest income and
noninterest income, partially offset by increases in the provision for loan
losses and noninterest expense.
INTEREST INCOME. Interest income increased by $10.7 million, or 3.8%, on a
taxable equivalent basis, to $292.2 million for the fiscal year ended June 30,
2004 from $281.5 million for the fiscal year ended June 30, 2003. The increase
was primarily due to an increase in average interest-earning assets of $793.4
million. This increase was partially offset by a decrease in average rate earned
on interest-earning assets of 0.71% from 6.15% to 5.44%. The increase in
interest-earning assets was due to the continued growth of the Northwest
franchise along with the acquisition of Bell Federal. The decrease in rate
earned was due to the low level of market interest rates. Interest income
increased by $2.4 million, or 0.9%, on a taxable equivalent basis, to $281.5
million for the fiscal year ended June 30, 2003 from $279.1 million for the
fiscal year ended June 30, 2002. This insignificant increase resulted from an
increase in average interest-earning assets of $719.5 million being
substantially offset by a decrease of 1.08% in the average rate earned on
interest earning assets to 6.15% from 7.23%.
Interest income on loans receivable increased by $3.7 million, or 1.6%, on
a taxable equivalent basis, to $232.5 million for the year ended June 30, 2004
from $228.8 million for the year ended June 30, 2003. This increase resulted
from continued portfolio growth, including through acquisition, the effects of
which were offset by a decrease in the portfolio yield. Average loans
outstanding increased by $452.7 million, or 14.3%, to $3.622 billion from $3.169
billion, while the average taxable equivalent yield on these loans decreased
0.80% to 6.42% from 7.22%. Interest income on loans receivable decreased by
$867,000, or less than 1%, on a taxable equivalent basis, to $228.8 million for
the year ended June 30, 2003 from $229.6 million for the year ended June 30,
2002. This decrease resulted primarily because average loans outstanding
increased by $233.6 million, or 8.0%, to $3.169 billion from $2.936 billion,
which was effectively offset by a decrease in the average yield on loans to
7.22% from 7.82%. Average loans outstanding increased over the past two years
because of strong loan demand throughout the Company's market area as well as
through acquisitions. The decrease in average yield resulted primarily from the
repricing of variable rate loans and the refinancing of fixed rate loans in a
historically low interest rate environment along with the growth in the
Company's loan portfolio over the past two years at interest rate levels lower
than the existing average portfolio rate.
37
Interest income on mortgage-backed securities decreased by $2.0 million,
or 7.5%, to $24.3 million for the year ended June 30, 2004 from $26.3 million
for the year ended June 30, 2003. Interest income on mortgage-backed securities
decreased due to the average rate decreasing by 76 basis points from 3.63% to
2.87%, which offset an increase in the average balance of $121.8 million, to
$846.4 million from $724.6 million. Interest income on mortgage-backed
securities decreased by $230,000, or less than 1%, to $26.3 million for the year
ended June 30, 2003 from $26.5 million for the year ended June 30, 2002. The
decrease resulted because the average rate decreased significantly by 1.55% from
5.18% to 3.63% while the average balance increased significantly by $212.6
million from $512.0 million to $724.6 million. The significant increase in
average balance resulted from the Company's efforts to increase its portfolio
investment in variable rate mortgage-backed securities in an effort to maintain
its net interest margin in the event that interest rates rise. The decrease in
average rate is a result of the emphasis on holding more variable rate
securities which typically offer lower yields than fixed rate securities.
Interest income on investment securities increased by $11.3 million, or
52.1%, on a taxable equivalent basis, to $33.0 million for the year ended June
30, 2004 from $21.7 million for the year ended June 30, 2003. This increase was
due to the average balance increasing by $313.8 million from $344.5 million to
$658.3 million. This increase offset the average rate decreasing 1.29% from
6.30% to 5.01%. Interest income on investment securities increased by $3.4
million, or 18.5%, on a taxable equivalent basis, to $21.7 million for the year
ended June 30, 2003 from $18.3 million for the year ended June 30, 2002. This
increase resulted primarily because the average balance of investment securities
increased by $73.9 million, or 27.3%, to $344.5 million from $270.6 million,
which was partially offset by a decrease in the taxable equivalent yield to
6.30% from 6.76%. The increase in the average balance of investment securities
over the past two years was primarily due to the Company investing a greater
percentage of its interest-earning assets in short term and variable rate
investments in preparation for a potential rise in interest rates. The decrease
in the taxable equivalent yield was primarily a result of the continued decrease
in interest rates.
Interest income on interest-earning deposits decreased by $2.0 million, or
51.7%, to $1.9 million for the year ended June 30, 2004 from $3.9 million for
the year ended June 30, 2003. This decrease is due to decreases in both the
average balance of interest-earning deposits and the average rate earned. The
average balance decreased by $101.0 million, from $310.5 million to $209.5
million, while the average rate decreased by 0.36% from 1.26% to 0.90%. Interest
income on interest-earning deposits increased by $418,000, or 12.0%, to
$3.9 million for the year ended June 30, 2003 from $3.5 million for the year
ended June 30, 2002. The increase is primarily attributed to an increase in the
average balance of $192.7 million to $310.5 million from $117.8 million. This
increase was primarily due to the tremendous volume of cash flow generated by
the loan and investment portfolios, which are placed in overnight deposits until
they can be deployed into loans and investments.
INTEREST EXPENSE. Interest expense decreased by $12.7 million, or 9.2%, to
$124.9 million for the fiscal year ended June 30, 2004 from $137.6 million for
the year ended June 30, 2003. A decrease in the average cost of interest-bearing
liabilities offset a significant increase in the average balance of
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities decreased by 70 basis points, or 22.0%, from 3.18% to 2.48% with
most of this decrease relating to a decrease in the cost of deposit accounts.
Total interest expense decreased by $9.7 million, or 6.5%, to $137.6 million for
the fiscal year ended June 30, 2003 from $147.3 million for the year ended June
30, 2002. This decrease was primarily due to a decrease in the average cost of
interest-bearing liabilities to 3.18% from 4.12%, which was partially offset by
an increase in the average balance of interest-bearing liabilities of $758.6
million, or 21.2%, to $4.334 billion from $3.575 billion. The decrease in the
cost of funds resulted from the continued low level of short-term interest rates
and the movement of deposits from certificates of deposits to savings and money
market accounts. The increase in the average balance of interest-bearing
liabilities resulted primarily from strong deposit growth throughout our market
area.
NET INTEREST INCOME. Net interest income increased by $23.4 million, or
16.2%, on a taxable equivalent basis, to $167.3 million for the year ended June
30, 2004 from $143.9 million for the year ended June 30, 2003. Net interest
income increased by $12.0 million, or 9.1%, on a taxable equivalent basis, to
$143.9 million for the fiscal year ended June 30, 2003 compared to $131.9
million for the fiscal year ended June 30, 2002. This increase in net interest
income in both years was attributable to the significant increase in average
interest earning assets and interest bearing liabilities, offset by a decrease
in net interest spread.
38
PROVISION FOR LOAN LOSSES. Management analyzes the allowance for loan
losses as described in the section "Allowance for Loan Losses." The provision
recorded adjusts 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. The provision for loan losses decreased by $1.6
million, or 18.8%, to $6.8 million for the year ended June 30, 2004 from $8.4
million for the year ended June 30, 2003. The reduction in the provision was
influenced by a decrease in net charge-offs of $400,000, or 8.1%, to $4.7
million for the year ended June 30, 2004 from $5.1 million for the year ended
June 30, 2003. The provision for loan losses increased by $2.0 million, or
32.6%, to $8.4 million for the year ended June 30, 2003 from $6.4 million for
the year ended June 30, 2002. As part of this analysis, management considered
the increase in net charge-offs of $300,000, or 4.9%, to $5.1 million for the
year ended June 30, 2003 from $4.8 million for the year ended June 30, 2002. To
the best of management's knowledge, management believes that all known losses as
of June 30, 2004 have been recorded.
NONINTEREST INCOME. Noninterest income increased by $5.2 million, or
19.5%, to $31.9 million for the year ended June 30, 2004 from $26.7 million for
the year ended June 30, 2003. The increase in noninterest income is primarily
due to an increase in the gain on sale of securities and increase in income from
bank-owned life insurance. The gain on sale of investments increased by $4.1
million and the income from bank-owned life insurance increased by $750,000.
Noninterest income increased by $8.5 million, or 47.1%, to $26.7 million for the
year ended June 30, 2003 from $18.2 million for the year ended June 30, 2002.
This increase in noninterest income was primarily related to increases in
service charges and fees, income from bank-owned life insurance and gains on the
sale of securities and loans. In addition, trust and other financial services
income increased by $1.3 million, or 55.6%, to $3.5 million for the current year
from $2.2 million the prior year as a result of the Company's acquisition of
Boetger and Associates, an actuarial and benefits consulting firm, on July 1,
2002.
NONINTEREST EXPENSE. Noninterest expense increased $16.0 million, or
16.3%, to $114.0 million for the year ended June 30, 2004 from $98.0 million for
the year ended June 30, 2003. All major expense categories increased during the
year with the largest increases in compensation and employee benefits and
amortization of intangibles. Compensation and employee benefits increased by
$8.6 million, or 15.7%, to $63.0 million for the year ended June 30, 2004 from
$54.4 million for the year ended June 30, 2003. Contributing to this increase
was an increase in full-time equivalent employees of 123, or 8.3%, to 1,612 at
June 30, 2004 from 1,489 at June 30, 2003. This increase is primarily a result
of the acquisition of Bell Federal. Other increases in the major expense
categories are attributed to the growth of the Company. During the year ended
June 30, 2004, the Company increased its core banking franchise by ten retail
offices. Noninterest expense increased by $13.5 million, or 16.0%, to $98.0
million for the year ended June 30, 2003 from $84.5 million for the year ended
June 30, 2002. Compensation and employee benefit expense increased by $6.3
million, or 13.0%, to $54.4 million; premises and occupancy costs increased by
$1.7 million, or 14.1%, to $13.5 million; processing expenses, which includes
data processing, check processing and ATM processing, increased by $1.2 million,
or 16.7%, to $8.3 million; and other operating expenses increased by $1.8
million, or 30.2%, to $7.8 million. These increases were primarily a result of
the significant growth of the Company including the growth of its retail network
of offices, the acquisition of Prestige Bank, the acquisition of Boetger and
Associates as well as the addition of new products and services.
INCOME TAXES. Income tax expense increased by $3.5 million, or 21.2%, to
$20.1 million for the year ended June 30, 2004 from $16.6 million for the year
ended June 30, 2003. Primarily contributing to the increase was an increase in
pre-tax income of $12.4 million, or 21.2%. Income tax expense decreased slightly
by $13,000, or less than 1%, to $16.6 million for the year ended June 30, 2003
from $16.6 million for the 2003 fiscal year ended June 30, 2002. The decease is
a result of tax planning initiatives implemented by the Company and the
relatively low increase in income before income taxes and cumulative effect of
accounting change in the current year.
39
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
-------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
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)(4)......... $3,621,858 $ 232,522 6.42% $3,169,180 $ 228,761 7.22% $2,935,629 $ 229,628 7.82%
Mortgage-backed securities (3)..... 846,439 24,324 2.87 724,606 26,301 3.63 511,965 26,531 5.18
Investment securities(3)(4)(5)..... 658,268 32,977 5.01 344,460 21,686 6.30 270,647 18,307 6.76
FHLB stock......................... 35,730 487 1.36 29,649 881 2.97 22,773 1,151 5.05
Interest-earning deposits.......... 209,494 1,887 0.90 310,456 3,910 1.26 117,795 3,492 2.96
---------- --------- ---------- --------- ---------- ---------
Total interest-earning assets...... 5,371,789 292,197 5.44 4,578,351 281,539 6.15 3,858,809 279,109 7.23
Noninterest-earning assets(6)........ 381,396 313,319 218,104
---------- ---------- ----------
Total assets...................... $5,753,185 $4,891,670 $4,076,913
========== ========== ==========
Interest-bearing liabilities:
Savings accounts................... $1,000,811 13,886 1.39 $ 812,530 17,701 2.18 $ 564,448 15,473 2.74
NOW accounts....................... 666,457 5,247 0.79 555,515 6,873 1.24 393,616 4,747 1.21
Money market demand accounts....... 739,373 11,990 1.62 498,298 11,403 2.29 314,455 9,019 2.87
Certificate accounts............... 2,067,439 65,679 3.18 1,928,082 73,530 3.81 1,988,489 99,765 5.02
Borrowed funds(7).................. 464,208 20,467 4.41 440,211 20,521 4.66 257,276 13,821 5.37
Debentures......................... 101,297 7,656 7.56 99,000 7,610 7.69 56,736 4,430 7.81
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities. 5,039,585 124,925 2.48 4,333,636 137,638 3.18 3,575,020 147,255 4.12
Noninterest-bearing liabilities...... 239,803 220,855 206,629
---------- ---------- ----------
Total liabilities.................. 5,279,388 4,554,491 3,781,649
Shareholders' equity................. 473,797 337,179 295,264
---------- ---------- ----------
Total liabilities and equity....... $5,753,185 $4,891,670 $4,076,913
========== ========== ==========
Net interest income.................. $ 167,272 $ 143,901 $ 131,854
========= ========= =========
Net interest rate spread(8).......... 2.96% 2.97% 3.11%
==== ==== ====
Net interest-earning assets.......... $ 332,204 $ 244,715 $ 283,789
========== ========== ==========
Net interest margin(9)............... 3.11% 3.14% 3.42%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 1.07x 1.06x 1.08x
========== ========== ==========
(1) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(2) Interest income includes accretion/amortization of deferred loan
fees/expenses.
(3) Average balances do not include the effect of unrealized gains or losses
on securities held as available-for-sale.
(4) Interest income on tax-free investment securities and tax-free loans are
presented on a taxable equivalent basis.
(5) Average balances include FNMA and FHLMC stock.
(6) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(7) Average balances include FHLB advances, securities sold under agreements
to repurchase and other borrowings.
(8) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(9) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
RATE/VOLUME ANALYSIS. Net interest income can also be analyzed in terms of
the impact of changes in interest rates on interest-earning assets and
interest-bearing liabilities and changes in the volume or amount of these assets
and liabilities. The following table represents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (change
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume) and (iii) the net change.
Changes that cannot be attributed to either rate or volume have been allocated
among both rate and volume.
40
YEARS ENDED JUNE 30,
--------------------------------------------------------------
2004 VS. 2003 2003 VS. 2002
------------------------------ -----------------------------
TOTAL TOTAL
INCREASE/(DECREASE) INCREASE INCREASE/(DECREASE) INCREASE
DUE TO (DECREASE) DUE TO (DECREASE)
-------------------- --------- ------------------- --------
RATE VOLUME RATE VOLUME
---- ------ ---- ------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable......................... $(28,915) $ 32,676 $ 3,761 $(19,136) $ 18,269 $ (867)
Mortgage-backed securities............... (6,399) 4,422 (1,977) (11,249) 11,019 (230)
Investment securities.................... (8,465) 19,756 11,291 (1,614) 4,993 3,379
FHLB stock............................... (575) 181 (394) (618) 348 (270)
Interest-earning deposits................ (933) (1,090) (2,023) (5,293) 5,711 418
-------- -------- -------- -------- -------- --------
Total interest-earning assets.......... (45,287) 55,945 10,658 (37,910) 40,340 2,430
Interest-bearing liabilities:
Savings accounts......................... (7,917) 4,102 (3,815) (4,573) 6,801 2,228
NOW accounts............................. (2,999) 1,373 (1,626) 126 2,000 2,126
Money market demand accounts............. (4,930) 5,517 587 (2,889) 5,273 2,384
Certificate accounts..................... (13,166) 5,315 (7,851) (23,286) (2,949) (26,235)
Borrowed funds........................... (1,173) 1,119 (54) (3,128) 9,828 6,700
Debentures............................... (131) 177 46 (120) 3,300 3,180
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities...... (30,316) 17,603 (12,713) (33,870) 24,253 (9,617)
Net change in net interest income...... $(14,971) $ 38,342 $ 23,371 $ (4,040) $ 16,087 $ 12,047
======== ======== ======== ======== ======== ========
REGULATORY CAPITAL REQUIREMENTS. The FDIC's capital regulations establish
a minimum 3.0% Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier I leverage ratio for such other banks
to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks are
those that the FDIC determines are not anticipating or experiencing significant
growth and have well diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity, good earnings and, in
general, which are considered a strong banking organization, rated composite 1
under the Uniform Financial Institutions Rating System. Leverage or core capital
is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit card relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 2004, 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
41
for the institution to be operated in a safe and sound manner. The FDIC capital
regulation also provides, among other things, for the issuance by the FDIC or
its designee(s) of a capital directive, which is a final order issued to a bank
that fails to maintain minimum capital to restore its capital to the minimum
leverage capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.
The following table summarizes the Bank's total stockholders' equity,
regulatory capital, total risk-based assets, leverage and risk-based regulatory
ratios at June 30, 2004 and 2003.
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
(DOLLARS IN THOUSANDS)
Total shareholders' equity or GAAP capital................... $ 539,691 $ 374,314
Less: unrealized (gain)/ loss on securities available for 2,438 (7,221)
sale.......................................................
Less: nonqualifying intangible assets........................ (139,839) (77,836)
Leverage capital............................................. 402,290 289,257
Plus: Tier 2 capital (1)..................................... 28,541 26,552
Total risk-based capital..................................... 430,831 315,809
============= =============
Average total assets for leverage ratio...................... 5,323,638 4,795,103
============= =============
Net risk-weighted assets including off-balance sheet items... 2,868,810 2,553,491
============= =============
Leverage capital ratio....................................... 7.56% 6.03%
Minimum requirement (2)...................................... 3.00% to 5.00% 3.00% to 5.00%
Risk-based capital ratio..................................... 15.02% 12.37%
Minimum requirement.......................................... 8.00% 8.00%
- ------------------------
(1) Tier 2 capital consists of the allowance for loan losses, which is limited
to 1.25% of total risk-weighted assets as detailed under regulations of
the FDIC, and 45% of pre-tax net unrealized gains on securities
available-for-sale.
(2) The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3.00%, and all
other institutions will be required to maintain an additional cushion of
100 to 200 basis points.
The following table summarizes Jamestown's total stockholders' equity,
regulatory capital, total risk-based assets, leverage and risk-based regulatory
ratios at June 30, 2004 and 2003.
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
(DOLLARS IN THOUSANDS)
Total shareholders' equity or GAAP capital.................. $ 20,057 $ 19,125
Less: unrealized (gain)/ loss on securities available for
sale...................................................... 1,868 (471)
Less: nonqualifying intangible assets....................... - -
Leverage capital............................................ 21,925 18,654
Plus: Tier 2 capital (1).................................... 2,043 1,551
Total risk-based capital.................................... 23,968 20,205
============= =============
Average total assets for leverage ratio..................... 378,395 335,372
============= =============
Net risk-weighted assets including off-balance sheet items.. 226,744 191,552
============= =============
Leverage capital ratio...................................... 5.79% 5.56%
Minimum requirement (2)..................................... 3.00% to 5.00% 3.00% to 5.00%
Risk-based capital ratio.................................... 10.57% 10.55%
Minimum requirement......................................... 8.00% 8.00%
- ---------------------
(3) Tier 2 capital consists of the allowance for loan losses, which is limited
to 1.25% of total risk-weighted assets as detailed under regulations of
the FDIC, and 45% of pre-tax net unrealized gains on securities
available-for-sale.
(4) The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3.00%, and all
other institutions will be required to maintain an additional cushion of
100 to 200 basis points.
42
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 25.2% and 40.1%, respectively, as
of June 30, 2004. 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 amounted to $123.0 million at June 30, 2004. Other
assets qualifying for liquidity outstanding at June 30, 2004, amounted to $1.214
billion. For additional information about cash flows from the Company's
operating, financing, and investing activities, see Statements of Cash Flows
included in the Consolidated Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 2004, the Company had $413.0 million in advances
from the FHLB. The Company borrows from the FHLB to reduce interest rate risk
and to provide liquidity when necessary.
At June 30, 2004, the Company's customers had $205.2 million of unused
lines of credit available and $144.9 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, 2004, totaled
$977.0 million. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Company.
The major sources of the Company's cash flows are the areas of loans,
marketable securities, deposits and borrowed funds.
Deposits are the Company's primary source of externally generated funds.
The level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-term
and long-term interest rates in the economy, as well as higher alternative
yields that investors may obtain on competing investments such as money market
mutual funds. Financial institutions, such as the Company, are also subject to
deposit outflows. The Company's net deposits excluding interest credits and
acquisitions, increased/(decreased) by $(271.6) million, $454.3 million and
$138.8 million for the fiscal years ended June 30, 2004, 2003 and 2002,
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, 2004, 2003 and 2002 were $892.0 million, $948.8
million and $697.4 million, respectively. Loan originations for the years ended
June 30, 2004, 2003 and 2002 were $1.307 billion, $1.301 billion and $974.4
million, respectively. The Company also sells a portion of the loans it
originates and the cash flows from
43
such sales for the fiscal years ended June 30, 2004, 2003 and 2002 were $89.9
million, $233.9 million and $132.5 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, 2004, 2003 and 2002 were $1.090 billion, $630.4
million and $193.1 million, respectively. During the fiscal years ended June 30,
2004, 2003 and 2002, the company utilized cash to purchase marketable securities
in the amount of $892.4 million, $1.226 billion and $338.4 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
increase/(decrease) of $(202.4) million for the fiscal year ended June 30, 2004,
$151.3 million for the fiscal year ended June 30, 2003 and a net decrease of
$17.0 million for the fiscal year ended June 30, 2002.
Other activity with respect to cash flow was the payment of cash dividends
on common stock in the amount of $10.0 million, $3.9 million and $2.9 million
for the fiscal years ended June 30 2004, 2003 and 2002, respectively. The
current fiscal year ended June 30, 2004 was the third year in which Northwest
Bancorp, MHC waived its right to receive cash dividends from the Company.
Northwest Bancorp, MHC did accept payment of dividends during the fourth fiscal
quarters. Dividends paid to Northwest Bancorp, MHC during the fiscal years ended
June 30, 2004, 2003 and 2002 were $2,812,000, $0 and $0, respectively. Dividends
waived by Northwest Bancorp, MHC during fiscal years ending June 30, 2004, 2003
and 2002 were $9,159,000, $11,317,000 and $8,488,000, respectively.
IMPACT OF INFLATION AND CHANGING PRICES. The Consolidated Financial
Statements of the Company and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments according to various
contracts. The following table presents the expected future payments of the
contractual obligations aggregated by obligation type.
- --------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS AT JUNE 30, 2004 Payments due by
------------------------------------------------
(in thousands) Total Less than 1 year 1-3 years 3-5 years 5+ years
- --------------------------------------------------------------------------------------------------
Long-term debt(a) 449,147 70,872 - 144,622 233,653
Junior subordinated debentures(b) 102,062 - - - 102,062
Operating leases(c) 15,899 2,659 4,124 3,139 5,977
- --------------------------------------------------------------------------------------------------
Total 567,108 73,531 4,124 147,761 341,692
- --------------------------------------------------------------------------------------------------
(a) See Note 12, Borrowed Funds, for additional information
(b) See Note 23, Junior Subordinated Debentures/Trust-Preferred Securities, for
additional information
(c) See Note 9, Premises and Equipment, for additional information
IMPACT OF NEW ACCOUNTING STANDARDS
In April, 2003, the FASB released Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instrument and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, except for
certain hedging relationships designated after June 30, 2003. All provisions of
this statement should be applied prospectively, unless specified within the
standard. Certain provisions of this statement that relate to Statement 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective dates. The Company does not anticipate that SFAS 149 will have a
material effect on its financial statements.
In May, 2003, the FASB released Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 concludes the first phase of the
FASB's redeliberations of the Exposure Draft, Accounting for Financial
Instruments with Characteristics of Liabilities, Equity or Both. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. It is to be implemented by reporting the
cumulative effect of a change in accounting principle for financial instruments
created before the issuance
44
date of the statement and still existing at the beginning of the interim period
of adoption. The Company does not anticipate a material effect on its financial
statements when this statement is adopted.
In December, 2003, the FASB released Statement of Financial Accounting
Standards No. 132 (Revised 2003), "Employers' Disclosure about Pensions and
Other Postretirement Benefits" ("SFAS 132R"). SFAS 132R revises employer's
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans required by FASB Statements
Nos. 87 and 106. This statement retains the disclosure requirements contained in
FASB Statement 132, which it replaces. It requires additional disclosures to
those in the original Statement 132 about assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. SFAS 132R is effective for financial statements
with fiscal years ending after December 31, 2003 and interim disclosures
required by SFAS 132R are effective for interim periods beginning after December
15, 2003. This statement did not have a material effect on the Company's
financial statements.
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, 2004, such
loans constituted $665.6 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, 2004, totaled $712.3 million
or 18.6% of the Company's total loan portfolio. Of the Company's $5.372 billion
of interest-earning assets at June 30, 2004, $1.457 billion, or 27.1%, 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, 2004, total interest-bearing assets maturing or repricing
within one year exceeded total interest-earning liabilities maturing or
repricing in the same period by $77.4 million, representing a cumulative
positive one-year gap ratio of 1.3%. The Company has an Asset/Liability
Committee with members consisting of various individuals from Senior Management.
This committee meets monthly in an effort to effectively manage the Company's
balance sheet and to monitor activity and set pricing. The Company also has a
Risk Management Committee comprised of certain members of the Board of Directors
which is responsible for reviewing the Company's asset and liability management
policies. The Committee meets quarterly and, as part of their risk management
assessment, reviews interest rate risks and trends, the Company's interest
sensitivity position and the liquidity and market value of the Company's
investment portfolio.
45
The following table sets forth, on an amortized cost basis, the amounts of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
2004, 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 OVER 20
YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS 10-20 YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Rate-sensitive assets:
Interest-earning deposits ...... $ 123,034 $ -- $ -- $ -- $ -- $ -- $ 123,034
Mortgage-backed securities: ....
Fixed ........................ 59,408 74,465 39,678 58,345 11,329 -- 243,225
Variable ..................... 547,125 -- -- -- -- -- 547,125
Investment securities .......... 318,861 57,961 122,172 132,452 2,118 -- 633,564
Real estate loans: .............
Adjustable-rate .............. 36,643 6,040 -- -- -- -- 42,683
Fixed-rate ................... 273,752 478,319 415,292 746,431 367,826 -- 2,281,620
Home equity lines of credit .... 150,689 -- -- -- -- -- 150,689
Education loans ................ 95,599 -- -- -- -- -- 95,599
Other consumer loans ........... 284,386 260,952 90,333 28,429 -- -- 664,100
Commercial loans ............... 285,401 187,198 110,709 7,065 -- -- 590,373
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets .. $2,174,898 $1,064,935 $ 778,184 $ 972,722 $ 381,273 $ -- $5,372,012
========== ========== ========== ========== ========== ========== ==========
Rate-sensitive liabilities:
Fixed maturity deposits ........ $ 977,019 $ 812,784 $ 218,630 $ 38,740 $ 156 $ -- $2,047,329
Money market deposit accounts .. 419,355 -- 98,338 -- 233,662 -- 751,355
Savings accounts ............... 506,000 80,000 -- -- 438,244 -- 1,024,244
Checking accounts .............. 97,948 -- -- -- -- 764,776 862,724
FHLB advances .................. 34,706 -- 144,622 232,802 851 -- 412,981
Other borrowings ............... 31,560 3,454 1,152 -- -- -- 36,166
Trust Preferred Securities ..... 30,928 -- -- -- -- 71,134 102,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate-sensitive
liabilities ................ $2,097,516 $ 896,238 $ 462,742 $ 271,542 $ 672,913 $ 835,910 $5,236,861
========== ========== ========== ========== ========== ========== ==========
Interest sensitivity gap per
period ......................... $ 77,382 $ 168,697 $ 315,442 $ 701,180 $ (291,640) $ (835,910) $ 135,151
========== ========== ========== ========== ========== ========== ==========
Cumulative interest sensitivity
gap ............................ $ 77,382 $ 246,079 $ 561,521 $1,262,701 $ 971,061 $ 135,151 $ 135,151
========== ========== ========== ========== ========== ========== ==========
Cumulative interest sensitivity
gap as a percentage of total
assets ......................... 1.34% 4.26% 9.72% 21.85% 16.80% 2.34% 2.34%
Cumulative interest-earning
assets as a percent of
cumulative interest-bearing
liabilities .................... 103.69% 108.22% 116.25% 133.87% 122.06% 102.58% 102.58%
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 15%; (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 15 to 20%; 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 $98.0 million of the Company's checking accounts and
$506.0 million of the Company's savings
46
accounts are interest sensitive and will reprice in one year or less, and that
the remainder will reprice over longer time periods.
The above assumptions utilized by management are annual percentages based
on remaining balances and should not be regarded as indicative of the actual
prepayments and withdrawals that may be experienced by the Company. Moreover,
certain shortcomings are inherent in the analysis presented by the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as some
adjustable-rate loans, have features that restrict changes in interest rates on
a short-term basis and over the life of the asset. Moreover, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
In an effort to assess the market risk, the Company utilizes a simulation
model to determine the effect of immediate incremental increases or decreases in
interest rates on net interest income and the market value of the Company's
equity. Certain assumptions are made regarding loan prepayments and decay rates
of passbook and NOW accounts. Because it is difficult to accurately project the
market reaction of depositors and borrowers, the effects of actual changes in
interest on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming interest
rate risk:
- Net income simulation. Given a parallel shift of 2% in
interest rates, the estimated net income may not decrease by
more than 20% within a one-year period.
- Market value of equity simulation. The market value of the
Company's equity is the net present value of the Company's
assets and liabilities. Given a parallel shift of 2% in
interest rates, equity may not decrease by more than 50% of
total shareholder' equity.
The following table illustrates the simulated impact of a 1% or 2% upward
or downward movement in interest rates on net income, return on average equity,
diluted earnings per share and market value of equity. This analysis was
prepared assuming that interest-earning asset levels at June 30, 2004 remain
constant. The impact of the rate movements was computed by simulating the effect
of an immediate and sustained shift in interest rates over a twelve-month period
from the June 30, 2004 levels.
MOVEMENTS IN INTEREST RATES FROM
JUNE 30, 2004 RATES
------------------------------------------
INCREASE DECREASE
----------------------- ---------------
1% 2% 1% 2%
------- ---------- -------- ---
Simulated impact over the next 12 months
compared with June 30, 2004:
Percentage increase/(decrease) in net income .............. 3.2% 2.0% 2.0% NM
Increase/(decrease) in return on average equity ........... 0.3% 0.2% 0.2% NM
Increase/(decrease) in diluted earnings per share ......... $ 0.04 $ 0.02 $ 0.02 NM
Percentage increase/(decrease) in market value of equity .. (8.1)% (16.2)% 6.4% NM
NM - Not meaningful
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are included in Part III, Item 15 of this Form
10-K.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
ITEM 9B. OTHER INFORMATION
Not applicable.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The "Proposal I -- Election of Directors" section of the Company's
definitive proxy statement for the Company's 2004 Annual Meeting of Stockholders
(the "2004 Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The "Proposal I -- Election of Directors" section of the Company's 2004
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 2004
Proxy Statement is incorporated herein by reference.
The Company does not have any equity compensation program that was not
approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2004 regarding
equity compensation plans that have been approved by stockholders.
NUMBER OF SECURITIES TO BE ISSUED NUMBER OF SECURITIES
EQUITY COMPENSATION PLANS UPON EXERCISE OF OUTSTANDING WEIGHTED AVERAGE REMAINING AVAILABLE FOR
APPROVED BY STOCKHOLDERS OPTIONS AND RIGHTS EXERCISE PRICE ISSUANCE UNDER PLAN
- ------------------------- --------------------------------- ---------------- -----------------------
1995 Stock Option Plan 514,309 $ 6.10 -0-
2000 Stock Option Plan 547,575 $ 13.01 227,215
Total 1,061,884 $ 9.66 227,215
========= ======= =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Transactions with Certain Related Persons" section of the Company's
2004 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The "Proposal V - Ratification of Appointment of Independent Registered
Public Accounting Firm" Section of the Company's 2004 Proxy Statement is
incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
(A) Report of Independent Registered Accounting Firm
(B) Consolidated Statements of Financial Condition - at June 30,
2004 and 2003
(C) Consolidated Statements of Income - Years ended June 30, 2004,
2003 and 2002
49
(D) Consolidated Statements of Changes in Shareholders' Equity -
Years ended June 30, 2004, 2003 and 2002
(E) Consolidated Statements of Cash Flows - Years ended June 30,
2004, 2003 and 2002
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Hereto
- ----------- ------------------------------------------ -------------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Articles of Incorporation and Bylaws ***
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Restated Deferred Compensation Plan for *
Directors
10.2 Retirement Plan for Outside Directors *
10.3 Northwest Savings Bank Nonqualified *
Supplemental Retirement Plan
10.4 Employee Stock Ownership Plan *
10.5 Employee Severance Compensation Plan *
10.6 Employment Agreement for William J. Wagner **
10.7 Form of Senior Vice President Employment **
Agreement
11 Statement re: computation of per share 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 **
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel 23
50
Regulation Reference to Prior Filing
S-K Exhibit or Exhibit Number
Number Document Attached Hereto
- ----------- ------------------------------------------ -------------------------
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
31.1 Certification pursuant to Rule 13a-14 of 31.1
the Securities Exchange Act of 1934, as
Amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Rule 13a-14 of 31.2
the Securities Exchange Act of 1934, as
Amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. 32
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.
** This document has been filed with the Securities and Exchange Commission
on September 30, 2002.
*** Incorporated by referenced to the Definitive Proxy Statement for the 2000
Annual Meeting of Shareholders (File No. 000-23817), filed with the SEC on
November 21, 2000.
51
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 13, 2004 By: /s/ WILLIAM J. WAGNER
-----------------------------
William J. Wagner, Chairman,
President and Chief Executive
Officer (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ WILLIAM J. WAGNER By: /s/ WILLIAM W. HARVEY, JR.
------------------------------ --------------------------------
William J. Wagner, Chairman, William W. Harvey, Jr., Senior
President, Chief Executive Vice President, Finance
Officer and Director (Principal Financial and
Accounting Officer)
Date: September 13, 2004 Date: September 13, 2004
By: /s/ JOHN M. BAUER By: /s/ RICHARD L. CARR
------------------------------ --------------------------------
John M. Bauer, Director Richard L. Carr, Director
Date: September 13, 2004 Date: September 13, 2004
By: /s/ RICHARD E. MCDOWELL By: /s/ THOMAS K. CREAL, III
------------------------------ --------------------------------
Richard E. McDowell, Director Thomas K. Creal, III, Director
Date: September 13, 2004 Date: September 13, 2004
By: /s/ JOSEPH F. LONG By: /s/ A. PAUL KING
------------------------------ --------------------------------
Joseph F. Long, Director A. Paul King, Director
Date: September 13, 2004 Date: September 13, 2004
By: /s/ ROBERT G. FERRIER
------------------------------
Robert G. Ferrier, Director
Date: September 13, 2004
52
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(With Report of Independent Registered Accounting Firm Thereon)
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
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, 2004 and 2003 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, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2004 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the consolidated financial statements, effective July
1, 2001, the Company changed its method of accounting for goodwill and other
intangible assets resulting from business combinations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No.
147, Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9.
Pittsburgh, Pennsylvania
July 21, 2004, except as to Note 25,
which is as of September 11, 2004
/s/ KPMG LLP
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 2004 and 2003
(Amounts in thousands, excluding share data)
2004 2003
----------- ---------
ASSETS
Cash and cash equivalents $ 48,045 75,563
Interest-earning deposits in other financial institutions 123,034 244,437
Marketable securities available-for-sale (amortized cost of
$835,610 and $884,667) 828,829 896,631
Marketable securities held-to-maturity (market value of
$588,366 and $486,922) 588,304 477,821
Loans receivable, net of allowance for estimated
losses of $29,689 and $26,593 3,788,570 3,246,771
Accrued interest receivable 21,387 18,714
Real estate owned, net 3,845 3,664
Federal Home Loan Bank stock, at cost 35,655 33,764
Premises and equipment, net 79,755 63,190
Bank owned life insurance 90,187 63,397
Goodwill 126,849 76,206
Other intangible assets 15,150 3,530
Other assets 29,013 18,679
----------- ---------
Total assets $ 5,778,623 5,222,367
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 4,685,652 4,263,556
Borrowed funds 449,147 465,750
Advances by borrowers for taxes and insurance 26,594 21,319
Accrued interest payable 3,919 4,101
Other liabilities 11,270 11,709
Junior subordinated deferrable interest debentures held by trusts
that issued guaranteed capital debt securities 102,062 --
Guaranteed preferred beneficial interests in Company's junior
subordinated deferrable interest debentures -- 99,000
----------- ---------
Total liabilities 5,278,644 4,865,435
Shareholders' equity:
Preferred stock, $0.10 par value. Authorized 10,000,000 shares;
issued and outstanding 0 shares at June 30, 2004 and 2003 -- --
Common stock, $0.10 par value. Authorized 100,000,000 shares;
issued and outstanding 47,960,287 and 47,693,981 shares at
June 30, 2004 and 2003, respectively 4,796 4,769
Paid-in capital 187,427 72,787
Retained earnings, substantially restricted 312,164 271,599
Accumulated other comprehensive income, net (4,408) 7,777
----------- ---------
Total shareholders' equity 499,979 356,932
----------- ---------
Total liabilities and shareholders' equity $ 5,778,623 5,222,367
=========== =========
See accompanying notes to consolidated financial statements.
2
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2004, 2003, and 2002
(Amounts in thousands, excluding share data)
2004 2003 2002
---------- ---------- ----------
Interest income:
Loans receivable $ 231,226 227,317 228,333
Mortgage-backed securities 24,324 26,301 26,531
Taxable investment securities 15,057 9,778 9,710
Tax-free investment securities 11,965 8,313 6,434
Interest-earning deposits 1,887 3,910 3,492
---------- -------- --------
Total interest income 284,459 275,619 274,500
Interest expense:
Deposits 96,802 109,507 129,004
Borrowed funds 28,123 28,131 18,251
---------- -------- --------
Total interest expense 124,925 137,638 147,255
---------- -------- --------
Net interest income 159,534 137,981 127,245
Provision for loan losses 6,842 8,431 6,360
---------- -------- --------
Net interest income after provision
for loan losses 152,692 129,550 120,885
Noninterest income:
Service charges and fees 13,785 13,428 11,910
Trust and other financial services income 3,982 3,492 2,245
Insurance commission income 948 1,188 1,523
Gain on sale of marketable securities, net 5,386 1,264 73
Gain on sale of loans 433 1,729 730
Gain on sale of real estate owned 1,310 493 592
Income from bank owned life insurance 4,004 3,253 144
Writedown of investment securities -- -- (400)
Other operating income 2,092 1,888 1,356
---------- -------- --------
Total noninterest income 31,940 26,735 18,173
---------- -------- --------
(Continued)
3
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2004, 2003, and 2002
(Amounts in thousands, excluding share data)
2004 2003 2002
-------- ------- --------
Noninterest expense:
Compensation and employee benefits $ 62,982 54,445 48,176
Premises and occupancy costs 15,826 13,537 11,869
Office operations 10,637 9,790 8,909
Processing expenses 9,061 8,295 7,108
Amortization of intangibles 4,532 650 283
Advertising 3,504 3,483 2,185
Other expenses 7,459 7,807 5,994
-------- ------ ------
Total noninterest expense 114,001 98,007 84,524
-------- ------ ------
Income before income taxes and
cumulative effect of accounting
change 70,631 58,278 54,534
Provision for income taxes:
Federal 16,800 14,362 14,507
State 3,303 2,225 2,093
-------- ------ ------
Total provision for income taxes 20,103 16,587 16,600
-------- ------ ------
Income before cumulative effect of
accounting change $ 50,528 41,691 37,934
Cumulative effect of accounting change -- -- 2,237
-------- ------ ------
Net income $ 50,528 41,691 40,171
======== ====== ======
Basic per share amounts:
Income before cumulative effect of accounting
change $ 1.05 0.88 0.80
Cumulative effect of accounting change -- -- 0.05
-------- ------ ------
Net income $ 1.05 0.88 0.85
======== ====== ======
Diluted per share amounts:
Income before cumulative effect of accounting
change $ 1.04 0.87 0.79
Cumulative effect of accounting change -- -- 0.05
-------- ------ ------
Net income $ 1.04 0.87 0.84
======== ====== ======
See accompanying notes to consolidated financial statements.
4
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 2004, 2003, and 2002
(Amounts in thousands, excluding share data)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS), NET
-------- -------- -------- -------------
Balance at June 30, 2001 $ 4,743 71,283 196,566 3,178
Comprehensive income:
Net income -- -- 40,171 --
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- -- -- 3,038
-------- ------- ------- ------
Total comprehensive income -- -- 40,171 3,038
Exercise of stock options 12 420 -- --
Tax benefit for excess of fair value above cost of stock option
plans -- 135 -- --
RRP shares released -- -- -- --
Dividends declared ($0.24 per share) -- -- (2,906) --
-------- ------- ------- ------
Balance at June 30, 2002 4,755 71,838 233,831 6,216
Comprehensive income:
Net income -- -- 41,691 --
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- -- -- 1,561
-------- ------- ------- ------
Total comprehensive income -- -- 41,691 1,561
Exercise of stock options 14 728 -- --
Tax benefit for excess of fair value above cost of stock
option plans -- 221 -- --
Dividends declared ($0.32 per share) -- -- (3,923) --
-------- ------- ------- ------
Balance at June 30, 2003 4,769 72,787 271,599 7,777
Comprehensive income:
Net income -- -- 50,528 --
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- -- -- (12,185)
-------- ------- ------- ------
Total comprehensive income -- -- 50,528 (12,185)
Exercise of stock options 27 1,004 -- --
Tax benefit for excess of fair value above cost of stock option plans -- 832 -- --
Dividends declared ($0.40 per share) -- -- (9,963) --
Common stock issued, net of issuance costs -- 112,804 -- --
-------- ------- ------- ------
Balance at June 30, 2004 $ 4,796 187,427 312,164 (4,408)
======== ======= ======= ======
UNEARNED
RECOGNITION
AND
RETENTION TOTAL
PLAN SHAREHOLDERS
SHARES EQUITY
----------- ------------
Balance at June 30, 2001 (57) 275,713
Comprehensive income:
Net income -- 40,171
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- 3,038
------ -------
Total comprehensive income -- 43,209
Exercise of stock options -- 432
Tax benefit for excess of fair value above cost of stock option
plans -- 135
RRP shares released 57 57
Dividends declared ($0.24 per share) -- (2,906)
------ -------
Balance at June 30, 2002 -- 316,640
Comprehensive income:
Net income -- 41,691
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- 1,561
------ -------
Total comprehensive income -- 43,252
Exercise of stock options -- 742
Tax benefit for excess of fair value above cost of stock
option plans -- 221
Dividends declared ($0.32 per share) -- (3,923)
------ -------
Balance at June 30, 2003 -- 356,932
Comprehensive income:
Net income -- 50,528
Change in unrealized gain on securities, net of tax and
reclassification adjustment -- (12,185)
------ -------
Total comprehensive income -- 38,343
Exercise of stock options -- 1,031
Tax benefit for excess of fair value above cost of stock option plans -- 832
Dividends declared ($0.40 per share) -- (9,963)
Common stock issued, net of issuance costs -- 112,804
------ -------
Balance at June 30, 2004 -- 499,979
====== =======
See accompanying notes to consolidated financial statements.
5
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2004, 2003, and 2002
(Amounts in thousands, excluding share data)
2004 2003 2002
----------- ----------- -----------
Operating activities:
Net income $ 50,528 41,691 40,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,842 8,431 6,360
Net gain on sales of assets (7,129) (3,486) (1,395)
Net depreciation, amortization, and accretion 14,076 10,217 5,892
Decrease (increase) in other assets 17,286 830 (2,457)
Increase (decrease) in other liabilities (10,550) (2,049) 1,998
Net (accretion) amortization of discounts/
premiums on marketable securities 7,770 898 (2,491)
Noncash compensation expense related
to stock benefit plans -- -- 57
Noncash writedown of investment securities -- -- 400
Noncash cumulative effect of change in
accounting principle -- -- (2,237)
----------- ----------- ---------
Net cash provided by operating
activities 78,823 56,532 46,298
----------- ----------- ---------
Investing activities:
Purchase of marketable securities held-to-maturity (309,059) (478,871) (129,047)
Purchase of marketable securities available-for-sale (583,355) (747,081) (209,396)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 426,068 413,988 72,144
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 663,715 216,394 120,960
Proceeds from sales of marketable securities
available-for-sale 286,770 84,134 50,720
Purchase of bank-owned life insurance -- (10,000) (50,000)
Loan originations (1,307,118) (1,301,263) (974,413)
Proceeds from loan maturities and principal
reductions 891,957 948,781 697,427
Proceeds from loan sales 89,929 233,868 132,464
Purchase of Federal Home Loan Bank stock 10,889 (7,422) (1,203)
Proceeds from sale of real estate owned 5,776 5,317 3,514
Sale of real estate owned for investment (226) (87) 32
Purchase of premises and equipment (22,832) (11,422) (13,184)
Acquisitions, net of cash received (97,097) 2,619 53,443
----------- ----------- ---------
Net cash provided by (used by)
investing activities 55,417 (651,045) (246,539)
----------- ----------- ---------
(Continued)
6
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2004, 2003, and 2002
(Amounts in thousands, excluding share data)
2004 2003 2002
--------- -------- --------
Financing activities:
(Decrease) increase in deposits, net $(187,291) 548,680 243,222
Proceeds from long-term borrowings -- 180,000 1,041
Repayments of long-term borrowings (203,064) (40,776) (17,294)
Net increase (decrease) in short-term borrowings 676 12,056 (699)
Increase (decrease) in advances by borrowers
for taxes and insurance 2,646 (20) (767)
Proceeds from issuance of guaranteed preferred
beneficial interests in Company's junior
subordinated debentures -- -- 99,000
Proceeds from stock offering, net of issuance costs 112,804 -- --
Cash dividends paid (9,963) (3,923) (2,906)
Proceeds from options exercised 1,031 742 432
--------- ------- -------
Net cash (used by) provided by financing
activities (283,161) 696,759 322,029
--------- ------- -------
Net (decrease) increase in cash and
cash equivalents (148,921) 102,246 121,788
--------- ------- -------
Cash and cash equivalents at beginning of year 320,000 217,754 95,966
Net increase in cash and cash equivalents (148,921) 102,246 121,788
--------- ------- -------
Cash and cash equivalents at end of year $ 171,079 320,000 217,754
========= ======= =======
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of
$84,336, $94,376, and $104,426, respectively) $ 125,107 139,031 145,806
Income taxes 7,129 15,399 14,689
Noncash activities:
Business acquisitions:
Fair value of assets acquired $ 910,803 176,885 32,566
Net cash received (paid) (97,097) 2,619 53,443
--------- ------- -------
Liabilities assumed $ 813,706 179,504 86,009
========= ======= ======
Loan foreclosures and repossessions $ 4,647 3,053 4,382
Sale of real estate owned financed by the Company 340 815 838
See accompanying notes to consolidated financial statements.
7
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
The Northwest group of companies is organized in a two-tier holding
company structure. Northwest Bancorp, MHC is a federal mutual
holding company and, at June 30, 2004, owned approximately 59% of
the outstanding shares of common stock of Northwest Bancorp, Inc.
(the Company), 100% of Leeds Federal Savings Bank and 100% of First
Carnegie Deposit. The current fiscal year ended June 30, 2004 was
the third fiscal year in which Northwest Bancorp, MHC applied for,
and received, approval from the Office of Thrift Supervision (OTS),
its primary regulator, to waive its right to receive cash dividends
from the Company. Dividends waived by Northwest Bancorp, MHC during
fiscal 2004, 2003, and 2002 were $9,159,000, $11,317,000, and
$8,488,000, respectively. Dividends paid to Northwest Bancorp, MHC
during fiscal 2004, 2003 and 2002 were $2,812,000, $-0- and $-0-,
respectively. Northwest Bancorp, MHC did not waive its right to
receive the fourth quarter of fiscal 2004 quarterly dividend in
response to additional liquidity needs relating to its ownership of
Leeds Federal Savings Bank and First Carnegie Deposit. Applications
have been filed to transfer ownership of these two entities to
Northwest Bancorp, Inc. After such transfers have occurred,
Northwest Bancorp, MHC will seek regulatory approval to resume
waiving dividends.
During the 2004 fiscal year, the Company sold 7,255,520 common
shares previously owned by the Mutual Holding Company. The
transaction increased the Company's capital by $112.8 million but
did not increase the number of shares outstanding.
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 132 banking locations in Pennsylvania, 10 banking locations in
southwestern New York and 5 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.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all
intercompany accounts and transactions.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other financial
institutions.
(d) MARKETABLE SECURITIES
The Company classifies marketable securities at the time of their
purchase as either held-to-maturity, available-for-sale or trading
securities. Securities for which management has the intent and the
Company has the ability to hold until their maturity are classified
as held-to-maturity and are carried on the Company's books at cost,
adjusted for amortization of premium and accretion of discount on a
level yield basis. If it is management's intent at the time of
purchase to hold securities for an indefinite period of time and/or
to use such securities as part of its asset/liability management
strategy, the securities are classified as available-for-sale and
are carried at fair value, with unrealized gains and losses excluded
from net earnings and reported as accumulated other comprehensive
income, a separate component of shareholders' equity, net of tax.
Securities available-for-sale include securities which may be sold
in response to changes in interest rates, resultant prepayment risk
or other market factors. Securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading and are reported at fair value, with
unrealized gains and losses included in earnings. The cost of
securities sold is determined on a
(Continued)
8
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
specific identification basis. The Company held no securities
classified as trading at June 30, 2004 and 2003.
Federal law requires a member institution of the Federal Home Loan
Bank (FHLB) system to hold stock of its district FHLB according to a
predetermined formula. This stock is recorded at cost and may be
pledged to secure FHLB advances.
(e) LOANS RECEIVABLE
Loans are stated at their unpaid principal balance net of any
deferred origination fees or costs and the allowance for estimated
loan losses. Interest income on loans is credited to income as
earned. Interest earned on loans for which no payments were received
during the month is accrued at month end. Interest accrued on loans
more than ninety days delinquent is reversed and such loans are
placed on nonaccrual status.
The Company has identified certain residential loans which will be
sold prior to maturity. These loans are recorded at the lower of
amortized cost or market value and are not significant as of June
30, 2004 and 2003.
Loan fees and certain direct loan origination costs are deferred,
and the net deferred fee or cost is then recognized using the
level-yield method over the contractual life of the loan as an
adjustment to interest income.
(f) PROVISION FOR LOAN LOSSES
Provisions for estimated loan losses and the amount of the allowance
for loan losses are based on losses inherent in the loan portfolio
that are both probable and reasonably estimable at the date of the
financial statements. Management believes, to the best of their
knowledge, that all known losses as of the balance sheet dates have
been recorded.
Management considers a loan to be impaired when it is probable that
the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Nonaccrual loans are
deemed to be impaired unless fully secured with liquid collateral.
In evaluating whether a loan is impaired, management considers not
only the amount that the Company expects to collect but also the
timing of collection. Generally, if a delay in payment is
insignificant (e.g., less than 30 days), a loan is not deemed to be
impaired.
When a loan is considered to be impaired, the amount of impairment
is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or at the loan's
market price or fair value of the collateral if the loan is
collateral dependent. Larger loans are evaluated individually for
impairment. Smaller balance, homogeneous loans (e.g., primarily
consumer and residential mortgages) are evaluated collectively for
impairment. Impairment losses are included in the allowance for loan
losses. Impaired loans are charged off when management believes that
the ultimate collectibility of a loan is not likely.
(Continued)
9
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Interest income on impaired loans is recognized using the cash basis
method. Such interest ultimately collected is credited to income in
the period of recovery or applied to reduce principal if there is
sufficient doubt about the collectibility of principal. Interest on
impaired loans that are contractually past due ninety days and over
is reversed.
(g) REAL ESTATE OWNED
Real estate owned is comprised of property acquired through
foreclosure or voluntarily conveyed by delinquent borrowers. These
assets are recorded on the date acquired at the lower of the related
loan balance or market value of the collateral, as determined by an
appraisal. Subsequently, foreclosed assets are valued at the lower
of the amount recorded at acquisition date or the current market
value, less estimated disposition costs. Gains or losses realized
from the disposition of such property are credited or charged to
noninterest income.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is accumulated on a
straight-line basis over the estimated useful lives of the related
assets. Estimated lives range from three to thirty years.
Amortization of leasehold improvements is accumulated on a
straight-line basis over the terms of the related leases or the
useful lives of the related assets, whichever is shorter.
(i) GOODWILL
On July 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS
141 addresses financial accounting and reporting for business
combinations. Because the Company generally used purchase accounting
for its business combinations, this statement did not materially
change its ongoing operation.
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. 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. Immediately upon
adoption, and as required by SFAS 141 and SFAS 142, existing
negative goodwill of $2.2 million was recorded in income as the
cumulative effect of a change in accounting principle and the
Company stopped amortizing the remaining goodwill of $65.5 million.
There was no tax effect associated with the recognition of negative
goodwill of $2.2 million as such amount arose in a tax-free
reorganization. In addition, the Company performed its initial
impairment analysis of goodwill and other intangible assets noting
that the estimated fair value exceeded the carrying amount.
On October 1, 2002, the FASB issued SFAS 147, Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No.
72 and 144 and FASB Interpretation No. 9 (SFAS 147). The standard
clarifies that a branch acquisition that meets the definition of a
business should be
(Continued)
10
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
accounted for as a business combination. Otherwise, the transaction
should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The effect of the
standard is to exclude a branch acquisition that meets the
definition of a business from the scope of SFAS 72 and include it
within the scope of SFAS 141. Upon adoption, unidentifiable
intangible assets arising from branch acquisitions that meet the
definition of a business combination shall be reclassified to
goodwill at the later of the date of acquisition or the date SFAS
142 was applied in its entirety. The reclassified goodwill shall be
accounted for and reported prospectively as goodwill under SFAS 142.
In addition, because the Company adopted SFAS 142 prior to October
1, 2002, all previously issued interim and annual financial
statements that reflect amortization of the reclassified goodwill
were restated to remove that amortization expense. As a result of
adopting SFAS 147, the Company reclassified approximately $60.0
million of unidentifiable intangible assets to goodwill as of June
30, 2002. (Such amount was $54.0 million as of July 1, 2001.)
Adopting SFAS 147 also increased net income for the year ended June
30, 2002 by $4.3 million.
As prescribed by Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets (SFAS 142), goodwill is no
longer amortized to expense, but rather is tested for impairment
periodically. At least annually, management reviews goodwill and
evaluates events or changes in circumstances that may indicate
impairment in the carrying amount of goodwill. The impairment test
is performed at the reporting unit level. If the sum of the expected
undiscounted future cash flows of the reporting unit is less than
the carrying amount of the reporting unit's net assets, an
impairment loss will be recognized. Impairment, if any, is measured
on a discounted future cash flow basis.
Prior to the adoption of SFAS 142 on July 1, 2001, the Company
amortized goodwill using the straight-line method over the estimated
benefit period of ten years.
(j) CORE DEPOSIT INTANGIBLES
The Company engages an independent third party of experts to analyze
and prepare a core deposit study for all acquisitions. This study
reflects the cumulative present value benefit of acquiring deposits
versus an alternative source of funding. Based upon this analysis,
the amount of the premium related to the core deposits of the
business purchased is calculated along with the estimated life of
the acquired deposits. The core deposit intangible, which is
recorded in other intangible assets, is then amortized to expense on
an accelerated basis over an approximate life of 7 years.
(k) BANK-OWNED LIFE INSURANCE
The Company owns insurance on the lives of a certain group of key
employees. The policies were purchased to help offset the cost of
increases in various fringe benefit plans including healthcare. The
cash surrender value of these policies is included in other assets
on the consolidated statements of financial condition and any
increases in the cash surrender value are recorded as noninterest
income on the consolidated statements of income. In the event of the
death of an insured individual under these policies, the Company
would receive a death benefit which would be recorded as noninterest
income.
(Continued)
11
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(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. The Company uses an April 30 measurement
date for its defined benefit pension plan.
(n) INCOME TAXES
The Company joins with its wholly owned subsidiaries, Northwest and
Jamestown, in filing a consolidated federal income tax return.
The Company accounts for income taxes using the asset and liability
method. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the
Company's assets and liabilities based on enacted tax rates expected
to be in effect when such amounts are realized or settled.
(o) STOCK OPTIONS
The Company accounts for its stock-based compensation plans under
the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees utilizing the intrinsic-value-based method, on which APB
No. 25 is based. In accordance with SFAS No. 123 Accounting for
Stock-based Compensation, the Company previously adopted the
disclosure only option and continues to apply the provisions of APB
No. 25, for financial statement purposes. The Black-Scholes option
pricing model was used to determine the fair value estimates for
disclosure purposes.
(Continued)
12
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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:
2004 2003 2002
-------- ------ ------
Net income:
As reported $ 50,528 41,691 40,17
Deduct total stock-based
employee compensation
expense determined under
fair-value-based method
for all awards, net of tax (313) (230) (145)
-------- ------ ------
Pro forma $ 50,215 41,461 40,026
======== ====== ======
Basic earnings per share:
As reported 1.05 0.88 0.85
Pro forma 1.05 0.87 0.84
Diluted earnings per share:
As reported 1.04 0.87 0.84
Pro forma 1.04 0.86 0.83
There was no stock-based employee compensation expense included in
reported net income during fiscal 2004, 2003, and 2002.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) dividend yields ranging
from 1.60% to 2.50%; (2) expected volatility of 18% to 33%; (3)
risk-free interest rates ranging from 4.50% to 6.50%; and (4)
expected lives of seven years. The effects of applying SFAS No. 123
may not be representative of the effects on reported net income in
future years.
(p) SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131, Disclosures
about Segments of an Enterprise and Related Information, requires
that public business enterprises report financial and descriptive
information about their reportable operating segments. Based on the
guidance provided by this statement, the Company has identified two
reportable segments, Community Banks and Consumer Finance. See
footnote 22 for related disclosures.
(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,
(Continued)
13
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
to various degrees, elements of credit and interest rate risk not
reported in the consolidated statement of financial condition.
(r) USE OF ESTIMATES
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
(s) RECLASSIFICATION OF PRIOR YEARS' STATEMENTS
Certain items previously reported have been reclassified to conform
with the current year's reporting format.
(2) CHARTER CONVERSION
Effective June 29, 2001, the Company converted its charter from a
Pennsylvania corporation to a Federal corporation as approved by its
stockholders at the annual meeting held on December 20, 2000. In addition,
Northwest Bancorp, MHC, the Company's Mutual Holding Company, also changed
its charter from a Pennsylvania mutual holding company to a federal mutual
holding company. As a result of this conversion, the primary regulators
also changed from the current Board of Governors of the Federal Reserve
System and the Pennsylvania Department of Banking to the Office of Thrift
Supervision. The Company's savings bank subsidiaries, however, have both
retained their state savings bank charters.
(3) BUSINESS COMBINATIONS
On August 31, 2003, the Company completed the acquisition of First Bell
Bancorp, Inc. and its subsidiary Bell Federal Savings and Loan Association
of Bellevue, both headquartered in Bellevue, Pennsylvania. The acquisition
included seven offices, assets of approximately $933.0 million and
deposits of approximately $609.4 million. The cash acquisition amount of
approximately $114.3 million created intangible assets of approximately
$66.4 million.
On September 13, 2002, the Company completed the acquisition of Prestige
Bancorp, Inc. and its subsidiary Prestige Bank, both headquartered in
Pleasant Hills, Pennsylvania. The acquisition included four offices,
assets of approximately $180.0 million and deposits of approximately
$122.0 million. The cash acquisition amount of approximately $14.6 million
created intangible assets of approximately $6.0 million.
On December 14, 2001, the Company completed the acquisition of two retail
banking offices located in the Pennsylvania communities of Johnsonburg and
Emporium. The acquisition included approximately $55 million in deposits,
$22 million in loans and the related fixed assets. This cash purchase
created intangible assets of approximately $5.7 million.
(Continued)
14
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
On November 16, 2001, the Company completed the acquisition of a retail
banking office in Ebensburg, Pennsylvania. The acquisition included
approximately $26 million of deposits and the related fixed assets. This
cash purchase created intangible assets of approximately S2.0 million.
(4) MARKETABLE SECURITIES
Marketable securities at June 30, 2004, 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 one year - five years $ 12,518 -- (1) 12,517
Due in five years - ten years 39,982 629 (257) 40,354
Municipal securities:
Due in five years - ten years 2,568 15 -- 2,583
Due after ten years 112,281 1,148 (2,257) 111,172
Corporate debt issues:
Due after ten years 41,178 1,796 (477) 42,497
Mortgage-backed securities:
Fixed rate pass-through 5,080 38 (39) 5,079
Variable rate pass-through 197,511 493 (2,037) 195,967
Fixed rate CMO 7,519 -- (75) 7,444
Variable rate CMO 169,667 1,148 (62) 170,753
-------- ----- ------ -------
Total mortgage-
backed securities 379,777 1,679 (2,213) 379,243
-------- ----- ------ -------
Total securities
held-to-maturity $588,304 5,267 (5,205) 588,366
======== ===== ====== =======
(Continued)
15
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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 - five
years $ 18,290 -- (506) 17,784
Due in five years - ten years 37,490 204 (164) 37,530
Due after ten years 109,972 -- (2,607) 107,365
Equity securities and mutual funds 87,042 3,611 (1,716) 88,937
Municipal securities:
Due in five years - ten years 915 7 (7) 915
Due after ten years 143,887 814 (3,147) 141,554
Corporate debt issues
Due in one year or less 3,018 9 -- 3,027
Due in one year - five years -- -- -- --
Due in five years - ten years 15,000 80 -- 15,080
Due after ten years 9,423 37 (129) 9,331
Mortgage-backed securities:
Fixed rate pass-through 89,141 767 (1,249) 88,659
Variable rate pass-through 87,237 141 (876) 86,502
Fixed rate CMO 141,485 280 (3,899) 137,866
Variable rate CMO 92,710 1,603 (34) 94,279
-------- ----- ------- -------
Total mortgage-
backed securities 410,573 2,791 (6,058) 407,306
-------- ----- ------- -------
Total securities
available-for-sale $835,610 7,553 (14,334) 828,829
======== ===== ======= =======
(Continued)
16
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 2003, are as follows:
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Held-to-maturity:
U.S. government and agencies:
Due in five years - ten years $ 14,985 1,532 -- 16,517
Due after ten years 2,047 645 -- 2,692
Municipal securities:
Due in one year - five years 90 4 -- 94
Due after ten years 65,466 3,345 -- 68,811
Corporate debt issues:
Due after ten years 45,831 2,311 (475) 47,667
Mortgage-backed securities:
Fixed rate pass-through 8,297 120 -- 8,417
Variable rate pass-through 57,988 219 (45) 58,162
Fixed rate CMO 24,651 185 (240) 24,596
Variable rate CMO 258,466 1,566 (66) 259,966
--------- ----- ------ -------
Total mortgage-
backed securities 349,402 2,090 (351) 351,141
--------- ----- ------ -------
Total securities
held-to-maturity $ 477,821 9,927 (826) 486,922
========= ===== ====== =======
(Continued)
17
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Available-for-sale:
U.S. government and agencies:
Due in five years - ten years $ 11,900 1,800 -- 13,700
Due after ten years 30,000 3 -- 30,003
Equity securities and mutual funds 140,603 3,768 (311) 144,060
Municipal securities:
Due in five years - ten years 459 23 -- 482
Due after ten years 119,337 3,846 (11) 123,172
Corporate debt issues:
Due in one year or less 1,006 11 -- 1,017
Due in one year - five years 7,089 287 -- 7,376
Due in five years - ten years 15,000 -- -- 15,000
Due after ten years 4,407 -- (219) 4,188
Mortgage-backed securities:
Fixed rate pass-through 43,449 2,030 (18) 45,461
Variable rate pass-through 128,528 960 (2) 129,486
Fixed rate CMO 191,911 135 (1,879) 190,167
Variable rate CMO 190,978 1,578 (37) 192,519
-------- ------ ------ -------
Total mortgage-
backed securities 554,866 4,703 (1,936) 557,633
-------- ------ ------ -------
Total securities
available-for-sale $884,667 14,441 (2,477) 896,631
======== ====== ====== =======
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
--------------------------
2004 2003
------- -------
Mortgage-backed securities:
FNMA $388,195 355,722
GNMA 177,490 58,834
FHLMC 179,166 426,753
Other (nonagency) 42,232 65,726
-------- -------
Total mortgage-backed securities $787,083 907,035
======== =======
(Continued)
18
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Marketable securities having a carrying value of $406,706,000 at June 30,
2004 were pledged under collateral agreements. During the fiscal years
2004, 2003, and 2002, the Company sold marketable securities classified as
available-for-sale for $286,770,000, $84,134,000, and $50,720,000,
respectively. The gross pretax profit on these sales was $5,386,000,
$1,264,000, and $73,000. 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.
The following table shows the fair value and gross unrealized losses on
investment securities, aggregated by investment category and length of
time that the individual securities have been in a continuous unrealized
loss position at June 30, 2004:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
--------------------- --------------------- --------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------- ---------- --------- ---------- ------- ----------
U.S. government and
agencies $ 180,357 3,535 -- -- 180,357 3,535
Municipal securities 124,947 4,963 4,340 449 129,287 5,412
Corporate debt issues 81,056 1,818 9,647 504 90,703 2,322
Mortgage-backed securities 406,047 5,568 45,550 2,702 451,597 8,270
---------- ------ ------ ----- ------- ------
Total temporarily
impaired securities $ 792,407 15,884 59,537 3,655 851,944 19,539
========== ====== ====== ===== ======= ======
The decline in the fair value of securities primarily resulted from
interest rate fluctuations. Approximately 92% of temporarily impaired
securities have been in a continuous unrealized loss position for less
than 12 months. The Company has the ability and intent to hold these
securities until the market value recovers or maturity and the Company
believes the collection of the contractual principal and interest is
probable. The Company believes for these reasons that the unrealized
losses are all considered temporary impairment losses. There are
approximately 430 positions that are temporarily impaired at June 30,
2004. The aggregate carrying amount of cost-method investments at June 30,
2004 was $1,417,133,000, of which all were evaluated for impairment.
(Continued)
19
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(5) LOANS RECEIVABLE
Loans receivable at June 30, 2004 and 2003, are summarized in the table
below:
2004 2003
----------- ---------
Real estate loans:
One- to four-family $ 2,372,352 2,112,811
Multi-family and commercial 440,864 377,507
----------- ---------
Total real estate loans 2,813,216 2,490,318
Consumer loans:
Automobile 120,887 118,120
Home improvement 575,644 378,341
Education 95,599 90,485
Loans on savings accounts 6,646 7,132
Other 111,612 107,483
----------- ---------
Total consumer loans 910,388 701,561
Commercial loans 149,509 130,115
----------- ---------
Total loans receivable, gross 3,873,113 3,321,994
Deferred loan fees (6,805) (7,409)
Allowance for loan losses (29,689) (26,593)
Undisbursed loan proceeds (real
estate loans) (48,049) (41,221)
----------- ---------
Total loans receivable, net $ 3,788,570 3,246,771
=========== =========
At June 30, 2004 and 2003, the Company serviced loans for others
approximating $314,150,000 and $327,243,000, 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, 2004, 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, 2004, include $712,285,000 of adjustable rate
loans and $3,160,828,000 of fixed rate loans.
Loans receivable at June 30, 2003, include $590,725,000 of adjustable rate
loans and $2,731,269,000 of fixed rate loans.
Included in the commercial loans balance of $149,509,000 at June 30, 2004
and $130,115,000 at June 30, 2003 is a receivable from Northwest Bancorp,
MHC of $22,000,000 and $12,000,000, respectively.
(Continued)
20
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
The Company's exposure to credit loss in the event of nonperformance by
the other party to off-balance-sheet financial instruments is represented
by the contract amount of the financial instrument. The Company uses the
same credit policies in making commitments for off-balance-sheet financial
instruments as it does for on-balance-sheet instruments. Financial
instruments with off-balance-sheet risk as of June 30,2004 and 2003, are
presented in the following table:
JUNE 30
---------------------------
2004 2003
--------- -------
Loan commitments $ 144,943 118,465
Undisbursed lines of credit 205,196 163,235
Standby letters of credit 12,234 12,589
--------- -------
$ 362,373 294,289
========= =======
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, 2004, for fixed rate
loans, are $54,684,000. The interest rates on these commitments
approximate market rates at June 30, 2004. Outstanding mortgage loan
commitments at June 30, 2004, for adjustable rate loans are $47,610,000.
The fair value of these commitments are affected by fluctuations in market
rates of interest.
The Company issues standby letters of credit in the normal course of
business. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Standby letters
of credit generally are contingent upon the failure of the customer to
perform according to the terms of the underlying contract with the third
party. The Company is required to perform under a standby letter of credit
when drawn upon by the guaranteed third party in the case of
nonperformance by the Company's customer. The credit risk associated with
standby letters of credit is essentially the same as that involved in
extending loans to customers and is subject to normal credit policies.
Collateral may be obtained based on management's credit assessment of the
customer. The maximum potential amount of future payments the Company
could be required to make under these standby letters of credit is
$12,234,000, of which $11,717,000 is fully collateralized. A liability of
$58,000 has been recognized by the Company for the obligations and there
are no recourse provisions that would enable the Company to recover any
amounts from third parties.
The Company automatically places loans on nonaccrual status when they
become more than 90 days contractually delinquent or when the paying
capacity of the obligor becomes inadequate to meet the requirements of the
contract. When a loan is placed on nonaccrual, all previously accrued and
uncollected interest is reversed against current period interest income.
Nonaccrual loans at June 30, 2004, 2003, and 2002 were $32,063,000,
$32,613,000, and $15,800,000, respectively.
(Continued)
21
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
A loan is considered to be impaired, as defined by SFAS No. 114 Accounting
by Creditors for Impairment of a Loan, when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments. The amount of
impairment is required to be measured using one of the three methods
prescribed by SFAS 114: (1) the present value of expected future cash
flows discounted at the loan's effective interest rate; (2) the loan's
observable market price; or (3) the fair value of collateral if the loan
is collateral dependent. If the measure of the impaired loan is less than
the recorded investment in the loan a specific reserve is allocated for
the impairment. Impaired loans at June 30, 2004, 2003, and 2002 were
$32,063,000, $32,613,000, and $15,327,000, respectively. Average impaired
loans during fiscal 2004, 2003, and 2002 were $32,361,000, $23,749,000 and
$16,152,000, 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, 2004 and 2003, is presented in
the following table:
June 30
-------------------
2004 2003
-------- --------
Investment securities $ 5,201 3,433
Mortgage-backed securities 2,574 2,738
Loans receivable 13,612 12,543
-------- ------
$ 21,387 18,714
======== ======
(7) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for losses on loans receivable for the years
ended June 30, 2004, 2003, and 2002, are presented in the following table:
2004 2003 2002
-------- ------- -------
Balance, beginning of fiscal year $ 26,593 22,042 20,290
Provision 6,842 8,431 6,360
Charge-offs (5,734) (5,778) (5,313)
Acquisitions 925 1,201 237
Recoveries 1,063 697 468
-------- ------- -------
Balance, end of fiscal year $ 29,689 26,593 22,042
======== ======= =======
While management uses available information to provide for losses, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information
available to them at the time of their examination. Management believes,
to the best of their knowledge, that all known losses as of the balance
sheet dates have been recorded.
(Continued)
22
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(8) FEDERAL HOME LOAN BANK STOCK
The Company's banking subsidiaries are members of the Federal Home Loan
Bank system. As a member, Northwest maintains an investment in the capital
stock of the Federal Home Loan Bank of Pittsburgh, at cost, in an amount
not less than 5% of borrowings outstanding plus 0.5% of unused FHLB
borrowing capacity.
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2004 and 2003, are summarized by major
classification in the following table:
2004 2003
-------- -------
Land and land improvements $ 6,894 5,883
Office buildings and improvements 71,565 54,105
Furniture, fixtures, and equipment 50,777 41,445
Leasehold improvements 6,610 5,900
-------- -------
Total, at cost 135,846 107,333
Less accumulated depreciation and
amortization 56,091 44,143
-------- -------
Premises and equipment, net $ 79,755 63,190
======== =======
Depreciation and amortization expense for the years ended June 30, 2004,
2003, and 2002, was $6,788,000, $6,014,000, and $5,339,000, 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:
2005 $ 2,659
2006 2,244
2007 1,880
2008 1,645
2009 1,494
Thereafter 5,977
---------
$ 15,899
=========
Rental expense for the years ended June 30, 2004, 2003, and 2002, was
$3,204,000, $2,698,000, and $2,535,000, respectively.
(Continued)
23
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(10) GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the effect on net income and earnings per share
as a result of adopting SFAS Nos. 141, 142, and 147.
FISCAL YEAR ENDED JUNE 30
----------------------------------
2004 2003 2002
---------- --------- ---------
Reported net income $ 50,528 41,691 40,171
Deduct cumulative effect of
accounting change -- -- 2,237
Add back goodwill amortization -- -- --
---------- --------- ---------
Adjusted net income $ 50,528 41,691 37,934
========== ========= =========
Basic earnings per share:
Reported net income $ 1.05 0.88 0.85
Deduct cumulative effect of
accounting change -- -- 0.05
Add back goodwill amortization -- -- --
---------- --------- ---------
Adjusted net income $ 1.05 0.88 0.80
========== ========= =========
Diluted earnings per share:
Reported net income $ 1.04 0.87 0.84
Deduct cumulative effect of
accounting change -- -- 0.05
Add back goodwill amortization -- -- --
---------- --------- ---------
Adjusted net income $ 1.04 0.87 0.79
========== ========= =========
(Continued)
24
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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
------------------
2004 2003
-------- ------
Amortized intangible assets:
Core deposit intangibles - gross $ 19,503 4,401
Less accumulated amortization (5,283) (1,621)
-------- ------
Core deposit intangibles - net $ 14,220 2,780
======== ======
Customer contract intangible assets - gross $ 831 831
Less accumulated amortization (164) (81)
-------- ------
Customer contract intangible
assets - net $ 667 750
======== ======
Noncompete intangible assets - gross $ 1,050 --
Less accumulated amortization (787) --
-------- ------
Noncompete intangible assets - net $ 263 --
======== ======
The following information shows the actual aggregate amortization expense
for the current and prior fiscal years as well as the estimated aggregate
amortization expense, based upon current levels of intangible assets, for
each of the five succeeding fiscal years:
For the fiscal year ended 6/30/01 $ 165
For the fiscal year ended 6/30/02 283
For the fiscal year ended 6/30/03 650
For the fiscal year ended 6/30/04 4,532
For the fiscal year ended 6/30/05 4,267
For the fiscal year ended 6/30/06 3,387
For the fiscal year ended 6/30/07 2,784
For the fiscal year ended 6/30/08 2,083
For the fiscal year ended 6/30/09 1,537
(Continued)
25
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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, 2002 $ 70,343 893 71,236
Goodwill acquired 4,970 -- 4,970
Amortization -- -- --
Impairment losses -- -- --
--------- ----- -------
Balance at June 30, 2003 75,313 893 76,206
Goodwill acquired 50,224 419 50,643
Amortization -- -- --
Impairment losses -- -- --
--------- ----- -------
Balance at June 30, 2004 $125,537 1,312 126,849
========= ===== =======
(11) DEPOSITS
Deposit balances at June 30, 2004 and 2003, are shown in the table below:
2004 2003
------------- ----------
Savings accounts $ 1,024,244 920,721
Interest-bearing checking accounts 645,057 670,935
Noninterest-bearing checking accounts 217,667 190,987
Money market deposit accounts 751,355 568,164
Certificates of deposit 2,047,329 1,912,749
------------- ---------
$ 4,685,652 4,263,556
============= =========
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $323,911,000 at June 30, 2004
and $297,514,000 at June 30, 2003. Generally, deposits in excess of
$100,000 are not federally insured.
(Continued)
26
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
The following table summarizes the contractual maturity of the certificate
accounts:
2004 2003
----------- ---------
Due within 12 months $ 977,019 845,985
Due between 12 and 24 months 492,815 432,694
Due between 24 and 36 months 319,969 287,215
Due between 36 and 48 months 139,102 196,404
Due between 48 and 60 months 79,528 109,992
After 60 months 38,896 40,459
----------- ---------
$ 2,047,329 1,912,749
=========== =========
The following table summarizes the interest expense incurred on the
respective deposits:
YEARS ENDED JUNE 30
----------------------------
2004 2003 2002
-------- ------- -------
Savings accounts $ 13,886 17,701 15,473
Interest-bearing checking accounts 5,247 6,873 4,747
Money market deposit accounts 11,990 11,403 9,019
Certificate accounts 65,679 73,530 99,765
-------- ------- -------
$ 96,802 109,507 129,004
======== ======= =======
(Continued)
27
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(12) BORROWED FUNDS
Borrowed funds at June 30, 2004 and 2003, are presented in the following
table:
2004 2003
-------------------------- --------------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ----------- ----------- -----------
Term notes payable to the FHLB
of Pittsburgh:
Due within one year $ 34,706% 6.15 $ 16,253% 6.62
Due between one and two years -- -- 35,056 6.15
Due between two and three years -- -- -- --
Due between three and four years 43,546 3.97 -- --
Due between four and five years 101,076 5.00 43,696 3.97
Due between five and ten years 232,802 4.72 333,912 4.80
Due between ten and twenty years 851 3.00 1,097 2.76
----------- -----------
412,981 430,014 4.89
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh -- -- -- --
Other borrowings due between
one and two years -- -- 180 10.00
Investor notes payable, due
various dates through 2008 6,264 4.99 6,330 4.98
Securities sold under agreement to
repurchase, due within one year 29,902 1.29 29,226 1.27
----------- -----------
Total borrowed funds $ 449,147 $ 465,750
=========== ===========
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 5, 2005. 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 2004 and 2003 was $29,364,000 and
$20,791,000, respectively. The maximum amount of security repurchase
agreements outstanding during fiscal years 2004 and 2003 was $32,097,000
and $29,226,000, respectively.
(Continued)
28
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(13) INCOME TAXES
Total income tax was allocated for the years ended June 30, 2004, 2003,
and 2002, as follows:
2004 2003 2002
--------- --------- ---------
Income before income taxes $ 20,103 16,587 16,600
Shareholders' equity for unrealized gain/
(loss) on securities available-for-sale (6,560) 840 1,636
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (832) (221) (135)
--------- --------- ---------
$ 12,711 17,206 18,101
========= ========= =========
Income tax expense (benefit) applicable to income before taxes consists
of:
YEARS ENDED JUNE 30
---------------------------------------
2004 2003 2002
--------- --------- ---------
Current $ 17,786 14,685 14,981
Deferred 2,317 1,902 1,619
--------- --------- ---------
$ 20,103 16,587 16,600
========= ========= =========
The significant components of deferred income tax expense (benefit) are as
follows:
JUNE 30
----------------------------
2004 2003 2002
------ ------ ------
Deferred income tax expense (benefit) $1,902 1,686 1,058
NOL carryforward 415 216 561
------ ------ ------
$2,317 1,902 1,619
====== ====== ======
(Continued)
29
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
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
-----------------------------
2004 2003 2002
----- ----- -----
Expected tax rate 35.0% 35.0% 35.0%
Tax-exempt interest income (6.5) (5.4) (4.9)
State income tax, net of federal benefit 3.0 2.5 2.5
Valuation allowance -- -- (0.9)
Bank-owned life insurance (2.0) (2.0) (0.1)
Other (1.0) (1.6) (1.2)
----- ----- -----
Effective tax rate 28.5% 28.5% 30.4%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 2004 and are presented below:
2004 2003
-------- --------
Deferred tax assets:
Deferred fee income $ 608 953
Deferred compensation expense 1,795 1,645
Net operating loss carryforwards 4,209 604
Bad debts 8,699 7,030
Accrued postretirement benefit cost 367 392
Marketable securities available-for-sale 2,374 --
Reserve for uncollected interest 866 703
Purchase accounting 857 738
Alternative minimum tax credit carryforward 8,055 --
Other 302 503
-------- --------
28,132 12,568
Deferred tax liabilities:
Marketable securities available-for-sale -- 4,187
Pension expense 102 307
Intangible asset 7,649 1,837
Mortgage servicing rights 844 835
Fixed assets 1,273 801
Other 491 530
-------- --------
10,359 8,497
-------- --------
Net deferred tax asset $ 17,773 4,071
======== ========
The Company has determined that no valuation allowance is necessary for
the deferred tax assets because it is more likely than not 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
(Continued)
30
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
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
$10,850,000 of federal net operating losses and approximately $5,950,000
of state net operating losses which expire in years 2005 through 2020.
These net operating losses were acquired as part of the Prestige Bank and
Bell Federal Savings and Loan acquisitions. In addition, the Company has
approximately $8,055,000 of alternative minimum tax credit carryforwards,
which can be carried forward indefinitely.
(14) SHAREHOLDERS' EQUITY
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts, which require Northwest and
Jamestown to maintain certain statutory reserves. Northwest and Jamestown
may not pay dividends on or repurchase any of their common stock if the
effect thereof would reduce retained earnings below the level of adequate
capitalization as defined by federal and state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the
Internal Revenue Code (the Code), to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. Bad debt deductions for income tax purposes are included in
taxable income of later years only if the bad debt reserve is used
subsequently for purposes other than to absorb bad debt losses. Because
Northwest does not intend to use the reserve for purposes other than to
absorb losses, no deferred income taxes have been provided prior to fiscal
1987. Retained earnings at June 30, 2004, includes approximately
$30,000,000 representing such bad debt deductions for which no deferred
income taxes have been provided.
(Continued)
31
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(15) EARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding for the period, without considering common stock
equivalents or any dilutive items. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
There were no anti-dilutive options in any period presented in the table
below. The computation of basic and diluted earnings per share follows:
YEARS ENDED JUNE 30
-------------------------------------
2004 2003 2002
--------- --------- ---------
Reported net income $ 50,528 41,691 40,171
Deduct cumulative effect of
accounting change -- -- 2,237
--------- --------- ---------
Net income before cumulative effect
of accounting change $ 50,528 41,691 37,934
========= ========= =========
Weighted average common shares
outstanding $ 47,817 47,626 47,479
Common stock equivalents due to effect
of stock options 582 531 511
--------- --------- ---------
Total weighted average
common shares and
equivalents $ 48,399 48,157 47,990
========= ========= =========
Basic earnings per share:
Reported net income $ 1.05 0.88 0.85
Deduct cumulative effect of
accounting change -- -- 0.05
--------- --------- ---------
Net income before cumulative effect
of accounting change $ 1.05 0.88 0.80
========= ========= =========
Diluted earnings per share:
Reported net income $ 1.04 0.87 0.84
Deduct cumulative effect of
accounting change -- -- 0.05
--------- --------- ---------
Net income before cumulative effect
of accounting change $ 1.04 0.87 0.79
========= ========= =========
(Continued)
32
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(16) EMPLOYEE BENEFIT PLANS
(a) PENSION PLANS
The Company maintains noncontributory defined benefit pension plans
covering substantially all employees and the members of its board of
directors. Retirement benefits are based on certain compensation
levels, age, and length of service. Contributions are based on an
actuarially determined amount to fund not only benefits attributed
to service to date but also for those expected to be earned in the
future. In addition, the Company has an unfunded Supplemental
Executive Retirement Plan (SERP) to compensate those executive
participants eligible for the Company's defined benefit pension plan
whose benefits are limited by Section 415 of the Internal Revenue
Code.
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 $5,271,000, $3,945,000, and
$3,186,000 for the years ended June 30, 2004, 2003, and 2002,
respectively. Net periodic pension cost for the Company's defined
benefit pension plans consist of the following:
YEARS ENDED JUNE 30
------------------------------------
2004 2003 2002
-------- -------- --------
Service cost $ 3,267 2,526 2,195
Interest cost 2,568 2,207 1,940
Expected return on plan assets (2,208) (1,910) (1,800)
Net amortization and deferral 811 349 109
-------- -------- --------
Net periodic pension
cost $ 4,438 3,172 2,444
======== ======== ========
(Continued)
33
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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, 2004 and 2003:
2004 2003
--------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 41,572 33,220
Service cost 3,267 2,526
Interest cost 2,568 2,207
Actuarial loss 2,278 4,665
Benefits paid (959) (1,046)
--------- ---------
Benefit obligation at end of year $ 48,726 41,572
========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ 28,148 24,245
Actual return on plan assets 4,740 (1,042)
Employer contribution 3,692 5,991
Benefits paid (959) (1,046)
--------- ---------
Fair value of plan assets at end of year $ 35,621 28,148
========= =========
Funded status $ (13,105) (13,424)
Unrecognized transition asset (137) (177)
Unrecognized prior service cost 330 423
Unrecognized net actuarial loss 13,389 14,401
Adjustment to recognize minimum liability (138) (171)
--------- ---------
Accrued benefit cost $ 339 1,052
========= =========
The Company uses the same discount rate and rate of increase in
compensation levels to determine both the net pension cost and benefit
obligation.
The following table sets forth the assumptions used to develop the net
pension cost and benefit obligation:
YEARS ENDED JUNE 30
--------------------------
2004 2003 2002
---- ---- ----
Discount rate 6.25% 6.25% 6.75%
Expected long-term rate of
return on assets 8.00 8.00 8.00
Rate of increase in compensation
levels 4.00 4.00 4.00
The expected long-term rate of return on assets is based on the expected
return of each of the asset categories, weighted based on the median of
the target allocation for each category.
(Continued)
34
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
The accumulated benefit obligation for the funded defined benefit pension
plan was $32,086,000 and $27,815,000 at June 30, 2004 and 2003,
respectively. The accumulated benefit obligation for all unfunded defined
benefit plans was $2,172,000 and $2,236,000 at June 30, 2004 and 2003,
respectively.
The Company anticipates making contributions to its defined benefit
pension plan of $3.0 million to $5.0 million during the fiscal year ending
June 30, 2005.
The investment policy as established by the Plan Administrative Committee,
to be followed by the Trustee, is to invest assets based on the target
allocations shown in the table below. The assets will be reallocated
periodically by the Trustee based on the ranges set forth by the Plan
Administrative Committee to meet the target allocations. The investment
policy will be reviewed periodically to determine if the policy should be
changed. Pension assets will be conservatively invested with the goal of
providing market or better returns with below market risks. Assets will be
invested in a balanced portfolio composed primarily of equities, fixed
income, and cash or cash equivalent investments. The Trustee will try to
maintain an approximate asset mix position of 30-60% equities and 20-50%
bonds.
A maximum of 10% may be invested in any one stock, including Northwest
Bancorp, Inc. The actual objective of holding equity securities is to
provide capital appreciation consistent with the ownership of the common
stocks of medium to large companies. Acceptable bond investments are
direct or agency obligations of the U.S. Government or investment grade
corporate bonds. The average maturity of the bond portfolio shall not
exceed 10 years.
The following table sets forth the weighted average asset allocation of
defined benefit plans:
JUNE 30
TARGET ----------------------
ALLOCATION 2004 2003
---------- -------- --------
Asset category and debt securities 20 - 50% 29% 32%
Equity securities 30 - 60 58 56
Real estate -- -- --
Other 5 - 50 13 12
-------- --------
Total 100% 100%
======== ========
The benefits expected to be paid in each year from 2005 - 2009 are $945,
$1,023, $1,183, $1,329 and $1,435, respectively. The aggregate benefits
expected to be paid in the five years from 2010 - 2014 are $12,554. The
expected benefits to be paid are based on the same assumptions used to
measure the Company's benefit obligation at June 30, 2004 and include
estimated future employee service.
(b) POSTRETIREMENT HEALTHCARE PLAN
In addition to pension benefits, the Company provides postretirement
healthcare benefits for certain employees who were employed by the Company
as of October 1, 1993, and were at least 55 years of age on that date. The
Company accounts for these benefits in accordance with Statement of
Financial
(Continued)
35
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other than Pensions (SFAS 106). SFAS 106 requires the accrual
method of accounting for postretirement benefits other than pensions.
Net periodic cost for the Company's postretirement healthcare benefits
consist of the following:
YEARS ENDED JUNE 30
----------------------------
2004 2003 2002
------ ------ ------
Service cost $ -- 2 7
Interest cost 76 64 56
Recognized actuarial gain 22 2 (178)
------ ------ ------
Net periodic (benefit
cost $ 98 68 (115)
====== ====== ======
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, 2004
and 2003:
2004 2003
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,261 993
Service cost -- 2
Interest cost 76 64
Actuarial (gain) loss 99 310
Benefits paid (83) (108)
-------- --------
Benefit obligation at end of year 1,353 1,261
Fair value of plan assets at end of year -- --
-------- --------
Funded status (1,353) (1,261)
Unrecognized net actuarial (gain) loss 515 438
-------- --------
Accrued benefit cost $ (838) (823)
======== ========
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
YEARS ENDED JUNE 30
------------------------------------
2004 2003 2002
-------- -------- --------
Discount rate 6.25% 6.25% 6.75%
Monthly cost of healthcare insurance
per beneficiary $ 222.25 198.61 141.41
Annual rate of increase in healthcare costs 4.00% 4.00% 4.00%
(Continued)
36
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
If the assumed rate of increase in healthcare costs was increased by one
percentage point to 5% from the level of 4% presented above, the service
and interest cost components of net periodic postretirement healthcare
benefit cost would increase by $7,117, in the aggregate, and the
accumulated postretirement benefit obligation for healthcare benefits
would increase by $113,872.
(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, $1,123,000, and $871,000 for the
fiscal years ended June 30, 2004, 2003, and 2002, respectively.
(d) RECOGNITION AND RETENTION PLAN
On November 21, 1995, the Company established a Recognition and Retention
Plan for Employees and Outside Directors (RRP). The objective of the RRP
was to enable the Company to provide directors, officers and employees
with a proprietary interest in the Company as an incentive to contribute
to its success. The number of common shares issued and granted under the
RRP was 552,000 (total market value of $3,243,000 at issuance date).
Shares of common stock granted pursuant to the RRP were in the form of
restricted stock and generally are payable over a five-year period at the
rate of 20% per year, commencing on the date of the award grant.
Compensation expense, in the amount of the fair market value of the common
stock at the date of the grant, was recognized pro rata over the five
years during which the shares were payable. The recipients are entitled to
all voting and other shareholder rights, except that the shares, while
restricted, may not be sold, pledged or otherwise disposed of and are
required to be held in a trust.
(e) STOCK OPTION PLAN
On November 21, 1995, the Company adopted the 1995 Stock Option Plan. The
objective of the Stock Option Plan is to provide an additional performance
incentive to the Company's employees and outside directors. The Stock
Option Plan authorized the grant of stock options and limited stock
appreciation rights for 1,380,000 shares of the Company's common stock. On
December 20, 1995, the Company granted 242,000 nonstatutory stock options
to its outside directors at an exercise price of $5.58 per share (95% of
the Company's common stock fair market value per share at grant date) and
923,200 incentive stock options to employees at an exercise price of
$5.875 per share. On March 22, 1996, the Company granted 122,800 incentive
stock options to employees at an exercise price of $5.625 per share. On
December 16, 1998, the Company granted 15,086 incentive stock options to
employees at an exercise price of $9.875 per share. On October 20, 1999,
the Company granted 2,000 nonstatutory stock options to an outside
director and 57,700 incentive stock options to employees at an exercise
price of $7.812 per share. On June 21, 2000, the Company granted the
remaining 17,214 incentive stock options as well as 786 previously
forfeited options at an exercise
(Continued)
37
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
price of $6.875 per share. On November 17, 2000, the Company adopted the
2000 Stock Option Plan. This Plan authorized the grant of stock options
and limited stock rights for 800,000 shares of the Company's common stock.
On October 17, 2001 the Company granted 84,000 nonstatutory stock options
to its outside directors and 143,845 incentive stock options to employees
at an exercise price of $9.780 per share. On August 21, 2002, the Company
granted 162,940 incentive stock options to employees at an exercise price
of $13.30 per share. On August 20, 2003, the Company granted 182,000
incentive stock options to employees at an exercise price of $16.59 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:
2004 2003 2002
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ---------- ---------- ---------- ---------- ----------
Balance at
beginning of year 1,182,656 $ 7.74 1,177,880 $ 6.74 1,124,316 6.00
Granted 182,000 16.59(a) 162,940 13.30(a) 227,845 9.78(a)
Exercised (301,314) 6.30 (156,792) 5.94 (166,569) 5.86
Forfeited (1,458) 13.23 (1,372) 7.82 (7,712) 8.15
---------- ---------- ----------
Balance at end of year 1,061,884 9.66 1,182,656 7.74 1,177,880 6.74
========== ========== ==========
Exercisable at
end of year 729,068 7.78 902,983 6.64 966,861 6.14
(a) Weighted average fair value of options at $4.03, $3.76, and $2.48,
grant date: respectively.
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE PRICE PRICE PRICE PRICE PRICE PRICE TOTAL
$5.580 $5.625 $5.875 $6.875 $7.812 $9.780 $9.875 $13.302 $16.590 $9.663
-------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
Options outstanding:
Number of options 58,450 28,460 366,433 10,200 36,280 212,113 14,486 156,456 179,006 1,061,884
Weighted average
remaining contract
life (years) 1.50 1.75 1.50 6.00 5.25 7.25 4.50 8.00 9.00 5.09
Options exercisable:
Number of options 58,450 28,460 366,433 10,200 36,280 122,582 14,486 58,973 33,204 729,068
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure about Fair Value of Financial Instruments (SFAS
107), requires disclosure of fair value information about financial
instruments whether or not recognized in the consolidated statement of
financial condition. SFAS 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
(Continued)
38
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
the underlying value of the Company. The carrying amounts reported in the
consolidated statement of financial condition approximate fair value for
the following financial instruments: cash on hand and interest-earning
deposits in other institutions, accrued interest receivable, accrued
interest payable, and marketable securities available-for-sale.
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:
2004 2003
----------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- --------- ----------
Financial assets:
Cash and equivalents $ 171,079 171,079 320,000 320,000
Securities available-for-sale 828,829 828,829 896,631 896,631
Securities held-to-maturity 588,304 588,366 477,821 486,922
Loans receivable 3,825,064 3,908,435 3,280,773 3,458,496
Accrued interest receivable 21,387 21,387 18,714 18,714
FHLB stock 35,655 35,655 33,764 33,764
----------- ---------- --------- ---------
Total financial assets $ 5,470,318 5,553,751 5,027,703 5,214,527
=========== ========== ========= =========
Financial liabilities:
Savings and checking accounts $ 2,638,323 2,638,323 2,350,807 2,350,807
Time deposits 2,047,329 2,082,423 1,912,749 1,974,350
Borrowed funds 449,147 452,691 465,750 500,449
Trust-preferred securities 102,062 102,959 99,000 109,293
Accrued interest payable 3,919 3,919 4,101 4,101
----------- ---------- --------- ---------
Total financial liabilities $ 5,240,780 5,280,315 4,832,407 4,939,000
=========== ========== ========= =========
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, 2004 and 2003.
MARKETABLE SECURITIES
Estimated market values are based on quoted market prices, dealer quotes
and prices obtained from independent pricing services. If a quoted market
price is not available, fair value is estimated using quoted market prices
for similar securities. Refer to note 4 of the consolidated financial
statements for the detail of type of investment securities.
LOANS RECEIVABLE
Loans with comparable characteristics including collateral and repricing
structures were segregated for valuation purposes. Each loan pool was
separately valued utilizing a discounted cash flow analysis. Projected
monthly cash flows were discounted to present value using a market rate
for comparable loans. Characteristics of comparable loans included
remaining term, coupon interest and estimated prepayment
(Continued)
39
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
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.
DEPOSIT LIABILITIES
SFAS 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits, money market and other savings
accounts, to be the amount payable on demand. Although market premiums
paid for depository institutions reflect an additional value for these
low-cost deposits, SFAS 107 prohibits adjusting fair value for any value
expected to be derived from retaining those deposits for a future period
of time or from the benefit that results from the ability to fund
interest-earning assets with these deposit liabilities. The fair value
estimates of deposit liabilities do not include the benefit that results
from the low-cost funding provided by these deposits compared to the cost
of borrowing funds in the market. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies
contractual cost currently being offered in the existing portfolio to
current market rates being offered locally for deposits of similar
remaining maturities. The valuation adjustment for the portfolio consists
of the present value of the difference of these two cash flows, discounted
at the assumed market rate of the corresponding maturity.
BORROWED FUNDS
The fixed rate advances were valued by comparing their contractual cost to
the prevailing market cost.
TRUST-PREFERRED SECURITIES
The fair value of fixed rate trust-preferred securities is based on the
closing trade price on the last day of the fiscal year. The variable rate
trust-preferred securities are calculated using the discounted cash flows
at the prevailing rate of interest.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
These financial instruments generally are not sold or traded, and
estimated fair values are not readily available. However, the fair value
of commitments to extend credit and standby letters of credit is estimated
using the fees currently charged to enter into similar agreements.
Commitments to extend credit issued by the Company are generally
short-term in nature and, if drawn upon, are issued under current market
terms. At June 30, 2004 and 2003, there was no significant unrealized
appreciation or depreciation on these financial instruments.
(18) REGULATORY CAPITAL REQUIREMENTS
The Company's banking subsidiaries are subject to various regulatory
capital requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by the
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices must be met. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
(Continued)
40
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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, 2004 and 2003,
the Company's banking subsidiaries exceed all capital adequacy
requirements to which they are subject. At June 30, 2004, the maximum
amount available for dividend payments by Northwest to the Company, while
maintaining its "well capitalized" status, is approximately $144.0
million.
As of June 15, 2004, the most recent notification from the FDIC
categorized Northwest and Jamestown as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized," the banks must maintain total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the banks' categories.
The actual, required and well capitalized levels as of June 30, 2004 and
2003, are as follows:
(in thousands)
JUNE 30, 2004
-----------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
--------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ----- --------- -----
Total capital (to risk
weighted assets):
Northwest Savings Bank $430,381 15.02% $ 229,505 8.00% $ 286,881 10.00%
Jamestown Savings Bank 23,968 10.57 18,140 8.00 22,674 10.00
Tier I capital (to risk
weighted assets):
Northwest Savings Bank 402,290 14.02 114,752 4.00 172,129 6.00
Jamestown Savings Bank 21,925 9.67 9,070 4.00 13,605 6.00
Tier I capital (leverage)
(to average assets):
Northwest Savings Bank 402,290 7.56 159,709 3.00* 266,182 5.00
Jamestown Savings Bank 21,925 5.79 11,352 3.00* 18,920 5.00
(Continued)
41
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
JUNE 30, 2003
----------------------------------------------------
MINIMUM CAPITAL WELL CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
--------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ----- --------- ------
Total capital (to risk
weighted assets):
Northwest Savings Bank $315,809 12.37% $ 204,279 8.00% $ 255,349 10.00%
Jamestown Savings Bank 20,205 10.55 15,324 8.00 19,155 10.00
Tier I capital (to risk
weighted assets):
Northwest Savings Bank 289,257 11.33 102,140 4.00 153,209 6.00
Jamestown Savings Bank 18,654 9.74 7,662 4.00 11,493 6.00
Tier I capital (leverage)
(to average assets):
Northwest Savings Bank 289,257 6.03 143,853 3.00* 239,755 5.00
Jamestown Savings Bank 18,654 5.56 10,061 3.00* 16,769 5.00
* 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, 2004, the Company had not been advised of any additional
requirements in this regard.
(19) CONTINGENT LIABILITIES
The Company and its subsidiaries are subject to a number of asserted and
unasserted claims encountered in the normal course of business. Management
believes that the aggregate liability, if any, that may result from such
potential litigation will not have a material adverse effect on the
Company's financial statements.
(20) COMPONENTS OF COMPREHENSIVE INCOME
For the year ended June 30:
2004 2003 2002
--------- ------ ------
Unrealized gain (loss) on marketable
securities available-for-sale $ (15,975) 3,101 4,674
Tax (expense) benefit 5,590 (1,085) (1,636)
Reclassification adjustment for (gains) losses
included in net income, net of tax
of $970, $245, and $0, respectively (1,800) (455) --
--------- ------ ------
Net unrealized gain (loss) $ (12,185) 1,561 3,038
========= ====== ======
(Continued)
42
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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
------------------
2004 2003
--------- -------
ASSETS
Cash and cash equivalents $ 10,542 42,390
Marketable securities available-for-sale 1,116 2,299
Investment in bank subsidiaries 559,748 396,501
Loan receivable - Northwest Bancorp, MHC 22,000 12,000
Goodwill 2,138 2,138
Other assets 7,006 3,874
--------- -------
Total assets $ 602,550 459,202
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures payable $ 102,062 102,062
Other liabilities 509 208
--------- -------
Total liabilities 102,571 102,270
Shareholders' equity 499,979 356,932
--------- -------
Total liabilities and shareholders' equity $ 602,550 459,202
========= =======
(Continued)
43
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Statements of Income
YEARS ENDED JUNE 30
--------------------------
2004 2003 2002
-------- ------- -------
Income:
Interest income $ 1,366 2,042 1,313
Dividends from bank subsidiary -- -- 1,250
Undistributed earnings from equity
investment in bank subsidiaries 55,499 45,778 41,204
Gain on sale of marketable securities
available-for-sale 69 -- --
Other income 2 9 8
-------- ------- -------
Total income 56,936 47,829 43,775
Expense:
Compensation and benefits 318 272 302
Amortization of intangible assets 788 -- --
Other expense 292 319 77
Interest expense 7,714 7,845 4,567
-------- ------- -------
Total expense 9,112 8,436 4,946
-------- ------- -------
Net income before taxes 47,824 39,393 38,829
Federal and state income taxes (2,704) (2,298) (1,342)
-------- ------- -------
Net income $ 50,528 41,691 40,171
======== ======= =======
(Continued)
44
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
YEARS ENDED JUNE 30
-----------------------------
2004 2003 2002
--------- -------- --------
Operating activities:
Net income $ 50,528 41,691 40,171
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Undistributed earnings of subsidiaries (55,499) (45,778) (41,204)
Depreciation and amortization 787 -- (1)
Noncash compensation expense related
to stock benefit plans -- -- 57
Gain on sale of marketable securities
available-for-sale (69) -- --
Net change in other assets and liabilities 1,037 (1,145) (2,071)
--------- -------- --------
Net cash used by operating
activities (3,216) (5,232) (3,048)
--------- -------- --------
Investing activities:
Additional investment in subsidiaries (1,000) (3,000) (33,062)
Loan to Northwest Bancorp, MHC (10,000) (12,000) --
Proceeds from sale or maturity of marketable
securities available-for-sale 1,169 1,932 --
Acquisitions, net of cash received (122,673) -- --
--------- -------- --------
Net cash used by investing
activities (132,504) (13,068) (33,062)
--------- -------- --------
Financing activities:
Cash dividends paid (9,963) (3,923) (2,906)
Proceeds from issuance of debentures -- -- 102,062
Proceeds from stock offering, net of
issuance costs 112,804 -- --
Proceeds from options exercised 1,031 742 432
--------- -------- --------
Net cash provided (used) by
financing activities 103,872 (3,181) 99,588
--------- -------- --------
Net increase (decrease) in cash
and cash equivalents $ (31,848) (21,481) 63,478
========= ======== ========
Cash and cash equivalents at beginning of year $ 42,390 63,871 393
Net increase (decrease) in cash
and cash equivalents (31,848) (21,481) 63,478
--------- -------- --------
Cash and cash equivalents at end of year $ 10,542 42,390 63,871
========= ======== ========
(Continued)
45
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(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, 2004 ($ IN 000'S) BANKS FINANCE OTHER* CONSOLIDATED
- ------------------------------- --------- -------- ------- ------------
External interest income $ 266,301 17,483 675 284,459
Intersegment interest income 4,507 -- (4,507) --
Interest expense 117,419 4,819 2,687 124,925
Provision for loan losses 4,120 2,722 -- 6,842
Noninterest income 30,430 1,269 241 31,940
Noninterest expense 104,685 7,919 1,397 114,001
Income tax expense (benefit) 21,440 1,367 (2,704) 20,103
Net income 53,574 1,925 (4,971) 50,528
Total assets 5,623,377 123,153 32,093 5,778,623
(Continued)
46
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
JUNE 30, 2003 ($ IN 000'S) BANKS FINANCE OTHER* CONSOLIDATED
- ------------------------------- --------- ---------- ------- ------------
External interest income $ 257,330 17,858 431 275,619
Intersegment interest income 5,278 -- (5,278) --
Interest expense 130,986 5,705 947 137,638
Provision for loan losses 5,860 2,571 -- 8,431
Noninterest income 25,625 1,110 -- 26,735
Noninterest expense 89,846 7,570 591 98,007
Income tax expense (benefit) 17,589 1,296 (2,298) 16,587
Net income 43,952 1,826 (4,087) 41,691
Total assets 5,078,418 123,747 20,202 5,222,367
AT OR FOR THE FISCAL YEAR ENDED COMMUNITY CONSUMER ALL
JUNE 30, 2002 ($ IN 000'S) BANKS FINANCE OTHER* CONSOLIDATED
- ------------------------------- --------- ---------- ------- ------------
External interest income $ 255,014 19,274 212 274,500
Intersegment interest income 6,710 -- (6,710) --
Interest expense 143,273 7,234 (3,252) 147,255
Provision for loan losses 3,180 3,180 -- 6,360
Noninterest income 16,921 1,252 -- 18,173
Noninterest expense 77,125 7,020 379 84,524
Income tax expense (benefit) 16,657 1,285 (1,342) 16,600
Cumulative effect of
accounting change 2,237 -- -- 2,237
Net income 40,647 1,807 (2,283) 40,171
Total assets 4,165,605 129,608 10,322 4,305,535
* Eliminations consist of intercompany interest income and interest
expense.
(23) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES)
The Company has two Delaware statutory business trusts, Northwest Capital
Trust I and Northwest Bancorp Statutory Trust I (the Trusts). These trusts
exist solely to issue preferred securities to third parties for cash,
issue common securities to the Company in exchange for capitalization of
the trusts, invest the proceeds from the sale of trust securities in an
equivalent amount of debentures of the Company and engage in other
activities that are incidental to those previously listed. Northwest
Capital Trust I issued
(Continued)
47
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
2,760,000 of 8.75% Cumulative Trust Preferred Securities through a public
offering on November 30, 2001 (liquidation value of $25 per preferred
security or $69,000,000) with a stated maturity of December 31, 2031. The
securities trade on the Nasdaq Stock Market under the symbol NWSBP.
Northwest Bancorp Statutory Trust I issued 30,000 Cumulative Trust
Preferred Securities in a private transaction to a pooled investment
vehicle on December 18, 2001 (liquidation value of $1,000 per preferred
security or $30,000,000) with a stated maturity of December 23, 2031 and a
floating rate of interest, which is reset quarterly, equal to three month
LIBOR plus 3.60%. The trust-preferred securities qualify as regulatory
Tier I capital and the cash distributions are tax deductible.
The Trusts have invested the proceeds of the offerings in junior
subordinated deferrable interest debentures issued by the Company. The
structure of these debentures mirrors the structure of the trust-preferred
securities. Northwest Capital Trust I holds $71,134,025 of the Company's
8.75% junior subordinated debentures, due December 31, 2031. Northwest
Bancorp Statutory Trust I holds $30,928,000 of the Company's junior
subordinated debentures due December 23, 2031 with a floating rate of
interest, reset quarterly, of three-month LIBOR plus 3.60%. The rate in
effect at June 30, 2004 was 5.13%. These subordinated debentures are the
sole assets of the trusts.
Prior to the adoption of FASB Interpretation No. 46 Revised (FIN 46
Revised) effective October 1, 2003, for financial reporting purposes, the
trusts were treated as subsidiaries and were consolidated into the
financial statements of the Company. The capital securities were presented
as separate line item on the consolidated statement of financial condition
as "Guaranteed preferred beneficial interests in Company's junior
subordinated deferrable interest debentures (trust-preferred securities)",
and the retained common capital securities of the trusts were eliminated
against the Company's investment in the trusts. Distributions on the
trust-preferred securities were reported as interest expense.
Upon adoption of FIN 46 Revised, the trusts were deconsolidated. As a
result, the junior subordinated debentures are reported on the
consolidated statement of financial condition as "Junior subordinated
deferrable interest debentures held by trusts that issue guaranteed
capital debt securities." The Company records interest expense on the
junior subordinated debentures. The Company also recorded the $3.1 million
of common capital securities issued by the trusts in other assets.
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.
(Continued)
48
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
The trusts must redeem the preferred securities when the debentures are
paid at maturity or upon an earlier redemption of the debentures to the
extent the debentures are redeemed. All or part of the debentures may be
redeemed at any time on or after December 31, 2006. Also, the debentures
may be redeemed at any time if existing laws or regulations, or the
interpretation or application of these laws or regulations, change,
causing:
- the interest on the debentures to no longer be deductible by the
Company for federal income tax purposes;
- the trust to become subject to federal income tax or to certain
other taxes or governmental charges;
- the trust to register as an investment company;
- the Company to become subject to capital requirements and the
preferred securities do not qualify as Tier I capital.
In addition, all or part of the debentures may be redeemed on or after
December 31, 2003 and prior to December 31, 2006 in the unlikely event of
a mutual-to-stock conversion of Northwest Bancorp, MHC (the 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).
(Continued)
49
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
(24) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(In thousands, except per share data)
Fiscal 2004:
Interest income $ 67,599 72,912 72,695 71,253
Interest expense 32,919 31,653 30,234 30,119
------------ ----------- -------- -------
Net interest income 34,680 41,259 42,461 41,134
Provision for loan losses 1,727 1,733 1,659 1,723
Noninterest income 9,761 7,310 7,860 7,009
Noninterest expenses 24,945 29,961 29,820 29,275
------------ ----------- -------- -------
Income before
income taxes 17,769 16,875 18,842 17,145
Income taxes 5,313 4,854 5,366 4,570
------------ ----------- -------- -------
Net income $ 12,456 12,021 13,476 12,575
============ =========== ======== =======
Basic earnings per share $ 0.26 0.25 0.28 0.26
Diluted earnings per share $ 0.26 0.25 0.28 0.26
(Continued)
50
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, 2003, and 2002
(All dollar amounts presented in tables are in thousands)
THREE MONTHS ENDED
---------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(In thousands, except per share data)
Fiscal 2003:
Interest income $ 69,011 70,170 69,267 67,171
Interest expense 34,620 35,856 33,810 33,352
------------ ----------- -------- -------
Net interest income 34,391 34,314 35,457 33,819
Provision for loan losses 1,659 2,157 2,295 2,320
Noninterest income 6,672 7,008 6,403 6,652
Noninterest expenses 22,767 24,459 25,417 25,364
------------ ----------- -------- -------
Income before
income taxes 16,637 14,706 14,148 12,787
Income taxes 5,194 4,418 3,952 3,023
------------ ----------- -------- -------
Net income $ 11,443 10,288 10,196 9,764
============ =========== ======== =======
Basic earnings per share $ 0.24 0.22 0.21 0.20
Diluted earnings per share $ 0.24 0.21 0.21 0.20
(25) SUBSEQUENT EVENTS
At the close of business on September 10, 2004, the Company acquired Leeds
Federal Savings Bank ("Leeds") from Northwest Bancorp, MHC in a
transaction accounted for as an exchange of shares between entities under
common control. The Company issued 1,334,859 common shares to Northwest
Bancorp, MHC in exchange for all of the outstanding shares of Leeds. In
addition to the shares issued, the Company cancelled a $12.0 million
loan to Northwest Bancorp, MHC. On September 11, 2004 the Company
converted the Leeds offices into Northwest Savings Bank offices. As a
result of this exchange, the Company's assets increased by $462.3 million,
deposits increased by $415.3 million and equity increased by $29.2
million (all unaudited).
For the year ended June 30, 2004, Leeds reported net income of $2.5
million (unaudited). For the period from January 24, 2003, date of
acquisition by Northwest Bancorp, MHC, to June 30, 2003 Leeds reported a
net loss of $15.8 million (unaudited), which included a goodwill
impairment charge of $16.8 million (unaudited).
On July 6, 2004, the Company filed an application with the Office of
Thrift Supervision to exchange shares with Northwest Bancorp, MHC to
transfer ownership of First Carnegie Deposit in a manner similar to the
Leeds transaction. The application is currently pending approval. At June
30, 2004 First Carnegie Deposit had assets of $97.7 million (unaudited)
and deposits of $86.7 million (unaudited).
51