<PAGE>
Registration No. 33-
------
As filed with the Securities and Exchange Commission on July 21, 1997
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NORTHWEST BANCORP, INC.
-------------------------------------------------
(Exact name of registrant as specified in charter)
Pennsylvania 6712 To be applied for
- -------------------------------- ------------------ ----------------------
(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification Number)
301 Second Avenue
Warren, Pennsylvania 16365
(814) 726-2140
-----------------------------------------------------------------------
(Address, including Zip Code, and telephone number, including area code
of Registrant's principal executive offices)
Eric Luse, Esq.
Kenneth R. Lehman, Esq.
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
(202) 274-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after receipt of all regulatory approvals.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================
Title of each class of
securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price per unit offering price registration fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 7,300,000 $ 16.25 /(1)/ $118,625,000 $35,947
$.10 par value shares
- ---------------------------------------------------------------------------------------------------------------
Common Stock, 690,000 $ 11.70 /(2)/ $ 8,073,000 $ 2,447
$.10 par value shares
- ---------------------------------------------------------------------------------------------------------------
Total Fee Paid $38,394
===============================================================================================================
</TABLE>
/(1)/ Pursuant to Rule 457(c), the registration fee is based upon the average of
the high and low prices of the common stock of Northwest Savings Bank on
July 17, 1997.
/(2)/ Represents shares underlying options. Such options have an exercise price
of $11.70 per share.
<PAGE>
__________ __, 1997
Dear Stockholder:
Please be advised that a Special Meeting of Stockholders (the "Special
Meeting") of Northwest Savings Bank (the "Bank") will be held at
_______________________, _______________________, Warren, Pennsylvania, on
__________, ________ __, 1997 at __:__ __.m., local time.
The attached Notice of Special Meeting and Prospectus/Information Statement
describe the formal business to be transacted at the Special Meeting. At the
Special Meeting a vote will be taken on a proposal to approve an Agreement and
Plan of Reorganization (the "Plan of Reorganization") which provides for the
establishment of Northwest Bancorp, Inc. (the "Stock Holding Company") as a
stock holding company parent of the Bank (the "Reorganization"). The Stock
Holding Company will be majority owned by Northwest Bancorp, M.H.C. (the "Mutual
Holding Company"), a Pennsylvania chartered mutual holding company. Pursuant to
the Plan of Reorganization: (i) the Bank will become a wholly owned subsidiary
of the Stock Holding Company; (ii) the Stock Holding Company will become a
majority owned subsidiary of the Mutual Holding Company; and (iii) each
outstanding share of common stock, par value $.10 per share, of the Bank will be
converted into one share of common stock, par value $.10 per share, of the Stock
Holding Company. Accordingly, immediately after the Reorganization each
stockholder of the Bank will have the same ownership interest in the Stock
Holding Company as such stockholder had in the Bank immediately prior to the
Reorganization.
Management believes that the establishment of the Stock Holding Company
will be in the best interests of stockholders because it will permit the Bank,
through the Stock Holding Company, to have substantially the same benefits of
other savings banks in a stock holding company structure. These benefits
include the ability to facilitate acquisitions of other financial institutions,
to repurchase common stock as market conditions permit, and to diversify holding
company operations.
Sincerely,
John O. Hanna
President and Chief Executive Officer
<PAGE>
NORTHWEST SAVINGS BANK
301 SECOND AVENUE
WARREN, PENNSYLVANIA 16365-2353
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________ __, 1997
A Special Meeting of Stockholders (the "Special Meeting") of Northwest
Savings Bank (the "Bank") will be held at _______________________________,
Warren, Pennsylvania, on ___________, _______ __, 1997, at __:__ .m., local
time.
The Special Meeting is for the following purpose which is more completely
described in the accompanying Prospectus/Information Statement:
The approval of an Agreement and Plan of Reorganization (the "Plan of
Reorganization") providing for the establishment of Northwest Bancorp, Inc.
(the "Stock Holding Company") as a stock holding company parent of the Bank
which stock holding company will be majority owned by Northwest Bancorp,
M.H.C. (the "Mutual Holding Company"), the Bank's mutual holding company.
Pursuant to the Plan of Reorganization: (i) the Bank will become a wholly
owned subsidiary of the Stock Holding Company; (ii) the Stock Holding
Company will become a majority owned subsidiary of the Mutual Holding
Company; and (iii) each outstanding share of common stock, par value $.10
per share, of the Bank will be converted into one share of common stock,
par value $.10 per share, of the Stock Holding Company; and
The approval of any other business that may properly be presented at the
Special Meeting. The Board of Directors is not aware of any other business to
come before the Special Meeting.
The adoption of the Plan of Reorganization must be approved by the
affirmative vote of two-thirds of the outstanding shares of the Bank's common
stock. The Mutual Holding Company owns more than two-thirds of the Bank's
common stock and intends to vote in favor of the proposal. ACCORDINGLY, THE
BANK IS NOT SOLICITING PROXIES FROM STOCKHOLDERS IN CONNECTION WITH THE SPECIAL
MEETING AND YOUR ATTENDANCE IS NOT REQUIRED.
Any action may be taken on the foregoing proposal at the Special Meeting or
any adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS
John O. Hanna
President and Chief Executive Officer
Warren, Pennsylvania
____________ __, 1997
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF......................................... 3
THE BANK................................................................................ 3
MARKET INFORMATION...................................................................... 5
DIVIDEND POLICY......................................................................... 6
General............................................................................... 6
Dividend Waivers by the Holding Company............................................... 7
MANAGEMENT OF THE BANK.................................................................. 7
Directors............................................................................. 9
Executive Officers who are not Directors.............................................. 10
TRANSACTIONS WITH CERTAIN RELATED PERSONS............................................... 10
PROPOSED FORMATION OF THE STOCK HOLDING COMPANY......................................... 11
Summary............................................................................... 11
Reasons for the Stock Holding Company Reorganization.................................. 11
Plan of Reorganization................................................................ 12
Capitalization........................................................................ 13
Regulatory Capital.................................................................... 15
Effective Date........................................................................ 15
Optional Exchange of Stock Certificates............................................... 15
Rights of Dissenting Stockholders..................................................... 16
Tax Consequences...................................................................... 16
Consequences Under Federal Securities Law............................................. 16
Conditions to the Reorganization...................................................... 17
Effect of the Reorganization on any Future Mutual-to-Stock Conversion of the Mutual
Holding Company...................................................................... 17
Effect of the Reorganization on Stock Benefit Plans of the Bank....................... 17
Amendment, Termination or Waiver...................................................... 17
Business of the Stock Holding Company................................................. 18
Management of the Stock Holding Company............................................... 18
Indemnification of Officers and Directors and Limitation of Liability................. 19
Comparison of Stockholder Rights and Certain Anti-Takeover Provisions................. 23
Regulation of the Stock Holding Company............................................... 26
DESCRIPTION OF CAPITAL STOCK OF THE STOCK HOLDING COMPANY............................... 29
General............................................................................... 29
Common Stock.......................................................................... 29
Preferred Stock....................................................................... 30
Accounting Treatment.................................................................. 30
Vote Required......................................................................... 31
STOCKHOLDER PROPOSALS................................................................... 31
MISCELLANEOUS........................................................................... 31
EXPERTS................................................................................. 31
AVAILABLE INFORMATION................................................................... 31
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................................... 32
</TABLE>
EXHIBIT A - Agreement and Plan of Reorganization
EXHIBIT B - Articles of Incorporation of Northwest Bancorp, Inc.
EXHIBIT C - Bylaws of Northwest Bancorp, Inc.
<PAGE>
PROSPECTUS/INFORMATION STATEMENT
NORTHWEST SAVINGS BANK
301 SECOND AVENUE
WARREN, PENNSYLVANIA 16365-2353
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1997
This Prospectus/Information Statement is furnished in connection with
the Special Meeting of Stockholders of Northwest Savings Bank (the "Bank"), a
Pennsylvania-chartered stock savings bank. The Special Meeting will be held at
___________________, Warren, Pennsylvania, on ___________, _______ __, 1997. The
accompanying Notice of Special Meeting and this Information Statement are first
being mailed to stockholders on or about __________ __, 1997.
At the Special Meeting stockholders will vote on the approval of an
Agreement and Plan of Reorganization (the "Plan of Reorganization") pursuant to
which the Bank and the Mutual Holding Company will reorganize into the "two-
tier" mutual holding company structure. In the Reorganization, a new
Pennsylvania chartered stock holding company (the "Stock Holding Company") will
be established as a majority owned subsidiary of Northwest Bancorp, MHC (the
"Mutual Holding Company") as described more specifically herein. Under the terms
of the proposed reorganization (the "Reorganization"), each outstanding share of
the common stock, par value of $.10 per share, of the Bank ("Bank Common Stock")
will be converted into one share of common stock, par value $.10 per share, of
the Stock Holding Company ("Holding Company Common Stock"), and the holders of
Bank Common Stock will become the holders of all of the outstanding Holding
Company Common Stock. Accordingly, as a result of the Reorganization, the owners
of Bank Common Stock other than the Mutual Holding Company ("Minority
Stockholders") will become minority stockholders of the Stock Holding Company.
Please make note of the following important considerations in
connection with the Reorganization:
. Operations of the Bank and the Mutual Holding Company. The
Reorganization will have no impact on the operations of the Bank
and the Mutual Holding Company. The Bank will continue its
operations at the same locations, with the same management, and
subject to all the rights, obligations and liabilities of the
Bank existing immediately prior to the Reorganization.
(Continued on next page)
__________________________
THE SECURITIES ISSUED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE PENNSYLVANIA DEPARTMENT OF BANKING, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES AUTHORITY. NOR
HAS ANY SUCH COMMISSION, OFFICE OR AUTHORITY PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A FEDERAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. THE COMMON STOCK IS NOT GUARANTEED BY THE BANK, THE STOCK
HOLDING COMPANY, OR THE MUTUAL HOLDING COMPANY. THERE CAN BE NO ASSURANCE
THAT THE TRADING PRICE OF THE COMMON STOCK OFFERED HEREBY WILL NOT DECREASE AT
ANY TIME.
<PAGE>
. Reasons for the Reorganization. The Board of Directors of the
Bank believes that the "two-tier" structure will be in the best
interests of stockholders because it will offer greater operating
flexibility than is currently available to the Bank in its
existing mutual holding company structure. The "two-tier"
structure will enhance the ability to make investments, acquire
other institutions, and repurchase shares of common stock. See
"Proposed Formation of the Stock Holding Company --Reasons for
the Stock Holding Company Reorganization."
. Optional Exchange of Stock Certificates. After the Reorganization
stock certificates evidencing shares of Bank Common Stock will
represent, by operation of law, the same number of shares of
Holding Company Common Stock. Former holders of the Bank Common
Stock will not be required to exchange their Bank Common Stock
certificates for Holding Company Common Stock certificates, but
will have the option to do so. See "Proposed Formation of the
Stock Holding Company --Optional Exchange of Stock Certificates."
. Tax Consequences. The Bank has received an opinion of its special
counsel, Luse Lehman Gorman Pomerenk & Schick, P.C., Washington,
D.C., as to certain federal income tax consequences of the
Reorganization, including that the Reorganization will be treated
as a nontaxable transaction for federal income tax purposes.
Please carefully read the section of this Prospectus/Information
Statement titled "Proposed Formation of the Stock Holding
Company --Tax Consequences."
. Conditions to the Reorganization. The Plan of Reorganization sets
forth a number of conditions to the completion of the
Reorganization, including: (i) approval of the Plan of
Reorganization by the holders of two-thirds of the outstanding
shares of Bank Common Stock; (ii) receipt of an opinion of
counsel that the Reorganization will be treated as a non-taxable
transaction for federal income tax purposes; and (iii) receipt of
any and all regulatory approvals necessary for the lawful
consummation of the Reorganization. "Proposed Formation of the
Stock Holding Company --Conditions to the Reorganization."
Please note that this list may not include all material terms of the
Reorganization, and must be read along with the more complete description of the
Reorganization included herein.
- --------------------------------------------------------------------------------
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
- --------------------------------------------------------------------------------
Holders of record of the Bank's common stock, par value $.10 per share
("Bank Common Stock"), as of the close of business on ___________ __, 1997 (the
"Record Date") are entitled to one vote for each share then held. As of the
Record Date, the Bank had 23,374,000 shares of Bank Common Stock issued and
outstanding. The presence in person or by proxy of a majority of the
outstanding shares of Bank Common Stock entitled to vote is necessary to
constitute a quorum at the Special Meeting. Broker non-votes will not be
counted as shares present and entitled to vote. Approval of the proposal
requires the affirmative vote of two-thirds of the outstanding shares of Bank
Common Stock. Consequently, broker non-votes will have the same effect as a
vote against the proposal. The Mutual Holding Company owns 16,200,000 shares,
or 69.3% of the outstanding Bank Common Stock, and intends to vote such shares
in favor of the Plan of Reorganization. Consequently approval of the Plan of
Reorganization is assured and the Bank is not soliciting proxies from
stockholders in connection with the Special Meeting.
___________________________________
THIS PROSPECTUS/INFORMATION STATEMENT INCORPORATES DOCUMENTS WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
WRITTEN OR ORAL REQUEST FROM GREGORY LAROCCA, CORPORATE SECRETARY, 301 SECOND
AVENUE, WARREN, PENNSYLVANIA 16365-2353 (TELEPHONE NUMBER (814) 726-2140). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT
LEAST FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE SPECIAL MEETING.
2
<PAGE>
Persons and groups who beneficially own in excess of 5% of the Bank
Common Stock, and executive officers and directors are required to file certain
reports with the Federal Deposit Insurance Corporation ("FDIC") pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act") regarding their ownership
of Bank Common Stock. The following table sets forth, as of December 31, 1996,
the shares of Bank Common Stock beneficially owned by executive officers and
directors as a group and by each person who was the beneficial owner of more
than 5% of the outstanding shares of Bank Common Stock on such date.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
OWNED AND NATURE PERCENT OF SHARES
NAME AND ADDRESS OF OF BENEFICIAL OF BANK COMMON
BENEFICIAL OWNER OWNERSHIP (1) STOCK OUTSTANDING
--------------------- ----------------- ------------------
<S> <C> <C>
Northwest Bancorp, MHC (2) 16,200,000 69.3%
301 Second Avenue
Warren, Pennsylvania 16365-2353
All Directors and Executive Officers 554,467 (3) 2.3% (3)
as a Group (15 persons)
</TABLE>
_______________________
(1) In accordance with 12 C.F.R. Section 335.403, a person is deemed to be the
beneficial owner for purposes of this table, of any shares of Common Stock
if he has sole or shared voting or investment power with respect to such
security, or has a right to acquire beneficial ownership at any time within
60 days from the date as of which beneficial ownership is being determined.
As used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares. Includes all shares held directly as well as by
spouses and minor children, in trust and other indirect ownership, over
which shares the named individuals effectively exercise sole or shared
voting and investment power.
(2) The Bank's executive officers and directors are also executive officers and
trustees of Northwest Bancorp, MHC.
(3) Number of shares includes 147,200 shares of Bank Common Stock that would be
received upon the exercise of all options that were exercisable within
sixty days of December 31, 1996. Percent column assumes that all such
options have been exercised and that the underlying shares of Bank Common
Stock are outstanding as of December 31, 1996.
- --------------------------------------------------------------------------------
THE 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 its subsidiaries, consumer finance services. The Bank's mutual
savings bank predecessor was founded in 1896 as a state-chartered mutual savings
and loan association, and in September 1993 converted to a state-chartered
mutual savings bank. On November 2, 1994, the Bank reorganized into a mutual
holding company structure. As part of the reorganization, the Bank formed and
became a subsidiary of the Mutual Holding Company. On November 4, 1994,
3,450,000 shares of Bank Common Stock, representing 29.9% of the issued and
outstanding shares of Bank Common Stock, were sold to eligible depositors of the
Bank and the Bank's tax-qualified employee stock benefit plan at a price of
$20.00 per share (the "Offering"). Net proceeds from the Offering totaled
approximately $67 million. On May 22, 1996 the Bank Common Stock was split two-
for-one.
As of March 31, 1997, the Bank and its wholly owned subsidiaries
operated one mortgage lending office in Pennsylvania, two in New York and two in
South Carolina, and 29 consumer lending offices throughout Pennsylvania and one
consumer lending office in New York. The Bank has grown significantly in the
past ten years, and intends to continue to expand through acquisitions and
internal growth in the future as market conditions permit.
The Bank has focused its lending activities primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to four-
family residences. The Bank, 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 Bank also
originates multifamily residential and commercial real estate loans, and
commercial business loans.
3
<PAGE>
The Bank also invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof. As part of the
Bank's current strategy of maintaining high levels of liquidity, the Bank
invests a portion of its assets in securities issued by the United States
Government, cash and cash equivalents including deposits in other financial
institutions and FHLB stock.
The Bank's principal sources of funds are deposits, borrowed funds and
the principal and interest payments on loans. The principal source of income is
interest received from loans, mortgage-backed securities and investment
securities. The Bank's principal expenses are the interest paid on deposits and
the cost of employee compensation and benefits.
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.
Set forth below are selected consolidated financial condition,
operating, and other data of the Bank.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------------- -------------- ----------
SELECTED CONSOLIDATED FINANCIAL (In Thousands)
CONDITION DATA (1):
<S> <C> <C> <C> <C> <C>
Total assets................................................ $1,877,925 $1,591,894 $1,430,284 $1,292,488 $1,217,474
Interest-earning deposits at other financial institutions... 30,498 59,930 85,705 38,699 80,533
Investment securities....................................... 54,086 65,470 41,778 10,988 12,986
Investment securities available for sale.................... 51,961 1,414 -- -- --
Mortgage-backed securities.................................. 101,932 204,841 199,165 166,631 185,615
Mortgage-backed securities held for sale.................... 189,514 38,343 200 31,436 --
Loans receivable net:
Real estate............................................... 1,066,887 906,276 864,448 819,098 730,888
Consumer.................................................. 249,051 202,630 179,765 163,036 149,787
Commercial................................................ 59,017 55,829 18,320 17,127 15,216
Total loans receivable, net............................. 1,374,955 1,164,735 1,062,533 999,261 895,891
Deposits.................................................... 1,450,047 1,283,935 1,235,401 1,136,116 1,099,895
Advances from FHLB and other borrowed funds................. 211,761 103,439 71,203 53,637 29,822
Shareholders' equity........................................ 190,651 178,690 102,319 84,251 70,203
</TABLE>
_____________________
footnote below
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------
SELECTED CONSOLIDATED OPERATING AND OTHER DATA (1): (In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income....................................... $ 135,130 $ 118,158 $ 106,492 $ 106,204 $ 108,945
Total interest expense...................................... 68,637 58,126 51,256 55,888 68,069
---------- ---------- ---------- ---------- ----------
Net interest income..................................... 66,493 60,032 55,236 50,316 40,876
Provision for loan losses................................... 1,502 1,098 1,728 1,797 2,414
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses..... 64,991 58,934 53,508 48,519 38,462
---------- ---------- ---------- ---------- ----------
Noninterest income.......................................... 4,125 4,512 7,811 8,180 7,536
Noninterest expense......................................... 40,827 36,971 34,130 33,898 31,599
---------- ---------- ---------- ---------- ----------
Income before income tax expense and cumulative effect
of accounting change....................................... 28,289 26,475 27,189 22,801 14,399
Income tax expense.......................................... 10,803 10,181 11,191 8,753 5,804
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of accounting change........ 17,486 16,294 15,998 14,048 8,595
Cumulative effect of change in accounting for income taxes.. -- -- 2,070 -- --
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 17,486 $ 16,294 $ 18,068 $ 14,048 $ 8,595
========== ========== ========== ========== ==========
PER SHARE INFORMATION:
Shareholders' equity per share........................... 8.16 7.64 N/A N/A N/A
Earnings per share....................................... $.77 $.47 N/A N/A N/A
Cash dividends declared................................... $.315 $.30 N/A N/A N/A
</TABLE>
____________________________
(1) Includes retroactive disclosure of all data for American Federal Savings,
which was merged in April 1992 and accounted for using the pooling of
interest method of accounting.
4
<PAGE>
- --------------------------------------------------------------------------------
MARKET INFORMATION
- --------------------------------------------------------------------------------
The Bank Common Stock is listed on the Nasdaq National Market under
the symbol "NWSB." As of December 31, 1996, the Bank had eight registered market
makers, 4,407 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
23,374,000 shares outstanding, which includes shares held by the Mutual Holding
Company. The following table sets forth market price and dividend information
for the Bank Common Stock for each quarter of the previous two calendar years.
All information has been revised to reflect the Bank's May 22, 1996 two-for-one
stock split.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
- ------------- ---- --- ---------
<S> <C> <C> <C>
1995
- ----
March 31 $8 7/8 $ 7 1/2 $.075
June 30 $9 7/8 $ 8 3/8 $.075
September 30 $12 $ 9 5/8 $.075
December 31 $13 1/2 $11 3/4 $.075
1996
- ----
March 31 $12 3/4 $11 1/8 $.075
June 30 $12 1/2 $11 1/8 $.08
September 30 $12 1/4 $10 3/4 $.08
December 31 $13 3/4 $13 $.08
</TABLE>
The last trade of the Bank Common Stock on November 12, 1996, the date
immediately prior to the Bank's announcement of its intention to reorganize
pursuant to the Plan of Reorganization, was at a price of $12 5/8 per share.
- --------------------------------------------------------------------------------
DIVIDEND POLICY
- --------------------------------------------------------------------------------
GENERAL
The Bank has paid quarterly cash dividends every quarter since the
completion of its mutual holding company reorganization and minority stock
issuance in November 1994. Although the Stock Holding Company expects to
continue to pay cash dividends in the same amount per share as the Bank, its
principal source of income will initially consist of dividends from the Bank.
Dividends paid by the Stock Holding Company will be determined by the Stock
Holding Company's Board of Directors and will be based upon its consolidated
financial condition, results of operations, tax considerations, economic
conditions, regulatory restrictions which affect the payment of dividends by the
Bank to the Stock Holding Company, and other factors. In addition, the Stock
Holding Company's ability to pay dividends is subject to limitations under
Pennsylvania law. There can be no assurance that dividends will be paid on
Holding Company Common Stock or that, if paid, such dividends will not be
reduced or eliminated in the future. See "Proposed Formation of Stock Holding
Company--Comparison of Stockholder Rights and Certain Anti-Takeover Provisions--
Payment of Dividends" for information regarding regulatory restrictions on the
Bank's ability to pay dividends or make cash contributions to the Stock Holding
Company.
The Stock Holding Company will not be subject to FRB regulatory
restrictions on the payment of dividends to its stockholders other than with
respect to maintaining minimum levels of capital, although the source of such
dividends will be dependent upon the factors set forth above. The Stock Holding
Company is subject, however, to the requirements of Pennsylvania law with
respect to the payment of dividends. See "Proposed Formation of Stock Holding
Company--Comparison of Stockholder Rights and Certain Anti-Takeover Provisions--
Payment of Dividends."
5
<PAGE>
DIVIDEND WAIVERS BY THE HOLDING COMPANY
In connection with the FRB's approval of the Bank's formation of the
Mutual Holding Company, the FRB imposed certain conditions on the waiver by the
Mutual Holding Company of dividends paid on Bank Common Stock. These conditions
will continue to apply to any waiver by the Mutual Holding Company of dividends
paid on Holding Company Common Stock. In particular, the Mutual Holding Company
must obtain prior FRB approval before it may waive any dividends. The amount of
any waived dividends will not be available for payment to Minority Stockholders
and will be excluded from capital for purposes of calculating dividends payable
to Minority Stockholders. Moreover, the cumulative amount of waived dividends
must be maintained in a restricted capital account which would be added to any
liquidation account of the Bank, and would not be available for distribution to
Minority Stockholders. The restricted capital account and liquidation account
amounts would not be reflected in the Bank's financial statements or the notes
thereto, but would be considered as a notational or memorandum account of the
Bank, and would be maintained in accordance with the rules, regulations and
policy of the Office of Thrift Supervision ("OTS") except that such rules would
be administered by the FRB, and any other rules and regulations adopted by the
FRB. As of December 31, 1996, the FRB had not given its approval to any waiver,
and the Mutual Holding Company had not waived any dividends paid by the Bank.
The Reorganization is not expected to have an effect on whether or not
the Mutual Holding Company applies to the FRB for approval to waive dividends.
After the Reorganization, if the Mutual Holding Company decides that it is in
its best interest to waive a particular dividend to be paid by the Stock Holding
Company, and the FRB approves such waiver, then the Stock Holding Company would
pay such dividend only to Minority Stockholders, and the amount of the dividend
waived by the Mutual Holding Company would be treated in the manner described
above. The Mutual Holding Company's decision as to whether or not to waive a
particular dividend will depend on a number of factors, including the Mutual
Holding Company's capital needs, the investment alternatives available to the
Mutual Holding Company as compared to those available to the Bank, and
regulatory approvals. Management believes that, after the Reorganization, the
factors considered by the Mutual Holding Company in deciding whether or not to
waive dividends are not likely to change, except that it will also consider the
investment alternatives available to the Stock Holding Company, which, after the
Reorganization, will include the repurchase of Holding Company Common Stock.
There can be no assurance (i) that after the Reorganization the Mutual Holding
Company will waive dividends paid by the Stock Holding Company, (ii) that the
FRB will approve any dividend waivers by the Mutual Holding Company or (iii) of
the terms that may be imposed by the FRB on any dividend waiver.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE BANK
- --------------------------------------------------------------------------------
The table below sets forth as of December 31, 1996 the name and age
of, and information regarding the number of shares of Bank Common Stock held by,
each of the Bank's Directors and executive officers who are not directors.
6
<PAGE>
<TABLE>
<CAPTION>
Shares of
Positions Common Stock
Held in the Director Current Term Beneficially Percent
Name (1) Age Bank Since (2) to Expire Owned (3) Of Class
-------- --- ----------------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS
John O. Hanna 65 President, Chief Executive 1970 1997 190,412 (4) *
Officer and Director
William J. Wagner 43 Executive Vice President, 1994 1999 46,920 (5) *
Chief Financial Officer,
Director and Chief Operating
Officer
Thomas K. Creal, III 57 Director 1982 1999 14,000 (6) *
John J. Doyle 68 Director 1970 1999 16,400 (7) *
John S. Young 69 Director 1972 1999 23,036 (8) *
Richard L. Carr 55 Director 1982 1997 16,412 (9) *
Robert G. Ferrier 56 Director 1980 1998 25,900 (10) *
Richard E. McDowell 53 Director 1972 1998 40,400 (11) *
Joseph T. Stadler 65 Director 1970 1998 12,400 (12) *
Walter J. Yahn 68 Director 1972 1998 25,158 (13) *
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Gregory C. LaRocca 46 Senior Vice President- N/A N/A 25,268 (14) *
Administration and
Corporate Secretary
James E. Vecellio 48 Senior Vice President- N/A N/A 27,309 (15) *
Operations
John M. Blair 60 Senior Vice President- N/A N/A 32,042 (16) *
Mortgage Lending
Robert A. Ordiway 46 Senior Vice President- N/A N/A 27,551 (17) *
Community Banking
Raymond R. Parry 60 Senior Vice President- N/A N/A 31,259 (18) *
Consumer Lending
</TABLE>
_____________________________
* Less than 1%.
(1) The mailing address for each person listed is 301 Second Avenue, Warren,
Pennsylvania 16365-2353. Each of the persons listed is also a trustee of
Northwest Bancorp, MHC, which owned 69.3% of the outstanding shares of Bank
Common Stock as of September 30, 1996.
(2) Reflects initial appointment to the Board of Trustees of the Bank's mutual
predecessor.
(3) See definition of "beneficial ownership" in the table in "Voting Securities
and Principal Holders Thereof."
(4) Includes exercisable options to purchase 60,000 shares of Bank Common
Stock; does not include options to purchase 90,000 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(5) Includes exercisable options to purchase 16,000 shares of Bank Common
Stock; does not include options to purchase 24,000 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(6) Includes exercisable options to purchase 4,400 shares of Bank Common
Stock; does not include options to purchase 6,600 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(7) Includes exercisable options to purchase 4,400 shares of Bank Common
Stock; does not include options to purchase 6,600 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(8) Includes exercisable options to purchase 4,400 shares of Bank Common
Stock; does not include options to purchase 6,600 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
7
<PAGE>
(9) Includes exercisable options to purchase 4,400 shares of Bank Common
Stock; does not include options to purchase 6,600 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(10) Includes exercisable options to purchase 4,400 shares of Bank Common Stock;
does not include options to purchase 6,600 shares of Bank Common Stock that
are not exercisable within 60 days of December 31, 1996.
(11) Includes exercisable options to purchase 4,400 shares of Bank Common Stock;
does not include options to purchase 6,600 shares of Bank Common Stock that
are not exercisable within 60 days of December 31, 1996.
(12) Includes exercisable options to purchase 4,400 shares of Bank Common Stock;
does not include options to purchase 6,600 shares of Bank Common Stock that
are not exercisable within 60 days of December 31, 1996.
(13) Includes exercisable options to purchase 4,400 shares of Bank Common Stock;
does not include options to purchase 6,600 shares of Bank Common Stock that
are not exercisable within 60 days of December 31, 1996.
(14) Includes exercisable options to purchase 5,600 shares of Bank Common
Stock; does not include options to purchase 8,400 shares of Bank Common
Stock that are not exercisable within 60 days of December 31, 1996.
(15) Includes exercisable options to purchase 8,800 shares of Bank Common Stock;
does not include options to purchase 11,200 shares of Bank Common Stock
that are not exercisable within 60 days of December 31, 1996.
(16) Includes exercisable options to purchase 8,000 shares of Bank Common Stock;
does not include options to purchase 12,000 shares of Bank Common Stock
that are not exercisable within 60 days of December 31, 1996.
(17) Includes exercisable options to purchase 5,600 shares of Bank Common Stock;
does not include options to purchase 8,400 shares of Bank Common Stock that
are not exercisable within 60 days of December 31, 1996.
(18) Includes exercisable options to purchase 8,000 shares of Bank Common Stock;
does not include options to purchase 12,000 shares of Bank Common Stock
that are not exercisable within 60 days of December 31, 1996.
The principal occupation during the past five years of each director
of the Bank is set forth below. All directors have held their present positions
for five years unless otherwise stated.
DIRECTORS
John O. Hanna has been employed by the Bank since 1960, and has been
Chief Executive Officer since 1974. Mr. Hanna is also a director of the
Pennsylvania Association of Community Bankers; the Heritrust Corporation; the
Blair Corporation, a mail order company, and serves as Chairman of the
Distribution Committee of the Warren Foundation.
William J. Wagner has been the Chief Financial Officer for the Bank
since 1984 and was named Chief Operating Officer in 1996. Mr. Wagner was
appointed Executive Vice President in 1992 and was elected to the Board of
Directors in 1994. Mr. Wagner is a certified public accountant.
Thomas K. Creal, III is a partner in the architectural firm of Creal,
Hyde & Larson, in Warren, Pennsylvania.
John J. Doyle has been President of Perry Construction Company, Erie,
Pennsylvania, since 1989.
John S. Young was President and Sales Manager for Young Brothers
Electronics, Inc. from 1953 through 1983, Sales Representative for Lee
Distributing Company from 1983 through 1987, and Sales Agent for Paul C. Nunes
Associates from 1987 through 1992, when he retired.
Richard L. Carr is the retired Superintendent of the Titusville Area
School District, Titusville, Pennsylvania. He presently serves as a consultant
to the University of Findlay located in Findlay, Ohio.
Robert G. Ferrier is President of Ferrier Hardware, Inc. and Drexel
Realty, Erie, Pennsylvania.
Richard E. McDowell is President of the University of Pittsburgh at
Bradford, Bradford, Pennsylvania. Dr. McDowell is also a director of Bradford
Educational Foundation, the Blaisdell Foundation, and the Bradford Regional
Medical Center.
Joseph T. Stadler retired in January 1995 as Vice President-
Manufacturing of Superior Bronze Corporation in Erie, Pennsylvania.
8
<PAGE>
Walter J. Yahn is Chairman of the Board, founder, and Chief Executive
Officer of the Erie Advanced Manufacturing Company, Erie, Pennsylvania.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Gregory C. LaRocca has been employed by the Bank since 1992, most
recently as Senior Vice President of Administration and Corporate Secretary. He
was previously Chief Executive Officer of American Federal Savings, which merged
with the Bank in March of 1992.
James E. Vecellio has been employed by the Bank since 1977, most
recently as Senior Vice President-Operations.
John M. Blair has been employed by the Bank since 1961, most recently
as Senior Vice President in charge of Mortgage Lending.
Robert A. Ordiway has been employed by the Bank since 1975, most
recently as Senior Vice President of Community Banking.
Raymond R. Parry has been employed by the Bank since 1981, most
recently as Senior Vice President of Consumer Lending and President of Northwest
Consumer Discount Company, a wholly owned subsidiary of the Bank.
- --------------------------------------------------------------------------------
TRANSACTIONS WITH CERTAIN RELATED PERSONS
- --------------------------------------------------------------------------------
Since 1989 federal law has required that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features.
Federal law also requires that loans to a director or executive officer in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to
a maximum of $500,000) be approved in advance by a majority of the disinterested
members of the Board of Directors. During the year ended June 30, 1996, the Bank
had no loans outstanding that were made to a person who was a director or
executive officer at the time the loan was originated, and that included
preferential terms.
The Bank leases approximately 13,000 square feet of office space from
Mr. Hanna at an annual rent of $48,000. The leasing value of the property was
appraised by two outside appraisers at the time the Bank and Mr. Hanna entered
into the lease. The Federal Home Loan Bank Board (the Bank's principal federal
regulator at such time) reviewed the terms of the lease and did not object to
the lease arrangement.
The Bank intends that all transactions between the Bank and its
executive officers, directors, holders of 10% or more of the shares of any class
of its common stock and affiliates thereof, will contain terms no less favorable
to the Bank than could have been obtained by it in arms-length negotiations with
unaffiliated persons, and will be approved by a majority of independent outside
directors of the Bank not having any interest in the transaction.
- --------------------------------------------------------------------------------
PROPOSED FORMATION OF THE STOCK HOLDING COMPANY
- --------------------------------------------------------------------------------
SUMMARY
The formation of the Stock Holding Company will be accomplished under
the Plan of Reorganization, pursuant to which the Bank will become a wholly
owned subsidiary of the Stock Holding Company, a newly formed Pennsylvania stock
corporation which will be majority owned by the Mutual Holding Company. Under
the terms of the proposed reorganization (the "Reorganization"), each
outstanding share of Bank Common Stock will be converted into one share of
Holding Company Common Stock, and the holders of Bank Common Stock will become
the holders of all of the outstanding Holding Company Common Stock. Accordingly,
as a result of the Reorganization, the owners of Bank Common Stock other than
the Mutual Holding Company ("Minority Stockholders") will become
9
<PAGE>
minority stockholders of the Stock Holding Company. The Stock Holding Company
was incorporated in April 1997 as a wholly owned subsidiary of the Bank, solely
for the purpose of becoming a bank holding company and has no prior operating
history. The Reorganization will have no impact on the operations of the Bank
and the Mutual Holding Company. The Bank will continue its operations at the
same locations, with the same management, and subject to all the rights,
obligations and liabilities of the Bank existing immediately prior to the
Reorganization.
REASONS FOR THE STOCK HOLDING COMPANY REORGANIZATION
The Board of Directors of the Bank believes that the formation of the
Stock Holding Company as a subsidiary of the Mutual Holding Company will be in
the best interests of stockholders and will offer greater operating flexibility
than is currently available to the Bank in its existing mutual holding company
structure. The Mutual Holding Company does not operate as a traditional holding
company at the present time because it is a mutual organization and represents
only the mutual ownership interest in the Bank. Establishing the Stock Holding
Company as a subsidiary of the Mutual Holding Company will permit the Stock
Holding Company to conduct activities and make investments for the benefit of
all stockholders. It will also provide greater flexibility to structure and
complete acquisitions of other financial institutions, repurchase shares of
Holding Company Common Stock as market conditions permit, and diversify the
Stock Holding Company's business activities.
Enhanced Ability to Invest Through the Stock Holding Company. Under
the existing mutual holding company structure the Mutual Holding Company cannot
make investments in other financial institutions or business enterprises for the
benefit of all stockholders of the Bank, and the Bank itself is limited by law
or regulation in its permissible investment activities. For example, if the
Mutual Holding Company invests in 5% of the common stock of another bank or
thrift holding company, any gain on such investment would accrue only to the
Mutual Holding Company. The Reorganization will permit the entity that issues
stock (i.e. the Stock Holding Company) to make investments, diversify business
activities, or acquire other financial institutions, for the benefit of all
stockholders.
Facilitate Mergers and Acquisitions. The Reorganization will also
facilitate the approval and completion of mergers and acquisitions since the
Stock Holding Company, acting as the sole stockholder of the Bank, will be able
to approve mergers and acquisitions involving the Bank. This is consistent with
the way other stock holding companies are able to approve mergers of their bank
or savings institution subsidiaries. Moreover, the Reorganization will enable
the Stock Holding Company to acquire other financial institutions and to operate
them as separate subsidiaries for the benefit of all stockholders of the Stock
Holding Company.
Stock Repurchases. The Reorganization will enable the Stock Holding
Company to repurchase Stock Holding Company Common Stock which, particularly in
recent years, has been an important, if not essential, means for banks and
savings institutions to enhance shareholder value and invest capital resources.
Historically, the Bank has used the percentage of taxable income method for
establishing its bad debt reserves for tax purposes. Federal tax laws generally
require that thrift institutions recapture into income and pay the tax on their
excess bad debt reserves in the event of certain distributions and redemptions,
such as stock repurchases. Accordingly, if the Bank were to repurchase any of
its outstanding shares of common stock, it would cause recapture of all or part
of its pre-1988 excess tax bad debt reserves. Because distributions or
redemptions by entities, such as the Stock Holding Company, that have not used
the percentage of taxable income method for computing bad debt reserves are not
subject to recapture, the Stock Holding Company will be permitted to repurchase
Holding Company Common Stock without causing any recapture of the Bank's tax bad
debt reserves. The ability to repurchase Holding Company Common Stock is an
important means of enhancing stockholder value and investing capital resources.
See "Regulation of the Stock Holding Company--Repurchases of Holding Company
Common Stock."
Stock Holding Company Powers. The Stock Holding Company would be
permitted to engage in the activities that are permissible for bank holding
companies under the Bank Holding Company Act (i.e. activities that are closely
related to banking) these include several activities in which the Bank is not
permitted to engage, such as investing in certain equity securities and holding
other savings banks as subsidiaries. See "--Stock Holding Company Regulation."
10
<PAGE>
Although the Reorganization will enable the Stock Holding Company's
stockholders to share in the rewards of the increased operating flexibility,
stockholders should also consider that the Stock Holding Company's stockholders
will also bear the risk that the transactions that are facilitated by the
increased operating flexibility may not prove to be advantageous to the Stock
Holding Company and its stockholders.
THE BOARD OF DIRECTORS OF THE BANK HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE PLAN OF
REORGANIZATION.
PLAN OF REORGANIZATION
The Reorganization will be accomplished under the Plan of Reorganization,
which is attached as Exhibit A hereto and is incorporated herein by reference.
The following discussion is qualified in its entirety by reference to the Plan
of Reorganization. The Plan of Reorganization was unanimously approved by the
Board of Directors on May 15, 1996.
The Reorganization and the establishment of the Stock Holding Company will
be accomplished as follows: (i) the Stock Holding Company will be organized as a
wholly owned subsidiary of the Bank; (ii) the Stock Holding Company will
organize an interim Pennsylvania stock savings bank ("Interim") as a wholly
owned subsidiary; (iii) Interim will merge into the Bank, with the Bank as the
surviving corporation; and (iv) in connection with the merger in step (iii)
above, all of the issued and outstanding shares of Holding Company Common Stock
held by the Bank prior to the Reorganization will be canceled, all of the issued
and outstanding shares of Bank Common Stock will be converted into and become an
equal number of shares of Holding Company Common Stock, and all of the issued
and outstanding shares of Interim, which are held by the Stock Holding Company,
will automatically be converted by operation of law into common stock of the
Bank. As a result of the steps described above, the Bank will become the wholly
owned subsidiary of the Stock Holding Company, the Stock Holding Company will
become the majority owned subsidiary of the Mutual Holding Company, and Minority
Stockholders will become minority stockholders of the Stock Holding Company.
The following diagram sets forth the Bank's current mutual holding company
structure:
- ----------------------------
Northwest Bancorp,
M.H.C.
- ----------------------------
69.3% of Bank
Common Stock
- ---------------------------- ------------------------
Northwest Savings Bank 30.7% of Bank Minority
Common Stock Stockholders
--------------------------
- ---------------------------- ------------------------
11
<PAGE>
The following diagram sets forth the Bank's proposed mutual holding company
structure following completion of the Reorganization:
- ----------------------------
Northwest Bancorp,
M.H.C.
- ----------------------------
69.3% of Holding Company Common
Stock
- ---------------------------- -------------------
Northwest Bancorp, Inc. 30.7% of Holding Minority
Company Common Stock Stockholders
------------------------
- ---------------------------- -------------------
100% Owned
- ----------------------------
Northwest Savings Bank
- ----------------------------
CAPITALIZATION
The Board of Directors of the Bank presently intends to capitalize the
Stock Holding Company with up to $10.0 million, subject to the receipt of any
required regulatory approvals. The Stock Holding Company is being capitalized
in such amount so that it will be in a position to take advantage of investment
opportunities as they arise from time to time. These opportunities may include
investments in equity securities, acquisitions of other financial institutions
and repurchases of shares of Holding Company Common Stock.
The $10.0 million contributed to the Stock Holding Company will reduce the
Bank's capital in a like amount, although the Stock Holding Company's
consolidated total stockholders' equity immediately subsequent the
Reorganization will be equal to the Bank's consolidated total shareholders'
equity immediately prior to the Reorganization. The following table sets forth
the historical capitalization of the Bank and the pro forma capitalization of
the Bank and the Stock Holding Company as of December 31, 1996.
12
<PAGE>
Set forth below is the historical and pro forma capitalization of the Bank
as of March 31, 1997 showing the effects of the Reorganization upon the Bank.
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
HISTORICAL PRO FORMA CAPITALIZATION
CAPITALIZATION CAPITALIZATION OF STOCK HOLDING
OF BANK OF BANK COMPANY
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Liabilities:
Deposits................................... $1,622,860 $1,622,860 $1,622,860
Borrowed funds............................. 154,158 154,158 154,158
Other liabilities.......................... 26,447 26,447 26,447
---------- ---------- ----------
Total liabilities............................ $1,803,465 $1,803,465 $1,803,465
========== ========== ==========
Capital Stock:
Common Stock, par value
$.10 per share (1)....................... $ 2,338 $ -- $ 2,338
Paid in capital............................ 67,854 70,192 67,854
Retained earnings.......................... 128,256 118,256 128,256
Net unrealized gain (loss) on securities
available for sale, net of income taxes.. (203) (203) (203)
Unearned ESOP shares....................... (2,358) (2,358) (2,358)
Unearned Recognition and Retention
Plan Shares.............................. (1,789) (1,789) (1,789)
---------- ---------- ----------
Total stockholders' equity (2)............... $ 194,098 $ 184,098 $ 194,098
========== ========== ==========
Stockholders' equity per share............... $ 8.30 NM $ 8.30
========== ==========
</TABLE>
_______________
(1) The Bank has 50,000,000 shares of Bank Common Stock authorized for issuance,
23,376,000 shares issued and outstanding as of March 31, 1997, and 100
assumed pro forma shares outstanding. The Stock Holding Company has
100,000,000 shares of Holding Company Common Stock authorized for issuance,
and 23,376,000 assumed pro forma shares outstanding.
(2) Estimated expenses of $100,000 will be capitalized and amortized over a five
year period.
Future capitalization of the Stock Holding Company will depend upon
earnings and dividends declared by the Bank and any issuance of debt or equity
securities. As of the date hereof, other than an issuance planned in connection
with the proposed acquisition of Corry Savings Bank, a Pennsylvania mutual
savings bank with assets of $29 million (the "Corry Acquisition") announced on
June 19, 1997, the Board of Directors of the Stock Holding Company has adopted
no plan or agreement with respect to any future issuance of securities.
Furthermore, as long as the Mutual Holding Company is in existence it must own a
majority of the Stock Holding Company's outstanding voting stock.
Following the Reorganization, unless the Bank receives the nonobjection of
the FDIC, the Bank may not issue to any person other than Stock Holding Company
(i) Bank Common Stock, or (ii) any equity security that would give the holder
the right to acquire any equity security of the Bank or that would give the
holder an interest in the retained earnings of the Bank. In addition, so long
as the Mutual Holding Company is in existence, no additional shares of Bank
Common Stock shall be offered for sale by the Bank to any person other than
Stock Holding Company unless the depositors of the Bank are given the rights set
forth in the FDIC's Rules and Regulations relating to mutual-to-stock
conversions of state-chartered savings banks. The Board of Directors of the
Bank has no present plans or intentions with respect to any future issuance of
securities of the Bank.
After the Reorganization, the Bank will continue its existing business and
operations as a wholly owned subsidiary of the Stock Holding Company, and the
consolidated capital, assets, liabilities, and form of financial statements of
the Stock Holding Company immediately following the Reorganization will be
substantially the same as those of the Bank immediately prior to consummation of
the Reorganization. The Articles of Incorporation and the Bylaws of the Bank
will continue in effect, and will not be affected in any manner by the
Reorganization. The Bank
13
<PAGE>
will continue to utilize the name "Northwest Savings Bank." The corporate
existence of the Bank will be unaffected by the Reorganization.
REGULATORY CAPITAL
Set forth below is a summary of the Bank's historical and pro forma
regulatory capital at March 31, 1997. Following completion of the
Reorganization, the Bank will exceed all regulatory capital requirements imposed
by the FDIC.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------ ---------
PERCENT PERCENT
AMOUNT OF ASSETS AMOUNT OF ASSETS
------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Tier 1 Leverage: Capital...... $182,737 9.11% $172,737 8.65%
Requirement.. 60,197 3.00 59,897 3.00
-------- -------- -------- --------
Excess....... $122,540 6.11% $112,840 5.65%
======== ======== ======== ========
Tier 1 Risk-Based: Capital...... $182,737 17.35% $172,737 16.40%
Requirement.. 42,131 4.00 42,131 4.00
-------- -------- -------- --------
Excess....... $140,606 13.35% $130,606 12.40%
======== ======== ======== ========
Total Risk-Based: Capital...... $195,733 18.58% $185,733 17.63%
Requirement.. 84,233 8.00 $ 84,233 8.00
-------- -------- -------- --------
Excess....... $111,500 10.58% $101,502 9.63%
======== ======== ======== ========
</TABLE>
EFFECTIVE DATE
The "Effective Date" of the Reorganization will be the date upon which the
Articles of Merger are filed with the Pennsylvania Department of State.
OPTIONAL EXCHANGE OF STOCK CERTIFICATES
After the Effective Date stock certificates evidencing shares of Bank
Common Stock will represent, by operation of law, the same number of shares of
Holding Company Common Stock. Former holders of the Bank Common Stock will not
be required to exchange their Bank Common Stock certificates for Holding Company
Common Stock certificates, but will have the option to do so. DO NOT SEND YOUR
STOCK CERTIFICATES TO THE BANK AT THIS TIME. Any stockholder desiring more
information about such exchange may request additional information from the Bank
by writing the Secretary of the Bank, Gregory C. LaRocca, 301 Second Avenue,
Warren, Pennsylvania 16365.
RIGHTS OF DISSENTING STOCKHOLDERS
Pennsylvania law applicable to the Bank generally provides that a
stockholder of a Pennsylvania-chartered savings bank which engages in a merger
transaction shall have the right to demand from the savings bank the payment of
the fair or appraised value of his or her stock in the savings bank, subject to
the satisfaction of specified procedural requirements. The statute also
provides that stockholders of a Pennsylvania savings bank are not entitled to
dissenters' rights if their common stock is either listed on a national
securities exchange or held of record by more than 2,000 shareholders. Since
the Bank Common Stock is held of record by more than 2,000 persons, stockholders
will not have dissenters' rights of appraisal in connection with the
Reorganization.
14
<PAGE>
TAX CONSEQUENCES
The Bank has received an opinion of its special counsel, Luse Lehman Gorman
Pomerenk & Schick, P.C., Washington, D.C., as to certain federal income tax
consequences of the Reorganization. This opinion of counsel, which is not
binding upon the Internal Revenue Service, provides substantially as follows:
(i) the merger of Interim with and into the Bank will constitute a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended ("Code"), and the Stock Holding Company, the Bank and Interim will each
be a "party to a reorganization" within the meaning of Section 368(b) of the
Code, provided that the merger of Interim with and into Bank qualifies as a
statutory merger under applicable law, after the transaction Bank will hold
substantially all of the assets of Interim and Bank stockholders exchange solely
for Holding Company Common Stock an amount of Bank Common Stock constituting
"control" of the Bank; (ii) no gain or loss will be recognized by Bank
stockholders on the exchange of Bank Common Stock for Holding Company Common
Stock; (iii) no gain or loss will be recognized by the Stock Holding Company
on the receipt by it of Bank Common Stock solely in exchange for Holding Company
Common Stock; (iv) the basis of Holding Company Common Stock received by the
Bank's stockholders will be the same as the basis of the Bank Common Stock
surrendered in exchange therefor; (v) the holding period of Holding Company
Common Stock to be received by Bank stockholders will include the holding period
of the Bank Common Stock surrendered in exchange therefor, provided the Bank
Common Stock was held as a capital asset on the date of the exchange; and (vi)
no gain or loss will be recognized by the Bank stockholders as a result of
conversion of their Bank stock options into options to purchase Holding Company
Common Stock.
Each Bank stockholder should consult his own tax counsel as to specific
federal, state and local tax consequences of the Reorganization, if any, to such
stockholder.
CONSEQUENCES UNDER FEDERAL SECURITIES LAWS
The Bank Common Stock is registered under Section 12 of the Exchange Act as
administered by the FDIC. Upon consummation of the Reorganization, the Stock
Holding Company will register the Common Stock under the Section 12 of the
Exchange Act as administered by the SEC. The Exchange Act will apply to the
Stock Holding Company to the same degree that it currently applies to the Bank,
except that the powers, functions and duties to administer and enforce the
Exchange Act requirements, including periodic and other reports, proxies, tender
offers, and short swing profits, and certain other requirements that are vested
in the FDIC with respect to securities of insured banks such as the Bank, are
vested in the SEC with respect to securities of corporations such as the Stock
Holding Company. In carrying out its responsibility to administer such
requirements, however, the FDIC is generally required by law to issue
substantially similar regulations to those adopted by the SEC. The issuance of
Holding Company Common Stock will be registered with the SEC under the
Securities Act of 1933.
CONDITIONS TO THE REORGANIZATION
The Plan of Reorganization sets forth a number of conditions to the
completion of the Reorganization, including: (i) approval of the Plan of
Reorganization by the holders of two-thirds of the outstanding shares of Bank
Common Stock; (ii) receipt of an opinion of counsel that the Reorganization will
be treated as a non-taxable transaction for federal income tax purposes; and
(iii) receipt of any and all regulatory approvals necessary for the lawful
consummation of the Reorganization.
The Plan has not yet been approved by the FRB, and there can be no
assurance that such approval will be received. The Mutual Holding Company, which
owns more than two-thirds of the outstanding shares of Bank Common Stock,
intends to vote its shares in favor of the Plan of Reorganization thereby
assuring stockholder approval of the Plan of Reorganization. Furthermore, the
Bank has received an opinion of special counsel that the Reorganization will be
treated as a non-taxable transaction for federal income tax purposes.
15
<PAGE>
EFFECT OF THE REORGANIZATION ON ANY FUTURE MUTUAL-TO-STOCK CONVERSION OF THE
MUTUAL HOLDING COMPANY
The Reorganization and the establishment of the Stock Holding Company is
not expected to have a material effect on the rights of Minority Stockholders in
the event of a mutual-to-stock conversion of the Mutual Holding Company. The
Mutual Holding Company has no current intention to engage in a mutual-to-stock
conversion.
EFFECT OF THE REORGANIZATION ON STOCK BENEFIT PLANS OF THE BANK
Upon completion of the Reorganization each share of restricted Bank Common
Stock awarded to the Bank's employees under the Bank's restricted stock plans
will be converted into a share of Holding Company Common Stock, and will
continue to be subject to the same restrictions. Shares awarded pursuant to the
Bank's Employee Stock Ownership Plan (the "ESOP") and unallocated shares held by
the ESOP trust will be converted into shares of Holding Company Common Stock.
Options to purchase shares of Bank Common Stock will be converted into and
become options to purchase Holding Company Common Stock on the same terms that
shares of Bank Common Stock could have been purchased prior to the
Reorganization.
AMENDMENT, TERMINATION OR WAIVER
The Board of Directors of the Bank may cause the Plan of Reorganization to
be amended or terminated if the Board determines for any reason that such
amendment or termination would be advisable. Such amendment or termination may
occur at any time prior to the filing of Articles of Merger with the Department,
provided that no such amendment may be made to the Plan of Reorganization after
stockholder approval if such amendment is deemed to be materially adverse to the
stockholders of the Bank. Additionally, any of the terms or conditions of the
Plan of Reorganization may be waived by the party which is entitled to the
benefit thereof.
BUSINESS OF THE STOCK HOLDING COMPANY
General. The Stock Holding Company was formed only recently and currently
has no business activities. Upon the completion of the Reorganization, the Bank
will become a wholly owned subsidiary of the Stock Holding Company and each
stockholder of the Bank will become a stockholder of the Stock Holding Company
with the same ownership interest therein as such stockholder's ownership
interest in the Bank immediately prior to the Reorganization.
Immediately after consummation of the Reorganization, it is expected that
the Stock Holding Company will not engage in any business activity other than to
hold all of the stock of the Bank. The Stock Holding Company does not
presently have any arrangements or understandings regarding any acquisition or
merger opportunities. It is anticipated, however, in the future that the Stock
Holding Company may pursue other investment opportunities, including possible
diversification through acquisitions and mergers.
Property. The Stock Holding Company is not expected to own real or
personal property initially. Instead, it intends initially to utilize the
premises, equipment and furniture of the Bank and will pay a rental fee to the
Bank for such use.
Legal Proceedings. Since its organization, the Stock Holding Company has
not been a party to any legal proceedings.
Employees. At the present time, the Stock Holding Company does not intend
to employ any persons other than senior officers of the Bank. It will utilize
the support staff of the Bank from time to time. If the Stock Holding Company
acquires other savings institutions or pursues other lines of business, it may
hire additional employees at such time. The Bank will be paid a fee for
services rendered to the Stock Holding Company by its employees based on an
estimate of the percentage of such person's time that will be spent performing
services for the Stock Holding Company.
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Competition. It is expected that for the immediate future the primary
business of the Stock Holding Company will be the ownership of the Bank Common
Stock. Therefore, the competitive conditions to be faced by the Stock Holding
Company will be the same as those faced by the Bank.
MANAGEMENT OF THE STOCK HOLDING COMPANY
Directors. The directors of the Stock Holding Company are, and upon
completion of the Reorganization will continue to be, the same persons who are
at present the directors of the Bank. The three-year terms of the directors are
staggered to provide for the election of approximately one-third of the board
members each year.
Executive Officers. The executive officers of the Stock Holding Company
are, and upon completion of the Reorganization will be, the same persons who are
at present the executive officers of the Bank.
Remuneration. Since the formation of the Stock Holding Company, none of
its executive officers or directors has received any remuneration from the Stock
Holding Company. It is expected that initially no compensation will be paid to
its directors and officers in addition to compensation paid to them by the Bank.
However, the Stock Holding Company may determine that separate and additional
compensation is appropriate in the future.
INDEMNIFICATION OF OFFICERS AND DIRECTORS AND LIMITATION OF LIABILITY
General. Certain provisions of the Articles of Incorporation of the Stock
Holding Company and the Bank seek to ensure that directors are able to exercise
their best business judgment in managing corporate affairs, subject to their
continuing fiduciary duties, and are not unreasonably impeded by exposure to the
potentially high personal costs or other uncertainties of litigation. The
nature of the responsibilities of directors and officers often requires them to
make difficult decisions which can expose such persons to personal liability,
but from which they will acquire no personal benefit (other than as
stockholders). In recent years, litigation against corporations and their
directors and officers, often amounting to mere "second guessing" of good-faith
judgments and involving no allegations of personal wrongdoing, has become
common. Such litigation often claims damages in large amounts which bear no
relationship to the amount of compensation received by the directors or
officers, particularly in the case of directors who are not officers of the
corporation, and the expense of defending such litigation, regardless of whether
it is well founded, can be enormous. Individual directors and officers can
seldom bear either the legal defense costs involved or the risk of a large
judgment.
In order to attract and retain competent and conscientious directors and
officers in the face of these potentially serious risks, corporations have
historically provided for corporate indemnification and limitation of liability
in their articles of incorporation or bylaws, and have obtained liability
insurance protecting the company and its directors and officers against the cost
of litigation and related expenses. Such indemnification and limitation of
liability provisions may also benefit stockholders who indirectly assume the
expense of litigation and directors and officers liability insurance. The Bank
currently has insurance coverage for its directors and officers, and the Bank's
management anticipates that the Stock Holding Company will be able to obtain
such coverage for its directors and officers. The individual members of the
Stock Holding Company's Board of Directors will benefit from the inclusion of
the indemnification and limitation of liability provisions in the Stock Holding
Company's Articles of Incorporation at the potential expense of stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Stock Holding
Company pursuant to the following provisions, the Stock Holding Company has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In
addition, Federal banking regulations restrict the Bank or the Stock Holding
Company from indemnifying officers and directors for civil monetary penalties or
judgments resulting from administrative or civil actions instituted by any
Federal banking agency, or any other liability or legal expense with regard to
any administrative proceeding or civil action instituted by any Federal banking
agency, which results in a final order or settlement pursuant to which such
person is assessed a civil monetary penalty, removed from office
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or prohibited from participating in the conduct of the affairs of an insured
depository institution, or required to cease and desist from or take certain
actions.
Limitation of Liability under the Bank's Articles of Incorporation. Under
the Bank's Articles of Incorporation a director of the Bank may not be
personally liable for monetary damages for any action taken or any failure to
take any action as a director, except to the extent applicable law requires that
a director's liability for monetary damages may not be limited. Except in the
case of criminal statutes or liability for taxes, Pennsylvania law permits
limitation of liability for monetary damages unless the director has breached or
failed to perform the fiduciary duties of his office under Pennsylvania law and
such breach or failure to perform constitutes self-dealing, willful misconduct
or recklessness. Federal banking and securities laws may limit the effect of
such provisions.
Limitation of Liability under the Stock Holding Company's Articles of
Incorporation. The Stock Holding Company's Articles of Incorporation provide
that the personal liability of a director or officer of the Stock Holding
Company for monetary damages shall be eliminated to the fullest extent permitted
by the Business Corporation Law of 1988, as amended, of the Commonwealth of
Pennsylvania (the "BCL") as it exists on the effective date of the Articles of
Incorporation or as such law may be thereafter in effect. The Articles of
Incorporation also state that in no event shall a director be personally liable
for monetary damages for any action taken unless the director has breached or
failed to perform the duties of his office under the BCL and the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
This latter provision regarding limitation of a director's personal liability is
specifically permitted by Pennsylvania law.
These provisions may reduce the likelihood of derivative litigation against
directors and discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have been beneficial to the Bank or the
Stock Holding Company and its stockholders. The provisions will not, however,
affect the right to pursue equitable remedies for breach of the duty of care,
although such remedies might not be available as a practical matter. Federal
banking and securities laws may limit the effect of such limitation of liability
provisions.
To the best of management's knowledge, there is currently no pending
litigation involving directors of the Bank that might have been affected by the
limitation of liability provision in the Stock Holding Company's Articles of
Incorporation had it been in effect at the time of the litigation, although the
Bank and the Bank's directors were recently involved in litigation for which
indemnification may be sought. This litigation involves a complaint that was
filed on December 13, 1994, in United States District Court, Western District of
Pennsylvania, by an individual who purported to have subscribed for stock in the
Bank's mutual holding company reorganization and stock offering (the "Offering")
that was completed in November 1994. The named defendants in the complaint
included the Bank, the Mutual Holding Company, the Bank's Board of Directors,
and the selling agent and independent appraiser in the Offering. The plaintiff
sought to represent persons who subscribed for and purchased stock in the
Offering. The complaint alleged that the appraisal used in the Bank's Offering
was inappropriately increased at the completion of the Offering, and that, among
other things, the Bank violated the federal securities laws (including section
10 of the Exchange Act and section 12(2) of the Securities Act) and regulations
thereunder, violated Pennsylvania securities law, breached a fiduciary duty owed
to plaintiff, and breached a contract with plaintiff. Similar claims were
asserted against the other defendants. Money damages and other relief were
sought. On November 17, 1995, the District Court dismissed all Federal claims
against the defendants with prejudice, and dismissed the remaining claims
without prejudice. On February 13, 1997, the United States Court of Appeals for
the Third Circuit denied the plaintiff's appeal of the District Court's
dismissal, and on April 7, 1997, it denied plaintiff's petition for rehearing.
As of the date of this Prospectus/Information Statement, plaintiff has not
sought further review or initiated additional proceedings. Management intends to
continue to vigorously defend any such proceedings.
Indemnification Provisions of the Bank's Articles of Incorporation. As
regards third party actions, the Bank's Articles of Incorporation require that
the Bank indemnify any employee, officer, or director who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Bank), by reason of the fact that
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he is or was a representative of the Bank, or is or was serving at the request
of the Bank as a representative of another entity, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action or proceeding if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Bank and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Articles provide that the termination of any action or proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contendere or its
equivalent does not of itself create a presumption that the person did not act
in good faith and in a manner that he reasonably believed to be in, or not
opposed to, the best interests of the Bank and, with respect to any criminal
proceeding, had reasonable cause to believe that his conduct was unlawful.
As regards derivative and corporate actions, the Bank's Articles of
Incorporation require that the Bank indemnify any employee, officer, or director
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action by or in the right of the Bank to procure a judgment
in its favor by reason of the fact that he is or was a representative of the
Bank, or is or was serving at the request of the Bank as a representative of
another entity, against expenses (including attorney's fees) actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Bank. The Articles require
that indemnification not be made in respect of any claim, issue or matter as to
which the person has been adjudged to be liable to the Bank unless and only to
the extent that the applicable court determines upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
the employee, officer, or director is fairly and reasonably entitled to
indemnity for the expenses that the court deems proper.
Unless ordered by a court, the indemnification described above shall be
made by the Bank only as authorized in the specific case upon a determination
that indemnification of the representative is proper in the circumstances
because he has met the applicable standard of conduct set forth above. The
determination shall be made: (1) by the board of directors by a majority vote of
a quorum consisting of directors who were not parties to the action or
proceeding; (2) if such a quorum is not obtainable or if obtainable and a
majority vote of a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion; or (3) by the shareholders.
The Bank's Articles of Incorporation provide that reasonable expenses
incurred by an officer or director of the Bank in defending a civil or criminal
action, suit or proceeding described above shall be paid by the Bank in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that the person is not entitled to be indemnified by
the Bank.
The Articles of Incorporation further provide that the indemnification and
advancement of expenses described above shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under the Articles of Incorporation, Pennsylvania law, any
insurance or other agreement, vote of stockholders or directors or otherwise,
both as to actions in their official capacity and as to actions in another
capacity while holding an office and shall continue as to a person who has
ceased to be director or officer and shall inure to the benefit of the heirs,
executors and administrators of such person.
Indemnification Provisions of the Stock Holding Company's Bylaws. The
Stock Holding Company's Bylaws provide that the Stock Holding Company shall
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Stock Holding Company), by reason of the fact that he is or was a
director or officer of the Stock Holding Company, or is or was serving at the
request of the Stock Holding Company as a representative of another entity,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement incurred by him in connection with the action or proceeding if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Stock Holding Company and, with respect to
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The Bylaws further provide that the Stock Holding Company shall not
be liable for any amounts which may be due to any such
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person in connection with a settlement of any action or proceeding initiated by
any such person (other than an action or proceeding to enforce rights to
indemnification hereunder).
As regards derivative and corporate actions, the Stock Holding Company's
Bylaws provide that the Stock Holding Company shall indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action by or in the right of the Stock Holding Company to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Stock Holding Company or is or was serving at the request of the
Stock Holding Company as a representative of another entity, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of the action if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Stock Holding Company. The Bylaws further provide that no
indemnification shall not be made under such provisions of the Bylaws in respect
of any claim, issue or matter as to which the person has been adjudged to be
liable to the Stock Holding Company unless and only to the extent that the court
of common pleas of the judicial district embracing the county in which the
registered office of the Stock Holding Company is located or the court in which
the action was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for the expenses that the
court of common pleas or other court deems proper.
Unless ordered by a court, any indemnification described above shall be
made by the Stock Holding Company only as authorized in the specific case upon a
determination that indemnification of the representative is proper in the
circumstances because he has met the applicable standard of conduct set forth
above. The determination shall be made: (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
action or proceeding; (2) if such a quorum is not obtainable, or if obtainable
and a majority vote of a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion; or (3) by the stockholders.
The Bylaws provide that expenses (including attorneys' fees) incurred in
defending any action or proceeding referred to above shall be paid by the Stock
Holding Company in advance of the final disposition of the action or proceeding
upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined that he is not entitled to be
indemnified by the Stock Holding Company.
The duties of the Stock Holding Company to indemnify and to advance
expenses to a director or officer are in the nature of a contract between the
Stock Holding Company and each such person, and no amendment or repeal of any
provision of the Bylaws may alter, to the detriment of such person, the right of
such person to the advance of expenses or indemnification related to a claim
based on an act or failure to act which took place prior to such amendment or
repeal.
COMPARISON OF STOCKHOLDER RIGHTS AND CERTAIN ANTI-TAKEOVER PROVISIONS
Introduction. As a result of the Reorganization, holders of Bank Common
Stock will become stockholders of the Stock Holding Company. Accordingly, after
the Reorganization, stockholders' rights will be governed by the BCL and the
Articles of Incorporation and Bylaws of the Stock Holding Company, and by the
Banking Code of 1965 (the "Banking Code") to the extent the Banking Code
addresses rights of stockholders of Pennsylvania-chartered savings bank holding
companies. Certain differences arise from this change of governing law, as well
as from distinctions between the Articles of Incorporation and Bylaws of the
Bank and the Stock Holding Company. The following discussion is not intended to
be a complete statement of the differences affecting the rights of stockholders,
but summarizes certain significant differences. The Articles of Incorporation
and Bylaws of the Stock Holding Company are attached hereto as Exhibits B and C,
respectively, and should be reviewed for more detailed information.
A number of provisions of the Articles of Incorporation and Bylaws of the
Bank and the Stock Holding Company deal with matters of corporate governance and
certain rights of stockholders. The following discussion is a general summary
of certain of these provisions and certain other statutory and regulatory
provisions relating to stock ownership and transfers, and business combinations.
Some of these provisions may be deemed to have potential anti-
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takeover effects in that they may have the effect of discouraging a future
takeover attempt or change of control which is not approved by the Board of
Directors but which a majority of individual stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management more difficult. The following description is general and
reference should be made in each case to the Stock Holding Company's Articles of
Incorporation and Bylaws, which are incorporated herein by reference.
Issuance of Capital Stock. The Bank's Articles of Incorporation authorizes
the issuance of 50,000,000 shares of common stock, par value $.10 per share, and
10,000,000 shares of preferred stock. The Articles of Incorporation of the
Stock Holding Company authorizes the issuance of 110,000,000 shares of Common
Stock, par value $.10 per share, and 10,000,000 shares of serial preferred
stock. Following the Reorganization, there will be the same number of shares
of the Holding Company Common Stock outstanding as there were shares of Bank
Common Stock outstanding immediately prior to the Reorganization.
Other than in connection with the Corry Acquisition, the Stock Holding
Company has adopted no plan or agreement to issue additional shares of stock at
this time, other than upon the exercise of stock options. If the Stock Holding
Company issues authorized but unissued shares of Holding Company Common Stock or
preferred stock it would not be required to obtain a vote of its stockholders or
the Bank's depositors, or, unless otherwise required by the FRB, give any such
person to right to purchase such shares. If additional authorized but unissued
shares of Holding Company Common Stock are issued in the future, the percentage
ownership interests of existing stockholders would be reduced and, depending on
the terms pursuant to which new shares are issued, the book value and earnings
per share of outstanding Stock Holding Company Common Stock might be diluted.
Moreover, such additional share issuances could be construed as having an anti-
takeover effect. The ability to issue additional shares, which exists under both
the Articles of Incorporation of the Bank and the Stock Holding Company, gives
management greater flexibility in financing corporate operations. As long as the
Mutual Holding Company is in existence it must own at least a majority of the
outstanding voting stock of the Stock Holding Company.
Payment of Dividends. The Banking Code states that Pennsylvania savings
banks may declare and pay dividends only out of accumulated net earnings and may
not declare or pay dividends unless surplus (shareholders equity) is at least
equal to capital. Also, dividends may not be declared or paid if the Bank is in
default in payment of any assessment due to the FDIC. The ability of the Bank
to pay dividends on Bank Common Stock is restricted by tax considerations
related to state savings banks and by federal regulations applicable to state
chartered savings banks. Income appropriated to bad debt reserves and deducted
for federal income tax purposes may not be used to pay cash dividends without
the payment of federal income taxes by the Bank on the amount of such income
removed from reserves for such purpose at the then current income tax rate.
Additionally, the Bank is precluded from paying dividends on its Bank Common
Stock if its regulatory capital would thereby be reduced below the regulatory
capital requirements prescribed for a state savings bank under federal law. The
Bank currently satisfies its applicable regulatory capital requirements.
After the Reorganization, the Stock Holding Company's principal source of
income will initially consist of dividends, if any, paid to the Stock Holding
Company by the Bank and earnings on such dividends, and earnings on the funds
contributed to the Stock Holding Company in connection with or after the
Reorganization. Although the Stock Holding Company will not be subject to the
above dividend restrictions regarding dividend payments to its stockholders, the
restrictions on the Bank's ability to pay dividends to the Stock Holding Company
will continue in effect. In addition, the Stock Holding Company will be subject
to FRB capital adequacy regulations that will restrict the ability of the Stock
Holding Company to pay dividends in the event the Stock Holding Company does not
maintain sufficient capital. See "-- Regulation of the Stock Holding Company."
Special Meetings of Stockholders. For a period of five years following
completion of its mutual holding company reorganization, (i.e., until November
1999), special meetings of the holders of the Bank's common stock may be called
only by the chairman of the board, the president or a majority of the Board of
Directors. After November 1999, a special meeting may be called upon the
written request of shareholders entitled to cast at least one-
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fifth of the votes which all shareholders are entitled to cast at a particular
meeting. The Articles of Incorporation of the Stock Holding Company provide that
special meetings of the stockholders of the Stock Holding Company may be called
only by the Board of Directors pursuant to a resolution approved by the
affirmative vote of a majority of directors then in office.
Cumulative Voting. Neither the Bank's nor the Stock Holding Company's
Articles of Incorporation provide for cumulative voting. The absence of
cumulative voting rights means that the holders of a majority of the shares
voted at a meeting of stockholders may elect all directors of the Stock Holding
Company thereby precluding minority stockholder representation on the Board of
Directors.
Rights of Stockholders to Dissent. Under the BCL, stockholders of a
Pennsylvania savings bank, such as the Bank, and a Pennsylvania corporation,
such as the Stock Holding Company, are generally not entitled to dissenters'
rights of appraisal if the their common stock is held of record by more than
2,000 stockholders, except where shares are converted by a plan, if the shares
are not converted solely into shares of the acquiring, surviving, new or other
corporation, or solely into such shares and money in lieu of fractional shares,
and in certain other circumstances.
Vacancies on the Board of Directors. Any vacancy occurring in the Bank's
Board of Directors may be filled by the affirmative vote of a majority of the
remaining directors. A director elected to fill a vacancy shall be elected to
serve until the next election of directors by the stockholders. Any directorship
to be filled by reason of an increase in the number of directors may be filled
by a vote of the majority of the board of directors for a term of office
continuing only until the next election of directors by the stockholders.
The Stock Holding Company's Articles of Incorporation provide that any
vacancy occurring in the Board of Directors, including any vacancy created by
reason of an increase in the number of directors, shall be filled by a majority
vote of the directors then in office, or by a sole remaining director, and any
director so chosen shall serve until the term of the class to which he was
appointed shall expire and until his successor is elected and qualified. When
the number of directors is changed, the Board of Directors shall determine the
class or classes to which the increased or decreased number of directors shall
be apportioned, provided that no decrease in the number of directors shall
shorten the term of any incumbent director.
Number and Term of Directors. The Bank's Articles of Incorporation
provides that the Board of Directors shall consist of not less than five nor
more than 20 members, as set forth in the Bylaws. The Stock Holding Company's
Bylaws provide that the Board of Directors shall consist of between 5 and 15
members, the exact number to be determined by the Board of Directors. The Board
of Directors of the Stock Holding Company has set the number of directors at 10
persons. Although the Stock Holding Company has no present intention of
reducing its number of directors below its present ten members, the Board of
Directors believes that the ability to reduce the number of directors will
result in greater flexibility in the event of vacancies on the current Board.
The Bank's Articles of Incorporation provides for a classified board of
directors, consisting of three substantially equal classes of directors, each
serving for a three year term, with the term of each class of directors ending
in successive years. The Stock Holding Company's Article of Incorporation also
provides for a classified board of directors.
Presentation of New Business at Meetings of Stockholders. The Bank's
Bylaws do not specifically provide for stockholders' nomination for the election
of directors or proposals for new business at a meeting of stockholders. The
Stock Holding Company's Bylaws provide that any stockholder entitled to vote
generally in an election of directors may nominate one or more persons for
election as directors at a meeting, and, if properly brought, may bring other
business before an annual meeting of the Stock Holding Company. For nominations
or other business to be properly brought before an annual meeting, written
notice of such stockholder's intent must be given not later than (i) 90 days
prior to the anniversary date of the mailing of proxy materials by the Stock
Holding Company in connection with the immediately preceding annual meeting of
stockholders of the Stock Holding Company or, in the case of the first annual
meeting of stockholders of the Stock Holding Company following the
Reorganization, ninety
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days prior to the anniversary date of the mailing of proxy materials by the Bank
in connection with the immediately preceding annual meeting of the Bank prior to
such acquisition, and (ii) with respect to a nomination relating to an election
of directors at a special meeting of stockholders, the close of business on the
tenth day following the date on which notice of such meeting is first given to
stockholders. The Stock Holding Company's Bylaws specify further procedural
requirements that must be satisfied for notice to be properly given.
Mutual Holding Company Ownership. So long as the Mutual Holding Company is
in existence, the Mutual Holding Company must own at least a majority of the
outstanding voting stock of the Bank, and, following the Reorganization, of the
Stock Holding Company. The Mutual Holding Company currently is able to elect
the Bank's directors and direct the affairs and business operations of the Bank.
After the Reorganization, the Mutual Holding Company will be able to elect
directors and direct the affairs and business operations of the Stock Holding
Company.
Limitation on Voting Rights. The Articles of incorporation of the Bank
provide that for a period of five years following the Bank's organization in
November 1994, no person other than the Mutual Holding Company, shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of any class of any equity security of the Bank. In the event shares are
acquired in violation of this provision, all shares beneficially owned by any
person in excess of 10% shall be considered "excess shares" and shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to the
stockholders for a vote. The Articles provide that this limitation shall not
apply to a transaction in which the Bank forms a stock holding company without
change in the respective beneficial ownership interest of its stockholders. The
Stock Holding Company's Articles of Incorporation contain a similar provision
that is not limited to a five year period.
Amendment of Articles of Incorporation and Bylaws. Amendments to the Stock
Holding Company's Articles of Incorporation must be approved by a majority vote
of its Board of Directors and, if required by applicable law, generally by a
majority vote of stockholders. The amendment of certain provisions of the
Articles relating to directors, meetings of stockholders and action without a
meeting, liability of directors and officers, restrictions on acquisitions of
the Stock Holding Company's equity securities, and amendments to the Articles,
however, requires a 75% vote of the Stock Holding Company's stockholders if such
amendments are not approved by the affirmative vote of 80% of the Stock Holding
Company's Board of Directors.
The Stock Holding Company's Bylaws provide that the Board of Directors, to
the extent permitted by law, or stockholders may amend the Bylaws. Such action
by the Board of Directors requires the affirmative vote of a majority of the
directors then in office at any regular or special meeting. Such action by the
stockholders generally requires the affirmative vote of the majority of the
shares of the Stock Holding Company entitled to vote in an election of
directors, provided that the affirmative vote of at least 75% of the shares of
the Stock Holding Company entitled to vote in an election of directors is
required to amend provisions of the Bylaws which are inconsistent with certain
provisions of the Articles of Incorporation relating to directors, meetings of
stockholders and action without a meeting, liability of directors and officers,
restrictions on acquisitions of the Stock Holding Company's equity securities,
and amendments to the Articles of the Stock Holding Company and which are not
approved by the affirmative vote of 80% of the members of the Stock Holding
Company's Board of Directors.
The Bank's Articles may be amended only after such amendment is proposed by
the Bank's Board of Directors, approved by a majority of votes eligible to be
cast by stockholders, and submitted to the Department. The Bank's Bylaws may be
amended by a majority vote of the Board of Directors or by a majority vote of
the votes cast by stockholders at any legal meeting.
REGULATION OF THE STOCK HOLDING COMPANY
General. Upon completion of the Reorganization, the Stock Holding Company
will become a registered bank holding company pursuant to the Bank Holding
Company Act of 1956, as amended (the "BHCA"). The Stock Holding Company will be
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB. The Mutual Holding Company is currently regulated by
the FRB. The FRB has adopted capital adequacy
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guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC. The Stock Holding Company's pro forma capital
exceeds these requirements.
BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the FRB. In determining whether to authorize a
bank holding company (or a company that will become a bank holding company) to
acquire control of a bank, the FRB takes into consideration the financial and
managerial resources of the bank holding company, as well as those of the bank
to be acquired, and considers whether the acquisition is likely to have anti-
competitive effects or other adverse effects. No approval under the BHCA is
required, however, for a bank holding company already owning or controlling 50%
or more of the voting shares of a bank to acquire additional shares of such
bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the FRB is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the FRB has determined to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto. In making such
determinations, the FRB is required to weigh expected benefits to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
The FRB has by regulation determined that certain activities are closely
related to banking within the meaning of the BHCA, including: operating a
mortgage company, a finance company, a credit card company, a factoring company,
a trust company or a saving association; performing certain data processing
operations; providing limited securities brokerage services; acting as an
investment or financial advisor; leasing personal property on a full-payout
(and, to a limited extent, less than full-payout), non-operating basis;
providing tax planning and preparation services; and operating a collection
agency. The FRB also has determined that certain other activities, including
real estate brokerage and syndication, property management and underwriting of
life insurance not related to credit transactions, are closely related to
banking or a proper incident thereto.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the BHCA on extensions of credit to the bank holding
company or any of its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries, and on the taking of
such stock or securities as collateral for loans to any borrower. Furthermore,
under amendments to the BHCA and regulations of the FRB, a bank holding company
and its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit or provision of credit or providing
any property or services. Generally, this provision provides that a bank may not
extend credit, lease or sell property, or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to the bank holding company, or to any other subsidiary of the bank
holding company or on the condition that the customer not obtain other credit or
service from a competitor of the bank, the bank holding company, or any
subsidiary of the bank.
Regulatory Capital Requirements. The FRB has capital adequacy guidelines
pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the
BHCA. The FRB capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8% of total risk-adjusted assets,
with at least one-half of that amount consisting of Tier 1 and up to one-half of
that amount consisting of Tier 2 or supplementary capital. Tier 1 capital for
bank holding companies generally consists of the sum of common shareholders'
equity and perpetual preferred stock (subject in the latter case to limitations
on the kind and amount of preferred stock which may be included as Tier 1
capital), less goodwill. Tier 2 capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier 1 capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100%
24
<PAGE>
for the bulk of assets which are typically held by a bank holding company,
including multi-family residential and commercial real estate loans, commercial
business loans and consumer loans. One-to four- family residential first
mortgage loans which are not 90 days or more past due or nonperforming and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership loans. Off-balance
sheet items also are adjusted to take into account certain risk characteristics.
The FRB has indicated that bank holding companies anticipating significant
growth will be expected to maintain capital ratios in excess of the required
minimums.
In addition to the risk-based capital requirements, the FRB requires bank
holding companies to maintain a minimum leverage capital ratio of Tier 1 capital
to total assets of 3.0%. Total assets for this purpose does not include goodwill
and any other intangible assets and investments that the FRB determines should
be deducted from Tier 1 capital. The FRB has announced that the 3.0% Tier 1
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies will be expected to maintain Tier 1
leverage capital ratios of at least 4.0% to 5.0% or more, depending on their
overall condition.
Repurchases of Holding Company Common Stock. Regulations promulgated by
the FRB provide that a bank holding company must file written notice with the
FRB prior to any repurchase of its equity securities if the gross consideration
for the purchase, when aggregated with the net consideration paid by the bank
holding company for all repurchases during the preceding 12 months, is equal to
10% or more of the bank holding company's consolidated net worth. This notice
requirement is not applicable, however, to a bank holding company, such as the
Stock Holding Company, that exceeds the thresholds established for a well
capitalized state member bank and that satisfies certain other regulatory
requirements.
Commitments to Affiliated Depository Institutions. Under FRB policy, the
Stock Holding Company will be expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The enforceability and precise scope of this
policy is unclear. However, in light of recent judicial precedent, should the
Bank require the support of additional capital resources, is expected that the
Stock Holding Company would be required to respond with any such resources
available to it. In addition, under the Federal Deposit Insurance Act, any
depository institution shall be liable for any loss incurred by the FDIC in
connection with the default of a commonly controlled insured depository
institution or assistance provided by the FDIC to any commonly controlled
depository institution in danger of default.
Federal Securities Law. The Stock Holding Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
Riegle-Neal Interstate Banking Act. On September 29, 1994, the President
signed into law the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal Act"). The Riegle-Neal Act permits bank holding companies to
acquire banks in any state on or after September 29, 1995, unless the state
elected to opt out of the Act, and beginning July 1, 1997, holding companies
with banks in more than one state may convert all of their out-of-state banks
into interstate branches of one bank. Once a bank establishes a branch in
another state through an interstate acquisition or merger, such bank may
establish and acquire additional branches throughout the state. The Riegle-Neal
Act permits an interstate acquisition of only a branch (without acquisition of
an entire bank) only if the laws of the state in which the branch is located
permits out-of-state banks to acquire a branch of a bank in such state without
acquiring the Bank. Pennsylvania did not opt out of the provision permitting
out-of-state bank holding companies to acquire banks in the state prior to
September 29, 1995, and the state is not expected to opt out of the provisions
which will permit interstate branches beginning July 1, 1997.
25
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK OF THE STOCK HOLDING COMPANY
- --------------------------------------------------------------------------------
GENERAL
The Stock Holding Company is authorized to issue 100.0 million shares of
Common Stock having a par value of $.10 per share and 10.0 million shares of
serial preferred stock (the "Preferred Stock"). In the Reorganization the Stock
Holding Company will issue a number of shares of Holding Company Common Stock
equal to the number of shares of Bank Common Stock outstanding immediately prior
to the Reorganization, and no shares of Preferred Stock. Each share of Holding
Company Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Holding Company Common
Stock.
THE HOLDING COMPANY COMMON STOCK WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY GOVERNMENT AGENCY.
COMMON STOCK
Dividends. The Stock Holding Company can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See "Proposed Formation of the Stock Holding Company--
Comparison of Stockholders Rights and Certain Anti-takeover Provisions --
Payment of Dividends." The holders of Holding Company Common Stock will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Stock Holding Company out of funds legally
available therefor. If the Stock Holding Company issues Preferred Stock, the
holders thereof may have priority over the holders of the Holding Company Common
Stock with respect to dividends.
Voting Rights. Upon completion of the Reorganization, the holders of
Holding Company Common Stock will possess exclusive voting rights in the Stock
Holding Company. They will elect the Stock Holding Company's Board of Directors
and act on such other matters as are required to be presented to them under
Pennsylvania law or the Stock Holding Company's Articles of Incorporation or as
are otherwise presented to them by the Board of Directors. Except as discussed
in "Proposed Formation of the Stock Holding Company--Comparison of Stockholders
Rights and Certain Anti-takeover Provisions-- Limitations on Voting Rights,"
each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. If the Stock
Holding Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Stock Holding Company, as holder of the Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Bank (including all deposit accounts and accrued
interest thereon) and after distribution of the balance in the special
liquidation account established in connection with any acquisition by the Bank
subsequent to the mutual holding company reorganization, all assets of the Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Stock Holding Company, the holders of Holding Company Common Stock
would be entitled to receive, after payment or provision for payment of all its
debts and liabilities, all of the assets of the Stock Holding Company available
for distribution. If Preferred Stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of Holding Company Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock is not subject to involuntary redemption.
PREFERRED STOCK
None of the shares of the Stock Holding Company's authorized Preferred
Stock will be issued in the Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from
26
<PAGE>
time to time determine. The Board of Directors can, without shareholder
approval, issue Preferred Stock with voting, dividend, liquidation and
conversion rights which could dilute the voting strength of the holders of
Holding Company Common Stock and may assist management in impeding an unfriendly
takeover or attempted change in control.
ACCOUNTING TREATMENT
The Reorganization will be treated similar to a pooling of interests for
accounting purposes. Therefore, the consolidated capitalization, assets,
liabilities, income and financial statements of the Stock Holding Company
immediately following the Reorganization will be substantially the same as those
of the Bank immediately prior to consummation of the Reorganization, all of
which will be shown on the Stock Holding Company's books at their historical
recorded values. Since the Reorganization will not result in a change in such
financial statements, this document does not include financial statements of the
Bank or the Stock Holding Company.
VOTE REQUIRED
Approval of the Plan of Reorganization requires the affirmative vote of
two-thirds of the total votes eligible to be cast at the Special Meeting.
Failure to vote or a vote to abstain is equivalent to voting against the Plan of
Reorganization. The Board of Directors recommends a vote "FOR" the approval of
the Plan of Reorganization. Approval of the Plan is assured because the Mutual
Holding Company intends to vote its shares in favor of the Plan.
THIS DESCRIPTION OF THE PROPOSED STOCK HOLDING COMPANY FOR THE BANK DOES
NOT PURPORT TO BE COMPLETE, BUT IS QUALIFIED IN ITS ENTIRETY BY THE PLAN OF
REORGANIZATION AND ARTICLES OF INCORPORATION AND BYLAWS OF THE STOCK HOLDING
COMPANY ATTACHED AS EXHIBITS A, B AND C, RESPECTIVELY, TO THIS
PROSPECTUS/INFORMATION STATEMENT.
- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------
In the event the Reorganization is not completed, in order to be eligible
for inclusion in the Bank's proxy materials for the Bank's 1998 Annual Meeting
of Stockholders, any stockholder proposal to take action at such meeting must be
received at the Bank's executive office, 301 Second Avenue, Warren, Pennsylvania
16365, no later than June 19, 1998. Any such proposals shall be subject to the
requirements of the proxy rules adopted under the Exchange Act as administered
by the FDIC.
- --------------------------------------------------------------------------------
MISCELLANEOUS
- --------------------------------------------------------------------------------
The Board of Directors is not aware of any business to come before the
Special Meeting other than the matters described above in the
Prospectus/Information Statement.
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The consolidated financial statements of the Bank and its subsidiaries,
included in the Annual Report on Form F-2 of the Bank for the fiscal year ended
June 30, 1996, which have been filed by the Stock Holding Company as an exhibit
to the registration statement of which this Prospectus/Information Statement is
a part, have been audited by KPMG Peat Marwick LLP, independent accountants, as
set forth in their report dated August 26, 1996 accompanying such financial
statements, and are incorporated herein by reference in reliance upon the report
of such firm, which report is given upon their authority as experts in
accounting and auditing. The report refers to a change in the method of
accounting for income taxes and accounting for certain investments in debt and
equity securities.
Any financial statements and schedules hereafter incorporated by reference
in the registration statement that have been audited and are the subject of a
report by independent accountants will be so incorporated by reference in
27
<PAGE>
reliance upon such reports and upon the authority of such firms as experts in
accounting and auditing to the extent covered by consents filed with the SEC.
- --------------------------------------------------------------------------------
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Stock Holding Company has filed with the SEC a registration statement
(the "Registration Statement"), of which the Prospectus/Information Statement is
a part, under the Securities Act. As permitted by the rules and regulations of
the SEC, this Information Statement/Prospectus does not contain all of the
information set forth in the Registration Statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. The SEC also maintains a Web site
at http://www.sec.gov that contains copies of reports, proxy and information
statements and other information regarding registrants, including the Stock
Holding Company, that file electronically with the SEC. The statements
contained herein as to the contents of any contract or other documents filed as
an exhibit to the Registration Statement are of necessary brief descriptions
thereof and are not necessarily complete. Each such statement is qualified by
reference to such contract or document.
The Bank is subject to the information, reporting and proxy statement
requirements of the Exchange Act and, in accordance therewith and with the rules
and regulations of the FDIC, files reports, proxy statements and other
information with the FDIC. Copies of such materials may be obtained at
prescribed rates from the FDIC. Upon completion of the Reorganization, the
Stock Holding Company will become subject to the information, reporting and
proxy statement requirements under the Exchange Act and in accordance therewith
and the rules and regulations of the SEC will file reports, proxy statements and
other information with the SEC. Such materials will be available for inspection
and copying as described above.
- --------------------------------------------------------------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The following documents filed with the FDIC by the Bank pursuant to the
Exchange Act and filed by the Stock Holding Company as exhibits to the
Registration Statement, are incorporated by reference in this
Prospectus/Information Statement:
1. The Bank's Annual Report on Form F-2 for the year ended June 30, 1996;
and
2. The Bank's Quarterly Reports on Form F-4 for each of the quarterly
periods ended September 30, 1996, December 31, 1996 and March 31, 1997.
All documents and reports filed with the FDIC by the Bank pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus/Information Statement and prior to the completion of the
Reorganization will also be filed with the SEC by the Stock Holding Company and
shall be deemed to be incorporated by reference in this Prospectus/Information
Statement and to be part hereof from the date of filing of such documents or
reports. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Information Statement to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus/Information Statement.
This Prospectus/Information Statement incorporates documents by reference
that are not presented herein or delivered herewith. These documents (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference) are available upon request to each person to whom a
copy of this Prospects/Information Statement is delivered, without charge, upon
written or telephone request to Greg LaRocca, Secretary, Northwest Bancorp,
Inc., 301 Second Avenue, Warren, Pennsylvania 16365-2353 (telephone number (814)
726-2140).
28
<PAGE>
BY ORDER OF THE BOARD OF DIRECTORS
John O. Hanna
President and Chief Executive Officer
Warren, Pennsylvania
____________ __, 1997
29
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
NORTHWEST SAVINGS BANK
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated May 15, 1996, is by and
between NORTHWEST SAVINGS BANK, a Pennsylvania stock savings bank (the "Bank");
NORTHWEST BANCORP, INC., a to-be-formed Pennsylvania corporation (the "Stock
Holding Company"); and NORTHWEST INTERIM SAVINGS BANK, a to-be-formed interim
Pennsylvania stock savings bank ("Interim").
The parties hereto desire to enter into this Agreement and Plan of
Reorganization whereby the corporate structure of the Bank will be reorganized
into the stock holding company form of ownership. As a result of the
reorganization, immediately after the Effective Date (as defined in Article V
below), all of the issued and outstanding shares of common stock, par value $.10
per share, of the Bank will be held by the Stock Holding Company, and the
holders of the issued and outstanding shares of common stock of the Bank will
become the holders of the issued and outstanding shares of common stock of the
Stock Holding Company.
The reorganization of the Bank will be accomplished by the following steps:
(1) the formation of the Stock Holding Company as a wholly owned subsidiary of
the Bank; (2) the formation of an interim Pennsylvania stock savings bank
("Interim"), which will be wholly owned by the Stock Holding Company; and (3)
the merger of Interim into the Bank, with the Bank as the surviving corporation.
Pursuant to such merger: (i) each of the issued and outstanding shares of common
stock of the Bank will be converted by operation of law into an equal number of
issued and outstanding shares of common stock of the Stock Holding Company; (ii)
each of the issued and outstanding shares of common stock of Interim will be
converted automatically by operation of law into an equal number of issued and
outstanding shares of common stock of the Bank; and (iii) the shares of common
stock of the Stock Holding Company held by the Bank will be canceled.
NOW, THEREFORE, in order to consummate this Agreement and Plan of
Reorganization, and in consideration of the mutual covenants herein set forth,
the parties agree as follows:
ARTICLE I
MERGER OF INTERIM INTO
THE BANK AND RELATED MATTERS
----------------------------
1.1 On the Effective Date, Interim will be merged with and into the Bank
(the "Merger") and the separate existence of Interim shall cease, and all assets
and property (real, personal and mixed, tangible and intangible, choses in
action, rights and credits) then owned by Interim, or which would inure to it,
shall immediately and automatically, by operation of law and without any
conveyance, transfer, or further action, become the property of the Bank. The
Bank shall be deemed to be a continuation of Interim, and the Bank shall succeed
to the rights and obligations of Interim.
1.2 Following the Merger, the existence of the Bank shall continue
unaffected and unimpaired by the Merger, with all the rights, privileges,
immunities and powers, and subject to all the duties and liabilities, of a
savings bank organized under Pennsylvania law. The Articles of Incorporation
(the "Charter") and Bylaws of the Bank, as presently in effect, shall continue
in full force and effect and shall not be changed in any manner whatsoever by
the Merger.
1.3 From and after the Effective Date, and subject to the actions of the
Board of Directors of the Bank, the business presently conducted by the Bank
(whether directly or through its subsidiaries) will continue to be conducted by
it, as a wholly owned subsidiary of Stock Holding Company, and the present
directors and officers of the Bank will continue in their present positions.
The home office and branch offices of the Bank in existence immediately prior to
the Effective Date shall continue to be the home office and branch offices,
respectively, of the Bank from and after the Effective Date.
<PAGE>
ARTICLE II
CONVERSION OF STOCK
-------------------
2.1 The terms and conditions of the Merger, the mode of carrying the same
into effect, and the manner and basis of converting the common stock of the Bank
into common stock of the Stock Holding Company pursuant to this Agreement shall
be as follows:
A. On the Effective Date, each share of common stock, par value $.10
per share, of the Bank issued and outstanding immediately prior to the Effective
Date shall automatically by operation of law be converted into and shall become
one share of common stock, par value $0.10 per share, of the Stock Holding
Company (the "Stock Holding Company Common Stock"). Each share of common stock
of Interim issued and outstanding immediately prior to the Effective Date shall,
on the Effective Date, automatically by operation of law be converted into and
become one share of common stock, $.10 par value per share, of the Bank and
shall not be further converted into shares of the Stock Holding Company, so that
from and after the Effective Date all of the issued and outstanding shares of
common stock of the Bank shall be held by the Stock Holding Company.
B. On the Effective Date, the current stock option plans and
recognition plans of the Bank (collectively, the "Benefit Plans") shall
automatically, by operation of law, be continued as Benefit Plans of the Bank
and/or the Stock Holding Company. Each option to purchase shares of the Bank
common stock under the Bank's stock option plan outstanding at that time will be
automatically converted into an identical option, with identical price, terms
and conditions, to purchase an identical number of shares of Stock Holding
Company Common Stock in lieu of shares of the Bank common stock. The Stock
Holding Company and the Bank may make appropriate amendments to the Benefit
Plans to reflect the adoption of the Benefit Plans as the plans of the Stock
Holding Company, without adverse effect on the Benefit Plans and their
participants.
C. From and after the Effective Date, each holder of an outstanding
certificate or certificates that, prior thereto, represented shares of the Bank
common stock, shall, upon surrender of the same to the designated agent of the
Bank, be entitled to receive in exchange therefor a certificate or certificates
representing the number of whole shares of Stock Holding Company Common Stock
into which the shares theretofore represented by the certificate or certificates
so surrendered shall have been converted, as provided in the foregoing
provisions of this Section 2.1. Until so surrendered, each such outstanding
certificate which, prior to the Effective Date, represented shares of the Bank
common stock shall be automatically deemed for all purposes to evidence the
ownership of the equal number of whole shares of Stock Holding Company Common
Stock. Former holders of shares of the Bank common stock will not be required
to exchange their the Bank common stock certificates for new certificates
evidencing the same number of shares of Stock Holding Company Common Stock. If
in the future Stock Holding Company determines to effect an exchange of stock
certificates, instructions will be sent to all holders of record of Stock
Holding Company Common Stock.
D. All shares of Stock Holding Company Common Stock into which shares
of the Bank common stock shall have been converted pursuant to this Article II
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such converted shares.
E. On the Effective Date, the holders of certificates formerly
representing the Bank common stock outstanding on the Effective Date shall cease
to have any rights with respect to the common stock of the Bank, and their sole
rights shall be with respect to the Stock Holding Company Common Stock into
which their shares of the Bank common stock shall have been converted by the
Merger.
2
<PAGE>
ARTICLE III
CONDITIONS
----------
3.1 The obligations of the Bank, Stock Holding Company and Interim to
effect the Merger and otherwise consummate the transactions which are the
subject matter hereof shall be subject to satisfaction of the following
conditions:
A. To the extent required by applicable law, rules, and regulations,
the holders of the outstanding shares of the Bank common stock shall, at a
meeting of the stockholders of the Bank duly called, have approved this
Agreement by the affirmative vote of two-thirds of the outstanding shares of the
Bank common stock.
B. Any and all approvals from the Federal Reserve Board (the "FRB"),
the Securities and Exchange Commission and any other state or federal
governmental agency having jurisdiction necessary for the lawful consummation of
the Merger and the issuance and delivery of Stock Holding Company Common Stock
as contemplated by this Agreement shall have been obtained.
C. The Bank shall have received either (i) a ruling from the Internal
Revenue Service or (ii) an opinion from its legal counsel, to the effect that
the Merger will be treated as a non-taxable transaction under applicable
provisions of the Internal Revenue Code of 1986, as amended, and that no gain or
loss will be recognized by the stockholders of the Bank upon the exchange of the
Bank common stock held by them solely for Stock Holding Company Common Stock.
ARTICLE IV
TERMINATION
-----------
4.1 This Agreement may be terminated at the election of any of the parties
hereto if any one or more of the conditions to the obligations of any of them
hereunder shall not have been satisfied and shall have become incapable of
fulfillment and shall not be waived. This Agreement may also be terminated at
any time prior to the Effective Date by the mutual consent of the respective
Boards of Directors of the parties.
4.2 In the event of the termination of this Agreement pursuant to any of
the foregoing provisions, no party shall have any further liability or
obligation of any nature to any other party under this Agreement.
ARTICLE V
EFFECTIVE DATE OF MERGER
------------------------
Upon satisfaction or waiver (in accordance with the provisions of this
Agreement) of each of the conditions set forth in Article III, the parties
hereto shall execute and cause to be filed this Agreement and such certificates
or further documents as shall be required by Pennsylvania law to be filed with
the Pennsylvania Secretary of State. Upon approval of the Merger by the
Pennsylvania Department of Banking, and the filing of the Articles of Merger
with the Pennsylvania Department of State, the Merger and other transactions
contemplated by this Agreement shall become effective. The Effective Date for
all purposes hereunder shall be the date of such filing with the Pennsylvania
Department of State.
3
<PAGE>
ARTICLE VI
MISCELLANEOUS
-------------
6.1 Any of the terms or conditions of this Agreement, which may
legally be waived, may be waived at any time by any party hereto that is
entitled to the benefit thereof, or any of such terms or conditions may be
amended or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, executed in the same manner as this
Agreement.
6.2 Any of the terms or conditions of this Agreement may be amended or
modified in whole or in part at any time, to the extent permitted by applicable
law, rules, and regulations, by an amendment in writing, provided that any such
amendment or modification is not materially adverse to the Bank, the Stock
Holding Company or their stockholders. In the event that any governmental agency
requests or requires that the transactions contemplated herein be modified in
any respect as a condition of providing a necessary regulatory approval or
favorable ruling, or that in the opinion of counsel such modification is
necessary to obtain such approval or ruling, this Agreement may be modified, at
any time before or after adoption thereof by the stockholders of the Bank, by an
instrument in writing, provided that the effect of such amendment would not be
materially adverse to the Bank, the Stock Holding Company or their stockholders.
6.3 This Agreement shall be governed by and construed under the laws of
the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
and Plan of Reorganization as of the date first above written.
NORTHWEST SAVINGS BANK
By: /s/ John O. Hanna
-----------------------------------
John O. Hanna
President and Chief Executive Officer
NORTHWEST BANCORP, INC.
By: /s/ John O. Hanna
-----------------------------------
John O. Hanna
President and Chief Executive Officer
NORTHWEST INTERIM SAVINGS BANK
(IN FORMATION)
By: /s/ John O. Hanna
-----------------------------------
John O. Hanna
President and Chief Executive Officer
<PAGE>
EXHIBIT B
NORTHWEST BANCORP, INC.
ARTICLES OF INCORPORATION
<PAGE>
ARTICLES OF INCORPORATION
OF
NORTHWEST BANCORP, INC.
ARTICLE I
NAME
The name of the corporation is Northwest Bancorp, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the initial registered office of the Corporation in the
Commonwealth of Pennsylvania is Liberty and Second Streets, Warren, PA 16365-
2353.
ARTICLE III
NATURE OF BUSINESS
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Business Corporation Law of
1988, as amended, of the Commonwealth of Pennsylvania (the "BCL"). The
Corporation is incorporated under the provisions of the BCL.
ARTICLE IV
CAPITAL STOCK
A. AUTHORIZED AMOUNT. The total number of shares of capital stock which
the Corporation has authority to issue is 110,000,000, of which 10,000,000 shall
be serial preferred stock, par value $.10 per share (hereinafter the "Preferred
Stock"), and 100,000,000 shall be common stock, par value $.10 per share
(hereinafter the "Common Stock"). Except to the extent required by governing
law, rule or regulation, the shares of capital stock may be issued from time to
time by the Board of Directors without further approval of stockholders. The
Corporation shall have the authority to purchase its capital stock out of funds
lawfully available therefor.
B. COMMON STOCK. Except as provided in this Article IV (or in any
resolution or resolutions adopted by the Board of Directors pursuant hereto),
the exclusive voting power of the Corporation shall be vested in the Common
Stock, with each holder thereof being entitled to one vote for each share of
such Common Stock standing in the holder's name on the books of the Corporation.
Subject to any rights and preferences of any class of stock having preference
over the Common Stock, holders of Common Stock shall be entitled to such
dividends as may be declared by the Board of Directors out of funds lawfully
available therefor. Upon any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, holders of Common
Stock shall be entitled to receive pro rata the remaining assets of the
<PAGE>
Corporation after the holders of any class of stock having preference over the
Common Stock have been paid in full any sums to which they may be entitled.
C. AUTHORITY OF BOARD TO FIX TERMS OF PREFERRED STOCK. The Board of
Directors shall have the full authority permitted by law to divide the
authorized and unissued shares of Preferred Stock into series and to fix by
resolution full, limited, multiple or fractional, or no voting rights, and such
designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights, and other special or relative rights
of the Preferred Stock or any series thereof that may be desired.
D. PREEMPTIVE RIGHTS. Except as may be provided in a resolution or
resolutions of the Board of Directors providing for the issue of any series of
Preferred Stock, no holder of shares of capital stock of the Corporation as such
shall have any preemptive or preferential right to purchase or subscribe to any
part of any new or additional issue of capital stock of any class whatsoever of
the Corporation, or of securities convertible into capital stock of any class
whatsoever, whether now or hereafter authorized or issued.
ARTICLE V
INCORPORATOR
The name of the sole incorporator is Northwest Savings Bank, the mailing
address of the sole incorporator is Liberty and Second Streets, Warren,
Pennsylvania 16365-2353, and the number and class of shares for which the sole
incorporator has subscribed is 100 shares of common stock.
ARTICLE VI
DIRECTORS
A. DIRECTORS AND NUMBER OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
Except as otherwise increased from time to time by the exercise of the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional directors, the
number of directors of the Corporation shall be as set forth in the
Corporation's Bylaws, as may be amended from time to time.
B. CLASSIFICATION AND TERM. The Board of Directors, other than those who
may be elected by the holders of any class or series of stock having preference
over the Common Stock as to dividends or upon liquidation, shall be divided into
three classes as nearly equal in number as possible, with one class to be
elected annually. The term of office of the initial directors shall be as
follows: the term of directors of the first class shall expire at the first
annual meeting of stockholders after the effective date of these Articles of
Incorporation; the term of office of the directors of the second class shall
expire at the second annual meeting of stockholders after the effective date of
these Articles of Incorporation; and the term of office of the third class shall
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expire at the third annual meeting of stockholders after the effective date of
these Articles of Incorporation; and, as to directors of each class, when their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors elected to succeed those whose terms are expiring shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders (except to the extent necessary to ensure that the Board of
Directors shall be divided into three classes as nearly equal in number as
possible) and when their respective successors are elected and qualified.
C. NO CUMULATIVE VOTING. Stockholders of the Corporation shall not be
permitted to cumulate their votes for the election of directors.
D. VACANCIES. Except as otherwise fixed pursuant to the provisions of
Article IV hereof relating to the rights of the holders of any class or series
of stock having preference over the Common Stock as to dividends or upon
liquidation to elect directors, any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, shall be filled by a majority vote of the directors then in office,
whether or not a quorum is present, or by a sole remaining director, and any
director so chosen shall serve until the term of the class to which he was
appointed shall expire and until his successor is elected and qualified. When
the number of directors is changed, the Board of Directors shall determine the
class or classes to which the increased or decreased number of directors shall
be apportioned, provided that no decrease in the number of directors shall
shorten the term of any incumbent director.
E. REMOVAL. Except as otherwise required by law, and subject to the
rights of any class or series of stock having preference over the Common Stock
as to dividends or upon liquidation to elect directors, any director (including
persons elected by directors to fill vacancies in the Board of Directors) may be
removed from office by stockholders only for cause and only upon the affirmative
vote of not less than a majority of the total votes eligible to be cast by
stockholders at a duly constituted meeting of stockholders called expressly for
such purpose. Cause for removal shall exist only if the director whose removal
is proposed has been either declared of unsound mind by an order of a court of
competent jurisdiction, convicted of a felony or of an offense punishable by
imprisonment for a term of more than one year by a court of competent
jurisdiction, or deemed liable by a court of competent jurisdiction for gross
negligence or misconduct in the performance of such director's duties to the
Corporation.
ARTICLE VII
MEETINGS OF STOCKHOLDERS; ACTION WITHOUT A MEETING
A. SPECIAL MEETING OF STOCKHOLDERS. Except as otherwise required by law
and subject to the rights of the holders of any class or series of Preferred
Stock, special meetings of stockholders may be called only by the Board of
Directors of the Corporation pursuant to a resolution approved by the
affirmative vote of a majority of the directors then in office.
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B. ACTION WITHOUT A MEETING. An action permitted to be taken by the
stockholders of the Corporation at a meeting of stockholders may be taken
without a meeting only if a unanimous written consent setting forth the action
so taken is signed by all stockholders who would be entitled to vote at a
meeting for such purpose and such consent is filed with the Secretary of the
Corporation as part of the corporate records.
C. ADVANCE NOTICE BY STOCKHOLDERS. Advance notice of stockholder
nominations for the election of Directors and of business to be brought by
stockholders before any meeting of the stockholders of the Corporation shall be
given in the manner provided in the Bylaws of the Corporation.
ARTICLE VIII
LIABILITY OF DIRECTORS AND OFFICERS
A. PERSONAL LIABILITY FOR MONETARY DAMAGES. The personal liabilities of
the directors and officers of the Corporation for monetary damages for conduct
in their capacities as such shall be eliminated to the fullest extent permitted
by the BCL as it exists on the effective date of these Articles of Incorporation
or as such law may be thereafter in effect, and in no event shall a director be
personally liable, as such, for monetary damages for any action taken unless the
director has breached or failed to perform the duties of his office under the
BCL and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. This section A of Article VIII shall not apply to
the responsibility or liability of a director pursuant to any criminal statute,
or the liability of a director for the payment of taxes pursuant to Federal,
State, or local law.
B. AMENDMENTS. No amendment, modification or repeal of this Article VIII,
nor the adoption of a provision of these Articles of Incorporation inconsistent
with this Article VIII, shall adversely affect the rights provided hereby with
respect to any claim, issue or matter in any proceeding that is based in any
respect on any alleged action or failure to act prior to such amendment,
modification, repeal or adoption.
ARTICLE IX
RESTRICTIONS ON OFFERS AND ACQUISITIONS OF
THE CORPORATIONS' EQUITY SECURITIES
A. DEFINITIONS.
(a) ACQUIRE. The term "Acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise.
(b) ACTING IN CONCERT. The term "Acting in Concert" means (a) knowing
participation in a joint activity or conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (b) a combination or
pooling of voting or other interests in the securities
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of an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
(c) AFFILIATE. An "Affiliate" of, or a Person "affiliated with" a
specified Person, means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with the Person specified.
(d) ASSOCIATE. The term "Associate" used to indicate a relationship with
any Person means:
(i) Any corporation or organization (other than the Corporation or a
Subsidiary of the Corporation), or any subsidiary or parent thereof, of
which such Person is a director, officer or partner or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class or equity
securities;
(ii) Any trust or other estate in which such Person has a 10% or
greater beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, provided, however, such term shall not
include any employee stock benefit plan of the Corporation or a Subsidiary
of the Corporation in which such Person has a 10% or greater beneficial
interest or serves as a trustee or in a similar fiduciary capacity.
(iii) Any relative or spouse of such Person (or any relative of such
spouse) who has the same home as such Person or who is a director of
officer of the Corporation or a Subsidiary of the Corporation (or any
subsidiary or parent thereof); or
(iv) Any investment company registered under the Investment Company
Act of 1940 for which such Person or any Affiliate or Associate of such
Person serves as investment advisor.
(e) BENEFICIAL OWNER (INCLUDING BENEFICIALLY OWNED). A Person shall be
considered the "Beneficial Owner" of any shares of stock (whether or not owned
of record):
(i) With respect to which such Person or any Affiliate or Associate of
such Person directly or indirectly has or shares (A) voting power,
including the power to vote or to direct the voting of such shares of
stock, and/or (B) investment power, including the power to dispose of or to
direct the disposition of such shares of stock;
(ii) Which such Person or any Affiliate or Associate of such Person
has (A) the right to acquire (whether such right is exercisable immediately
or only after the passage of time) pursuant to any agreement, arrangement
or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, and/or (B) the right to vote
pursuant to any agreement, arrangement or understanding (whether such right
is exercisable immediately or only after the passage of time); or
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(iii) Which are Beneficially Owned within the meaning of (i) or (ii)
of this Article IX(A)(e) by any other Person with which such first-
mentioned Person or any of its Affiliates or Associates either (A) has any
agreement, arrangement or understanding, written or oral, with respect to
acquiring, holding, voting or disposing of any shares of stock of the
Corporation or any Subsidiary of the Corporation or acquiring, holding or
disposing of all or substantially all, or any Substantial part, of the
assets or business of the Corporation or a Subsidiary of the Corporation,
or (B) is Acting in Concert. For the purpose only of determining whether a
Person is the Beneficial Owner of a percentage specified in this Article IX
of the outstanding Voting Shares, such shares shall be deemed to include
any Voting Shares which may be issuable pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights,
exchange rights, warrants, options or otherwise and which are deemed to be
Beneficially Owned by such Person pursuant to the foregoing provisions of
this Article IX(A)(e), but shall not include any other Voting Shares which
may be issuable in such manner.
(f) OFFER. The term "Offer" shall mean every offer to buy or acquire,
solicitation of an offer to sell, tender offer or request or invitation for
tender of, a security or interest in a security for value; provided that the
term "Offer" shall not include (i) inquiries directed solely to the management
of the Corporation and not intended to be communicated to stockholders which are
designed to elicit an indication of management's receptivity to the basic
structure of a potential acquisition with respect to the amount of cash and or
securities, manner of acquisition and formula for determining price, or (ii)
non-binding expressions of understanding or letters of intent with the
management of the Corporation regarding the basic structure of a potential
acquisition with respect to the amount of cash and or securities, manner of
acquisition and formula for determining price.
(g) PERSON. The term "Person" shall mean any individual, partnership,
corporation, association, trust, group or other entity. When two or more Persons
act as a partnership, limited partnership, syndicate, association or other group
for the purpose of acquiring, holding or disposing of shares of stock, such
partnership, syndicate, associate or group shall be deemed a "Person".
(h) SUBSTANTIAL PART. The term "Substantial Part" as used with reference
to the assets of the Corporation or of any Subsidiary means assets having a
value of more than 10% of the total consolidated assets of the Corporation and
its Subsidiaries as of the end of the Corporation's most recent fiscal year
ending prior to the time the determination is being made.
(i) SUBSIDIARY. "Subsidiary" means any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by the Person in
question.
(j) VOTING SHARES. "Voting Shares" shall mean shares of the Corporation
entitled to vote generally in an election of directors.
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(k) CERTAIN DETERMINATIONS WITH RESPECT TO ARTICLE IX. A majority of the
directors shall have the power to determine for the purposes of this Article IX,
on the basis of information known to them and acting in good faith: (A) the
number of Voting Shares of which any Person is the Beneficial Owner; (B) whether
a Person is an Affiliate or Associate of another; (C) whether a Person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of "Beneficial Owner" as hereinabove defined; and (D) such
other matters with respect to which a determination is required under this
Article IX.
(l) DIRECTORS, OFFICERS OR EMPLOYEES. Directors, officers or employees of
the Corporation or any Subsidiary thereof shall not be deemed to be a group with
respect to their individual acquisitions of any class of equity securities of
the Corporation solely as a result of their capacities as such.
B. RESTRICTIONS. No Person other than Northwest Bancorp, MHC, shall
directly or indirectly Offer to acquire or acquire the Beneficial Ownership of
(i) more than 10% of the issued and outstanding shares of any class of an equity
security of the Corporation, or (ii) any securities convertible into, or
exercisable for, any equity securities of the Corporation if, assuming
conversion or exercise by such Person of all securities of which such Person is
the Beneficial Owner which are convertible into, or exercisable for, such equity
securities (but no securities convertible into, or exercisable for, such equity
securities of which such Person is not the Beneficial Owner), such Person would
be the Beneficial Owner of more than 10% of any class of any equity security of
the Corporation.
C. EXCLUSIONS. The foregoing restrictions shall not apply to (i) any
Offer with a view toward public resale made exclusively to the Corporation by
underwriters or a selling group acting on its behalf, (ii) any tax qualified
employee benefit plan or arrangement established by the Corporation or a
Subsidiary of the Corporation and any trustee of such a plan or arrangement, and
(iii) any other Offer or acquisition approved in advance by the affirmative vote
of 80% of the members of the Corporation's Board of Directors then in office.
D. REMEDIES. In the event that shares are acquired in violation of this
Article IX, all shares Beneficially Owned by any Person in excess of 10% shall
be considered "Excess Shares" and shall not be counted as shares entitled to
vote and shall not be voted by any Person or counted as Voting Shares in
connection with any matters submitted to stockholders for a vote.
ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribe by law, and all rights conferred upon stockholders herein
are granted subject to this reservation. No amendment, addition, alteration,
change or repeal of these Articles of Incorporation shall be made unless it is
first approved by the Board of Directors of the Corporation pursuant to a
resolution
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adopted by the affirmative vote of a majority of the directors then in office,
and, to the extent required by applicable law, thereafter is approved by the
holders of a majority (except as provided below) of the shares of the
Corporation entitled to vote generally in an election of directors, voting
together as a single class, as well as such additional vote of the Preferred
Stock as may be required by the provisions of any series thereof.
Notwithstanding anything contained in these Articles of Incorporation to the
contrary, the affirmative vote of the holders of at least 75% of the shares of
the Corporation entitled to vote generally in an election of directors, voting
together as a single class, as well as such additional vote of the Preferred
Stock as may be required by the provisions of any series thereof, shall be
required to amend, adopt, alter, change or repeal any provision of Articles VI,
VII, VIII, IX and X hereof which is not approved by the affirmative vote of 80%
of the Corporation's Board of Directors then in office.
THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the Business Corporation Law of
1988, as amended, of the Commonwealth of Pennsylvania through these Articles of
Incorporation, has caused these Articles of Incorporation to be signed by its
President and Chief Executive Officer, who hereby declares and certifies that
the facts herein stated are true and who has hereunto set his hand this 6th
day of May, 1997.
ATTEST NORTHWEST SAVINGS BANK
/s/ Gregory C. LaRocca By: /s/ John O. Hanna
- ------------------------------ -----------------------------------
Gregory C. LaRocca, Secretary John O. Hanna, President
and Chief Executive Officer
<PAGE>
EXHIBIT C
NORTHWEST BANCORP, INC.
BYLAWS
<PAGE>
BYLAWS OF
NORTHWEST BANCORP, INC.
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
--------------------------------------
Northwest Bancorp, Inc. ("Corporation") shall be located in the Commonwealth of
Pennsylvania at such place as may be fixed from time to time by the Board of
Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office.
1.2 OTHER OFFICES. The Corporation may have other offices within or
-------------
outside the Commonwealth of Pennsylvania at such place or places as the Board of
Directors may from time to time determine.
ARTICLE II
STOCKHOLDERS' MEETINGS
2.1 PLACE OF MEETING. All meetings of the stockholders shall be held at
----------------
such place within or without the Commonwealth of Pennsylvania as shall be
determined by the Board of Directors.
2.2 ANNUAL AND SPECIAL MEETINGS. The annual meeting of the stockholders
---------------------------
for the election of directors and for the transaction of such other business as
may properly come before the meeting shall be held each year on the third
Wednesday of October at the hour of 10:00 a.m. if not a legal holiday, and if a
legal holiday, then on the day following, at the same hour, or at such other
date and time as may be determined by the Board of Directors and stated in the
notice of such meeting. Special meetings of stockholders may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the directors then in office.
2.3 ORGANIZATION AND CONDUCT. Each meeting of the stockholders shall be
------------------------
presided over by the President, or if the President is not present, by any
Executive or Senior Vice President or such other person as the directors may
determine. The Secretary, or in his absence a temporary Secretary, shall act as
secretary of each meeting of the stockholders. In the absence of the Secretary
and any temporary Secretary, the chairman of the meeting may appoint any person
present to act as secretary of the meeting. The chairman of any meeting of the
stockholders, unless prescribed by law or regulation or unless the Board of
Directors has otherwise determined, shall determine the order of the business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussions as shall be deemed appropriate by him in
his sole discretion.
<PAGE>
2.4 NOTICE.
------
(a) Written notice of every meeting of stockholders shall be given by, or
at the direction of, the Secretary of the Corporation or other authorized person
to each stockholder of record entitled to vote at the meeting at least (i) ten
days prior to the date named for a meeting that will consider a fundamental
change under Chapter 19 of the Pennsylvania Business Corporation Law ("BCL"), or
any successor thereto, or (ii) five days prior to the date named for a meeting
in any other case. A notice of meeting shall specify the place, date and hour
of the meeting and in the case of a special meeting the general nature of the
business to be transacted thereat, as well as any other information required by
law.
(b) When a meeting of stockholders is adjourned, it shall not be necessary
to give any notice of the adjourned meeting or of the business to be transacted
at an adjourned meeting, other than by announcement at the meeting at which the
adjournment is taken, unless the Board of Directors fixes a new record date for
the adjourned meeting or notice of the business to be transacted is required to
be given by applicable law and such notice previously has not been given.
2.5 RECORD DATE. The Board of Directors may fix in advance a record date
-----------
for the purpose of determining stockholders entitled to notice of or to vote at
any meeting of stockholders, or any adjournment thereof, such date to be not
more than ninety (90) days and not less than (i) ten (10) days in the case of a
meeting that will consider a fundamental change under Chapter 19 of the BCL, or
any successor thereto, or (ii) five (5) days in the case of a meeting for any
other purpose, prior to the date of the meeting established by the Board of
Directors.
2.6 VOTING LIST. The office or agent having charge of the transfer books
-----------
for shares of the Corporation shall make a complete list of the stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical order,
with the address of and number of shares held by each. The list shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any stockholder during the whole time of the meeting for
the purposes thereof.
2.7 QUORUM. Except as otherwise required by law:
------
(a) The presence in person or by proxy of stockholders entitled to vote at
least a majority of the votes that all stockholders are entitled to cast on a
particular matter to be acted upon at a meeting of stockholders (after giving
effect to Article IX of the Corporation's Articles of Incorporation) shall
constitute a quorum for the purposes of consideration and action on the matter.
Where a separate vote by a class or classes is required, a majority of the
shares of such class or classes present in person or represented by proxy shall
constitute a quorum entitled to take action with respect to that vote on that
matter. If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time. If a notice of any adjourned special meeting of stockholders is
sent to all stockholders entitled to vote
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thereat, stating that it will be held with those present constituting a quorum,
then except as otherwise required by law, those present at such adjourned
meeting shall constitute a quorum, and all matters shall be determined by a
majority of the votes cast at such meeting.
(b) The stockholders present at a duly organized meeting can continue to
do business until adjournment notwithstanding the general withdrawal of enough
stockholders to leave less than a quorum.
2.8 VOTING OF SHARES.
----------------
(a) Except as otherwise provided in these Bylaws or to the extent that
voting rights of the shares of any class or classes are limited or denied by the
Articles of Incorporation, each stockholder, on each matter submitted to a vote
at a meeting of stockholders, shall have one vote for each share of stock
registered in his name on the books of the Corporation.
(b) Except as otherwise provided by the Articles of Incorporation, by law
or by paragraph (c) of this Section 2.8, any corporate action to be taken by
vote of the stockholders of the Corporation shall be authorized by receiving the
affirmative vote of a majority of the votes cast by all stockholders entitled to
vote thereon and, if any stockholders are entitled to vote thereon as a class,
upon receiving the affirmative vote of a majority of the votes cast by
stockholders entitled to vote as a class.
(c) Directors are to be elected by a plurality of votes cast by the shares
entitled to vote in the election at a meeting at which a quorum is present. If,
at any meeting of the stockholders, due to a vacancy or vacancies or otherwise,
directors of more than one class of the Board of Directors are to be elected,
each class of directors to be elected at the meeting shall be elected in a
separate election by a plurality vote.
2.9 PROXIES. Every stockholder entitled to vote at a meeting of
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stockholders may authorize another person to act for him by a proxy duly
executed by the stockholder or his duly authorized attorney-in-fact. The
presence of, or vote or other action at a meeting of stockholders, by a proxy of
a stockholder shall constitute the presence of, or vote or other action by the
stockholder for all purposes. No proxy shall be valid after three years from the
date of execution unless a longer time is expressly provided therein.
2.10 PROPOSALS. At an annual meeting of the stockholders, only such
---------
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, or (b) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than ninety (90) days
prior
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to the anniversary date of the mailing of proxy materials by the Corporation in
connection with the immediately preceding annual meeting of stockholders of the
Corporation or, in the case of the first annual meeting of stockholders of the
Corporation following its acquisition of all of the outstanding capital stock of
Northwest Savings Bank, ninety days prior to the anniversary date of the mailing
of proxy materials by Northwest Savings Bank in connection with the immediately
preceding annual meeting of Northwest Savings Bank prior to such acquisition. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting, (b) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (c) the class and number of shares of the Corporation
which are beneficially owned by the stockholder, and (d) any material interest
of the stockholder in such business. The chairman of an annual meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Article II, Section 2.10, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted. This provision is not a limitation on any other applicable
laws and regulations.
2.11 JUDGES OF ELECTION.
------------------
(a) For each meeting of stockholders, the Board of Directors may appoint
judges of election, who need not be stockholders, to act at the meeting or any
adjournment thereof. If judges of election are not so appointed, the presiding
officer of the meeting may, and on the request of any stockholder shall, appoint
judges of election at the meeting. The number of judges shall be one or three. A
person who is a candidate for office to be filled at the meeting shall not act
as a judge.
(b) The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies,
receive votes or ballots, hear and determine all challenges and questions in any
way arising in connection with the right to vote, count and tabulate all votes,
determine the result and do such acts as may be proper to conduct the election
or vote with fairness to all stockholders. The judges of election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three judges of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
ARTICLE III
BOARD OF DIRECTORS
3.1 NUMBER AND POWERS. The business affairs of the Corporation shall be
-----------------
managed under the direction of a Board of Directors of not less than five (5)
nor more than fifteen (15), as set from time to time by resolution of the Board
of Directors. Directors need not be stockholders or residents of the
Commonwealth of Pennsylvania. In addition to the powers and authorities
expressly conferred upon it by these Bylaws and the Articles of Incorporation,
all such powers of
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the Corporation as are not by statute or by the Corporation's Articles of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders may be exercised by or under the authority of the Board of
Directors.
3.2 CLASSIFICATION AND TERMS. The classification and terms of the
------------------------
directors shall be as set forth in the Corporation's Articles of Incorporation,
which provisions are incorporated herein with the same effect as if they were
set forth herein.
3.3 VACANCIES. All vacancies in the Board of Directors shall be filled in
---------
the manner provided in the Corporation's Articles of Incorporation, which
provisions are incorporated herein with the same effect as if they were set
forth herein.
3.4 REMOVAL OF DIRECTORS. Directors may be removed in the manner provided
--------------------
in the Corporation's Articles of Incorporation, which provisions are
incorporated herein with the same effect as if they were set forth herein.
3.5 REGULAR MEETINGS. Regular meetings of the Board of Directors or any
----------------
committee may be held without notice at the principal place of business of the
Corporation or at such other place or places, either within or without the
Commonwealth of Pennsylvania, as the Board of Directors or such committee, as
the case may be, may from time to time appoint or as may be designated in the
notice of the meeting. A regular meeting of the Board of Directors shall be held
without notice immediately after the annual meeting of stockholders.
3.6 SPECIAL MEETINGS.
----------------
(a) Special meetings of the Board of Directors may be called at any
time by the President or by a majority of the authorized number of directors, to
be held at the principal place of business of the Corporation or at such other
place or places as the Board of Directors or the person or persons calling such
meeting may from time to time designate. Written notice of all special meetings
of the Board of Directors shall be given to each director by five days' service
of the same. Such notice need not specify the business to be transacted at, nor
the purpose of, the meeting.
(b) Special meetings of any committee may be called at any time by
such person or persons and with such notice as shall be specified for such
committee by the Board of Directors, or in the absence of such specification, in
the manner and with the notice required for special meetings of the Board of
Directors.
3.7 ACTION OF DIRECTORS BY COMMUNICATIONS EQUIPMENT. One or more persons
-----------------------------------------------
may participate in a meeting of directors, or of a committee thereof, by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other.
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3.8 QUORUM OF AND ACTION BY DIRECTORS. A majority of the Board of
---------------------------------
Directors then in office shall be necessary at all meetings to constitute a
quorum for the transaction of business and the acts of a majority of the
directors present and voting at a meeting at which a quorum is present shall be
the acts of the Board of Directors. Every director of the Corporation shall be
entitled to one vote.
3.9 REGISTERING DISSENT. A director who is present at a meeting of the
-------------------
Board of Directors or of a committee thereof, at which action on a corporate
matter is taken on which the director is generally competent to act, shall be
presumed to have assented to such action unless his dissent is entered in the
minutes of the meeting, or unless he files his written dissent to such action
with the person acting as the secretary of the meeting before the adjournment
thereof, or unless he delivers his dissent in writing to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
3.10 ACTION BY DIRECTORS WITHOUT A MEETING. Any action which may be taken
-------------------------------------
at a meeting of the directors, or of a committee thereof, may be taken without a
meeting if prior or subsequent to the action a consent or consents in writing
setting forth the action so taken or to be taken is signed by all of the
directors in office, or by all of the members of the committee as the case may
be, and filed with the Secretary of the Corporation. Such consent shall have the
same effect as a unanimous vote.
3.11 COMPENSATION OF DIRECTORS. The Board of Directors shall have the
-------------------------
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the Corporation.
3.12 NOMINATIONS OF DIRECTORS. Subject to the rights of holders of any
------------------------
class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for the election of directors may be
made by the Board of Directors or committee appointed by the Board of Directors
or by any stockholder entitled to vote generally in an election of directors.
However, any stockholder entitled to vote generally in an election of directors
may nominate one or more persons for election as directors at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid to the Secretary of the Corporation not later than (i)
ninety (90) days prior to the anniversary date of the mailing of proxy materials
by the Corporation in connection with the immediately preceding annual meeting
of stockholders of the Corporation or, in the case of the first annual meeting
of stockholders of the Corporation following its acquisition of all of the
outstanding capital stock of Northwest Savings Bank, ninety (90) days prior to
the anniversary date of the mailing of proxy materials by Northwest Savings Bank
in connection with the immediately preceding annual meeting of Northwest Savings
Bank prior to such acquisition, and (ii) with respect to an election to be held
at a special meeting of stockholders for the election of directors, the close of
business on the tenth (10th) day following the date on which notice of such
meeting is first given to stockholders. Each such notice shall set
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forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholders; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedures.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
4.1 EXECUTIVE COMMITTEE.
-------------------
(a) The Board of Directors may appoint from the Board of Directors an
Executive Committee of not less than three (3) members, and may delegate to such
committee, except as otherwise provided by law or the Articles of Incorporation,
the powers of the Board of Directors in the management of the business and
affairs of the Corporation in the intervals between meetings of the Board of
Directors in all cases in which specific directions shall not have been given by
the Board, as well as the power to authorize the seal of the Corporation to be
affixed to all papers which may require it, provided, however, that the
Executive Committee shall not have the power or authority of the Board of
Directors with respect to the following: the submission to stockholders of any
action requiring approval of stockholders by law; the creation or filling of
vacancies in the Board of Directors; the adoption, amendment or repeal of the
Articles of Incorporation or these Bylaws; the amendment or repeal of any
resolution of the Board of Directors that by its terms is amendable or
repealable only by the Board of Directors; action on matters committed by these
Bylaws or resolution of the Board of Directors to another committee of the Board
of Directors; the declaration of dividends; and approval of a transaction in
which any member of the Executive Committee, directly or indirectly, has any
material beneficial interest.
(b) Meetings of the Executive Committee shall be held at such times and
places as the Chairman of the Executive Committee may determine. The Executive
Committee, by a vote of a majority of its members, may appoint a Chairman and
fix its rules of procedure, determine its manner of acting and specify what
notice, if any, of meetings shall be given, except as otherwise set forth in
these Bylaws or as the Board of Directors shall by resolution otherwise provide.
(c) The Executive Committee shall keep minutes of all business transacted
by it. All completed action by the Executive Committee shall be reported to the
Board of Directors at its
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meeting next succeeding such action or at its meeting held in the month
following the taking of such action, and shall be subject to revision or
alteration by the Board of Directors.
4.2 AUDIT COMMITTEE. The Board of Directors shall designate not less than
---------------
three (3) members of the Board of Directors who are not employed by the
Corporation to constitute an Audit Committee, which shall receive and evaluate
internal and independent auditor's reports, monitor the Corporation's adherence
in accounting and financial reporting to generally accepted accounting
principles and perform such other duties as may be delegated to it by the Board
of Directors. Meetings of the Audit Committee shall be held at such times and
places as the Chairman of the Audit Committee may determine. The Audit
Committee, by a vote of a majority of its members, may fix its rules of
procedure, determine its manner of acting and specify what notice, if any, of
meetings shall be given, except as otherwise set forth in these Bylaws or as the
Board of Directors shall by resolution otherwise provide.
4.3 OTHER COMMITTEES. The Board may, by resolutions passed by a majority
----------------
of the Board of Directors, designate members of the Board to constitute other
committees, which shall in each case consist of one or more directors and shall
have and may execute such powers as may be determined and specified in the
respective resolutions appointing them. A majority of all the members of any
such committee may fix its rules of procedure, determine its manner of acting
and fix the time and place of its meetings and specify what notice thereof, if
any, shall be given, except as otherwise set forth in these Bylaws or as the
Board of Directors shall by resolution otherwise provide.
4.4 TERM. A majority of the Board of Directors shall have the power to
----
change the membership of any committee of the Board of Directors at any time, to
fill vacancies therein and to discharge any such committee or to remove any
member thereof, either with or without cause, at any time.
ARTICLE V
OFFICERS
5.1 DESIGNATIONS. The Board of Directors shall annually appoint a Chairman
------------
of the Board, a President a Secretary, a Treasurer and such other officers as
the Board of Directors may from time to time deem appropriate.
5.2 POWERS AND DUTIES. The officers of the Corporation shall have such
-----------------
authority and perform such duties as are specified in these Bylaws and as the
Board of Directors may from time to time authorize or determine. In the absence
of action by the Board of Directors, the officers shall have such powers and
duties as generally pertain to their respective offices.
5.3 CHAIRMAN OF THE BOARD. The Chairman of the Board, who shall be chosen
---------------------
from among the directors, shall preside at all meetings of the Board of
Directors and stockholders. He shall supervise the carrying out of the policies
adopted or approved by the Board of Directors.
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5.4 PRESIDENT. The President shall in the absence of the Chairman of the
---------
Board preside at all meetings of the Board of Directors and stockholders. The
President shall have general executive powers and shall have and may exercise
any and all other powers and duties pertaining by law, regulations or practice
to the office of President, or imposed by these Bylaws.
5.5 SECRETARY. The Secretary shall keep the minutes of the meetings of the
---------
stockholders and the Board of Directors and shall give notice of all such
meetings as required in these bylaws, the Corporation's Articles of
Incorporation or by law. The Secretary shall have custody of such minutes, the
seal of the Corporation and the stock certificate records of the Corporation,
except to the extent some other person is authorized to have custody and
possession thereof by a resolution of the Board of Directors.
5.6 TREASURER. The Treasurer shall keep, or cause to be kept, the fiscal
---------
accounts of the Corporation, including an account of all monies received or
disbursed.
5.7 TERM; REMOVAL. Each officer of the Corporation shall hold office for a
-------------
term of one year and until his successor has been selected and qualified or
until his earlier death, resignation or removal. Any officer or agent of the
Corporation may be removed at any time, with or without cause, by the Board of
Directors, but such removal shall be without prejudice to the contract rights,
if any, of the person so removed. Election or appointment of an officer or agent
shall not of itself create contract rights.
5.8 COMPENSATION. The officers of the Corporation shall receive such
------------
salary or compensation as may be determined by or under authority of the Board
of Directors.
5.9 DELEGATION. In the case of absence or inability to act of any officer
----------
of the Corporation and of any person herein authorized to act in his place, the
Board of Directors may from time to time delegate the powers or duties of such
officer to any other officer or any director or other person whom it may select.
5.10 VACANCIES. Vacancies in any office arising from any cause may be
---------
filled by the Board of Directors at any regular or special meeting of the Board.
5.11 BONDS. The Board of Directors may, by resolution, require any and all
-----
of the officers to give bonds to the Corporation, with sufficient surety or
sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
ARTICLE VI
INDEMNIFICATION
6.1 THIRD PARTY ACTIONS. The Corporation shall indemnify any person who
-------------------
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action or
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proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation), by reason of the fact that he
is or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action or proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful, provided that the Corporation shall
not be liable for any amounts which may be due to any such person in connection
with a settlement of any action or proceeding effected without its prior written
consent or any action or proceeding initiated by any such person (other than an
action or proceeding to enforce rights to indemnification hereunder).
6.2 DERIVATIVE AND CORPORATE ACTIONS. The Corporation shall indemnify any
--------------------------------
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a representative of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of the action if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, provided that the Corporation
shall not be liable for any amounts which may be due to any such person in
connection with a settlement of any action or proceeding affected without its
prior written consent. Indemnification shall not be made under this Section 6.2
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the Corporation unless and only to the extent that the
court of common pleas of the judicial district embracing the county in which the
registered office of the Corporation is located or the court in which the action
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court of common
pleas or other court deems proper.
6.3 MANDATORY INDEMNIFICATION. To the extent that a representative of the
-------------------------
Corporation has been successful on the merits or otherwise in defense of any
action or proceeding referred to in Section 6.1 or Section 6.2 or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 PROCEDURE FOR EFFECTING INDEMNIFICATION. Unless ordered by a court,
---------------------------------------
any indemnification under Section 6.1 or Section 6.2 shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the representative is
10
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proper in the circumstances because he has met the applicable standard of
conduct set forth in those sections. The determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
(2) if such a quorum is not obtainable, or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) by the stockholders.
6.5 ADVANCING EXPENSES. Expenses (including attorneys' fees) incurred in
------------------
defending any action or proceeding referred to in this Article VI shall be paid
by the Corporation in advance of the final disposition of the action or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article VI
or otherwise.
6.6 INSURANCE. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any person who is or was a representative of the
Corporation or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against that liability under the provisions of this
Article VI.
6.7 MODIFICATION. The duties of the Corporation to indemnify and to
------------
advance expenses to a director or officer provided in this Article VI shall be
in the nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article VI shall alter, to the
detriment of such person, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment or repeal.
ARTICLE VII
CAPITAL STOCK
7.1 CERTIFICATES. Certificates of stock shall be issued in numerical
------------
order, and each stockholder shall be entitled to a certificate signed by the
President or a Vice President, and the Secretary or the Treasurer, or in such
other manner as the Corporation may determine and may be sealed with the seal of
the Corporation or a facsimile thereof. The signatures of such officers may be
facsimiles if the certificate is manually signed on behalf of a transfer agent,
or registered by a registrar, other than the Corporation itself or an employee
of the Corporation. If an officer who has signed or whose facsimile signature
has been placed upon such certificate ceases to be an
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officer before the certificate is issued, it may be issued by the Corporation
with the same effect as if the person were an officer on the date of issue. Each
certificate of stock shall state:
(a) that the Corporation is incorporated under the laws of the
Commonwealth of Pennsylvania;
(b) the name of the person to whom issued;
(c) the number and class of shares and the designation of the series,
if any, which such certificate represents; and
(d) the par value of each share represented by such certificate, or a
statement that such shares are without par value.
7.2 TRANSFERS.
---------
(a) Transfers of stock shall be made only upon the stock transfer
books of the Corporation, kept at the registered office of the Corporation or at
its principal place of business, or at the office of its transfer agent or
registrar, and before a new certificate is issued the older certificate shall be
surrendered for cancellation. The Board of Directors may, by resolution, open a
share register in any state of the United States, and may employ an agent or
agents to keep such register, and to record transfers of shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificate or an assignment separate from the certificate, or by a
written power of attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of stock shall be transferred on the books
of the Corporation until the outstanding certificates therefor have been
surrendered to the Corporation.
7.3 REGISTERED OWNER. Registered stockholders shall be treated by the
----------------
Corporation as the holders in fact of the stock standing in their respective
names and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
below or by the laws of the Commonwealth of Pennsylvania. The Board of Directors
may adopt by resolution a procedure whereby a stockholder of the Corporation may
certify in writing to the Corporation that all or a portion of the shares
registered in the name of such stockholder are held for the account of a
specified person or persons. The resolution shall set forth:
(a) The classification of shareholder who may certify;
(b) The purpose or purposes for which the certification may be made;
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(c) The form of certification and information to be contained
therein;
(d) If the certification is with respect to a record date, the time
after the record date within which the certification must be
received by the Corporation; and
(e) Such other provisions with respect to the procedure as are deemed
necessary or desirable.
Upon receipt by the Corporation of a certification complying with the above
requirements, the persons specified in the certification shall be deemed, for
the purpose or purposes set forth in the certification, to be the holders of
record of the number of shares specified in place of the stockholder making the
certification.
7.4 MUTILATED, LOST OR DESTROYED CERTIFICATES. In case of any mutilation,
-----------------------------------------
loss or destruction of any certificate of stock, another may be issued in its
place upon receipt of proof of such mutilation, loss or destruction. The Board
of Directors may impose conditions on such issuance and may require the giving
of a satisfactory bond or indemnity to the Corporation in such sum as they might
determine, or establish such other procedures as they deem necessary.
7.5 FRACTIONAL SHARES OF SCRIP. The Corporation may: (a) issue fractions
--------------------------
of a share which shall entitle the holder to exercise voting rights, to receive
dividends thereon, and to participate in any of the assets of the Corporation in
the event of liquidation; (b) arrange for the disposition of fractional
interests by those entitled thereto; (c) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such shares are
determined; or (d) issue scrip in registered or bearer form which shall entitle
the holder to receive a certificate for a full share upon the surrender of such
scrip aggregating a full share.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of June of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the Board of Directors or the Audit Committee of the Board of Directors. The
appointment of such accountants shall be subject to annual ratification by the
stockholders.
ARTICLE IX
DIVIDENDS AND FINANCE
9.1 DIVIDENDS. Dividends may be declared by the Board of Directors and
---------
paid by the Corporation in accordance with the conditions and subject to the
limitations imposed by the laws of the Commonwealth of Pennsylvania. The Board
of Directors may declare dividends payable
13
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only to stockholders of record at the close of business on any business day not
more than (90) days prior to the date on which the dividend is paid.
9.2 DEPOSITORIES. The monies of the Corporation shall be deposited in the
------------
name of the Corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out only
by check or other order for payment of money signed by such persons and in such
manner as may be determined by resolution of the Board of Directors.
ARTICLE X
NOTICES
10.1 NOTICE. Whenever written notice is required to be given to any person
------
pursuant to these Bylaws, it may be given to the person either personally or by
sending a copy thereof by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid, or by facsimile transmission, to
his address (or to his telex, TWX or facsimile number), in the case of
stockholders, appearing on the books of the Corporation or, in the case of
directors, supplied by them to the Corporation for the purpose of notice or, in
the case of the Corporation, at the address of its principal executive offices.
If the notice is sent by mail, telegraph or courier service, it shall be deemed
to have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person or, in the case of telex or TWX, when dispatched.
10.2 WRITTEN WAIVER OF NOTICE. Whenever any written notice is required to
------------------------
be given under these Bylaws, a waiver thereof in writing, signed by the person
or persons entitled to the notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of the notice. Neither the
business to be transacted at, nor the purpose of a meeting need be specified in
the waiver of notice of the meeting.
10.3 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a person at any meeting
------------------------------
shall constitute a waiver of notice of the meeting except where a person attends
a meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
ARTICLE XI
SEAL
The corporate seal of the Corporation shall be in such form and bear such
inscription as may be adopted by resolution of the Board of Directors, or by
usage of the officers on behalf of the Corporation.
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ARTICLE XII
BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes and proceedings of meetings of its stockholders
and Board of Directors; and it shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of its stockholders, giving the names and addresses of all stockholders and the
number and class of the shares held by each. Any books, records and minutes may
be in written form or any other form capable of being converted into written
form within a reasonable time.
ARTICLE XIII
AMENDMENTS
The Board of Directors, to the extent permitted by law, or stockholders may
adopt, alter, amend or repeal the Bylaws of the Corporation. Such action by the
Board of Directors shall require the affirmative vote of a majority of the
directors then in office at any regular or special meeting of the Board of
Directors. Such action by the stockholders shall require the affirmative vote of
the holders of a majority of the shares of the Corporation entitled to vote
generally in an election of directors, voting together as a single class, as
well as such additional vote of the Preferred Stock as may be required by the
provisions of any series thereof, provided that the affirmative vote of the
holders of at least 75% of the shares of the Corporation entitled to vote
generally in an election of directors, voting together as a single class, as
well as such additional vote of the Preferred Stock as may be required by the
provisions of any series thereof, shall be required to amend, adopt, alter,
change or repeal any provision of these Bylaws which is inconsistent with
Article VI, VII, VIII, IX and X of the Articles of Incorporation of the
Corporation and which is not approved by the affirmative vote of 80% of the
members of the Corporation's Board of Directors then in office.
15
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's Articles of Incorporation provides for
the following indemnification for Directors and Officers.
6.1 THIRD PARTY ACTIONS. The Corporation shall indemnify any person who
-------------------
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was a director or officer of
the Corporation, or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful, provided that the Corporation shall not be liable for any
amounts which may be due to any such person in connection with a settlement of
any action or proceeding effected without its prior written consent or any
action or proceeding initiated by any such person (other than an action or
proceeding to enforce rights to indemnification hereunder).
6.2 DERIVATIVE AND CORPORATE ACTIONS. The Corporation shall indemnify any
--------------------------------
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a representative of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred by him in connection with the defense or settlement of the action if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, provided that the Corporation
shall not be liable for any amounts which may be due to any such person in
connection with a settlement of any action or proceeding affected without its
prior written consent. Indemnification shall not be made under this Section 6.2
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the Corporation unless and only to the extent that the
court of common pleas of the judicial district embracing the county in which the
registered office of the Corporation is located or the court in which the action
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court of common
pleas or other court deems proper.
6.3 MANDATORY INDEMNIFICATION. To the extent that a representative of the
-------------------------
Corporation has been successful on the merits or otherwise in defense of any
action or proceeding referred to in Section 6.1 or Section 6.2 or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 PROCEDURE FOR EFFECTING INDEMNIFICATION. Unless ordered by a court,
---------------------------------------
any indemnification under Section 6.1 or Section 6.2 shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the representative is proper in the circumstances because he
has met the applicable standard of conduct set forth in those sections. The
determination shall be made:
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<PAGE>
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action or proceeding;
(2) if such a quorum is not obtainable, or if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) by the stockholders.
6.5 ADVANCING EXPENSES. Expenses (including attorneys' fees) incurred in
------------------
defending any action or proceeding referred to in this Article VI shall be paid
by the Corporation in advance of the final disposition of the action or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article VI
or otherwise.
6.6 INSURANCE. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any person who is or was a representative of the
Corporation or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against that liability under the provisions of this
Article VI.
6.7 MODIFICATION. The duties of the Corporation to indemnify and to
------------
advance expenses to a director or officer provided in this Article VI shall be
in the nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article VI shall alter, to the
detriment of such person, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment or repeal.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statements filed as part of this Registration
Statement are as follows:
(a) Exhibits
The Index of Exhibits immediately precedes the attached Exhibits.
(b) Financial Statements
Not applicable.
(c) Report or Appraisal
Not applicable.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
II-2
<PAGE>
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or most recent post effective amendment
thereof) which individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of, and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Warren, Pennsylvania, on July 15,
1997.
NORTHWEST BANCORP, INC.
By: /s/ John O. Hanna
--------------------------------------
John O. Hanna, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned Directors of Northwest Bancorp, Inc. severally
constitute and appoint John O. Hanna with full power of substitution, our true
and lawful attorney and agent, to do any and all things and acts in our names in
the capacities indicated below which said John O. Hanna may deem necessary or
advisable to enable Northwest Bancorp, Inc. to comply with the Securities Act of
1933, and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the Registration Statement on Form S-4 relating
to the offering of Northwest Bancorp, Inc. Common Stock, including specifically,
but not limited to, power and authority to sign for us or any of us in our names
in the capacities indicated below the Registration Statement and any and all
amendments (including post-effective amendments) thereto; and we hereby ratify
and confirm all that said John O. Hanna shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
By: /s/ John O. Hanna By: /s/ William J. Wagner
--------------------------------- -----------------------------------
John O. Hanna, President, Chief William J. Wagner, Executive Vice
Executive Officer and Director President, Chief Financial Officer,
(Principal Executive Officer) Chief Operating Officer and Director
(Principal Financial and Accounting
Officer)
Date: July 15, 1997 Date: July 15, 1997
By: /s/ Richard L. Carr By: /s/ Thomas K. Creal, III
-------------------------------- -----------------------------------
Richard L. Carr, Director Thomas K. Creal, III, Director
Date: July 15, 1997 Date: July 15, 1997
By: /s/ John J. Doyle By: /s/ Robert G. Ferrier
-------------------------------- -----------------------------------
John J. Doyle, Director Robert G. Ferrier, Director
Date: July 15, 1997 Date: July 15, 1997
By: /s/ Richard E. McDowell By: /s/ Joseph T. Stadler
------------------------------- -----------------------------------
Richard E. McDowell, Director Joseph T. Stadler, Director
Date: July 15, 1997 Date: July 15, 1997
By: /s/ Walter J. Yahn By: /s/ John S. Young
------------------------------- -----------------------------------
Walter J. Yahn, Director John S. Young, Director
Date: July 15, 1997 Date: July 15, 1997
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2 Agreement and Plan of Reorganization (Incorporated herein by
reference to Exhibit A of Prospectus/Information Statement)
3.1 Articles of Incorporation of Northwest Bancorp, Inc.
(Incorporated herein by reference of Exhibit B to
Prospectus/Information Statement)
3.2 Bylaws of Northwest Bancorp, Inc. (Incorporated herein by
reference to Exhibit C of Prospectus/Information Statement)
4 Form of Stock Certificate of Northwest Bancorp, Inc.
5.1 Form of Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation regarding legality of securities
5.2 Form of Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation
10.1 Deferred Compensation Plan for Directors, as amended
10.2 Retirement Plan for Outside Directors
10.3 Northwest Savings Bank Nonqualified Supplemental Retirement
Plan
10.4 Employment Agreement between the Bank and John O. Hanna,
President and Chief Executive Officer, as amended
10.5 Northwest Savings Bank and Northwest Bancorp, MHC Stock
Option Plan
10.6 Recognition and Retention Plan for Employees and Outside
Directors
21 Subsidiaries of the Registrant
24.1 Consent of Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation (Contained in its opinion filed as Exhibit 5.1)
24.2 Consent of KPMG Peat Marwick LLP
24.3 Power of Attorney (Incorporated herein by reference to the
signature page of this registration statement)
99.1 Northwest Savings Bank Annual Report on Form F-2 for fiscal
year ended June 30, 1996.
99.2 Northwest Savings Bank quarterly report on Form F-4 for
fiscal quarter ended September 30, 1996.
99.3 Northwest Savings Bank quarterly report on Form F-4 for
fiscal quarter ended December 31, 1996.
99.4 Northwest Savings Bank quarterly report on Form F-4 for
fiscal quarter ended March 31, 1997.
</TABLE>
<PAGE>
EXHIBIT NO. 4
<PAGE>
EXHIBIT 4
CHARTERED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
================ ===================
No. NORTHWEST BANCORP, INC. Shares
WARREN, PENNSYLVANIA
================ ===================
FULLY PAID AND NON-ASSESSABLE
PAR VALUE $.10 EACH
THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO
RESTRICTIONS, SEE REVERSE SIDE
THIS CERTIFIES that is the owner of
SHARES OF COMMON STOCK OF
NORTHWEST BANCORP, INC.
a Pennsylvania corporation
The shares evidenced by this certificate are transferable only on the books
of Northwest Bancorp, Inc. by the holder hereof, in person or by attorney, upon
surrender of this certificate properly endorsed. The capital stock evidenced
hereby is not an account of an insurable type and is not insured by the Federal
Deposit Insurance Corporation or any other Federal or state governmental agency.
IN WITNESS WHEREOF, Northwest Bancorp, Inc. has caused this certificate to
be executed, by the facsimile signatures of its duly authorized officers and has
caused its a facsimile of its seal to be hereunto affixed.
By_________________________ [SEAL] By_____________________
SECRETARY PRESIDENT
<PAGE>
The shares of common stock evidenced by this certificate are subject to a
limitation contained in the Articles of Incorporation of Northwest Bancorp, Inc.
(the "Company") to the effect that no person other than Northwest Bancorp, MHC,
the parent mutual holding company of the Company, shall directly or indirectly
offer to acquire or acquire the beneficial ownership of (i) more than 10% of any
class of any equity security of the Company or (ii) any securities convertible
into more than 10% of any class of any equity security of the Company. This
limitation shall not apply to (i) any offer with a view toward public resale
made exclusively to the Company or underwriters or a selling group acting on its
behalf, (ii) the purchase of shares by a tax-qualified employee stock benefit
plan or arrangement of the Company or a subsidiary of the Company and any
trustee of such a plan or arrangement, or (iii) any offer or acquisition
approved in advance by the affirmative vote of 80% of the members of the
Company's Board of Directors then in office. In the event shares are acquired
in violation of this provision, all shares beneficially owned by any person in
excess of 10% shall be considered "excess shares" and shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matters submitted to stockholders for a
vote.
The Board of Directors of the Company is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Company will furnish to
any shareholder upon request and without charge a full description of each class
of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted on
any matter. The Articles of Incorporation require the affirmative vote of the
holders of at least 75% of the voting stock of the Company, voting together as a
single class, to amend certain provisions of the Articles of Incorporation.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________ Custodian _________
(Cust) (Minor)
TEN ENT - as tenants by the entirety
Under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as
___________________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, ______________________ hereby sell, assign and transfer unto
________________________________________________________________
________________________________________________________________
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
________________________________________________________________________________
(please print or typewrite name and address including postal zip code of
assignee)
________________________________________________________________________________
______________________________________________________________________ Shares of
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
________________________ Attorney to transfer the said shares on the books of
the within named corporation with full power of substitution in the premises.
Dated, _______________
In the presence of Signature:
______________________________ ____________________________________
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT NO. 5.1
<PAGE>
EXHIBIT 5.1
(202) 274-2009
July 17, 1997
Board of Directors
Northwest Bancorp, Inc.
Liberty and Second Streets
Warren, Pennsylvania 16365
RE: NORTHWEST BANCORP, INC.
REGISTRATION STATEMENT ON FORM S-4
----------------------------------
Gentlemen:
We have served as special counsel for Northwest Bancorp, Inc., a federal
corporation, in connection with the registration under the Securities Act of
1933, of 7,990,000 shares of Common Stock, par value $0.10 per share of which
7,300,000 shares will be issued immediately and 690,000 shares underly options.
Based upon the foregoing and having regard for such legal considerations as
we have deemed relevant, it is our opinion that:
(1) the shares of Common Stock have been duly authorized;
(2) upon issuance, sale and delivery of the shares as contemplated in the
Registration Statement, the shares will be legally issued, fully paid
and non-assessable.
We hereby consent to the reference to our firm under the heading "Proposed
Formation of Stock Holding Company--Legal Opinion" in the Prospectus and Proxy
Statement in the Registration Statement (and all amendments thereto) and to the
filing of this opinion as Exhibit 5.1 thereto.
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick
-----------------------------------------------
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
<PAGE>
EXHIBIT NO. 5.2
<PAGE>
EXHIBIT 5.2
FORM OF
FEDERAL TAX OPINION
(202) 274-2000
__________, 1997
Board of Directors
Northwest Savings Bank
301 Second Avenue
Warren, Pennsylvania 16365-2353
Re: Federal Income Tax Opinion Relating to the Exchange of the Common
Stock of Northwest Savings Bank, for All the Common Stock of a Newly
Created Bank Holding Company under Internal Revenue Code Sections
368(a)(1)(A) and 368(a)(2)(E)/1/
------------------------------
Gentlemen:
We are rendering this opinion to you in our capacity as special counsel to
Northwest Savings Bank (the "Bank") in connection with its proposed
reorganization into a two-tier holding company structure (the "Reorganization")
by creating Northwest Bancorp, Inc., a Pennsylvania corporation (the "Holding
Company") which will be the stock holding company of the Bank and a majority
owned subsidiary of Northwest Bancorp, M.H.C. (the "Mutual Holding Company").
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including, but not
limited to the Agreement and Plan of Reorganization adopted by the Bank's Boards
of Directors on May 15, 1996 (the "Plan of Reorganization"); the application on
Form FR Y-3 ("FR Y-3 Application") together with exhibits filed by the Holding
Company with the Board of Governors of the Federal Reserve System ("FRB") on
January 13, 1997, the Application for a Merger or Other Transaction, together
with exhibits filed by the Bank with the Federal Deposit Insurance Corporation
("FDIC") on January 13, 1997, in connection with the Reorganization; the Charter
and Bylaws of the Mutual Holding Company; the Articles of Incorporation and
Bylaws of the Bank; the Articles of Incorporation and Bylaws of the Holding
Company; the Affidavit of Representations dated __________, 1997, provided to us
by the Bank in connection with this opinion (the "Affidavit"). In such
examination, we have assumed, and have not independently verified, the
genuineness of all signatures on original documents where due execution and
delivery are requirements to the effectiveness thereof. Terms used but not
defined herein, whether capitalized or not, shall have the same meaning as
defined in the Plan.
________________
/1/ All Section references herein are to the Internal Revenue Code of 1986,
as amended (the "Code").
<PAGE>
Board of Directors
Northwest Savings Bank
___________, 1997
PAGE 2
BACKGROUND
The Bank is a Pennsylvania chartered stock savings bank with savings
deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). The
authorized capital stock of the Bank consists of 50,000,000 shares of common
stock ("Bank Common Stock") with a par value of $0.10 per share. On November 2,
1994, the Bank reorganized from a mutual savings bank to become the majority-
owned stock subsidiary of the Mutual Holding Company. As of December 31, 1996,
the Bank had approximately 23,374,000 shares of Bank Common Stock issued and
outstanding of which 16,200,000 shares, or 69.3%, are held by the Mutual Holding
Company. At such date, the Bank had no serial preferred stock issued and
outstanding. The Bank Common Stock is listed on the Nasdaq National Market under
the symbol "NWSB". As of September 30, 1996, the Bank had total assets of
approximately $1.9 billion, total deposits of $1.53 billion and stockholders'
equity of approximately $187.2 million.
The Bank Common Stock possesses voting rights, dividend rights, and the
residual equity of the Bank in the event of liquidation. Savings depositors
receive a fixed rate of return; in the event of liquidation they are only
entitled to receive the face amount of their accounts plus accrued interest. The
savings accounts do not possess voting rights. In accordance with the tax law
changes enacted in the Small Business Job Protection Act of 1996 (P.L. 104-188),
for its 1996 fiscal year, the Bank will employ either the experience method of
providing for bad debt deductions as computed under Code Section 585 or the
specific-charge off method.
The business of the Bank consists primarily of attracting savings deposits
from the general public in the Bank's market area, and investing such deposits
in loans secured by one- to four-family residential real estate, and, to a
lesser extent, home equity and property improvement loans, second mortgage,
education and other consumer loans.
PROPOSED TRANSACTION
The Board of Directors of the Bank adopted the Plan of Reorganization on
May 15, 1996, pursuant to which the Bank will reorganize to form a two-tier
holding company structure with the Bank becoming the wholly-owned subsidiary of
the Holding Company, which will be a majority owned subsidiary of the Mutual
Holding Company. Under the terms of the proposed reorganization, each
outstanding share of Bank Common Stock, par value $0.10 per share, will be
converted into one share of common stock of the Holding Company, par value $.10
per share ("Common Stock"), and the holders of Bank Common Stock will become
the holders of all of the outstanding Common Stock of the Holding Company (the
"Reorganization"). The Holding Company was incorporated in ____________ 1997,
solely for the purpose of becoming a bank
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 3
holding company and has no prior operating history. Following the
Reorganization, the Bank will continue its operations at the same locations,
with the same management, and subject to all the rights, obligations and
liabilities of the Bank existing immediately prior to the Reorganization.
REASONS FOR THE HOLDING COMPANY REORGANIZATION
- ----------------------------------------------
The Board of Directors of the Bank believes that a stock holding company
structure will provide the Bank with greater operating flexibility than is
currently available under the existing mutual holding company structure.
Pennsylvania law and regulations, and Federal regulations applicable to savings
banks limit both the types of businesses in which the Bank may engage and the
amount which may be invested by the Bank in subsidiaries. Establishing the
Holding Company will provide greater flexibility in structuring and completing
the acquisition of other financial institutions. In addition, in the current
structure, if the Mutual Holding Company wishes to acquire another financial
institution and hold it as a separate entity from the Bank, it would be
difficult to do so in a way that benefits minority stockholders and the Mutual
Holding Company in proportion to their respective ownership interests. The
Reorganization will also enable the Holding Company to repurchase its
outstanding Common Stock as market conditions permit without causing a recapture
into income of all or a portion of the Bank's existing tax bad debt reserves.
The Reorganization will be structured as follows:
(i) The Bank will organize the Holding Company as a Pennsylvania
corporation which will issue to the Bank 1,000 shares of Common
Stock, consisting of all the issued and outstanding stock of
the Holding Company for $100.00 per share. The Holding Company
will thereby become a wholly-owned subsidiary of the Bank. The
Holding Company will form Northwest Interim Savings Bank
("Interim"), an interim Pennsylvania stock savings bank, as a
wholly-owned subsidiary of the Holding Company solely to
facilitate the Reorganization.
(ii) Pursuant to the Plan of Reorganization and in accordance with
applicable Pennsylvania law, Interim will be merged with and
into the Bank, with the Bank as the surviving entity. As a
result, the Bank will acquire all of the assets and assume all
of the liabilities of Interim. Upon completion of the merger,
the separate corporate existence of Interim will cease.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 4
(iii) As part of the merger, each share of the Bank Common Stock held
immediately prior to the effective date of the merger by
stockholders of the Bank shall automatically be converted by
operation of law into one share of Common Stock of the Holding
Company.
(iv) Upon the effective date of the merger, all of the previously
issued and outstanding shares of common stock of Holding
Company owned by the Bank will be cancelled. All of the issued
and outstanding shares of common stock of Interim will
automatically be converted by operation of law into an equal
number of issued and outstanding shares of Bank Common Stock,
which will be all of the issued and outstanding stock of the
Bank.
(v) All unexercised stock options to acquire the Bank Common Stock
existing prior to the merger shall upon the consummation of the
merger be and become stock options to acquire shares of Common
Stock of Holding Company. Further, the stock option plan of the
Bank shall become the stock option plan of the Holding Company.
Lastly, any stock option agreement of the Bank shall become the
stock option agreement of the Holding Company.
(vi) As a result of the proposed transaction, all stockholders of
the Bank will become the stockholders of Holding Company, and
the Bank will become a wholly-owned subsidiary of Holding
Company.
(vii) After the Reorganization is consummated, the Bank and Interim
will constitute a single corporation and the separate existence
of Interim will cease by operation of law. All assets and
liabilities of Interim will be transferred to and assumed by
the Bank as of the date of the Reorganization. The Bank will
continue to operate as a savings bank and retain its present
name and Pennsylvania charter. Directors of the Bank will
continue as Directors of the Bank after the Reorganization is
consummated.
Consummation of the Reorganization requires the approval of (i) the FRB of
the applications of the Holding Company and Mutual Holding Company pursuant to
the Bank Holding Company Act ("BHCA") to acquire control of the Bank and the
Holding Company, respectively;
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 5
(ii) the Pennsylvania Department of Banking (the "Department") of the
application of the Holding Company to acquire control of a Pennsylvania savings
bank, the charter of Interim, and the merger of Interim with and into the Bank;
(iii) the FDIC under the Bank Merger Act of the merger of Interim with and into
the Bank; and (iv) the Plan of Reorganization by at least two-thirds of the
issued and outstanding shares of Bank Common Stock.
REPRESENTATIONS
The following statements and representations have been made by management
of the Bank regarding the treatment of the Reorganization as a merger under
Sections 368(a)(1)(A) and 368(a)(2)(E):
(a) The fair market value of Holding Company Common Stock to be received by
each Bank shareholder will be approximately equal to the fair market
value of the Bank Common Stock surrendered in the exchange.
(b) The management of the Bank has no knowledge of any plan or intention on
the part of its shareholders who own 5% or more of Bank Common Stock,
and to the best of the knowledge of management of the Bank, there is no
plan or intention on the part of the remaining shareholders of the Bank
to sell, exchange, or otherwise dispose of a number of shares of
Holding Company Stock received in the Reorganization that would reduce
the Bank shareholders' ownership of Holding Company Common Stock to a
number of shares having a value, as of the date of the Reorganization,
of less than 50% of the value of all of the formerly outstanding Bank
Common Stock as of the same date. For purposes of this representation,
shares of Bank Common Stock exchanged for cash or other property or
exchanged for cash in lieu of fractional shares of Holding Company
Common Stock will be treated as outstanding Bank Common Stock on the
date of the transaction. Moreover, shares of Bank Common Stock and
shares of Holding Company Common Stock held by Bank shareholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the
transaction as part of the Agreement will be considered in making this
representation.
(c) Following the Reorganization, the Bank will hold at least 90% of the
fair market value of its net assets and at least 70% of the fair market
value of its gross assets and at least 90% of the fair market value of
Interim's net assets and at least 70 percent of the fair market value
of Interim's gross assets held immediately prior to the Reorganization.
For purposes of this representation, amounts paid by the Bank
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 6
or Interim to shareholders who receive cash or other property, amounts
used by the Bank or Interim to pay reorganization expenses, and all
redemptions and distributions (except for regular, normal dividends)
made by the Bank will be included as assets of the Bank or Interim,
respectively, immediately prior to the Reorganization.
(d) Prior to the transaction, Holding Company will be in control of Interim
within the meaning of Section 368(c).
(e) As of the date of the execution of the Plan of Reorganization, the Bank
has no plan or intention to issue additional shares of its stock that
would result in Holding Company losing control of the Bank within the
meaning of Section 368(c).
(f) As of the date of the Plan of Reorganization, Holding Company has no
plan or intention to reacquire any of its stock issued in the
transaction.
(g) Holding Company has no plan or intention to liquidate the Bank; to
merge the Bank with or into another corporation except in a merger with
another corporation controlled by Holding Company in which Bank is the
surviving entity; to sell or otherwise dispose of the stock of the Bank
except for transfers of stock to corporations controlled by Holding
Company; or to cause the Bank to sell or otherwise dispose of any of
its assets or of any of the assets acquired from Interim, except for
dispositions made in the ordinary course of business or transfers of
assets to a corporation controlled by the Bank.
(h) The liabilities of Interim, if any, assumed by the Bank and the
liabilities to which the transferred assets of Interim are subject were
incurred by Interim in the ordinary course of its business.
(i) Following the transaction, the Bank will continue its historic business
or use a significant portion of its historic business assets in a
business.
(j) Holding Company, Interim, the Bank, and the shareholders of the Bank
will pay their respective expenses, if any, incurred in connection with
the Reorganization. The Bank will pay or assume only those expenses of
Interim, if any, that are solely and directly related to the
transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 7
(k) There is no intercorporate indebtedness existing between Holding
Company and the Bank or between Interim and the Bank that was issued,
acquired, or will be settled at a discount.
(l) In the Reorganization, shares of Bank stock representing control of the
Bank, as defined in Section 368(c), will be exchanged solely for voting
stock of Holding Company. For purposes of this representation, shares
of Bank stock exchanged for cash or other property originating with
Holding Company will be treated as outstanding Bank Common Stock on the
date of the Reorganization.
(m) At the time of the Reorganization, the Bank will not have outstanding
any warrants, options, convertible securities or any other type of
right pursuant to which any person could acquire stock in the Bank
that, if exercised or converted, would affect Holding Company's
acquisition or retention of control of the Bank, as defined in Section
368(c).
(n) Holding Company does not own, nor has it owned during the past five
years, any shares of the stock of the Bank, nor will Holding Company
acquire any such stock prior to the proposed transaction.
(o) No two parties to the transaction are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv).
(p) On the date of the Reorganization, the fair market value of the assets
of the Bank on a going concern basis will exceed the sum of its
liabilities, plus the amount of liabilities, if any, to which the
assets are subject.
(q) The Bank is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).
(r) None of the compensation received by any of the shareholder-employees
of the Bank will be separate consideration for, or allocable to, any of
their shares of Bank Common Stock; none of the shares of Holding
Company Common Stock received by any shareholder-employees will be
separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employees will be for
services actually rendered and will be commensurate with amounts paid
to third parties bargaining at arm's-length for similar services.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 8
OPINION
Based solely upon the terms of the proposed transaction described herein
and the representations set forth, it is our opinion that the following federal
income tax consequences will result from the Reorganization.
(1) Provided that the merger of Interim with and into the Bank qualifies
as a statutory merger under applicable law, and after the
Reorganization the Bank will hold substantially all of the assets of
Interim, and in the Reorganization, Bank shareholders exchange solely
for voting Holding Company Common Stock an amount of Bank Common Stock
constituting "control" of the Bank within the meaning of Section
368(c), the Reorganization will constitute a reorganization within the
meaning of Section 368(a)(1)(A)./2/ The Reorganization will not be
disqualified by reason of the fact that Common Stock of Holding
Company is used in the transaction (Section 368(a)(2)(E)). The Bank,
Holding Company and Interim will each be a party to the Reorganization
within the meaning of Section 368(b).
(2) Interim will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for Bank Common Stock and the
assumption by the Bank of the liabilities, if any, of Interim
(Sections 361(a) and 357(a)).
(3) The Bank will not recognize any gain or loss on the receipt of the
assets of Interim in exchange for Bank Common Stock (Section 1032(a)).
(4) The Bank's basis in the assets received from Interim in the exchange
will, in each case, be the same as the basis of such assets in the
hands of Interim immediately prior to the Reorganization (Section
362(b)).
(5) Holding Company will not recognize any gain or loss upon its receipt
of Bank Common Stock solely in exchange for Interim stock (Section
354(a)).
(6) The Bank's holding period for the assets received from Interim in the
exchange will, in each instance, include the period during which such
assets were held by Interim (Section 1223(2)).
_________________
/2/ For purposes of this opinion, "substantially all" means at least 90 percent
of the fair market value of the net assets and at least 70 percent of the fair
market value of the gross assets of the Bank and Interim.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 9
(7) Bank shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Holding Company
Common Stock (Section 354(a)).
(8) A Bank shareholder's basis in his or her Holding Company Common Stock
received in the exchange will be the same as the basis of the Bank
Common Stock surrendered in the exchange therefor (Section 358(a)).
(9) A Bank shareholder's holding period in his or her Holding Company
Common Stock received in the exchange will include the period during
which the Bank Common Stock surrendered was held, provided that the
Bank Common Stock surrendered is a capital asset in the hands of the
Bank shareholder on the date of the exchange (Section 1223(1)).
(10) Bank shareholders will not recognize any gain or loss as a result of
the conversion of their Bank stock options into options to purchase
stock of the Holding Company (Treasury Regulation Section 1.83-
8(b)(6)).
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. This
opinion is not binding on the Internal Revenue Service and there can be no
assurance, and none is hereby given, that the Internal Revenue Service will not
take a position contrary to one or more of the positions reflected in the
foregoing opinion, or that our opinion will be upheld by the courts if
challenged by the Internal Revenue Service.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 10
CONSENT
We hereby consent to the references to us under the heading "Proposed
Formation of Stock Holding Company - Tax Consequences" in the Proxy
Statement/Prospectus constituting a part of the Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on behalf of the
Holding Company.
USE OF OPINION
This opinion is rendered solely for the benefit of Northwest Savings Bank,
in connection with the proposed transaction and is not to be relied upon or used
for any other purpose without our prior written consent.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK,
A Professional Corporation
By: _______________________________
Beverly J. White
<PAGE>
EXHIBIT NO. 10.1
<PAGE>
EXHIBIT 10.1
DEFERRED COMPENSATION PLAN
SECTION I
Purpose
-------
The purpose of this plan is to enable this Association to attract and
retain as Directors over the years persons of outstanding competence.
SECTION II
Definitions
-----------
1. "Association" means the Northwest Mutual Savings Association or any
-------------
association or corporation succeeding thereto by merger, consolidation,
liquidation, or other reorganization that has made provision for adoption of
this plan and the assumption of the Association's obligations thereunder.
2. "Administrator" means the person appointed by the Board of Directors
---------------
of the Association pursuant to Section III hereof.
3. "Director" means those Directors of the Association that receive
----------
compensation for their services as Directors in the form of fees and are not
compensated by the Association by a regular salary and are not employed by the
Association on a full-time basis.
4. "Participant" means a Director who files an election to defer his fees
-------------
under Section V hereof. The class designated in Paragraph 3 of this Section may
be modified and expanded to include Director Emeritus, Regional Board Members,
Advisory Committee Members and Solicitors.
SECTION III
Administration
--------------
The Board of Directors of the Association shall appoint any officer
<PAGE>
Deferred Compensation Plan
- --------------------------
or Director of the Association not eligible to become a Participant to act as
the Administrator of this plan and who shall serve at the pleasure of the Board
of Directors to administer, construe, and interpret this plan. The
Administrator shall not be liable for any act done or determination made in
good faith.
SECTION IV
Deferred Directors' Fees Ledger
-------------------------------
The Association shall set up and maintain an appropriate record,
hereinafter called "Deferred Directors' Fees Ledger", and thereafter enter the
name of each Participant in the plan and the amount of his credits and interest
thereon under the provisions of Paragraph I of Section V.
SECTION V
Credits to the Participants
---------------------------
1. So long as this plan remains in effect, the Association shall credit
the Deferred Directors' Fees Ledger quarterly throughout the term of his service
as a Director, an amount designated by him of the fees that would have been paid
to him if he had not elected to participate in this plan, as fixed by Resolution
duly passed by the members of the Association at any regular or special meeting
thereof. The amounts credited shall earn interest from the date they are
credited at the earnings rate being paid on the Association's Variable-Rate IRA
Account and shall be credited on or before the last business day of each
calendar quarter.
2. Prior to March 31, 1979 and before the first day of any fiscal year
thereafter, any Director may file with the Administrator of the plan, an
election in writing to participate in the plan for that year or for that year
and succeeding years. Nothwitstanding the above, any Director newly elected at
an Annual Meeting may, on or before the last day of the month in which that
meeting is held, file with the Administrator of the plan a written election to
participate in the plan for that year. When
-2-
<PAGE>
Deferred Compensation Plan
- --------------------------
such an election is filed, the Participant shall designate in this election the
amount of his fees to be deferred and to be credited. This amount shall be set
forth as a dollar amount. If an election is filed to participate in the plan for
succeeding years, an election to terminate participation in the plan for any
year must likewise be filed prior to the first day of that fiscal year.
3. If the Board of Directors of the Association shall terminate this plan
at any time, no further credits shall be made under the provisions of Paragraph
1 of this Section but the amounts theretofore credited shall continue to bear
interest under the provisions of said Paragraph 1 of this Section, and said
amounts shall be paid out in accordance with the provisions of Section VI.
4. Following the occurrence of an event as set forth in Section VI, the
benefits payable shall be payable either in a lump sum (within thirty days of
the event) or in five equal installments, the first installment to begin
within thirty days of the event. In the event that the installment method is
designated, the amount remaining to the Participant's or beneficiary's credit
shall continue to bear interest under the provisions of Paragraph 1 of this
Section.
SECTION VI
Payment of Benefits
-------------------
The benefits payable under the plan shall be the aggregate amount
accumulated to the Participant's credit in the Deferred Directors' Fees Ledger
and may be paid upon the occurrence of one or more of the following events.
1. Death - Upon the death of a Participant, all benefits shall be paid in
-----
such manner as the Participant shall designate at the time of his election to
defer.
-3-
<PAGE>
Deferred Compensation Plan
- --------------------------
2. Total and Permanent Disability - Upon attaining total and permanent
------------------------------
disability, the same as would entitle a Participant to benefits under the Social
Security Act, all benefits shall be paid in such manner as the Participant shall
designate at the time of his election to defer.
3. Normal Retirement Age - Upon attaining age 65 years, or at any date
---------------------
thereafter, but in no event later than attaining age 75 years, the Participant
may, or shall, be paid all benefits in such manner as the Participant shall
designate at the time of his election to defer.
4. Termination of Service Upon the Board - If for any reason other than
-------------------------------------
death, total and permanent disability or attaining normal retirement age, all as
above described, the Participant ceases to be a member of the Board of
Directors, the Participant may receive early payment of all benefits in a manner
as the Participant shall have elected at the time of his election to defer.
5. In the event that the Association is in a period of economic hardship,
as the same may be determined by the Board, benefit payments shall be uniform
with respect to all Participants affected at the same time. Further, the
payments may be extended by the Board to installments payable not over a period
in excess of ten (10) years.
SECTION VII
Nonalienation of Benefits
-------------------------
1. No right or benefit under this plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be
void. No right or benefit hereunder shall in any manner be liable for or subject
to the debts, contract, liabilities, or torts of the person entitled to such
benefit. If any Participant or beneficiary hereunder should become bankrupt or
attempt to anticipate,
-4-
<PAGE>
Deferred Compensation Plan
- --------------------------
alienate, sell, assign, pledge, encumber or charge any right or benefit
hereunder, then such right or benefit, in the discretion of the Administrator,
shall cease and determine, and in such event, the Association may hold or apply
the same or any part thereof for the benefit of the Participant or beneficiary,
his or her spouse, children or other dependents, or any of them, in such manner
and in such portion as the administration may deem proper.
2. Assignment of Rights - None of the rights to compensation under this
--------------------
Agreement are assignable by the Director or any beneficiary of the Director and
any attempt to anticipate, sell, transfer, assign, pledge, encumber or charge
Director's right to receive compensation shall be void.
SECTION VIII
Amendment or Termination of Plan
--------------------------------
1. The Board of Directors may terminate this plan at any time.
2. The Board of Directors may amend this plan at any time.
3. Any amendment or termination of this plan shall not affect the rights
of Participants or beneficiaries to payments in accordance with Section VI of
amounts standing to the credit of Participants in the Deferred Directors' Fees
Ledger at the time of such amendment or termination.
SECTION IX
Miscellaneous Provisions
------------------------
1. Status of Agreement - This Agreement does not constitute a contract of
-------------------
employment between the parties, nor shall any provision of this Agreement
restrict the right of the Association's Depositors to replace the Director or
the right of the Director to terminate his service.
-5-
<PAGE>
Page 2 of 2
Revised 6/87
I hereby give notice to the Administrator of the Plan that for the calendar
year 19 ____, the amount of my participation in the Deferred Compensation Plan
shall be $_________.
________________ ______________________________
Date (Signature of Participant)
______________________________
(Title of Participant)
- -------------------------------------------------------------------------------
RECEIVED AND FILED: _________________________
(Date)
_______________________________
(Signature of Administrator)
<PAGE>
AMENDMENTS TO NORTHWEST MUTUAL SAVINGS ASSOCIATION'S
DEFERRED COMPENSATION PLAN
At a regularly scheduled meeting of the Board of Directors of Northwest Mutual
Savings Association, held on June 17, 1987, it was duly moved, seconded and
unanimously carried to adopt the following amendments to the Association's
"Deferred Compensation Plan":
Section II, Paragraph 3, is amended to read:
-----------------------
"Director" shall mean those Directors of the Association that receive
compensation for their services as Directors in the form of fees. (The
remainder of Paragraph 3 is deleted.)
SECTION V, Paragraph 4, is amended to read:
----------------------
Following the occurrence of an event as set forth in Section VI, the
benefits payable shall be payable in a lump sum (within thirty (30) days of
the event), in five (5) equal installments or ten (10) equal installments,
the first installment to begin within thirty (30) days of the event.
(The last sentence shall remain unchanged.)
SECTION VI, Paragraph 3, is amended to read:
-----------------------
Normal Retirement Age: Upon attaining Age 59 1/2 years, or at any date
---------------------
thereafter, but in no event later than attaining Age 72 years, the
Participant shall begin to be paid all benefits in such manner as the
Participant shall designate at the time of his election to defer. If the
Participant designated a lump-sum payment, the payment must be made no
later than his/her attaining Age 75 years.
<PAGE>
EXHIBIT NO. 10.2
<PAGE>
EXHIBIT 10.2
NORTHWEST SAVINGS BANK, PaSA
RETIREMENT PLAN FOR OUTSIDE DIRECTORS
ARTICLE I. ESTABLISHMENT AND PURPOSE
1.1 ESTABLISHMENT OF THE PLAN
Northwest Savings Bank, PaSA (the "Company") hereby establishes the Retirement
Plan for Outside Directors (the "Plan") of Northwest Savings Bank, effective
July 1, 1992 (the "Effective Date").
1.2 PURPOSE
The purpose of this Plan is to recognize the value of an Outside Director's past
service to the Company, to enhance the Company's ability to attract and retain
competent and experienced Outside Directors, and to assure the availability of
each participating Outside Director's knowledge and experience as a resource to
the Company following his retirement as an Outside Director. The Plan is
intended to be an unfunded plan of deferred compensation, not qualified under
the Internal Revenue Code.
ARTICLE II. DEFINITIONS AND CONSTRUCTION
2.1 DEFINITIONS
The terms used in this Plan shall have the meanings assigned to them below.
(a) "Administration Committee" means the Committee appointed by the Board of
Directors to administer this Plan.
(b) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(c) "Company" means Northwest Savings Bank, PaSA.
(d) "Director" means a member of the Board.
(e) "Disability Benefit" is the amount payable to a Participant in accordance
with Section 3.5 hereof upon his meeting the test for disability benefits
under the Federal Social Security Act.
<PAGE>
(f) "Fiscal Year" means the twelve month period from July 1 through June 30 of
the following calendar year.
(g) "Outside Director" means a Director who is not an employee of the Company
and who is not entitled, either before or after retirement from the Board,
to receive employee pension benefits from the Company or from any of its
subsidiaries.
(h) "Participant" means any eligible Outside Director of the Company who meets
the participation requirements set forth in Section 3.1 of this Plan.
(j) "Retainer" means the annual Retainer payable to an Outside Director each
Fiscal Year as compensation for membership on the Board of Directors of the
Company.
(j) "Retire" or "Retirement" means termination for any reason from service as a
Director of the Company after five or more Years of Service.
(k) "Retirement Benefit" is the amount payable to a Participant following his
Retirement calculated in accordance with Section 3.3(a) of this Plan.
(l) "Years of Service" means the number of full Fiscal Years which an Outside
Director serves on the Company's Board of Directors, but not to exceed ten
(10) years. Years of Service shall include service on the Board of
Directors of the Company prior to the establishment of this Plan and any
period during which the Participant is disabled within the meaning of
Section 3.5 hereof prior to age 65. However, in no event shall the Years
of service credited under this Plan exceed ten Fiscal Years.
2.2 GENDER AND NUMBER
Except when otherwise indicated by the context, words in the masculine gender
shall include the feminine gender; the plural shall include the singular and the
singular shall include the plural.
2.3 NOT A CONTRACT OF SERVICE
Neither the establishment of, nor the participation or eligibility for
participation of any Outside Director in, this Plan shall be construed to confer
any right of tenure on the part
-2-
<PAGE>
of any Outside Director or any right of nomination, renomination, election or
re-election to the Board of Directors of the Company. The Company shall not
incur any liability for any loss of benefits that might result under this Plan
from any failure of the stockholders to elect or re-elect any Outside Director
to the Board of Directors or any failure of the Board of Directors to nominate
any Outside Director for re-election.
2.4 SEVERABILITY
In the event any provision of the Plan shall be held invalid or illegal for any
reason, such illegality or invalidity shall not affect the remaining parts of
the Plan, but the Plan shall be construed and enforced as if the illegal or
invalid provision had never been inserted, and the Company shall have the
privilege and opportunity to correct and remedy such questions of illegality or
invalidity by amendment as provided in the Plan.
2.5 APPLICABLE LAW
The Plan shall be governed and construed in accordance with the laws of the
Commonwealth of Pennsylvania except as otherwise required by applicable Federal
law.
ARTICLE III. PARTICIPATION AND BENEFITS
3.1 PARTICIPATION
An Outside Director shall become a Participant in this Plan on the date such
Director completes five Years of Service as a Director of the Company.
3.2 ELIGIBILITY FOR BENEFITS
An Outside Director shall not be eligible for any benefits hereunder until such
Director has completed five Years of Service. No benefits are payable under this
Plan to any Director who terminates his service on the Board prior to completing
five Years of Service.
-3-
<PAGE>
3.3 RETIREMENT BENEFIT
(a) AMOUNT OF RETIREMENT BENEFIT. Upon a Participant's Retirement from the
Board on or after his attainment of age 60, he shall be entitled to an
annual Retirement Benefit in an amount equal to:
(1) Sixty percent of the annual Retainer payable to an Outside Director as
compensation for membership on the Board at the annual rate which was
in effect immediately prior to his Retirement;
plus
(2) Sixty percent of the annual meeting fees payable to an Outside
Director as compensation for his attendance at meetings of the Board
of Directors at the annual rate which was in effect immediately prior
to his Retirement.
(b) Upon a Participant's retirement from the Board prior to his attainment of
age 60 he shall be entitled to an annual Retirement Benefit equal to
one-half of the Retirement Benefit calculated under subparagraphs (1) and
(2) of paragraph (a) above.
(c) COMMENCEMENT OF PAYMENTS.
(1) TERMINATION OF SERVICE PRIOR TO ATTAINMENT OF AGE 65. In the event a
Participant terminates his service prior to his attainment of age 65,
Retirement Benefits shall commence on the first day of the calendar
quarter following his attainment of age 65.
(2) TERMINATION OF SERVICE AFTER ATTAINMENT OF AGE 65. In the event a
Participant terminates his service after his attainment of age 65,
Retirement Benefits shall commence on the first day of the calendar
quarter following his Retirement.
(d) DURATION AND PAYMENT OF BENEFITS RETIREMENT. Retirement Benefits shall be
paid to each Retired Participant for a period equal to the lesser of the
number of his completed full Years of Service, his life, or ten years.
Retirement Benefits shall be paid in quarterly installments on the first
day of each calendar quarter following the Participant's Retirement.
-4-
<PAGE>
3.4 NO BENEFITS PAYABLE AFTER DEATH
In the event of a Participant's death prior to the receipt of all Retirement
Benefits otherwise due under the Plan, all further benefits shall cease as of
the first calendar quarter following his death. No death benefits are payable
under this Plan.
3.5 DISABILITY BENEFITS
In the event a Participant suffers a disability prior to age 65 for which the
Participant receives disability benefits under the Federal Social Security Act,
or if the Participant is not subject to the Federal Social Security Act and he
suffers a disability for which he would qualify for disability benefits
thereunder, the Participant shall continue to receive sixty percent of the
annual Retainer and the annual Board meeting fees at the annual rate in effect
immediately prior to his meeting the test for disability benefits under the
Social Security Act as a Disability Benefit hereunder. Such Disability Benefit
shall be payable under this Plan until the Participant's age 65, at which time
the Participant shall be eligible for Retirement Benefits calculated as though
the disabled Participant had continued in active service on the Board until his
age 65. The period of time during which a Participant receives Disability
Benefits hereunder prior to his attainment of age 65 shall be included in the
Years of Service credited to the Participant for purposes of calculating the
duration of Retirement Benefits payable hereunder. In the event a Participant
becomes permanently disabled within the meaning of the Federal Social Security
Act after age 65 he shall Retire from the Board and commence to receive his
Retirement Benefit hereunder on the first day of the ensuing calendar quarter.
ARTICLE IV. CONTINUING OBLIGATIONS OF RETIRED OUTSIDE DIRECTORS
4.1 CONSULTATION
During the period that a retired Outside Director is receiving a Retirement
Benefit under the Plan, he shall make himself available to the Company for
consultation with Directors or senior officers of the Company upon request on
matters within his experience related to the business of the Company. Such
consulting services shall be rendered at reasonable times and places, taking
into account the health, age and other duties of such retired Outside Director.
To the extent possible, such
-5-
<PAGE>
consulting services shall be rendered by personal consultation by telephone or
at the principal residence or office, wherever located, of the retired Outside
Director, at times most convenient to the retired Outside Director.
4.2 NON-COMPETITION
The obligation of the Company to make or continue payments under this Plan shall
be subject to the condition that the retired Outside Director shall not engage,
either directly or indirectly, in any activity which is competitive with any
activity of the Company. In the event of a breach by the retired Outside
Director of the foregoing condition, the Company shall not be obligated to make
any payment coming due hereunder subsequent to the occurrence of such breach.
The Administration Committee, upon prior written request of a retired Outside
Director, may waive the condition specified above with respect to non-
competition if, based upon all of the relevant circumstances, in the sole
judgment of the Administration Committee, the granting of such a waiver is
justified, having due regard to both the interests of the Company and those of
the Retired Outside Director.
ARTICLE V. GENERAL PROVISIONS
5.1 ADMINISTRATION
This Plan shall be administered by the Administration Committee appointed by the
Board of Directors. The members of the Administration Committee shall not be
eligible to participate in the Plan. The Administration Committee shall have the
power to interpret the Plan and to decide any and all matters arising hereunder,
including but not limited to the right to remedy possible ambiguities,
inconsistencies or omissions, by general rule or particular decision; provided,
that all such interpretations and decisions shall be applied in a uniform and
nondiscriminatory manner to all Participants similarly situated. In addition,
any interpretations and decisions made by the Administration Committee shall be
final, conclusive and binding upon all persons who have or who claim to have any
interest in or under the Plan.
-6-
<PAGE>
5.2 FUNDING
All benefits paid under this Plan shall be paid in cash from the general assets
of the Company. All liability for Retirement Benefits payable under the Plan
shall be reflected on the accounting records of the Company, but shall not be
construed to create or require the creation of a trust, custodial, or escrow
account. The Company may establish one or more trusts, with such trustees as the
Board may approve, for the purpose of providing for the payment of Retirement
Benefits hereunder. Such trusts may be irrevocable but the assets thereof shall
be subject to the claims of the Company's creditors. To the extent that any
Retirement Benefits provided under the Plan are actually paid from any such
trust, the Company shall have no further obligations with respect thereto, but
to the extent not so paid, such benefits shall remain the obligation of and
shall be paid by the Company. No Director shall have any right, title, or
interest in or to any investment reserves, accounts, or funds that the Company
may purchase, establish, or accumulate to aid in providing benefits under this
Plan. Nothing contained in this Plan, and no action taken pursuant to its
provisions, shall create a trust or fiduciary relationship of any kind between
the Company and a Director or any other person. A Director shall not acquire any
interest greater than that of an unsecured creditor.
5.3 EXPENSES
The expenses of administering the Plan shall be borne by the Company.
5.4 INDEMNIFICATION
The members of the Administration Committee and its agents, and officers,
directors and employees of the Company shall be indemnified and held harmless
by the Company to the fullest extent now or hereafter permitted by law against
and from any and all loss, cost, liability, or expense, including attorneys'
fees, fines, civil penalties and excise taxes that may be imposed upon or
reasonably incurred by them in connection with or resulting from any actual or
threatened civil, criminal, administrative or investigative claim, action, suit,
or proceeding to which they may be a party in or which they may be involved by
reason of any action taken or failure to act under this Plan and against and
from any and all amounts paid by them in settlement (with the Company's written
approval) or paid by them in satisfaction of a judgment in any such action,
suit, or proceeding. The
-7-
<PAGE>
indemnification provided by this section shall continue for persons who have
ceased to be members or agents of the Administrative Committee, and to former
directors, officers and employees of the Company, and shall inure to the benefit
of the heirs, executors and administrators of persons entitled to indemnity
hereunder. This section shall not be applicable to any person if the loss, cost,
liability, or expense is finally judicially determined to be due to such
person's recklessness or willful misconduct.
5.5 NONASSIGNABILITY
Neither a Participant in this Plan nor any other person shall have any right to
sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
hypothecate or convey in advance of actual receipt the Retirement Benefits, if
any, payable hereunder, all rights to which are expressly declared to be
nonassignable and nontransferable. No part of any amount payable hereunder,
prior to actual payment, shall be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of law in the
event of a Participant's or any other person's bankruptcy or insolvency.
5.6 PAYMENT TO GUARDIAN
If a Plan benefit is payable to a person declared incompetent or to a person
incapable of handling the disposition of property, the Administration Committee
may direct payment of such Plan benefit to the guardian, legal representative or
person having the care and custody of such incompetent person, without
responsibility to follow application of amounts so paid. Payments made pursuant
to this provision shall completely discharge the Company, the Plan and the
Administration Committee.
5.7 SUCCESSORS
The provisions of this Plan shall bind and inure to the benefit of the Company
and its successors and assigns. The term successors as used herein shall include
any corporate or other business entity which shall, whether by merger,
consolidation, purchase or otherwise, acquire all or substantially all of the
business and assets of the Company, and the successors of any such corporation
or other business entity.
-8-
<PAGE>
ARTICLE VI. AMENDMENT AND TERMINATION
6.1 AMENDMENT AND TERMINATION
The Company expects to continue the Plan indefinitely, but specifically reserves
the right, in the sole and unfettered discretion of its Board of Directors, at
any time, to amend, in whole or in part, any or all of the provisions of the
Plan and to terminate the Plan in whole or in part, provided, however, that no
such amendment or termination shall adversely affect any rights of an Outside
Director to receive the Retirement Benefit which had accrued on his behalf on
account of his service as an Outside Director prior to such amendment or
termination.
6.2 CONDITIONAL ADOPTION
Adoption of this Plan by the Board of Directors effective as of the Effective
Date is conditioned upon its approval by the stockholders of the Company.
6.3 SUBJECT TO REGULATORY ACTION
If the Plan is approved by the stockholders of the Company the Plan shall be
effective as of the Effective Date unless it is subsequently found to violate
any rule or regulation of any governmental agency which is authorized to
regulate the Company or the Plan.
In witness whereof, Northwest Savings Bank, PaSA has caused this instrument to
be executed by its duly authorized officers on this _________ day of
_________________, 19 ______
NORTHWEST SAVINGS BANK, PASA
By:____________________________________
Attest:
By:____________________________________
-9-
<PAGE>
EXHIBIT NO. 10.3
<PAGE>
NORTHWEST SAVINGS BANK
NONQUALIFIED SUPPLEMENTAL RETIREMENT PLAN
Preamble
--------
Northwest Mutual Savings Association, doing business as Northwest
Savings Bank ("Employer"), has established the Northwest Savings Bank Pension
Plan as a defined benefit pension plan ("Qualified Plan") intended to be
qualified under the Internal Revenue Code of 1986, as amended ("Code"), for the
purpose of providing income to its employees during their retirement from the
service of the Bank.
Sections 401(a)(17) and 415 of the Code reduce the pension otherwise
payable under the Northwest Savings Bank Pension Plan to employees whose
compensation exceeds the limits of Section 401(a)(17) or for whom contributions
or benefits would exceed the limits of Section 415.
Effective June 16, 1993 the Employer established this supplemental
retirement plan of unfunded deferred compensation that is not qualified under
the Code ("Nonqualified Plan") to make up for the cut back in retirement income
required by the above-referred Sections of the Code with respect to senior
higher paid employees who retire on or after the Earliest Retirement Age
provided under the Qualified Plan. This Nonqualified Plan provides a
supplemental retirement benefit for participants in
<PAGE>
the Northwest Savings Bank Pension Plan which, when combined with the pension
payable to them under the Qualified Plan, will equal the pension which they
would have received thereunder but for the application of Sections 401(a)(17)
and 415 of the Code.
-2-
<PAGE>
ARTICLE I
Definitions
-----------
1.1. Incorporation by Reference. Unless the context of this Plan
--------------------------
requires or connotes a different meaning, all undefined capitalized terms used
in this Plan shall have the same meanings as are respectively assigned to them
under the Northwest Savings Bank Pension Plan ("Qualified Plan"), and the terms
and conditions of the Qualified Plan are incorporated herein by reference
wherever necessary or appropriate.
1.2. "Benefit Formula" means the method set forth in the Qualified
Plan to calculate the amount of benefit payable to a participant thereunder at
the time such benefit commences to be paid, including all actuarially equivalent
factors utilized under the Qualified Plan. The Benefit Formula shall include all
applicable actuarial reductions, and all offsets and deductions, required by the
Qualified Plan for payments available from Federal Social Security, from
Worker's Compensation, and from other qualified plans, if any, but shall not
reflect the application of Sections 401(a)(17) or 415 of the Code.
1.3. "Committee" means the Personnel/Pension Committee of the
Employer's Board of Directors.
1.4. "Effective Date" means June 16, 1993.
1.5. "Nonqualified Plan" means the Northwest Savings Bank Nonqualified
Supplemental Retirement Plan as herein set forth and as it may hereafter be
amended from time to time.
-3-
<PAGE>
1.6. "Participant" means a participant in the Qualified Plan, or the
beneficiary or estate of a deceased Participant, who is or becomes entitled to a
benefit hereunder by reason of a reduction required by Sections 401(a)(17) or
415 of the Code in the amount of benefit otherwise payable to such Participant
as a participant in the Qualified Plan.
1.7. "Qualified Plan" means the Northwest Savings Bank Pension Plan, a
defined benefit pension plan sponsored by the Employer for the benefit if its
eligible employees, which is or is intended to be qualified under Section 401 of
the Code, as the Qualified Plan presently exists, and as it may be hereafter
amended, superseded, modified or redesignated.
1.8. "Supplemental Retirement Benefit" means the benefit payable by
the Company to a Participant hereunder.
ARTICLE II
Calculation of Supplemental Retirement Benefit
----------------------------------------------
2.1. Supplemental Retirement Benefit for Qualified Plan. The
--------------------------------------------------
Supplemental Retirement Benefit payable to a Participant hereunder shall equal
the difference between the amount payable to the Participant as a participant
under the Qualified Plan and the amount which would have been payable to such
participant who retires under the Qualified Plan after the Effective Date of
this Plan under the Benefit Formula of the Qualified Plan but for the
limitations of Sections 401(a)(17) or
-4-
<PAGE>
of Sections 401(a)(17) and 415 of the Code. This Nonqualified Plan shall not be
a substitute for or an alternative to the Qualified Plan, which shall remain the
primary source of all benefits provided thereunder.
ARTICLE III
Plan Administration
-------------------
3.1. Duties and Obligations of Committee.
-----------------------------------
Responsibility to administer this Plan to interpret and carry out its provisions
is hereby delegated to the Committee. The Committee and its delegates shall have
the same rights, powers, duties and fiduciary obligations, and operate with the
same standard of care, with respect to this Plan and its Participants as the
Plan Administrator of the Qualified Plan has and does with respect to the
Qualified Plan and its participants.
3.2 Eligibility and Benefit Determination. The Committee shall have
-------------------------------------
the sole right to determine the eligibility of any person to participant in this
Plan, and the time, manner and amount of distribution of benefits under this
Plan upon each Participant's retirement, disability or death in accordance with
the payment provision or option of the Qualified Plan which is elected by or
applicable to such Participant; provided, however, that any such determination
shall be made under uniform rule consistently applied to persons in like
circumstances; and provided further, that no such determination may add to,
subtract
-6-
<PAGE>
from or modify the terms of the Plan, or reduce or add to any benefits provided
by the Plan, or fail to apply or add to any requirements of eligibility for
benefits under the Plan. Any designation of beneficiary or revocation of same
made by a Participant under the Qualified Plan shall apply with equal force and
effect to this Nonqualified Plan.
ARTICLE IV
Funding
-------
4.1. Unfunded, Nonqualified Plan. The Employer shall not be required
---------------------------
to establish any form of trust or funded account for the purpose of providing
any Supplemental Retirement Benefit. The Nonqualified Plan is not intended to
be qualified under the Code.
4.2. Optional Funding. In order to meet its deferred obligations
----------------
hereunder, the Employer may set aside or earmark funds in an amount necessary to
actuarially fund part or all of the total retirement benefits expected to be
paid from this Plan under Article II. Funds set aside or earmarked to meet the
Employer's deferred obligation hereunder may be kept in cash, or invested and
reinvested, in the discretion of the Committee. Title to and beneficial
ownership of any assets, whether cash or investments, which the Employer may set
aside or earmark to meet its deferred obligations hereunder, shall at all times
remain in the Employer; and no Participant or beneficiary shall under any
-7-
<PAGE>
circumstances acquire any property interest in any specific assets of the
Employer.
4.3. Investment of Earmarked Funds. Investments of funds set aside or
-----------------------------
earmarked to meet the Employer's deferred obligation hereunder may be made in
savings accounts, stocks, bonds or other securities selected by the Committee in
its sole discretion. In the exercise of the foregoing discretionary investment
powers, the Committee may engage investment counsel, and, if it so desires, may
delegate to such counsel full or limited authority to select the securities in
which the funds are to be invested. The cost of any such service shall be
charged as an expense of administering the Plan and paid as provided in Section
5.2.
ARTICLE V
General
-------
5.1. Inducement to Employees Affected by Limitations of Code Sections
----------------------------------------------------------------
401(a) (17) and 415. This Nonqualified Supplemental Retirement Plan is adopted
- -------------------
in consideration of the valuable contributions to the Employer made by employees
whose benefits otherwise available from the Employer's Qualified Plan have been
reduced by application of Sections 401(a) (17) and 415 of the Code and with the
intention that the provisions of this Plan shall be disseminated to all such
employees so that it may act as an inducement to them to continue to devote
their utmost efforts,
-8-
<PAGE>
leadership and counsel in the service of the best interests of the Employer over
the long term with a sense of security regarding the amount of retirement
benefit which they may rely upon for income following the conclusion of their
careers with the Employer.
5.2. Expenses. The books and records to be maintained for the purpose
--------
of the Nonqualified Plan shall be maintained by the officers and employees of
the Employer at its expense and subject to the supervision and control of the
Committee. All expenses of administering the Nonqualified Plan shall be paid by
the Employer either from funds set aside or earmarked under the Plan or from
other funds.
5.3. Prohibition Against Assignment of Benefits. To the extent
------------------------------------------
permitted by law, the right of any Participant or any beneficiary in any benefit
or to any payment hereunder shall not be subject in any manner to attachment or
other legal process for the debts of such Participant or beneficiary; and any
such benefit or payment shall not be subject to anticipation, alienation, sale,
transfer, assignment or encumbrance.
5.4. No Liability for Actions Taken In Good Faith. No member of the
--------------------------------------------
Board of Directors of the Employer or of the Committee and no officer or
employee of the Employer shall be liable to any person for any action taken or
omitted in connection with the administration of this Nonqualified Plan unless
attributable to his own fraud of willful misconduct; nor shall the Employer be
liable to any person for any such action
-9-
<PAGE>
unless attributable to fraud or wilful misconduct on the part of the director,
officer or employee of the Employer.
5.5. No Contract of Employment. This Nonqualified Plan shall not be
-------------------------
construed to establish a guarantee of future or continued employment by the
Employer of any Participant.
5.6. No Trust or Fiduciary Relationship Created. Nothing contained
------------------------------------------
herein shall be deemed to create a trust of any kind or create any fiduciary
relationship. Funds invested hereunder shall continue for all purposes to be a
part of the general funds of the Employer, and no person other than the Employer
shall, by virtue of the provisions of this Nonqualified Plan, have any interest
in such funds. To the extent that any person acquires a right to receive
payments from the Employer under this Nonqualified Plan, such right shall be no
greater than the right of any unsecured general creditor of the Employer.
5.7. Incompetency of a Participant or Beneficiary. If the Committee
--------------------------------------------
determines that any person entitled to payments under the Nonqualified Plan is
an infant or incompetent by reason of physical or mental disability, it may
cause all payments thereafter becoming due to such person to be made to any
other person for his benefit, without responsibility to follow application of
amounts so paid. Payments made pursuant to this provision shall completely
discharge the Employer, the Nonqualified Plan, and the Committee.
5.8. Applicable Law and Construction. The provisions of the
-------------------------------
Nonqualified Plan shall be construed, administered and
-10-
<PAGE>
governed under the laws of the Commonwealth of Pennsylvania to the extent such
laws are not preempted by ERISA or any other federal laws which may from time to
time be applicable. Whenever any words are used herein in the masculine gender,
they shall be construed as though they were also used in the feminine gender in
all cases where they would so apply, and whenever any words are used herein in
the singular form, they shall be construed as though they were also used in the
plural form in all cases where they would so apply. Titles of Articles and
Sections hereof are for convenience of reference only and are not to be taken
into account in construing the provisions of this Plan.
5.9. Severability. In case any provision of the Nonqualified Plan
------------
shall be held illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts of the Nonqualified Plan, which shall be
construed and enforced as if said illegal and invalid provision had never been
inserted herein.
ARTICLE VI
Amendment and Termination
-------------------------
6.1. Amendment and Termination of the Plan. The Employer expects to
-------------------------------------
continue the Nonqualified Plan indefinitely, but specifically reserves the
right, in the sole and unfettered discretion of its Board of Directors, at any
time, to amend, in whole or in part, any and all of the provisions of the
-11-
<PAGE>
Nonqualified Plan and to terminate it in whole or in part, provided that no such
amendment or termination may divest any Participant of benefits accrued or
earned hereunder prior to the date of any such amendment or termination.
6.2. Notice. Notice of the adoption of this Nonqualified Plan and of
------
every Plan amendment shall be given in writing to each Participant and
beneficiary of a deceased Participant.
-12-
<PAGE>
EXHIBIT NO. 10.4
<PAGE>
EXHIBIT 10.4
AGREEMENT MADE THIS 20th DAY OF NOVEMBER, 1990, by and between
NORTHWEST SAVINGS BANK, PaSA, a Pennsylvania Corporation, hereinafter referred
to as "Employer", and JOHN O. HANNA, Warren, Pennsylvania, hereinafter referred
to as "Employee".
WITNESSETH:
WHEREAS, Employee is President and Chief Executive Officer of
Northwest Savings Bank, PaSA, and has developed an intimate and thorough
knowledge of Employer's methods and operations; and
WHEREAS, the retention of Employee's services for and on behalf of
Employer is of material importance to the preservation and continued progress of
the Employer;
NOW, THEREFORE, in consideration of the mutual covenants set forth
below, the parties agree as follows:
I. Term of Employment:
-------------------
A. Employer hereby employs the Employee as President and Chief
Executive officer as set forth herein and Employee hereby accepts
this employment and agrees to render such services to Employer on
the terms and conditions set forth in this Agreement.
B. The initial term of employment under this Agreement shall commence
November 20, 1990 and shall terminate November 20, 1995, unless
further extended or sooner terminated in accordance with the terms
and conditions of this Agreement; said term shall be extended
automatically for an additional one year on the first anniversary
of this Agreement and each annual anniversary thereafter through
November 20, 1993 unless the Board of Directors of Employer or
Employee gives contrary written notice to the other in accordance
with provisions of this Agreement.
II. Duties
------
A. During the term of this Agreement, Employee shall have and
exercise such duties, responsibilities, privileges, powers and
authority commensurate with the positions of President and Chief
Executive Officer and as may be assigned him by the Board of
Directors of the Employer. He shall be responsible only to the
Board of Directors.
<PAGE>
B. Employee has been elected to the Board of Directors and will be
retained in that position during the term of his employment.
C. Employer will continue to furnish Employee with a private office,
personal secretary and any other facilities, services and staff
that are necessary and adequate for the performance of his duties
and suitable to the position of the President and Chief Executive
Officer.
D. Employee will devote his time and best efforts to the business of
the Employer and to performing his duties hereunder. Employee
shall not, during his employment, be engaged in or concerned with
any other activities or pursuits which are competitive with the
business of the Employer.
III. Compensation
------------
A. As compensation for services rendered hereunder, the Employer
shall pay Employee the Annual base salary of not less than Two
Hundred Thousand ($200,000.00) Dollars, payable in equal monthly
installments on the first day of each and every month or in equal
installments on Employer's regularly designated pay dates.
B. Employee's salary shall be adjusted annually. The adjusted salary
shall be not less than the base salary for the "Upper 25%"
category under the designation of the Highest Paid Employee" as
shown in the current year's U.S. League Compensation Survey for
Financial Institutions of comparable assets and size for the year
in which the survey is conducted. However, regardless of the
salary permitted by the Compensation Survey, the Employee's base
salary shall not exceed Two Hundred Fifty Thousand ($250,00,00.00)
Dollars for the calendar year of 1991 and Three Hundred Thousand
($300,000.00) Dollars for the calendar year of 1992. All salary
adjustments shall be retroactive to January 1st for the year of
the survey.
Said survey shall be the basis for the annual adjustment for as
long as the survey is available; in the event the survey is no
longer available, a similar survey for Chief Executive Officers of
Financial Institutions shall be substituted.
IV. Benefits
--------
A. Employer agrees to include Employee and his dependents in the
hospitalization, surgical and medical benefit plan adopted by
Employer.
-2-
<PAGE>
B. In lieu of the Employer's policy for providing employees with
life insurance, the Employer agrees to include Employee under the
Employee's Group Term Life Insurance Policy in the amount of One
Million ($1,000,000) Dollars plus one year's annual salary. Life
insurance coverage shall be maintained after Employee's
retirement in the amount of Two Hundred Thousand ($200,000.00)
Dollars; Employee may, at his own discretion and expense,
increase this coverage through the Employer's carrier up to an
additional One Hundred Thousand ($100,000.00) Dollars.
C. Employer agrees to include Employee in the Employee Pension Plan.
In the event of termination under Paragraph VII.J., payments made
to the Employee and the term of said payments shall be eligible
for use in the calculation of pension benefits earned.
D. Employee shall be entitled to participate in any Employee bonus
plan in proportion to his compensation and position.
E. Employee shall be provided at all times with a luxury class
automobile that is not more than three (3) years old. Employee
may, at any time and at his option, purchase said vehicle for the
Employer's book value. In the event of termination or retirement,
for a period of one year thereafter, Employee may purchase said
vehicle for the Employer's book value as of the date of purchase.
F. Employer shall on behalf of the Employee pay all membership dues
and assessments to the Conewango Valley County Club and the
Conewango Club, both in Warren, Pennsylvania, and the Kahkwa
Club, Erie, Pennsylvania, or similar facilities in the community
of his residence.
G. Nothing in this Agreement shall be construed to limit or impair
Employee's right to participate in any and all employee benefit
plans of the Employer of every nature and Employee shall
participate in all such plans in proportion to his
compensation and position.
H. Nothing paid to Employee under any plan or arrangement presently
in effect or made available in the future shall be deemed to be
in lieu of the salary payable to Employee under Section III.
V. Reimbursement of Expenses
-------------------------
Employee may incur reasonable expenses for promoting the Employer's
business including, but not by way of limitation, expenses for
entertainment, travel, conferences and seminars, and similar items.
Employer will reimburse Employee or otherwise provide for or pay for
all reasonable expenses incurred by Employee. Employee shall be
entitled to $200.00 per month for reasonable miscellaneous expenses
incurred by him without presentation of an itemized accounting;
-3-
<PAGE>
the presentation of an itemized accounting will be required only if the
items exceed $200.00 in any single month.
VI. Death/Disability
----------------
A. If Employee dies during the term of his employment, Employer will pay
to Employee's window the amount of Employee's compensation, including
all bonus payments to which he would be entitled, for a period of one
(1) year from Employee's date of death, to be paid in equal monthly
installments. If Employee's spouse does not survive him, said payments
shall be made to his estate. Hospitalization, surgical and medical
plans and Club memberships shall continue for Employee's widow during
her lifetime. Employee's widow may also exercise the automobile
purchase option outlined in Paragraph IV.E.
B. If Employee becomes disabled during the employment term, the Employer
agrees to continue Employee's salary in accordance with Paragraph III
herein during such period of disability; however, should such period
exceed one year, Employee's disability payments shall be reduced to no
less than two-thirds (2/3's) of Employee's then annual salary until
date of normal retirement at Age 65. At Age 65, the Employee will be
entitled to the same retirement benefits that would have been
available had no disability occurred. If Employee dies during a period
of disability, Employee's spouse or estate shall be entitled to the
same benefits as if the Employee died during the employment term and
without disability.
VII. Termination
-----------
A. Employer shall have the right, at any time upon prior written Notice
of Termination satisfying the requirements of Paragraph VII. Section
I, to terminate Employee's employment for just cause. For the purpose
of this Agreement, "termination for just cause" shall mean termination
for personal dishonesty, willful misconduct, breach of fiduciary duty
involving personal profit, willful violation of any law or regulation
(excepting traffic violations and other similar offenses), willful
violation of a final cease-and-desist order, or material breach or any
provision of this Agreement as determined by a court of competent
jurisdiction. For purposes of this paragraph, no act, or failure to
act, on the Employee's part shall be considered "willful" unless done,
or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of
Employer: provided that any act or omission
-4-
<PAGE>
to act on the Employee's behalf in reliance upon an opinion of
counsel to Employer or counsel to the Employee shall not be
deemed to be willful.
B. In the event employment is terminated for just cause pursuant to
Section A. Employee shall have no right to compensation or other
benefits for any period after the date of termination. If
Employee is terminated by Employer other than for just cause,
Employee's right to compensation and other benefits under this
Agreement shall be as set forth in Section J and Section L.
C. If Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of Employer's
affairs pursuant to notice served under Section 8(a)(3) or (g)(1)
of the Federal Deposit Insurance Act, Employer's obligations
under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, Employer shall (i) pay Employee all
the compensation withheld while contract obligations were
suspended and (ii) reinstate any of its obligations which were
suspended.
D. If Employee is removed from office and/or permanently prohibited
from participating in the conduct of Employer's affairs by an
order issued under Section 8(a)(4) or (g)(1) of the Federal
Deposit Insurance Act, all obligations of Employer under this
Agreement shall terminate, as of the effective date of the order,
but vested rights and rights of the Employee to compensation
earned as of the date of termination shall not be affected.
E. All obligations under this Agreement may be terminated: (i) by
Employer at the time the Federal Deposit Insurance Corporation
enters into an agreement to provide assistance to or on behalf of
the Employer under the authority contained in Section 13(c) of
the Federal Deposit Insurance Act, and (ii) by the Director of
the Office of Thrift Supervision at the time the Director of the
Office of Thrift Supervision approves a supervisory merger to
resolve problems related to operations of Employer or when the
Employer is determined by the Director of the Office of Thrift
Supervision to be in an unsafe or unsound condition, but rights
of the Employee to compensation earned as of the date of
termination shall not be affected.
F. If Employer is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under this
Agreement shall terminate as of the date of default, but vested
rights and rights of the Employee to compensation earned as of
the date of termination shall not be effected.
-5-
<PAGE>
G. In the event that Employee is terminated in a manner which
violates the provisions of Section A, Employee shall be entitled
to reimbursement for all reasonable costs, including attorney's
fees in challenging such termination. Such reimbursement shall be
in addition to all rights to which Employee is otherwise entitled
under this Agreement.
H. On completion of thirty (30) years' service and having reached
the age of sixty (60) and less than age sixty-five (65), the
Employee may terminate his employment upon twelve (12) months'
written notice to Employer. In such event, Employee shall
continue to receive his present salary as provided in Paragraph
III for a period of two years from the date termination is
effective. The termination shall be considered early retirement
and all benefits contained in Paragraph IV, with the exception of
bonus provisions, shall continue. The Employee shall not accept
employment for a period of one year; thereafter, for a period of
four (4) years, he shall not become an employee of a firm or
entity involved in activities of the Employer within a one
hundred mile radius of Warren, Pennsylvania. Should employment
commence after one year from the date termination is effective,
the monthly salary provided for in this Paragraph VII-H shall be
decreased from the date of employment by any sum earned in the
new employment for the remainder of the two-year term.
I. Any termination of Employee's employment by Employer or by
Employee shall be consummated by written Notice of Termination to
the other party. For purposes of this Agreement, a "Notice of
Termination" shall mean a dated notice which (i) indicates the
specific termination provision in the Agreement relied upon; (ii)
sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Employee's
employment under the provision so indicated; (iii) specifies a
date of termination (which shall not be less than twelve (12)
months or 365 days) after such Notice of Termination is given,
except in the case of termination by Employer of Employee's
employment for just cause pursuant to Section A, in which case
the Notice of Termination may specify a date of termination as of
the date such Notice of Termination is given); and (iv) be given
in writing sent by U.S. first-class certified or registered
mail, postage prepaid.
-6-
<PAGE>
J. Employer may terminate employment of Employee without cause upon
twelve (12) months' written notice to Employee. In such event,
Employee shall receive:
(1) One hundred (100%) percent of Employee's then annual
compensation as computed in accordance with Paragraph III
for the two-year period following the date termination is
effective; sixty (60%) percent of said compensation for the
subsequent year; and forty (40%) percent of said
compensation for the next succeeding one-year period.
(2) Termination shall be considered early retirement and all
benefits contained in Paragraph IV, with the exception of
bonus provisions, shall continue.
K. In the event of a reorganization, merger or consolidation, as
described in Paragraph VIII herein, Employee may terminate his
employment upon twelve months' written notice to Employer. In
such event, Employee shall receive a lump-sum payment equal to
three times the Employee's then annual compensation as computed
in Paragraph III; said payment shall be made on the date
termination is effective. If the severance payments would be
subject to excise tax imposed by Section 4999 of the Internal
Revenue Code, then the severence payments will be reduced to the
extent necessary to ensure that no portion of the payments are
subject to excise tax under Section 4999. The termination shall
be considered as early retirement and all benefits contained in
Paragraph IV, with the exception of the bonus provision, shall
continue.
L. Severance pay based on length of service of Employee to Employer
and its predecessors, computed at the rate of one-half month's
base pay for every one year of service based upon Employee's than
annual compensation as computed in Paragraph III, will be paid on
the date termination under Paragraph VII.H. or VII.J. is
effective.
VIII. Reorganization - Merger
-----------------------
If the Employer shall at any time be reorganized, merged or
consolidated into or with any other corporation or entity or if
substantially all of the assets of the Employer are transferred to
another corporation or entity, the provisions of this Agreement shall
survive any such transaction and shall be binding upon and inure to
the benefit of the Corporation resulting from such merger or
consolidation or the Corporation to which such assets will be
transferred.
-7-
<PAGE>
IX. Leased Property
---------------
In the event employment is terminated by either party, Employer
shall purchase from Employee the building and lot presently
leased by Employer, located at Liberty and Clark Streets, Warren,
Pennsylvania, and the purchase price shall be determined in
accordance with the formula contained in said lease for purchase
and shall be paid in full within one year of the Notice of
Termination.
X. General Provisions
------------------
A. If either party waives a breach of this Agreement by the
other party, that waiver will not operate or be construed as
a waiver of later similar breaches.
B. Employer's rights and obligations under this Agreement will
inure to the benefit of and be binding upon Employer's
successors and assigns.
C. Employee's rights under this Agreement shall inure to the
benefit of Employee's heirs and assigns.
D. This Agreement may be modified in writing only and by mutual
consent of the parties.
NORTHWEST MUTUAL SAVINGS ASSOCIATION
d/b/a NORTHWEST SAVINGS BANK, PaSA
By: _____________________________________
By: _____________________________________
By: _____________________________________
-8-
<PAGE>
AMENDMENTS
Pursuant to resolutions of the Board of Directors on December 18, 1996, the
first sentence of section VII, Paragraph H is changed to read: "On completion of
thirty (30) years of service and having reached the age of sixty (60) and before
November 30, 1997, the employee may terminate his employment upon twelve (12)
months written notice to employer." The remaining text of Paragraph is
unchanged and in effect.
<PAGE>
EXHIBIT NO. 10.5
<PAGE>
NORTHWEST SAVINGS BANK
AND NORTHWEST BANCORP, MHC
1995 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Northwest Savings Bank and Northwest Bancorp, MHC 1995
Stock Option Plan (the "Plan") is to advance the interests of Northwest Savings
Bank (the "Bank") and its shareholders by providing Employees and Outside
Directors of the Bank and its affiliates, including Northwest Bancorp MHC, the
mutual holding company of the Bank (the "Company"), upon whose judgment,
initiative and efforts the successful conduct of the business of the Bank and
its affiliates largely depends, with an additional incentive to perform in a
superior manner as well as to attract people of experience and ability.
2. DEFINITIONS
"AFFILIATE" means any "parent corporation" or "subsidiary corporation" of
the Bank or the Company, as such terms are defined in Section 424(e) or 424(f),
respectively, of the Internal Revenue Code of 1986, as amended.
"AWARD" means an award of Nonstatutory Stock Options, Incentive Stock
Options, and/or Limited Rights granted under the provisions of the Plan.
"BANK" means Northwest Savings Bank.
"BENEFICIARY" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"BOARD" means the Board of Directors of the Bank or the Board of Trustees
of the Company, as applicable.
"CAUSE" shall mean personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or a final cease-and-desist order, any
of which results in a material loss to the Bank or an Affiliate.
"CHANGE IN CONTROL" means:
(1)(i) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Bank or the Company or a
similar transaction in which the Bank or Company is not the resulting entity or
the Stock Holding Company (as defined below) is not the resulting entity; (ii)
individuals who constitute the board of directors of the Bank or the board of
trustees of the Company as of the date hereof (the "Incumbent Board"), cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-fourths of the directors composing the Incumbent Board
or whose nomination for election by the Bank's or Company's stockholders or
members was approved by the same nominating committee serving under an Incumbent
Board shall be for purposes of this section considered as though he were a
member of the Incumbent Board; or (iii) an acquisition of "control" of the Bank
or
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the Company as defined by the Bank Holding Company Act of 1956, as amended, and
applicable rules and regulations promulgated thereunder as in effect at the time
of the Change in Control (collectively, the "BHCA"), (iv) an acquisition of
control of the Bank or more than 25% of the Bank's stock requiring submission of
an application or notice under the BHCA, Bank Merger Act, the Home Owners' Loan
Act, or Change in Bank Control Act, or (v) a mutual to stock conversion of the
Company.
(2) In the event the Company converts from the mutual form of organization
to the stock form of organization (the "Stock Holding Company") at any time
subsequent to the effective date of this Plan, a "Change in Control" shall occur
on the date the Board of Directors adopts the plan of conversion relating to
such transaction. For persons who begin service after such date, a "Change in
Control" shall mean a change in control of the Bank or the Stock Holding Company
of a nature that: (i) would be required to be reported in response to Item 1a of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a change in control of the Bank or the Stock Holding Company
within the meaning of the BHCA; or (iii) without limitation, such a change in
control shall be deemed to have occurred at such time as (a) any "person" (as
such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Stock Holding Company
representing 25% or more of the Bank's or Stock Holding Company's outstanding
securities ordinarily having the right to vote at the election of directors,
except for any securities of the Bank issued to the Stock Holding Company in
connection with the Reorganization and Stock Offering pursuant to the Bank's
Plan of Reorganization and Stock Issuance and securities purchased by the Bank's
or the Stock Holding Company's employee stock benefit plans; or (b) the
Incumbent Board ceases for any reason to constitute at least a majority of the
board of directors of the Bank or Stock Holding Company; or (c) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Stock Holding Company or similar transaction; (d) a
proxy statement is distributed that solicits proxies from stockholders of the
Stock Holding Company, by someone other than the current management of the Stock
Holding Company, seeking stockholder approval of a plan of reorganization,
merger or consolidation of the Bank or the Stock Holding Company or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Stock Holding Company; or (e) a tender offer is made pursuant to which 25% or
more of the outstanding securities of the Bank of the Stock Holding Company are
acquired.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Stock Benefits Committee of the Board of Directors
appointed by the Bank consisting of at least three Outside Directors of the Bank
or the Company, and all of whom are and must be "disinterested directors" as
that term is defined under Rule 16b-3 under the Securities Exchange Act of 1934,
as amended.
"COMMON STOCK" means the common stock of the Bank, par value $0.10 per
share.
"COMPANY" means Northwest Bancorp, MHC.
"CONTINUOUS SERVICE" means employment as an Employee or service as an
Outside Director without any interruption or termination of such employment or
service. In the case of an Employee, employment shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Bank or in the case of transfers between payroll
locations of the Bank or between the Bank, its parent, its subsidiaries or its
successor. For purposes of determining Continuous Service, an Outside Director
who terminates service on the Board but who continues to serve the Bank or
Company as a Director Emeritus will not be deemed to have an interruption or
termination of service under the Plan.
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"CONVERSION TRANSACTION" means the conversion of the Company from the
mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion, as contemplated by regulations of the Federal
Deposit Insurance Corporation ("FDIC") or any successor thereof.
"DATE OF GRANT" means the actual date on which an Award is granted by the
Committee.
"DIRECTOR" means a member of the Board of Directors of the Bank or Trustees
of the Company.
"DIRECTOR EMERITUS" means a former Director of the Bank, who in recognition
of his or her past contributions to the Bank, has been titled as a director
emeritus of the Bank.
"DISABILITY" means a physical or mental condition of a Participant
resulting from bodily injury, disease, or mental disorder which renders him
incapable of continuing any gainful occupation and which condition constitutes
total disability under the federal Social Security Acts.
"EFFECTIVE DATE" shall be the date the Plan is ratified by the Board of
Directors following the approval of stockholders.
"EMPLOYEE" means any person who is currently employed by the Bank or the
Company or an Affiliate, including officers.
"FAIR MARKET VALUE" means, when used in connection with the Common Stock on
a certain date, the reported closing price of the Common Stock as reported by
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market (as published by the Wall Street Journal, if published) on the
day prior to such date, or if the Common Stock was not traded on such date, on
the next preceding day on which the Common Stock was traded thereon; provided,
however, that if the Common Stock is not reported on the Nasdaq National Market,
Fair Market Value shall mean the average sale price of all shares of Common
Stock sold during the 30-day period immediately preceding the date on which such
stock option was granted, and if no shares of stock have been sold within such
30-day period, the average sale price of the last three sales of Common Stock
sold during the 90-day period immediately preceding the date on which such stock
option was granted. In the event Fair Market Value cannot be determined in the
manner described above, then Fair Market Value shall be determined by the
Committee. The Committee shall be authorized to obtain an independent appraisal
to determine the Fair Market Value of the Common Stock.
"INCENTIVE STOCK OPTION" means an Option granted by the Committee to a
Participant, which Option is designated as an Incentive Stock Option pursuant to
Section 8.
"INCUMBENT BOARD" means, in the case of (i) the Company or the Stock
Holding Company, or (ii) the Bank, the Board of Directors of the Company or the
Bank, respectively, on the date hereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by members or stockholders was approved by the
same nominating committee serving under an Incumbent Board, shall be considered
as though he were a member of the Incumbent Board.
"LIMITED RIGHT" means the right to receive an amount of cash based upon the
terms set forth in Section 9.
"NONSTATUTORY STOCK OPTION" means an Option granted to (i) an Outside
Director or (ii) to any other Participant and such option is either (A) not
designated as an Incentive Stock Option, or (B) fails to satisfy the
requirements of an Incentive Stock Option as set forth in Section 422 of the
Code and the regulations thereunder.
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"NORMAL RETIREMENT" means retirement from employment or service on or after
any of the following: (i) the attainment of age 65 by an Employee or Outside
Director, (ii) the attainment of age 55 and the completion of 15 years of
employment or service as an Employee or Outside Director; or (iii) the
completion of 25 years of employment or service as an Employee or Outside
Director.
"OFFERING" means the initial public offering of the Common Stock of the
Bank.
"OPTION" means Award granted under Section 7 or Section 8.
"OUTSIDE DIRECTOR" means a Director who is not also an employee.
"PARTICIPANT" means (i) an Outside Director or (ii) an Employee chosen by
the Committee to participate in the Plan.
"PLAN" means the Northwest Savings Bank and Northwest Bancorp, MHC 1995
Stock Option Plan.
"REORGANIZATION" means the reorganization of Northwest Savings Bank as a
mutual holding company and the establishment of the Bank as its wholly-owned
subsidiary.
"STOCK HOLDING COMPANY" means the holding company resulting from a stock
conversion of the Company in a conversion transaction.
3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all Participants in the Plan
and on their legal representatives and beneficiaries.
The awards of Nonstatutory Options to Outside Directors under Section 7 of
the Plan are intended to comply with Rule 16b-3 under the Securities Exchange
Act of 1934. Notwithstanding any term to the contrary appearing herein, unless
permitted by Rule 16b-3(c)(2)(ii), neither the Committee nor the Board shall
have the authority to determine the amount and price of securities to be awarded
and/or timing of awards under Section 7 of the Plan to Outside Directors, which
terms shall be set forth herein. To the extent any provision of the Plan or
action by Plan administrators fails to comply with this Section 3, such
provision or action shall, to the extent permitted by law and deemed advisable
by the Board, be null and void.
4. TYPES OF AWARDS
Awards under the Plan may be granted in any combination of (a) Nonstatutory
Stock Options as defined in Section 7; (b) Incentive Stock Options as defined in
Section 8; and (c) Limited Rights as defined herein in Section 9.
5. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for issuance under the Plan is 345,000 shares. The maximum
number of shares reserved for issuance to Employees is 284,500 shares. The
maximum number of shares reserved for issuance to Outside Directors is 60,500
shares.
The shares of Common Stock represented by such options may be either
authorized but unissued shares or shares previously issued and reacquired by the
Bank or the Company. To the extent that options together with any
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<PAGE>
related rights granted under the Plan terminate, expire or are cancelled without
having been exercised or, in the case of Limited Rights exercised for cash, new
Awards may be made with respect to these shares.
6. ELIGIBILITY
Officers and other employees of the Bank or the Company or its affiliates
shall be eligible to receive Incentive Stock Options, Nonstatutory Stock Options
and/or Limited Rights under the Plan. Directors who are not employees or
officers of the Bank or the Company or its affiliates shall not be eligible to
receive Incentive Stock Options or Limited Rights under the Plan. Outside
Directors shall be eligible to receive only Nonstatutory Stock Options.
7. NONSTATUTORY STOCK OPTIONS
7.1 GRANT OF NONSTATUTORY STOCK OPTIONS
(a) Grants to Outside Directors. Each Outside Director who is serving in
---------------------------
such capacity on the date of the Bank's Offering and at the Effective Date of
the Stock Option Plan, shall be granted Options to purchase 5,500 shares of
Common Stock of the Bank, subject to adjustment pursuant to Section 14. Each
person who becomes an Outside Director subsequent to the Effective Date of the
Stock Option Plan, shall be granted Nonstatutory Stock Options to purchase 500
shares of the Common Stock, subject to adjustment pursuant to Section 14, to the
extent shares remain available under this Stock Option Plan. Nonstatutory Stock
Options granted under this Plan are subject to the terms and conditions set
forth in this Section 7.
(b) Grants to Employees. The Committee may, from time to time, grant
-------------------
Nonstatutory Stock Options to eligible Employees and, upon such terms and
conditions as the Committee may determine, grant Nonstatutory Stock Options in
exchange for and upon surrender of previously granted Awards under the Plan.
Nonstatutory Stock Options granted under this Plan are subject to the terms and
conditions set forth in this Section 7.
(c) Option Agreement. Each Option shall be evidenced by a written option
----------------
agreement between the Bank and the employee specifying the number of shares of
Common Stock that may be acquired through its exercise and containing such other
terms and conditions that are not inconsistent with the terms of this grant.
The maximum number of shares subject to a Nonstatutory Option that may be
awarded under the Plan to any Employee shall be 80,000.
(d) Price. The purchase price per share of Common Stock deliverable to an
-----
Outside Director upon the exercise of each Nonstatutory Stock Option shall be
95% of the Fair Market Value of the Bank's Common Stock on the date the Option
is granted. The purchase price per share of Common Stock deliverable to an
Employee upon the exercise of each Nonstatutory Stock Option shall be determined
by the Committee on the date the Nonstatutory Stock Option is granted, provided
that such purchase price shall generally be not less than 100% of the Fair
Market Value of the Bank's Common Stock on the date the Option is granted.
Shares may be purchased only upon full payment of the purchase price. Payment
of the purchase price may be made, in whole or in part, through the surrender of
previously acquired shares of the Common Stock of the Bank at the Fair Market
Value of such shares at the date of exercise of the Nonstatutory Stock Option.
(e) Manner of Exercise. Nonstatutory Stock Options granted under the
------------------
Stock Option Plan shall vest in an Outside Director who maintains Continuous
Service at the rate of twenty percent (20%) per year commencing with the vesting
of the first portion on the date of grant. The Nonstatutory Stock Options
awarded to Employees shall be exercisable in installments, as determined by the
Committee. The Committee shall determine the date on which each installment
shall become exercisable. The shares comprising each installment may be
purchased in whole or in part at any time after such installment becomes
exercisable. The Committee, in its sole discretion, may accelerate the time at
which any Nonstatutory Stock Option awarded to Employees may be exercised in
whole or in part. The vested Option may be exercised from time to time, in whole
or in part, by delivering a written notice of exercise to
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<PAGE>
the President or Chief Executive Officer of the Bank. Such notice is
irrevocable and must be accompanied by full payment of the purchase price in
cash or shares of previously acquired Common Stock of the Bank at the Fair
Market Value of such shares determined on the exercise date by the manner
described in Section 2 hereof.
(f) Terms of Options. Nonstatutory Stock Options may be exercised by an
----------------
Outside Director no later than 10 years and one day from the Date of Grant. The
term during which each Nonstatutory Stock Option may be exercised by an Employee
shall be determined by the Committee, but in no event shall a Nonstatutory Stock
Option be exercisable in whole or in part more than 10 years and one day from
the Date of Grant.
(g) Termination of Employment or Service. Upon the termination of an
------------------------------------
Employee's employment or upon termination of an Outside Director's service for
any reason other than Disability, death, Normal Retirement or termination for
Cause; the Employee's or Outside Director's Nonstatutory Stock Options shall be
exercisable only as to those shares that were immediately purchasable by the
Employee or Outside Directors at the date of termination and only for a period
of one year following termination. For purposes of determining the date of
termination of an Outside Director's service, service as a Director Emeritus of
the Bank following termination from the Board of Directors will not cause the
Outside Director to incur a termination of service. Such Outside Director will
continue to vest in his or her award until termination of service as a Director
Emeritus. In the event of termination for Cause, all rights under his
Nonstatutory Stock Options shall expire upon termination. In the event of
termination of employment or service due to the death, Disability or Normal
Retirement of any Employee or Outside Director, all Nonstatutory Stock Options
held by such Employee or Outside Director, whether or not vested at such time,
shall be or become exercisable by such person or his or her legal
representatives or beneficiaries for five years following the date of his or her
cessation of employment or service, as applicable. Notwithstanding the above,
all Nonstatutory Stock Options held by a Participant whose employment as an
Employee or service as an Outside Director terminates following a Change in
Control of the Bank or the Company shall be deemed earned as of the last day of
employment or service with the Bank or an Affiliate and shall be exercisable for
five years following such termination of employment or service. In no event
shall the period for exercise extend beyond the expiration of the Nonstatutory
Stock Option term.
8. INCENTIVE STOCK OPTIONS
8.1 GRANT OF INCENTIVE STOCK OPTIONS
The Committee, from time to time, may grant Incentive Stock Options to
eligible Employees. Incentive Stock Options granted pursuant to the Plan shall
be subject to the following terms and conditions:
(a) Option Agreement. Each Option shall be evidenced by a written option
----------------
agreement between the Bank and the Employee specifying the number of shares of
Common Stock that may be acquired through its exercise and containing such other
terms and conditions that are not inconsistent with the terms of this grant.
(b) Price. The purchase price per share of Common Stock deliverable upon
-----
the exercise of each Incentive Stock Option shall be not less than 100% of the
Fair Market Value of the Bank's Common Stock on the date the Incentive Stock
Option is granted. However, if an Employee owns stock possessing more than 10%
of the total combined voting power of all classes of Common Stock of the Bank
(or under Section 424(d) of the Code, is deemed to own stock representing more
than 10% of the total combined voting power of all classes of stock of the Bank
or its Affiliates by reason of the ownership of such classes of common stock
directly or indirectly, by or for any brother, sister, spouse, ancestor or
lineal descendant of such Employee or by or for any corporation, partnership,
estate or trust of which such employee is a shareholder, partner or
beneficiary), the purchase price per share of Common Stock deliverable upon the
exercise of each Incentive Stock Option shall not be less than 110% of the Fair
Market Value of the Bank's Common Stock on the date the Incentive Stock Option
is granted. Shares may be purchased only upon payment of the full purchase
price. Payment of the purchase price may be made, in whole or in part, through
the surrender of shares of the Common Stock of the Bank. If previously acquired
shares of common stock are tendered
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<PAGE>
in payment of all or part of the exercise price, the value of such shares shall
be determined as of the date of exercise of the Incentive Stock Option.
(c) Manner of Exercise. Incentive Stock Options granted under the Stock
------------------
Option Plan shall vest in the manner determined by the Stock Benefit Committee.
The vested Options may be exercised from time to time, in whole or in part, by
delivering a written notice of exercise to the President or Chief Executive
Officer of the Bank, provided, however, that no Options shall be exercisable
prior to approval of the Plan by stockholders. Such notice is irrevocable and
must be accompanied by full payment of the purchase price in cash or shares of
previously acquired Common Stock of the Bank. If previously acquired shares of
Common Stock are tendered in payment of all or part of the exercise price, the
Fair Market Value of such shares shall be determined as of the date of such
exercise of the Incentive Stock Option.
(d) Amount of Options. Incentive Stock Options may be granted to any
-----------------
eligible Employee in such amounts as determined by the Committee; provided that
the amount granted is consistent with the terms of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Notwithstanding the above, the
maximum number of shares that may be subject to an Incentive Stock Option
awarded under the Plan to any Employee shall be 80,000. In granting Incentive
Stock Options, the Committee shall consider the position and responsibilities of
the eligible Employee, the length and value of his or her service to the Bank,
the compensation paid to the Employee and the Committee's evaluation of the
performance of the Bank according to measurements that include, among others,
key financial ratios, levels of classified assets, and independent audit
findings. In the case of an option intended to qualify as an Incentive Stock
Option, the aggregate Fair Market Value (determined as of the time the option is
granted) of the Common Stock with respect to which Incentive Stock Options
granted are exercisable for the first time by the Participant during any
calendar year (under all plans of the Participant's employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000. The provisions
of this Section 8.1(d) shall be construed and applied in accordance with Section
422(d) of the Code and the regulations, if any, promulgated thereunder.
(e) Term of Options. The term during which each Incentive Stock Option
---------------
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If any Employee, at the time an Incentive Stock Option
is granted to him, owns Common Stock representing more than 10% of the total
combined voting power of the Bank or its Affiliates (or, under Section 424(d) of
the Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all such classes of Common Stock, by reason of the
ownership of such classes of Common Stock, directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such Employee, or by
or for any corporation, partnership, estate or trust of which such employee is a
shareholder, partner or beneficiary), the Incentive Stock Option granted to him
or her shall not be exercisable after the expiration of five years from the Date
of Grant. No Incentive Stock Option granted under this Plan is transferable
except by will or the laws of descent and distribution and is exercisable during
his lifetime only by the Employee to which it is granted.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable and may provide that an Incentive Stock Option shall
become exercisable in installments. The shares comprising each installment may
be purchased in whole or in part at any time after such installment becomes
purchasable, provided that the amount able to be first exercised in a given year
is consistent with the terms of Section 422 of the Code. To the extent required
by Section 422 of the Code, the aggregate fair market value (determined at the
time the Option is granted) of the Common Stock for which Incentive Stock
Options are exercisable for the first time by a Participant during any calendar
year (under all plans of the Bank and its Affiliates) shall not exceed $100,000.
The Committee, in its sole discretion, may accelerate the time at which any
Incentive Stock Option may be exercised in whole or in part; provided that it is
consistent with the terms of Section 422 of the Code. Notwithstanding the
above, in the event of a Change in Control of the Bank or Company, all Incentive
Stock Options shall become immediately exercisable unless the fair market value
of the amount exercisable as a result of a Change in Control shall exceed
$100,000 (determined as of the date of grant). In such event, the first
$100,000 of Incentive Stock Options (determined as of
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<PAGE>
the date of grant) shall be exercisable as Incentive Stock Options and any
excess shall be exercisable as Nonstatutory Stock Options
(f) Termination of Employment. Upon the termination of an Employee's
-------------------------
employment for any reason other than Disability, Change in Control, death,
Normal Retirement or termination for Cause, his or her Incentive Stock Options
shall be exercisable only as to those shares which were immediately purchasable
by him at the date of termination for a period of one year following termination
provided, however, that such Option shall not be eligible for treatment as an
Incentive Stock Option in the event such Option is exercised more than three
months following termination of employment. In the event of termination for
Cause all rights under his or her Incentive Stock Options shall expire upon
termination.
In the event of death or Disability of any Employee, all Incentive Stock
Options held by such Employee, whether or not vested at such time, shall be or
become exercisable by such Employee or his legal representatives or
beneficiaries for five years following the date of his death or cessation of
employment due to Disability; provided, however, that in the event of
Disability, such Option will not be eligible for treatment as an Incentive Stock
Option in the event the Option is exercised more than one year following the
date of Disability. Upon termination of an Employee's service due to a Change
in Control or Normal Retirement, all Incentive Stock Options held by such
Employee, whether or not vested at such time, shall be or become exercisable for
a period of five years following the date of his cessation of employment;
provided, however, that such Option shall not be eligible for treatment as an
Incentive Stock Option in the event such Option is exercised more than three
months following the date of such termination due to a Change in Control or
Normal Retirement. In no event shall the exercise period extend beyond the
expiration of the Incentive Stock Option term.
(g) Compliance with Code. The Options granted under this Section 8 of the
--------------------
Plan are intended to qualify as Incentive Stock Options within the meaning of
Section 422 of the Code, but the Bank makes no warranty as to the qualification
of any Option as an incentive stock option within the meaning of Section 422 of
the Code. If an Option granted hereunder fails for whatever reason to comply
with the provisions of Section 422 of the Code and such failure is not or cannot
be cured, such Option shall be a Nonstatutory Stock Option.
9. LIMITED RIGHTS
9.1 GRANT OF LIMITED RIGHTS
The Committee may grant a Limited Right simultaneously with the grant of
any Option to any Employee of the Bank, with respect to all or some of the
shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
---------------
whole or in part before the expiration of six months from the date of grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control of the Bank.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
Option.
Upon exercise of a Limited Right, the related Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying Option. The Limited Right is transferable only
when the underlying Option is transferable and under the same conditions.
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(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
-------
receive from the Bank an amount of cash equal to the difference between the Fair
Market Value on the Date of Grant of the related Option and the Fair Market
Value of the underlying shares on the date the Limited Right is exercised,
multiplied by the number of shares with respect to which such Limited Right is
being exercised. In the event of a Change of Control in which pooling
accounting treatment is a condition to the transaction, the Limited Right shall
be exercisable solely for shares of stock of the Bank, or in the event of a
merger transaction, for shares of the acquiring corporation, or its parent, as
applicable. The number of shares to be received on the exercise of such Limited
Right shall be determined by dividing the amount of cash that would have been
available under the first sentence above by the Fair Market Value at the time of
exercise of the shares underlying the Option subject to the Limited Right.
10. SURRENDER OF OPTION
In the event of a Participant's termination of employment or termination of
service as a result of death, Disability or Normal Retirement, the Participant
(or his personal representative(s), heir(s), or devisee(s)) may, in a form
acceptable to the Committee, make application to surrender all or part of the
Options held by such Participant in exchange for a cash payment from the Bank of
an amount equal to the difference between the Fair Market Value of the Common
Stock on the date of termination of employment and the exercise price per share
of the Option on the Date of Grant. Whether the Bank accepts such application
or determines to make payment, in whole or part, is within its absolute and
sole discretion, it being expressly understood that the Bank is under no
obligation to any Participant whatsoever to make such payments. In the event
that the Bank accepts such application and determines to make payment, such
payment shall be in lieu of the exercise of the underlying Option and such
Option shall cease to be exercisable.
11. RIGHTS OF A SHAREHOLDER; NON-TRANSFERABILITY
An optionee shall have no rights as a shareholder with respect to any
shares covered by a Nonstatutory and/or Incentive Stock Option until the date of
issuance of a stock certificate for such shares. Nothing in this Plan or in any
Award granted confers on any person any right to continue in the employ of the
Bank or its Affiliates or to continue to perform services for the Bank or its
Affiliates or interferes in any way with the right of the Bank or its Affiliates
to terminate his or her services as an officer or other employee at any time.
No Award under the Plan shall be transferable by the optionee other than by
will or the laws of descent and distribution and may only be exercised during
his or her lifetime by the optionee, or by a guardian or legal representative.
12. AGREEMENT WITH GRANTEES
Each Award of Options, and/or Limited Rights will be evidenced by a written
agreement, executed by the Participant and the Bank or its Affiliates that
describes the conditions for receiving the Awards including the date of Award,
the purchase price if any, applicable periods, and any other terms and
conditions as may be required by the Board of Directors or applicable securities
law.
13. DESIGNATION OF BENEFICIARY
A Participant, with the consent of the Committee, may designate a person or
persons to receive, in the event of death, any Option or Limited Rights Award to
which he or she would then be entitled. Such designation will be made upon
forms supplied by and delivered to the Bank and may be revoked in writing. If a
Participant fails effectively to designate a Beneficiary, then his estate will
be deemed to be the Beneficiary.
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14. DILUTION AND OTHER ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of the
Bank by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Bank, the Committee will make
such adjustments to previously granted Awards, to prevent dilution or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
covered by Awards already made under the Plan;
(c) subject to Section 8.1(b) hereof, adjustments in the purchase price of
outstanding Incentive and/or Nonstatutory Stock Options, or any Limited
Rights attached to such options.
No such adjustments, however, may change materially the value of benefits
available to a Participant under a previously granted Award.
15. LIMITATIONS UPON EXERCISE OF OPTIONS
Notwithstanding any other provision of the Plan, so long as the Company
remains in the mutual form of organization and so long as any applicable statute
or regulation requires the Company to own at least a majority of the
outstanding Common Stock of the Bank, an Option granted under this Plan may not
be exercised if the exercise of such an Option would result in the Company
owning less than a majority of the Common Stock of the Bank. Nothing herein
shall preclude the Bank from issuing additional authorized but unissued shares
of Common Stock to the Company to allow for the exercise of options which would
otherwise have resulted in the Company owning less than a majority of the Common
Stock of the Bank.
16. TREATMENT OF OPTIONS IN THE EVENT OF A CONVERSION TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction ("Stock Holding Company"), any Options outstanding shall, at the
option of the holder, (i) be convertible into Options for Common Stock of the
Stock Holding Company, or (ii) be exercised by the holder prior to the effective
date of the Conversion Transaction and the holder shall be entitled to exchange,
in the same manner as other minority stockholders of the Bank, the shares of
Common Stock of the Bank received upon such exercise for shares of Common Stock
of the Stock Holding Company. If for any reason such options are not to be
converted or such shares are not exchanged, the holders of Options under this
plan shall receive cash payment for the shares of stock represented by the
Options in an amount equal to the fair market value of the underlying Options or
the initial offering price of the Common Stock of the Stock Holding Company for
which the Common Stock underlying the Option would otherwise be exchanged, less
the original exercise price of such options and, with respect to options that
have been exercised, the Stock Holding Company shall redeem such shares for cash
in the same manner as such redemption would occur for other minority
stockholders of the Bank. Any exchange, conversion of Options, or cash payment
for shares shall be subject to applicable federal and state regulations and, if
necessary, subject to the approval of the appropriate regulatory authorities.
17. WITHHOLDING
There may be deducted from each distribution of cash and/or Common Stock
under the Plan the amount of tax required by any governmental authority to be
withheld.
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18. AMENDMENT OF THE PLAN
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect; provided, however, that if necessary to continue
to qualify the Plan under the Securities and Exchange Commission Rule 16b-3, the
approval by a majority of the shares represented in person or by proxy at an
annual or special meeting of the Bank shall be required for any such
modification or amendment that:
(a) increases the maximum number of shares for which options may be
granted under the Plan (subject, however, to the provisions of Section
14 hereof);
(b) reduces the exercise price at which Awards may be granted (subject,
however, to the provisions of Sections 8.1(a) and 14 hereof):
(c) extends the period during which options may be granted or exercised
beyond the times originally prescribed (subject, however, to the
provisions of Section 8.1(a) hereof); or
(d) changes the class of persons eligible to participate in the Plan.
Failure to ratify or approve amendments or modifications to subsections (a)
through (d) of this Section 18 by shareholders shall be effective only as to the
specific amendment or modification requiring such ratification. Other
provisions, sections, and subsections of this Plan will remain in full force and
effect.
No such termination, modification or amendment may affect the rights of a
Participant under an outstanding Award.
19. APPROVAL BY STOCKHOLDERS
The Plan shall be approved by stockholders of the Bank within 12 months
after the Plan has been adopted by the Board of the Bank and the Company.
20. TERMINATION OF THE PLAN
The right to grant Awards under the Plan will terminate upon the earlier of
ten (10) years after the Effective Date or the date the Plan is approved by
stockholders, or the date on which the exercise of Options or related rights
equaling the maximum number of shares reserved under the Plan occurs as set
forth in Section 5 hereof. The Board of Directors has the right to suspend or
terminate the Plan at any time; provided that no such action will, without the
consent of a Participant, affect adversely his rights under a previously granted
Award.
[Remainder of Page Intentionally Left Blank]
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21. APPLICABLE LAW
The Plan will be administered in accordance with the laws of the
Commonwealth of Pennsylvania.
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EXHIBIT NO. 10.6
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NORTHWEST SAVINGS BANK
AND NORTHWEST BANCORP, MHC
1995 RECOGNITION AND RETENTION PLAN
FOR EMPLOYEES AND OUTSIDE DIRECTORS
1. ESTABLISHMENT OF THE PLAN
Northwest Savings Bank (the "Bank") and Northwest Bancorp, MHC (the
"Company") hereby establish the 1995 Recognition and Retention Plan (the "Plan")
upon the terms and conditions hereinafter stated in this Plan.
2. PURPOSE OF THE PLAN
The purpose of the Plan is to retain Employees and Outside Directors of
experience and ability by providing such persons with a proprietary interest in
the Bank as compensation for their contributions to the Bank and the Company and
their Affiliates and as an incentive to make such contributions and to promote
the Bank's growth and profitability in the future.
3. DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural:
"AFFILIATE" means any "parent corporation" or "subsidiary corporation" of
the Bank or the Company, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"AWARD" means the grant of Restricted Stock, as provided in the Plan.
"BANK" means Northwest Savings Bank.
"BENEFICIARY" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"BOARD" means the Board of Directors of the Bank or the Board of Trustees
of the Company, as applicable.
"CAUSE" shall mean personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or a final cease-and-desist order, any
of which results in a material loss to the Bank or an Affiliate.
"CHANGE IN CONTROL" means:
(1)(i) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Bank or the Company or a
similar transaction in which the Bank or Company is not the resulting entity or
the Stock Holding Company (as defined below) is not the resulting entity; (ii)
individuals who constitute the board of directors of the Bank or the board of
trustees of the Company as of the date hereof (the "Incumbent Board"), cease for
any reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to
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the date hereof whose election was approved by a vote of at least three-fourths
of the directors composing the Incumbent Board or whose nomination for election
by the Bank's or Company's stockholders or members was approved by the same
nominating committee serving under an Incumbent Board shall be for purposes of
this section considered as though he were a member of the Incumbent Board; or
(iii) an acquisition of "control" of the Bank or the Company as defined by the
Bank Holding Company Act of 1956, as amended, and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), (iv) an acquisition of control of the Bank
or more than 25% of the Bank's stock requiring submission of an application or
notice under the BHCA, Bank Merger Act, the Home Owners' Loan Act, or Change in
Bank Control Act, or (v) a mutual to stock conversion of the Company.
(2) In the event the Company converts from the mutual form of organization
to the stock form of organization (the "Stock Holding Company") at any time
subsequent to the effective date of this Plan, a "Change in Control" shall occur
on the date the Board of Directors adopts the plan of conversion relating to
such transaction. For persons who begin service after such date, a "Change in
Control" shall mean a change in control of the Bank or the Stock Holding Company
of a nature that: (i) would be required to be reported in response to Item 1a of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a change in control of the Bank or the Stock Holding Company
within the meaning of the BHCA; or (iii) without limitation, such a change in
control shall be deemed to have occurred at such time as (a) any "person" (as
such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Stock Holding Company
representing 25% or more of the Bank's or Stock Holding Company's outstanding
securities ordinarily having the right to vote at the election of directors,
except for any securities of the Bank issued to the Stock Holding Company in
connection with the Reorganization and Stock Offering pursuant to the Bank's
Plan of Reorganization and Stock Issuance and securities purchased by the Bank's
or the Stock Holding Company's employee stock benefit plans; or (b) the
Incumbent Board ceases for any reason to constitute at least a majority of the
board of directors of the Bank or Stock Holding Company; or (c) a
reorganization, merger, consolidation, sale of all or substantially all of the
assets of the Bank or the Stock Holding Company or similar transaction; (d) a
proxy statement is distributed that solicits proxies from stockholders of the
Stock Holding Company, by someone other than the current management of the Stock
Holding Company, seeking stockholder approval of a plan of reorganization,
merger or consolidation of the Bank or the Stock Holding Company or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Stock Holding Company; or (e) a tender offer is made pursuant to which 25% or
more of the outstanding securities of the Bank of the Stock Holding Company are
acquired.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Stock Benefits Committee of the Board appointed by
the Bank which shall consist of at least three Outside Directors of the Bank or
the Company, all of whom are and must be "disinterested directors," as that term
is defined under Rule 16b-3 of the Securities Exchange Act of 1934.
"COMMON STOCK" means shares of the common stock of the Bank, par value of
$0.10 per share.
"COMPANY" means Northwest Bancorp, MHC.
"CONTINUOUS SERVICE" means employment as an Employee or service as an
Outside Director without any interruption or termination of such employment or
service. In the case of an Employee, employment shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Bank or in the case of transfers between payroll
locations of the Bank or between the Bank, its parent, its subsidiaries or its
successor. For purposes of determining Continuous Service, an Outside Director
who terminates service on the
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Board but who continues to serve the Bank or Company as a Director Emeritus will
not be deemed to have an interruption or termination of service under the Plan.
"CONVERSION TRANSACTION" means the conversion of the Company from the
mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion, as provided by regulations of the Federal
Deposit Insurance Corporation ("FDIC").
"DIRECTOR" means a member of the Board of Directors of the Bank or Trustees
of the Company.
"DIRECTOR EMERITUS" means a former Director of the Bank, who in recognition
of his or her past contributions to the Bank, has been titled as a director
emeritus of the Bank.
"DISABILITY" means a physical or mental condition of a Recipient resulting
from bodily injury, disease, or mental disorder which renders him incapable of
continuing any gainful occupation and which condition constitutes total
disability under the federal Social Security Acts.
"EFFECTIVE DATE" shall be the date the Plan is ratified by the Board,
following the approval of stockholders.
"EMPLOYEE" means any person who is currently employed by the Bank or the
Company or an Affiliate, including officers.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"INCUMBENT BOARD" means, in the case of (i) the Company or the Stock
Holding Company, or (ii) the Bank, the Board of the Company or the Bank,
respectively, on the date hereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by members or stockholders was approved by the same
nominating committee serving under an Incumbent Board, shall be considered as
though he were a member of the Incumbent Board.
"NORMAL RETIREMENT" means retirement from employment or service on or after
any of the following: (i) the attainment of age 65 by an Employee or Outside
Director, (ii) the attainment of age 55 and the completion of 15 years of
employment or service as an Employee or Outside Director; or (iii) the
completion of 25 years of employment or service as an Employee or Outside
Director.
"OFFERING" means the initial public offering of the Common Stock of the
Bank.
"OUTSIDE DIRECTOR" means a director who is not also an Employer.
"PLAN" means the Northwest Savings Bank and Northwest Bancorp, MHC 1995
Recognition and Retention Plan.
"RECIPIENT" means an Employee or Director who receives an Award under this
Plan.
"REORGANIZATION" means the reorganization of Northwest Savings Bank as a
mutual holding company and the establishment of the Bank as its wholly-owned
subsidiary.
"RESTRICTED PERIOD" means the period of time selected by the Committee for
the purpose of determining when restrictions are in effect under Section 6
hereof with respect to Restricted Stock awarded under the Plan.
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<PAGE>
"RESTRICTED STOCK" means shares which have been contingently awarded to a
Recipient by the Committee subject to the restrictions referred to in Section 6
hereof, so long as such restrictions are in effect.
"STOCK HOLDING COMPANY" means the holding company resulting from a stock
conversion of the Company in a Conversion Transaction.
4. ADMINISTRATION OF THE PLAN
4.1 ROLE OF THE COMMITTEE. The Plan shall be administered and interpreted
by the Committee, which shall have all of the powers allocated to it in this and
other Sections of the Plan. The interpretation and construction by the
Committee of any provisions of the Plan or of any Award granted hereunder shall
be final and binding. The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. The Committee shall report
its actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
4.2 ROLE OF THE BOARD. The members of the Committee shall be appointed or
approved by, and will serve at the pleasure of, the Board. The Board may in its
discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that except as provided in Section 6.5, the Board may
not revoke any Award except in the case of revocation for Cause, or with respect
to unearned Awards, in the event a Recipient of an Award voluntarily terminates
employment with the Bank prior to Normal Retirement.
4.3 PLAN ADMINISTRATION RESTRICTIONS. This Plan is intended to comply
with Rule 16b-3 under the Securities Exchange Act of 1934. Notwithstanding any
term to the contrary appearing herein, unless permitted by Rule 16b-3(c)(2)(ii),
subsequent to the establishment of the Plan, neither the Committee nor the Board
shall have the authority to determine the amount and price of securities to be
awarded and/or timing of awards to Outside Directors which terms shall be set
forth in the Plan. To the extent any provision of the Plan or action by Plan
administrators fails to comply with this Section, such provision or action
shall, to the extent permitted by law and deemed advisable by the Board, be
deemed null and void.
4.4 LIMITATION ON LIABILITY. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Awards granted under it. If a member of the Board or the Committee
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of anything done or not done by him in such capacity
under or with respect to the Plan, the Bank shall indemnify such member against
expense (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Bank, the Company and its
Affiliates and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
5. ELIGIBILITY; AWARDS
5.1 ELIGIBILITY. Employees and Outside Directors are eligible to receive
Awards.
5.2 AWARDS TO EMPLOYEES. The Committee may determine which of the
Employees referenced in Section 5.1 will be granted Awards and the number of
shares covered by each Award; provided, however, that in no event shall any
Awards be made that will violate the Plan, the Charter, Bylaws or Plan of
Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock
Issuance Plan of the Bank or any applicable federal or
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<PAGE>
state law or regulation. Shares of Restricted Stock which are awarded by the
Committee shall, on the date of the Award, be registered in the name of the
Recipient and transferred to the Recipient, in accordance with the terms and
conditions established under this Plan. The total number of shares that will be
awarded or reserved for Employees under this Plan shall be 105,000 shares.
In the event Restricted Stock is forfeited for any reason, the Committee,
from time to time, may determine which of the Employees referenced in Section
5.01 will be granted additional Awards to be awarded from forfeited Restricted
Stock. In selecting those Employees to whom Awards will be granted and the
amount of Restricted Stock covered by such Awards, the Committee shall consider
the position and responsibilities of the eligible Employees, the length and
value of their services to the Bank and its Affiliates, the compensation paid to
the Employees and any other factors the Committee may deem relevant, and the
Committee may request the written recommendation of the Chief Executive Officer
and other senior executive officers of the Bank, the Company and its Affiliates.
All allocations by the Committee shall be subject to review, and approval or
rejection, by the Board.
Subject to Sections 6.3 and 6.4, no Restricted Stock shall be earned unless
the Employee maintains Continuous Service until the restrictions lapse.
5.3 AWARDS TO OUTSIDE DIRECTORS. Each Outside Director serving on the
Board of the Bank or the Company on the Effective Date shall be issued an Award
equal to 3,000 shares of Restricted Stock. The total number of shares that will
be awarded or reserved for Outside Directors under this Plan shall be 33,000
shares.
Any person who becomes an Outside Director subsequent to the date of
approval of this Plan by stockholders shall receive an Award of Restricted Stock
equal to 300 shares, subject to availability.
No Restricted Stock shall be earned by an Outside Director unless the
Outside Director maintains Continuous Service with the Bank or the Company until
the restrictions lapse.
5.4 MANNER OF AWARD. As promptly as practicable after a determination is
made pursuant to Sections 5.2 and 5.3 that an Award has been granted, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of shares of Restricted Stock covered by the Award, and the terms upon
which the Restricted Stock subject to the Award may be earned. Upon
notification of an Award of Restricted Stock, the Recipient shall execute and
return to the Bank a restricted stock agreement setting forth the terms and
conditions under which the Recipient shall earn the Restricted Stock (the
"Restricted Stock Agreement), together with a stock power endorsed in blank.
Thereafter, the Recipient's Restricted Stock and stock power shall be deposited
with an escrow agent specified by the Bank (the "Escrow Agent") who shall hold
such Restricted Stock under the terms and conditions set forth in the Restricted
Stock Agreement. Each certificate representing an Award under the Plan shall be
registered in the name of the Recipient.
5.5 TREATMENT OF FORFEITED SHARES. In the event shares of Restricted
Stock are forfeited by a Recipient hereunder, such shares shall be returned to
the Bank and shall be held and accounted for and re-awarded pursuant to the
terms of the Plan.
6. TERMS AND CONDITIONS OF RESTRICTED STOCK
The Committee shall have full and complete authority, subject to the
limitations of the Plan, to grant Awards of Restricted Stock and, in addition to
the terms and conditions contained in paragraphs 6.1 through 6.9 of this Section
6, to provide such other terms and conditions (which need not be identical among
Recipients) in respect of such Awards, and the vesting thereof, as the Committee
shall determine.
6.1 GENERAL RULES. Restricted Stock shall be earned by an Employee at the
rate determined by the Committee at the time of grant of the Award; provided,
however, that no shares shall be earned for any year in which
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the Bank is not meeting all of its fully phased-in capital requirements. Awards
granted to Outside Directors shall be earned by an Outside Director at the rate
of twenty percent (20%) of the aggregate number of shares covered by the Award
per year commencing with the first portion of the award that shall be earned on
the date of grant. Subject to any such other terms and conditions as the
Committee shall provide with respect to awards to Employees, shares of
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Recipient, except as hereinafter provided, during the
Restricted Period. The Committee shall have the authority, in its discretion,
to accelerate the time at which any or all of the restrictions shall lapse with
respect to Awards issued to Employees, or to remove any or all of such
restrictions, whenever it may determine that such action is appropriate by
reason of changes in applicable tax or other laws or other changes in
circumstances occurring after the commencement of such Restricted Period.
6.2 CONTINUOUS SERVICE; FORFEITURE. Except as provided in Sections 6.3
and 6.4 hereof, if an Employee ceases to maintain Continuous Service for any
reason, unless the Committee shall otherwise determine, all shares of Restricted
Stock theretofore awarded to such Employee and which at the time of such
termination of Continuous Service are subject to the restrictions imposed by
Section 6.1 shall upon such termination of Continuous Service be forfeited.
6.3 EXCEPTION FOR TERMINATION DUE TO DEATH, DISABILITY OR NORMAL
RETIREMENT. Notwithstanding the general rule contained in Sections 6.1 and 6.2,
Awards to a Recipient whose employment or service with the Bank, the Company or
an Affiliate terminates due to death, Disability, or Normal Retirement that has
not theretofore been earned, shall be deemed earned as of the Recipient's last
day of employment or service.
6.4 EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL. Notwithstanding
the general rule contained in Sections 6.1 and 6.2, all Restricted Stocks
subject to an Award held by a Recipient whose employment as an Employee or
service as an Outside Director terminates following a Change in Control of the
Bank or the Company shall be deemed earned as of the Recipient's last day of
employment or service.
6.5 REVOCATION FOR CAUSE. Notwithstanding anything herein to the
contrary, if a Recipient is terminated for cause or has engaged in conduct that
would justify termination for cause, the Board may by resolution immediately
revoke, rescind and terminate any Award, or portion thereof, previously awarded
under this Plan, whether or not yet earned, to the extent Restricted Stock has
not been redelivered by the Escrow Agent to the Recipient.
6.6 RESTRICTED STOCK LEGEND. Each certificate representing an Award under
the Plan shall be registered in the name of the Recipient and deposited by the
Recipient, together with a stock power endorsed in blank, with the Escrow Agent
and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the Northwest Savings Bank
and Northwest Bancorp, MHC 1995 Recognition and Retention Plan.
Copies of such Plan are on file in the offices of the Secretary
of Northwest Savings Bank, Second and Liberty Street, Warren,
Pennsylvania 16365-2353.
6.7 PAYMENT OF DIVIDENDS. After an Award has been granted but before such
Award has been earned, the Recipient shall receive any cash dividends or stock
dividends paid with respect to such shares. Unless the Recipient has made an
election under Section 83(b) of the Internal Revenue Code, cash dividends so
paid on shares which have not yet been earned by the Recipient shall be treated
as compensation income to the Recipient when paid.
6.8 VOTING OF RESTRICTED SHARES. After an Award has been granted, the
Recipient as owner of such shares shall have the right to vote such shares.
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6.9 DELIVERY OF EARNED SHARES. At the expiration of the restrictions
imposed by Section 6.1, the Escrow Agent shall redeliver to the Recipient (or
where the relevant provision of Section 6.2 applies in the case of a deceased
Recipient, to his Beneficiary), the certificate(s) deposited with it pursuant to
Section 6.4 and the shares represented by such certificate(s) shall be free of
the restrictions referred to Section 6.1.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding shares subsequent to the
effective date of the Plan by reason of any reorganization (other than the
Reorganization), recapitalization, stock split, combination or exchange of
shares, merger, consolidation or any change in the corporate structure or shares
of the Bank, the maximum aggregate number and class of shares as to which Awards
may be granted under the Plan shall be appropriately adjusted. Any shares of
stock or other securities received, as a result of any of the foregoing, by a
Recipient shall be subject to the same restrictions and the certificate(s) or
other instruments representing or evidencing such shares or securities shall be
legended and deposited with the Bank in the manner provided in Section 6.6
hereof.
8. ASSIGNMENTS AND TRANSFERS
No Award nor any right or interest of a Recipient under the Plan in any
instrument evidencing any Award under the Plan may be assigned, encumbered or
transferred except, in the event of the death of a Recipient, by will or the
laws of descent and distribution.
9. EMPLOYEE RIGHTS UNDER THE PLAN
No Employee shall have a right to be selected as a Recipient nor, having
been so selected, to be selected again as a Recipient and no Employee or other
person shall have any claim or right to be granted an Award under the Plan or
under any other incentive or similar plan of the Bank or any Affiliate. Neither
the Plan nor any action taken thereunder shall be construed as giving any
Employee any right to be retained in the employ of the Bank or any Affiliate.
10. WITHHOLDING TAX
Upon the termination of the Restricted Period with respect to any shares of
Restricted Stock (or at any such earlier time, if any, that an election is made
by the Employee under Section 83(b) of the Code, or any successor provision
thereto, to include the value of such shares in taxable income), the Bank or its
Affiliate, as applicable, shall have the right to require the Employee or other
person receiving such shares to pay the Bank or Affiliate the amount of any
taxes which the Bank or Affiliate is required to withhold with respect to such
shares, or, in lieu thereof, to retain or sell without notice, a sufficient
number of shares held by it to cover the amount required to be withheld. The
Bank or Affiliate shall have the right to deduct from all dividends paid with
respect to shares of Restricted Stock the amount of any taxes which the Bank or
Affiliate is required to withhold with respect to such dividend payments.
11. TREATMENT OF RESTRICTED STOCK IN THE EVENT OF CONVERSION TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction, any Restricted Stock shall be exchanged into shares of Common Stock
of the Stock Holding Company, provided, however, that if for any reason such
shares are not to be exchanged, the Stock Holding Company shall, simultaneously
with the closing of the Conversion Transaction, purchase Restricted Stock for
cash equal to the fair market value of such Restricted Stock or Shares. Any
exchange of shares or cash payment for shares shall be subject to applicable
federal and state regulations and, if necessary, subject to the approval of the
appropriate Regulatory authorities.
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12. AMENDMENT OR TERMINATION
The Board of the Bank or the Company may amend, suspend or terminate the
Plan or any portion thereof at any time, but (except as provided in Section 6
hereof) no amendment shall be made without approval of the stockholders of the
Bank which shall (i) materially increase the aggregate number of shares with
respect to which Awards may be made under the plan, (ii) materially increase the
aggregate number of shares which may be subject to Awards to Recipients who are
not Employees or (iii) change the class of persons eligible to participate in
the Plan; provided, however, that no such amendment, suspension or termination
shall impair the rights of any Recipient, without his consent, in any Award
theretofore made pursuant to the Plan.
13. GOVERNING LAW
The Plan shall be governed by the laws of the Commonwealth of Pennsylvania.
14. TERM OF PLAN
The Plan shall become effective upon its ratification by the Board of the
Bank and the Company, following the approval of the Plan by stockholders. It
shall continue in effect until the earlier of (i) fifteen years from the
Effective Date, unless sooner terminated under Section 12 hereof, or (ii) the
date upon which all shares of Common Stock available for award hereunder, have
vested in the Recipients of such Awards.
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EXHIBIT NO. 21
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SUBSIDIARIES OF THE REGISTRANT
------------------------------
Following the Reorganization, Northwest Savings Bank will be wholly-owned
by the Registrant. The following is a list of subsidiaries of Northwest Savings
Bank:
Northwest Financial Services, Inc., a Pennsylvania corporation
Great Northwest Corporation, a Pennsylvania corporation
Northwest Consumer Discount Company, Inc., a Pennsylvania corporation which
operates under this name in four locations in Western and Central Pennsylvania
and also operates:
d/b/a Northwest Finance Company in Jamestown, NY, a New York Corporation
d/b/a Butler Consumer Discount Company in eight locations in Southwestern
PA
d/b/a Preis Consumer Discount Company in two locations in Central PA
d/b/a Uniontown Financial Services in Uniontown, PA
d/b/a Erie Consumer Discount in Erie, PA
d/b/a Franklin Consumer Discount in Franklin, PA
d/b/a Corry Consumer Discount in Corry, PA
d/b/a Community Consumer Discount in Warren, PA
d/b/a Thrift Financial Services in Indiana, PA
d/b/a Clearfield Consumer Discount in Clearfield, PA
d/b/a Titusville Consumer Discount in Clearfield, PA
d/b/a Lewistown Consumer Discount in Lewistown, PA
d/b/a Friendly Loan Consumer Discount in Jeannette, PA
d/b/a Zelie Consumer Discount in Zelienople, PA
d/b/a Johnstown Consumer Discount in Johnstown, PA
d/b/a Washington Consumer Discount in Washington, PA
d/b/a St. Mary's Consumer Discount in St. Marys, PA
Northwest Mortgage Corporation, a Delaware corporation
Northwest Capital Group Inc., a Pennsylvania corporation
Rid-Fed Inc., a Pennsylvania corporation
Power Funding Group, Inc., a New York corporation
<PAGE>
Exhibit No. 24.2
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK APPEARS HERE]
Independent Auditors' Consent
-----------------------------
The Board of Directors
Northwest Savings Bank:
We consent to the inclusion in this Registration Statement on Form S-4 of
Northwest Bancorp, Inc. of our report dated August 26, 1996, with respect to the
consolidated financial statements of Northwest Savings Bank and subsidiaries as
of June 30, 1996 and 1995, and for each of the years in the three-year period
ended June 30, 1996, and to the reference to our firm under the heading
"Experts" in the prospectus/information statement.
Our report refers to a change in the method of accounting for income taxes and
accounting for certain investments in debt and equity securities as of July 1,
1993, and July 1, 1994, respectively.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
July 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,279
<INT-BEARING-DEPOSITS> 26,557
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 246,339
<INVESTMENTS-CARRYING> 156,650
<INVESTMENTS-MARKET> 155,049
<LOANS> 1,487,381
<ALLOWANCE> 13,391
<TOTAL-ASSETS> 1,997,563
<DEPOSITS> 1,622,860
<SHORT-TERM> 154,158
<LIABILITIES-OTHER> 26,447
<LONG-TERM> 0
0
0
<COMMON> 2,338
<OTHER-SE> 191,760
<TOTAL-LIABILITIES-AND-EQUITY> 1,997,863
<INTEREST-LOAN> 93,351
<INTEREST-INVEST> 19,034
<INTEREST-OTHER> 361
<INTEREST-TOTAL> 112,746
<INTEREST-DEPOSIT> 53,763
<INTEREST-EXPENSE> 59,931
<INTEREST-INCOME-NET> 52,815
<LOAN-LOSSES> 1,185
<SECURITIES-GAINS> 901
<EXPENSE-OTHER> 42,308
<INCOME-PRETAX> 14,631
<INCOME-PRE-EXTRAORDINARY> 14,631
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,628
<EPS-PRIMARY> .37
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.16
<LOANS-NON> 10,353
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,848
<ALLOWANCE-OPEN> 13,130
<CHARGE-OFFS> 1,359
<RECOVERIES> 231
<ALLOWANCE-CLOSE> 13,391
<ALLOWANCE-DOMESTIC> 13,391
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT NO. 99.1
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
1776 F STREET, N.W.
WASHINGTON, D.C. 20429
FORM F-2 ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 AND ANNUAL DISCLOSURE STATEMENT UNDER TITLE 12,
CODE OF FEDERAL REGULATIONS, SECTION 350, FOR THE FISCAL YEAR ENDED
JUNE 30, 1996
FDIC CERTIFICATE NUMBER 28178-6
-------
NORTHWEST SAVINGS BANK
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2790930
-----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
LIBERTY AND SECOND STREETS, WARREN, PENNSYLVANIA 16365
-----------------------------------------------------------------
(Address of Principal Office) Zip Code
(814) 726-2140
--------------------------------------------
(Bank's telephone number including area code)
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 if disclosure of delinquent filers pursuant to
Item 10 is not contained herein, and will not be contained, to the best of the
Bank's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form F-2 or any amendment to this Form F-2.
[_].
Indicate by check mark whether the Bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Bank was required
to file such reports) and (2) has been subject to such requirements for the past
90 days. YES X NO __.
--
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, including officers and directors and the Registrant's tax
qualified employee benefit plans but excluding shares held by Northwest Bancorp,
M.H.C., computed by reference to the last sale price of the Registrant's common
stock on June 30, 1996, was approximately $69.7 million.
As of June 30, 1996, there were issued and outstanding 7,176,000
shares of the Registrant's Common Stock.
This report has not been reviewed or confirmed for accuracy or
reliance by the Federal Deposit Insurance Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Bank's Annual Report to Stockholders for
the fiscal year ended June 30, 1996 (Parts II and III).
2. Portions of the Bank's Definitive Proxy Statement for the 1996
Annual Meeting of Stockholders are incorporated by reference into Parts I and
III of this Form F-2.
<PAGE>
PART I
------
ITEM 1. BUSINESS
- -----------------
GENERAL. 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 its subsidiaries, consumer finance
services. The Bank's mutual savings bank predecessor was founded in 1896 as a
state-chartered mutual savings and loan association, and in September 1993
converted to a state-chartered mutual savings bank. The Bank was formed on
November 2, 1994, as a result of the reorganization (the "Reorganization") of
the Bank's mutual predecessor into a mutual holding company structure. As a
result of the Reorganization, the Bank's mutual predecessor reorganized from a
Pennsylvania-chartered mutual savings bank into Northwest Bancorp, MHC, a
Pennsylvania-chartered mutual holding company (the "Holding Company"); (i)
formed the Bank as a new Pennsylvania-chartered capital stock savings bank
subsidiary; and (ii) transferred substantially all of its assets (except for
$1.0 million) and liabilities to the Bank. As part of the Reorganization, the
liquidation rights of the depositors of the Bank became liquidation rights in
the Holding Company. On November 4, 1994, 3,450,000 shares of the Bank's common
stock (the "Common Stock") representing 29.9% of the issued and outstanding
shares of the Common Stock were sold to eligible depositors of the Bank and the
Bank's tax-qualified employee stock benefit plans at a price of $20.00 per share
(the "Offering"). As part of the Reorganization and stock issuance, the Holding
Company received 8,100,000 shares of the Bank's common stock representing 70.1%
of the issued and outstanding shares. Net proceeds from the Offering totalled
approximately $67 million. On May 23, 1996, the Bank completed a two-for-one
stock split in the form of a stock dividend. Total shares outstanding at June
30, 1996 were 23,376,000 with 16,200,000 shares owned by the Holding Company.
At June 30, 1996, the Bank had total assets of $1.878 billion, total
deposits of $1.450 billion and shareholders equity of $190.7 million. As of
June 30, 1996, the Bank operated 54 community banking offices throughout its
market area in northwest, southwest and central Pennsylvania. The Bank and its
wholly owned subsidiaries also operate two mortgage lending offices in
Pennsylvania, four in New York and two in South Carolina, and 28 consumer
lending offices throughout Pennsylvania and one consumer lending office in New
York. The Bank has focused its lending activities primarily on the origination
of loans secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 1996, $1.034 billion, or 72.6%, of the Bank's total
loans receivable were collateralized by one- to four-family residential real
estate. The Bank, directly or through its subsidiaries, also emphasizes the
origination of consumer loans, including home equity, second mortgage, education
and other consumer loans. At June 30, 1996, such loans totalled $252.1 million,
or 17.7%, of the Bank's total loans receivable. To a lesser extent, the Bank
also originates multifamily residential and commercial real estate loans, which
totalled $71.7 million, or 5.0%, of the Bank's total loans receivable at June
30, 1996, and commercial business loans, which totalled $67.0 million, or 4.7%,
of the Bank's total loans receivable.
The Bank also invests in mortgage-backed securities issued or guaranteed by
the United States Government or agencies thereof, which totalled $291.4 million,
or 15.5%, of total assets at June 30, 1996. As part of the Bank's current
strategy of maintaining high levels of liquidity, the Bank invests a portion of
its assets in securities issued by the United States Government, cash and cash
equivalents including deposits in other financial institutions. These
investments totalled $150.4 million, or 8.00%, of total assets at June 30, 1996.
The Bank's principal sources of funds are deposits, borrowed funds and the
principal and interest payments on loans. The principal source of income is
interest received from loans, mortgage-backed securities and investment
securities. The Bank's principal expenses are the interest paid on deposits and
the cost of employee compensation and benefits.
The Bank's principal executive office is located at Liberty and Second
Streets, Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Warren,
Pennsylvania which is located in the northwestern region of the state, and the
Bank has the highest concentration of deposits and loans in the portion of its
office network located in northwestern Pennsylvania. Over the past eight years
the Bank has expanded, primarily through acquisition, into the southwestern and
central regions of Pennsylvania. As of June 30, 1996, the Bank operated in
Pennsylvania 54 community banking offices, two mortgage lending offices
2
<PAGE>
and twenty-eight consumer finance offices, located in the following counties:
Allegheny, Armstrong, Bedford, Butler, Centre, Chester, Clarion, Clearfield,
Crawford, Cumberland, Dauphin, Elk, Erie, Fayette, Indiana, Lancaster, Lebanon,
Luzerne, McKean, Mifflin, Schuylkill, Venango, Warren, and Westmoreland. The
Bank and its subsidiaries also operate four mortgage lending offices and one
consumer finance office in western New York and two mortgage lending offices in
South Carolina. The mortgage lending offices are operated to provide an
additional source of mortgage loans as well as to provide additional geographic
diversity to the Bank's mortgage loan portfolio. The consumer finance offices
are operated through Northwest Consumer Discount Company, a subsidiary of the
Bank. Northwest Consumer Discount Company provides a source of short-term
consumer loans, which improve the Bank's earnings and reduce its sensitivity to
interest rate risk.
The Bank has experienced significant geographic and asset expansion during
the past 20 years through internal growth as well as mergers and acquisitions of
savings institutions in existing and nearby market areas. This expansion has
reflected the Bank's strategy of growing in order to be more competitive and to
offer a full range of customer services. In 1984, the Bank merged with Mutual
Savings and Loan Association, which was headquartered in Erie, Pennsylvania, and
had assets of approximately $241 million at the time of the merger. As a result
of the merger, the Bank's total assets increased to approximately $530 million.
In 1985 the Bank acquired Bakerstown Savings and Loan Association, which had
assets of approximately $26 million and also acquired a branch office of another
financial institution located in Clarion, Pennsylvania. Branch offices with
deposits of $58 million located in Erie, Meadville and Warren were purchased in
1986. Butler Consumer Discount Company, with eight consumer finance offices and
assets of approximately $19 million, also was purchased in 1986.
As part of its efforts to expand its market presence outside of
northwestern Pennsylvania, the Bank started a de novo office in Hershey,
Pennsylvania in 1988. In March of 1990 the Bank acquired Horizon Savings
Association, which had assets of approximately $34 million and offices in
Lewistown and State College. In June 1990 the Bank acquired Steitz Savings and
Loan with assets of approximately $58 million and with four offices in
communities surrounding Lebanon. In 1991 and 1992 the Bank continued to expand
by opening additional offices in Warren and Bradford, Pennsylvania. In March
1992 the Bank acquired American Federal Savings and Loan Association with assets
of $119 million and five offices in northwestern Pennsylvania. In September
1993 the Bank purchased three full-service office locations in the greater Erie
area with deposits of $14 million, and in June 1995 the Bank purchased four
full-service offices in York and Lancaster counties with deposits of $22
million. During the fiscal year ended June 30, 1995, the Bank purchased two
consumer discount companies in Jeannette and Zelienople, Pennsylvania, with
loans of approximately $13.0 million and purchased a mortgage banking company
headquartered in Buffalo, New York, with loan production facilities in Buffalo,
Rochester, and Syracuse. During the fiscal year ended June 30, 1996, the bank
acquired two financial institutions: First Federal Savings Bank of Kane with
assets of $45.6 million and offices in Kane and Clarion, Pennsylvania and First
National Bank of Centre Hall with assets of $39.3 million and offices in Centre
Hall and State College, Pennsylvania. The Bank also acquired a full-service
retail facility in Pottsville, Pennsylvania, with deposits of $23.8 million from
another financial institution. In June 1996, the Bank announced that it had
entered into a definitive agreement to acquire Bridgeville Savings Bank which
has one office in Bridgeville, Pennsylvania and had assets of $55.7 million at
March 31, 1996.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Bank 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
Bank 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 Bank has sought to make its
inter est-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- and medium-term fixed-rate consumer
loans. The Bank also purchases mortgage-backed securities that generally have
adjustable interest rates. At June 30, 1996, approximately $209.4 million, or
14.7%, of the Bank's total loan portfolio, and $225.1 million, or 77.2%, of the
Bank's mortgage-backed securities portfolio, consisted of loans or securities
with adjustable interest rates. Because the Bank 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 Bank to resell them in the
secondary mortgage market for purposes of managing interest-rate risk and
liquidity. The Bank, through its mortgage banking subsidiaries, 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
3
<PAGE>
residential mortgage loans with maturities of 15 years or less. The Bank is
primarily a portfolio lender and at any one time the Bank holds only a nominal
amount of loans that may be sold. The Bank retains servicing on the mortgage
loans it sells and realizes monthly service fee income. The Bank retains in its
portfolio all consumer loans, multifamily residential and commercial real estate
loans, and commercial business loans that it originates.
4
<PAGE>
ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating to
the composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------
1996 1995 1994 1993
----------- -------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount
-------- ------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family (1)............. $1,034,242 72.6% $ 880,110 73.6% $ 837,896 75.7% $ 764,522
multifamily and commercial.......... 71,658 5.0 53,022 4.4 65,539 5.9 85,240
---------- ------- ---------- ------ ---------- ------ ----------
Total real estate loans........... 1,105,900 77.6 933,132 78.0 903,435 81.6 849,762
Consumer:
home equity and home
improvement....................... 38,146 2.7 40,547 3.4 41,053 3.7 42,009
education loans..................... 47,842 3.4 39,315 3.3 31,827 2.9 26,000
loans on savings accounts 6,543 .5 5,930 .5 5,313 .5 5,894
other (2)........................... 159,532 11.2 119,611 10.0 103,945 9.4 91,595
---------- ------- ---------- ------ ---------- ------ ----------
Total consumer loans (3).......... 252,063 17.7 205,403 17.2 182,138 16.5 165,498
Commercial business................... 67,045 4.7 56,788 4.8 20,945 1.9 17,127
---------- ------- ---------- ------ ---------- ------ ----------
Total loans receivable, gross... 1,425,008 100.0% 1,195,323 100.0% 1,106,518 100.0% 1,032,387
======= ====== ======
Deferred loan fees.................... (3,495) (3,772) (4,184) (4,473)
Undisbursed loan proceeds............. (33,428) (14,982) (28,563) (17,654)
Allowance for loan losses
(real estate loans)................. (9,662) (8,102) (8,340) (8,537)
Allowance for loan losses
(other loans)....................... (3,468) (3,732) (2,898) (2,462)
---------- ---------- ---------- ----------
Total loans receivable, net..... $1,374,955 $1,164,735 $1,062,333 $ 999,261
========== =========== ========== ==========
<CAPTION>
At June 30,
------------------------------------
1992
---------------
Percent Amount Percent
--------- -------- ---------
<S> <C> <C> <C>
Real estate:
One- to four-family (1)............. 74.1% $ 692,803 75.1%
multifamily and commercial.......... 8.2 63,113 6.8
------ ---------- ------
Total real estate loans........... 82.3 755,916 81.9
Consumer:
home equity and home
improvement....................... 4.1 37,210 4.0
education loans..................... 2.5 22,489 2.5
loans on savings accounts........... 0.5 6,700 0.7
other (2)........................... 8.9 85,592 9.3
------ ---------- ------
Total consumer loans (3).......... 16.0 151,991 16.5
Commercial business................... 1.7 15,216 1.6
------ ---------- ------
Total loans receivable, gross... 100.0% 923,123 100.0%
====== ======
Deferred loan fees.................... (3,724)
Undisbursed loan proceeds............. (13,250)
Allowance for loan losses
(real estate loans)................. (8,054)
Allowance for loan losses
(other loans)....................... (2,204)
----------
Total loans receivable, net..... $ 895,891
==========
</TABLE>
__________________________________________
(1) Includes $40.1 million of loans originated and held by the Bank's
subsidiaries at June 30, 1996.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $63.7 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 1996.
FIXED- AND ADJUSTABLE-RATE LOANS. Set forth below are selected data
regarding the dollar amounts of the Bank's total loans represented by fixed- and
adjustable-rate loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------- ---------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount
-------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Adjustable................. $ 94,426 6.6% $ 111,184 9.3% $ 104,717 9.5% $ 134,908
Fixed...................... 1,011,474 71.0 821,948 68.8 798,718 72.1 714,854
---------- ------ ---------- ------ ---------- ------ ----------
Total mortgage loans..... 1,105,900 77.6 933,132 78.1 903,435 81.6 849,762
Other loans:
Adjustable................. 114,943 8.1 117,323 9.8 72,880 6.6 68,009
Fixed...................... 204,165 14.3 144,868 12.1 130,203 11.8 114,616
---------- ------ ---------- ------ ---------- ------ ----------
Total other loans........ 319,108 22.4 262,191 21.9 203,083 18.4 182,625
---------- ------ ---------- ------ ---------- ------ ----------
$1,425,008 100.0% $1,195,323 100.0% $1,106,518 100.0% $1,032,387
========== ====== ========== ====== ========== ====== ==========
<CAPTION>
At June 30,
------------------------------------
1992
----------------
Percent Amount Percent
--------- -------- ---------
<S> <C> <C> <C>
Mortgage loans:
Adjustable................. 13.1% $ 131,642 14.3%
Fixed...................... 69.2 624,274 67.6
------ ---------- ------
Total mortgage loans..... 82.3 755,916 81.9
Other loans:
Adjustable................. 6.6 59,699 6.5
Fixed...................... 11.1 107,508 11.6
------ ---------- ------
Total other loans........ 17.7 167,207 18.1
------ ---------- ------
100.0% $ 923,123 100.0%
====== ========== ======
</TABLE>
5
<PAGE>
LOAN MATURITY AND REPRICING SCHEDULE. The following table sets forth the
maturity or period of repricing of the Bank's loan portfolio at June 30, 1996.
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.
<TABLE>
<CAPTION>
Beyond
Within 1-3 3-5 5-10 10-20 20
1 Year Years Years Years Years Years Total
-------- ------- ------- -------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential....... $ 87,466 $32,939 $18,184 $183,838 $376,925 $334,890 $1,034,242
Multifamily and commercial............ 3,732 10,985 1,378 6,002 49,561 - 71,658
Consumer loans......................... 112,356 51,660 50,888 27,746 9,413 - 252,063
Commercial business loans.............. 38,298 2,108 2,755 5,161 18,723 - 67,045
-------- ------- ------- -------- -------- -------- ----------
Total loans.......................... $241,852 $97,692 $73,205 $222,747 $454,622 $334,890 $1,425,008
======== ======= ======= ======== ======== ======== ==========
</TABLE>
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 1996, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 1997. Adjustable- and floating-rate loans are included in the
period in which they are contractually due.
<TABLE>
<CAPTION>
Fixed Adjustable Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential.................................. $ 929,623 $ 89,677 $1,019,300
Multifamily and commercial....................................... 66,199 2,536 68,735
Consumer........................................................... 137,990 85,988 223,978
Commercial......................................................... 27,487 28,955 56,442
---------- -------- ----------
Total.......................................................... $1,161,299 $207,156 $1,368,455
========== ======== ==========
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of the Bank and its subsidiaries consists of the origination for
retention in the Bank's portfolio of owner-occupied one- to four-family
residential mortgage loans secured by properties located in the Bank's market
area. At June 30, 1996, $1.034 billion, or 72.6%, of the Bank's total loan
portfolio consisted of one- to four-family residential mortgage loans, including
residential construction loans.
The Bank currently offers one- to four-family residential mortgage loans
with terms typically ranging from 10 to 30 years, with either adjustable or
fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Bank's interest rate gap position and loan products
offered by the Bank'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 Bank's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Bank 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 Bank's current liquidity and interest
rate sensitivity position. The Bank historically has been primarily a portfolio
lender, and at any one time the Bank has held only a nominal amount of loans
that may be sold. The Bank'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 Bank is more likely to retain fixed-rate loans if its interest
rate sensitivity is within acceptable limits. The Bank'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 Bank currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one and three years, based on changes in a
designated market index. The Bank 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
6
<PAGE>
the loan is originated. One- to four-family residential adjustable-rate mortgage
loans totalled $89.7 million, or 6.3% of the Bank's total loan portfolio at June
30, 1996.
The primary purpose of offering adjustable-rate mortgage loans is to make
the Bank'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 Bank 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 Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank 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 Bank's fixed-rate mortgage loan portfolio, and the
Bank 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 generally performed by
the Bank's in-house appraisal staff. Such regulations permit a maximum loan-to-
value ratio of 90% for residential property and 80% for all other real estate
loans. The Bank'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 Bank 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 Bank generally requires the borrower to
obtain private mortgage insurance on the entire amount of the loan. The Bank
requires fire and casualty insurance, as well as a title guaranty regarding good
title, on all properties securing real estate loans made by the Bank.
In the past, the Bank purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
1996, the Bank's portfolio of loans serviced by others totalled $12.3 million.
The Bank currently has no plans to enter into loan participations.
Included in the Bank's $1.034 billion of one- to four-family residential
real estate loans are $32.2 million, or 4.1%, of the Bank's total loan
portfolio, of construction loans and land loans. The Bank offers fixed-and
adjustable-rate residential construction loans primarily for the construction of
owner-occupied one- to four-family residences in the Bank'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 either a fixed-rate or an
adjustable interest rate that adjusts monthly and convert into either a fixed-
rate or an adjustable-rate mortgage loan at the end of the construction period.
Upon completion of the construction, the permanent loan is priced to reflect a
rate no lower than current interest rates on one- to four-family mortgage loans.
Advances are made as construction is completed. In addition, the Bank 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 5 years. The maximum loan-to-value ratio for the Bank's land loans is 75% of
the appraised value, and the maximum loan-to-value ratio for the Bank's
construction loans is 80% 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. Loans
collateralized by multifamily residential and commercial real estate constituted
approximately $71.7 million, or 5.0%, of the Bank's total loan portfolio at June
30, 1996. The Bank's multifamily residential real estate loans are secured by
multifamily residences, such as rental properties. The Bank's commercial real
estate loans are secured by nonresidential properties such as hotels, church
property, and retail establishments. At June 30, 1996, a significant portion of
the Bank's multifamily residential and commercial real estate loans were secured
by properties located within the Bank's market area. The Bank's largest
multifamily residential real estate loan relationship at June 30, 1996, had a
principal balance of $4.3 million, and was collateralized by a limited-care
living facility in Warren County, Pennsylvania. The Bank's largest
7
<PAGE>
commercial real estate loan at June 30, 1996, had a principal balance of $4.4
million and was collateralized by a nursing home and personal care facility in
Westmoreland County, Pennsylvania. Multifamily residential and commercial real
estate loans are offered with both adjustable interest rates and fixed interest
rates. The terms of each multifamily residential and commercial real estate
loan are negotiated on a case-by-case basis. The Bank generally makes
multifamily residential and commercial real estate loans up to 70% 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. As of June 30, 1996, consumer loans totalled $252.1
million, or 17.7%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are adjustable-rate home equity lines of
credit and variable-rate education loans, and fixed-rate consumer loans such as
second mortgage 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 Bank'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 75% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 1996, the
disbursed portion of home equity lines of credit totalled $38.1 million, or
15.1%, of consumer loans, with $49.3 million remaining undisbursed.
The underwriting standards employed by the Bank 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 Bank 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 Bank 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 Bank currently offers commercial business
loans to existing customers to finance various activities in the Bank's market
area, some of which are secured in part by additional real estate collateral. At
June 30, 1996, the Bank had 623 commercial business loans outstanding with an
aggregate balance of $67.0 million, or 4.7% of the Bank's total loan portfolio.
As of June 30, 1996, the average commercial business loan balance was
approximately $108,000. On June 11, 1995, the Bank purchased a portfolio of 26
loans, with an aggregate balance of $35.0 million, made to the employee stock
ownership plans ("ESOPs") of 25 different financial institutions and one
investment banking company. The portfolio was purchased from the Superintendent
of Banking for the State of New York, who was acting as the receiver for a New
York-chartered trust company. The interest rates on these loans adjust each
quarter based upon changes to either the prime rate or federal funds rate. The
loans are collateralized by the stock of the financial institution which formed
the ESOP, and in some cases have additional collateral in the form of cash
deposits. The largest ESOP loan had a balance as of June 30, 1996 of $6.1
million and the borrower is the ESOP of a bank in New Jersey. The average
balance of the loans in the portfolio was approximately $1.2 million with only
three loans having a balance in excess of $2.0 million.
Other than the aforementioned ESOP loans, the largest commercial business
loan had a principal balance of $3.7 million, was to two individuals from
Reading, Pennsylvania and was secured by commercial real estate and
8
<PAGE>
marketable securities. Commercial business loans are generally offered with
adjustable interest rates and with terms of up to 15 years.
Underwriting standards employed by the Bank 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 Bank 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, and walk-in
customers. All of the Bank's loan originators, except the originators for the
Bank's New York-based mortgage banking subsidiary, are salaried employees, and
the Bank does not pay commissions in connection with loan originations. The
loan originators employed by the Bank's New York-based mortgage banking
subsidiary are paid a commission based upon the loans they originate. Upon
receiving a loan application, the Bank 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 Bank appraises the real
estate intended to secure the proposed loan. A loan processor in the Bank's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. The Bank has a formal loan policy which
assigns lending limits to the Bank's various loan officers. Also, the Bank has
a Senior Loan Committee which meets as needed to review and verify that the
assigned lending limits are being followed and to monitor the Bank's lending
policies and the Bank's loan activity. The Senior Loan Committee also has
lending authority as designated in the Bank's loan policy which is approved by
the Board of Trustees. Loans exceeding the limits established for the Senior
Loan Committee must be approved by the Executive Committee of the Board of
Trustees or by the entire Board of Trustees. The Bank's policy is to make no
loans either individually or in the aggregate to one entity in excess of $7.5
million. 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 Bank, flood
insurance may be required. After the loan is approved, a loan commitment letter
is promptly issued to the borrower. At June 30, 1996, the Bank had commitments
to originate $76.3 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.
9
<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the Bank's
originations of loans for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net, at beginning of period.................... $1,162,373 $1,059,643 $ 999,261
Originations:
Real estate loans.............................................. 351,146 180,503 234,450
Consumer and commercial business loans......................... 213,234 124,471 97,488
---------- ---------- ----------
Total loan originations.................................... 564,380 304,974 331,938
Principal repayments:
Real estate loans.............................................. (144,680) (116,280) (158,992)
Consumer and commercial business loans......................... (171,894) (113,451) (89,813)
---------- ---------- ----------
Total repayments............................................. (316,574) (229,731) (248,805)
Loan purchases including acquisitions............................ 65,910 49,454 --
Loan sales....................................................... (99,062) (19,956) (20,435)
Transfer to REO.................................................. (2,072) (2,011) (2,316)
---------- ---------- ----------
Loans receivable, net, at end of period.................. $1,374,955 $1,162,373 $1,059,643
========== ========== ==========
</TABLE>
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's portfolio, Statement of
Financial Accounting Standards No. 91 requires that the Bank 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, 1996, the Bank had $3.5 million of 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 Bank 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 REO
operations. The Bank recognized fees and service charges of $2.0 million, $1.7
million, and $1.6 million for the fiscal years ended June 30, 1996, 1995 and
1994, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). At June 30, 1996, the largest
aggregate amount loaned by the Bank to one borrower totalled $6.1 million and
was made to the ESOP of a financial institution located in New Jersey. The loan
is secured by the undistributed shares of the common stock of the financial
institution that are owned by the ESOP. The Bank's second largest lending
relationship totalled $4.4 million, and was secured by a nursing home and
personal care facility in Westmoreland County, Pennsylvania. The Bank's third
largest lending relationship totalled $4.3 million and was secured by a limited
care apartment facility in Warren County, Pennsylvania. The Bank's fourth
largest lending relationship totalled $3.9 million and was made to a builder and
real estate developer in Erie, Pennsylvania and was secured by residential
properties and land. The Bank's fifth largest lending relationship totalled $3.7
million and was made to two individuals in Reading, Pennsylvania and was secured
by commercial real estate and marketable securities.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. The Bank'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
10
<PAGE>
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 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. At June 30, 1996, the Bank had nonperforming loans of $9.5
million, and a ratio of nonperforming loans to net loans receivable of .69%.
Real estate acquired by the Bank 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
provisions, the difference is charged against the allowance for loan losses.
Any subsequent write-down of REO is charged against earnings. At June 30, 1996,
the Bank had approximately $5.8 million of property acquired as the result of
foreclosure, and classified as REO. At June 30, 1996, the Bank had non-
performing assets of $15.3 million and a ratio of nonperforming assets to total
assets of .81%.
11
<PAGE>
LOANS PAST DUE AND NONPERFORMING ASSETS. The following table sets forth
information regarding the Bank'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 Bank fully reserves all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------- ------- ------- -------
Number Balance
------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 30 days to 59 days:
One- to four-family residential loans..... 98 $ 3,031 $ 2,140 $ 4,354 $ 3,610 $ 5,187
Multifamily and commercial loans.......... 3 423 281 -- 240 652
Consumer loans............................ 628 2,178 1,135 1,111 922 1,304
Commercial business loans................. 1 240 -- 76 -- --
------ ------- ------- ------- ------- -------
Total loans past due
30 days to 59 days.................. 730 5,872 3,556 $ 5,541 $ 4,772 $ 7,143
------ ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans..... 37 1,153 1,165 1,065 2,317 1,696
Multifamily and commercial loans.......... 1 21 139 -- -- 257
Consumer loans............................ 386 1,143 443 398 401 449
Commercial business loans................. 1 148 45 4 -- 2
------ ------- ------- ------- ------- -------
Total loans past due 60 days
to 89 days......................... 425 2,465 1,792 1,467 2,718 2,404
------ ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans..... 108 4,913 6,473 6,432 7,947 7,752
Multifamily and commercial loans.......... 5 2,704 3,262 6,797 8,149 10,856
Consumer loans............................ 197 772 539 652 934 1,675
Commercial business loans................. 7 1,092 150 273 108 120
------ ------- ------- ------- ------- -------
Total loans past due 90 days or more.. 317 9,481 10,424 14,154 17,138 20,403
------ ------- ------- ------- ------- -------
Total loans 30 days or more past due.......... 1,472 17,818 15,772 $21,162 $24,628 $29,950
====== ======= ======= ======= ======= =======
Total loans 90 days or more past due (1)...... $ 317 $ 9,481 $10,424 $14,154 $17,138 $20,403
Total REO..................................... 53 5,771 5,895 7,701 14,100 14,315
------ ------- ------- ------- ------- -------
Total loans 90 days or more past due
and REO.................................... $ 370 $15,252 $16,319 $21,855 $31,238 $34,718
====== ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable...................... .69% .89% 1.33% 1.72% 2.28%
Total loans 90 days or more past due
and REO to total assets................... .81% 1.03% 1.53% 2.42% 2.85%
</TABLE>
____________________________________
(1) The Bank classifies as nonperforming all loans 90 days or more delinquent.
During the fiscal year ended June 30, 1996, gross interest income of
approximately $607,000 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 periods
except for $276,000 of cash interest payments received for the Bank's largest
non-performing loan.
The following summarizes the Bank's nonperforming assets with carrying
values exceeding $1.0 million at June 30, 1996:
The Bank's largest nonperforming asset at June 30, 1996, consisted of a
loan collateralized by a recreational facility and surrounding undeveloped land
located in St. George, Utah with a carrying value of $2.2 million. The original
loans on these properties were originated from 1985 to 1988 and were to be
repaid from the sale of existing
12
<PAGE>
condominiums and the construction of additional units. The Bank classified
these loans as in-substance foreclosures in 1990 after conducting a review of
the collateral and financial condition of the borrower and concluding that the
borrower had insufficient funds to satisfy the terms of the existing notes.
Effective July 1, 1995, the Bank adopted SFAS 114 and, as a result, the loans
were no longer considered in-substance foreclosures and were reported as loans.
During the fiscal year ended June 30, 1996, the borrower made payments of
$480,000 to the Bank. The Bank applied $204,000 of these payments to the loans'
principal balance and $276,000 was recognized as interest income. The borrower
continues to operate the recreational facility and the Bank is working with the
borrower toward an acceptable disposition of this asset. Market conditions and
cash flow have improved considerably and it is anticipated that during the next
fiscal year the debt will be restructured and regular payments will be made. In
September 1993 the Bank granted, to a borrower unrelated to the borrower on the
previously described delinquent loans, a $2.0 million loan secured by water
rights and undeveloped land adjacent to the recreational facility and
surrounding undeveloped land. This loan was current as of June 30, 1996.
Although the Bank has done little lending outside of its market area over the
past few years, the loan was made in 1993 primarily because the Bank was
familiar with the area and had previously experienced a favorable lending
relationship with the borrower. Also, management anticipates that the
construction of a golf course and development on this land will enhance the
value of the Bank's other collateral.
The Bank's second largest nonperforming asset at June 30, 1996, consisted
of an apartment complex and adjacent vacant land in New York State located
approximately 25 miles from the Bank's corporate headquarters. The loan on this
property was originated in 1978, and the Bank foreclosed on the property in
1987. The asset is held for sale and had a carrying value of $1.4 million as of
June 30, 1996.
The Bank's third largest nonperforming asset at June 30, 1996 consisted of
a strip plaza with a carrying value of $750,000. The loan on the property was
originated in 1987. The asset was sold in August 1996 for $825,000 with the Bank
providing financing in the amount of $625,000.
CLASSIFICATION OF ASSETS. The Bank'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" and of such little value 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, 1996, the Bank had three loans, with an
aggregate principal balance of $2.4 million, designated as special mention.
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to establish general valuation allowances or "loss
reserves" in an amount deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a savings bank
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings bank's determination as to
the classification of its assets and the amount of its valuation allowance is
subject to review by its regulatory agencies, which can order the establishment
of additional general or specific loss allowances. The Bank regularly reviews
its asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. The Bank's largest classified assets
are also the Bank's largest nonperforming assets and are discussed above.
13
<PAGE>
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Substandard assets........................ $19,594 $20,344 $21,373
Doubtful assets........................... 95 95 --
Loss assets............................... -- -- --
------- ------- -------
Total classified assets.................. $19,689 $20,439 $21,373
======= ======= =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and current economic conditions. Such evaluation,
which includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters, the estimated net realizable
value or the fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and valuation of foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgment about information available to them at the time of their
examination.
Effective December 21, 1993, the FDIC, in conjunction with the Office of
the Comptroller of the Currency, the OTS, and the FRB, issued an Interagency
Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes previous FDIC
guidance, addresses (i) the responsibilities of management for the assessment
and establishment of an adequate allowance and (ii) considerations for the
agencies' examiners to use in evaluating the adequacy of such allowance and the
policies utilized to determine such allowance. The Policy Statement also sets
forth quantitative measures for the allowance with respect to assets classified
substandard and doubtful, and with respect to the remaining portion of an
institution's loan portfolio. Specifically, the Policy Statement sets forth the
following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified substandard; and (iii)
for the portions of the portfolio that have not been classified (including loans
designated special mention), estimated credit losses over the upcoming twelve
months based on facts and circumstances available on the evaluation date. While
the Policy Statement sets forth this quantitative measure, such guidance is not
intended as a "floor" or "ceiling."
The Bank provided $1.5 million, $1.1 million, and $1.7 million, to its
allowance for loan losses for the fiscal years ended June 30, 1996, 1995 and
1994, respectively. At June 30, 1996, the total allowance was $13.1 million,
which amounted to .95% of total net loans and 138.5% of nonperforming loans.
The allowance is established based upon the Bank's evaluation of the risks
inherent in its loan portfolio, the general economy and a general trend within
the savings industry to increase allowances for losses as a percentage of total
gross loans. The Bank will continue to monitor and modify the level of its
allowance for loan losses in order to maintain it at a level which management
considers adequate to provide for potential loan losses. For the fiscal years
ended June 30, 1996, 1995 and 1994, the Bank had charge-offs of $1.3 million,
$1.1 million, and $1.6 million, respectively, against this allowance.
14
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net loans receivable................................... $1,374,955 $1,164,735 $1,062,533 $999,261 $895,891
Average loans outstanding.............................. 1,243,758 1,093,602 1,036,819 937,315 870,218
Allowance for loan losses balance
at beginning of period............................... 11,833 11,238 10,999 10,258 9,285
Provision for loan losses.............................. 1,502 1,098 1,728 1,797 2,414
Charge-offs............................................ (1,333) (1,071) (1,620) (1,124) (1,522)
Recoveries............................................. 428 333 131 68 81
Acquired through acquisition........................... 700 235 -- -- --
---------- ---------- ---------- -------- --------
Allowance for loan losses balance
at end of period................................. $ 13,130 $ 11,833 $ 11,238 $ 10,999 $ 10,258
========== ========== ========== ======== ========
Allowance for loan losses as a percentage
of net loans receivable.............................. .95% 1.02% 1.06% 1.10% 1.15%
Net loans charged-off as a percentage
of average loans outstanding(1)...................... .11% .10% .16% 0.12% 0.17%
Allowance for loan losses as a percentage..
of nonperforming loans............................... 138.49% 113.52% 79.40% 64.18% 50.28%
Allowance for loan losses as a percentage
of nonperforming loans and REO....................... 86.09% 72.51% 51.42% 35.21% 29.55%
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the allocation of allowance for loan losses by loan category for the
periods indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
% of % of % of
Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1)
------- --------- ------- --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real estate loans........................ $ 9,133 77.6% $ 8,101 78.0% $ 8,475 81.6%
Consumer loans........................... 3,009 17.7 2,773 17.2 2,350 16.5
Commercial business loans................ 988 4.7 959 4.8 413 1.9
------- ----- ------- ----- ------- -----
Total allowance for loan
losses........................... $13,130 100.0% $11,833 100.0% $11,238 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
__________________________________________
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Bank's investment portfolio comprises mortgage-backed securities,
investment securities, and cash and cash equivalents. In recent years, the Bank
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 Bank leveraging its capital by borrowing
funds and investing the proceeds in marketable securities in order to realize a
net interest spread. Also, the Bank maintains a high percentage of its assets
in marketable securities and cash equivalents to assist in asset/liability
management.
The majority of the Bank's mortgage-backed securities are issued or
guaranteed by the United States Government or agencies thereof. At June 30,
1996, the carrying value of mortgage-backed securities totalled $291.4
15
<PAGE>
million compared to $243.2 million at June 30, 1995. Of this $291.4 million,
$225.1 million had adjustable-rates and $66.3 million had fixed-rates. Of this
total, $289.7 million were issued by Ginnie Mae ("GNMA"), Fannie Mae ("FNMA") or
Freddie Mac ("FHLMC").
The carrying value of the Bank's investment securities totalled $106.0
million at June 30, 1996, compared to $66.9 million at June 30, 1995. The
Bank's cash and cash equivalents, consisting of cash and due from banks, and
interest-earning deposits with other financial institutions, totalled $44.3
million at June 30, 1996, compared to $70.1 million at June 30, 1995, a decrease
of $25.8 million, or 36.8%. The decrease in cash and cash equivalents has
occurred as the Bank increased its investment in loans, mortgage-backed
securities and investment securities, which generally pay higher yields than
interest-earning deposits, in order to improve the Bank's yield on its portfolio
of liquid assets.
The Bank 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 Bank 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 Bank's loan origination and
other activities.
PURCHASES, SALES, AND REPAYMENTS OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. Set forth below is information relating to the Bank's purchases,
sales and repayments of investment and mortgage-backed securities for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities balance
at beginning of period (1)............................ $243,184 $199,365 $198,067
Purchases............................................... 59,453 51,579 114,847
Sales................................................... -- -- (32,771)
Securities acquired by business combination............. 4,854 -- --
Increase in market value of securities
available for sale.................................... (519) 1,782 --
Principal repayments.................................... (15,526) (9,542) (80,778)
-------- -------- --------
Mortgage-backed securities
balance at end of period (1)..................... $291,446 $243,184 $199,365
======== ======== ========
Investment securities balance
at beginning of period................................ $ 66,884 $ 33,180 $ 2,699
Purchases............................................... 40,120 44,143 30,981
Sales................................................... -- (1,164) --
Securities acquired by business combination............. 8,834 -- --
Increase in market value of securities
available for sale.................................... 208 725 --
Maturities.............................................. (9,999) (10,000) (500)
-------- -------- --------
Investment securities balance at
end of period.................................... $106,047 $ 66,884 $ 33,180
======== ======== ========
</TABLE>
_____________________________________
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes FHLB stock.
16
<PAGE>
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 Bank's investment securities portfolio,
mortgage-backed securities portfolio and its available for sale portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Fixed-rate pass through
certificates......................................... $ 11,063 $ 10,863 $ 26,900 $ 27,287 $ 49,526 $ 49,257
Variable-rate pass through
certificates......................................... 2,998 3,151 3,726 3,824 4,765 4,775
Fixed-rate collateralized
mortgage obligations ("CMOs")........................ 761 736 3,122 3,113 4,369 4,245
Variable-rate CMOs..................................... 87,110 85,446 171,093 166,368 140,505 137,691
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities held to maturity...................... $101,932 $100,196 $204,841 $200,592 $199,165 $195,968
-------- -------- -------- -------- -------- --------
Mortgage-backed securities
available for sale:
Fixed-rate pass through certificates................... $ 51,328 $ 52,655 $ 35,980 $ 37,758 $ 200 $ 200
Variable-rate pass through certificates................ 1,041 1,047 585 585 -- --
Fixed-rate collateralized mortgage obligations (CMOs).. 1,854 1,854 -- -- -- --
Variable-rate CMOs..................................... 134,032 133,958 -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities available for sale.................... $188,255 $189,514 $ 36,565 $ 38,343 $ 200 $ 200
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities................................... $290,187 $289,710 $241,406 $238,935 $199,365 $196,168
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency............................... $ 53,836 $ 54,260 $ 65,180 $ 67,085 $ 32,757 $ 32,267
Corporate debt issues.................................... 250 281 290 290 290 283
Equity securities........................................ -- -- -- -- 133 716
Total investment securities held to maturity........... 54,086 54,541 65,470 67,375 $ 33,180 $ 33,266
======== ======== ======== ======== ======== ========
Investment securities available for sale:
Equity securities........................................ $ 1,113 $ 2,141 $ 688 $ 1,414 $ -- $ --
U.S. Government and agency............................... 47,083 46,998 -- -- -- --
Corporate debt issues.................................... 1,401 1,400 -- -- -- --
Municipal securities..................................... 1,430 1,422 -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities available for sale......... $ 51,027 $ 51,961 $ 688 $ 1,414 $ -- $ --
======== ======== ======== ======== ======== ========
</TABLE>
ISSUERS OF MORTGAGE-BACKED SECURITIES. The following table sets forth
information regarding the issuers and the carrying value of the Bank's mortgage-
backed securities held to maturity and mortgage-backed securities available for
sale.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
FNMA............................................................................. $142,757 $110,718 $108,866
GNMA............................................................................. 39,513 38,187 19,505
FHLMC............................................................................ 107,463 91,704 67,759
Other (non-agency)............................................................... 1,713 2,575 3,235
-------- -------- --------
Total mortgage-backed
securities................................................................. $291,446 $243,184 $199,365
======== ======== ========
</TABLE>
17
<PAGE>
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Bank's investment securities and mortgage-backed
securities portfolios at June 30, 1996. Adjustable-rate mortgage-backed
securities are included in the period in which interest rates are next scheduled
to adjust.
<TABLE>
<CAPTION>
At June 30, 1996
-------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and
agency obligations....................... $ 10,445 5.91% $43,391 6.83% $ -- --%
Other debt securities...................... -- -- -- -- -- --
-------- ---- ------- ---- ------- ----
Total investment securities held
to maturity.......................... 10,445 5.91 43,391 6.83 -- --
-------- ---- ------- ---- ------- ----
Investment securities available for sale:
Equity securities.......................... -- -- -- -- -- --
U.S. Government and agency
obligations.............................. 450 4.94 37,641 6.74 -- --
Other debt securities...................... 1,098 6.30 303 5.42 -- --
Municipal securities....................... -- -- 220 4.40 1,010 5.64
-------- ---- ------- ---- ------- ----
Total investment securities
available for sale..................... 1,548 5.90 38,164 6.72 1,010 5.64
-------- ---- ------- ---- ------- ----
Mortgage-backed securities held to maturity:
Pass-through certificates.................. 2,998 6.41 11,063 5.89 -- --
CMOs....................................... 87,828 6.32 43 9.02 -- --
-------- ---- ------- ---- ------- ----
Total mortgage-backed
securities held to maturity............ 90,826 6.32 11,106 5.90 -- --
-------- ---- ------- ---- ------- ----
Mortgage-backed securities available
for sale:
CMOs..................................... 135,077 6.56 809 6.22 -- --
Pass-through certificates................ 1,041 7.61 1,822 7.61 -- --
-------- ---- ------- ---- ------- ----
Total mortgage-backed securities
available for sale.................. 136,118 6.57 2,631 7.18 -- --
-------- ---- ------- ---- ------- ----
Total investment securities and
mortgage-backed securities................. $238,937 6.44% $95,292 6.69% $1,010 5.64%
======== ==== ======= ==== ======= ====
<CAPTION>
At June 30, 1996
----------------------------------------------------------------
More than Ten Years Total
----------------------- -------------------------------------
Annualized Annualized
Weighted Weighted
Amortized Average Carrying Market Average
Cost Yield Value Value Yield
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and
agency obligations....................... $ -- --% $ 53,836 $ 54,260 6.65%
Other debt securities...................... 250 9.00 250 281 9.00
--------- ---- -------- -------- ----
Total investment securities held
to maturity.......................... 250 9.00 54,086 54,541 6.66
--------- ---- -------- -------- ----
Investment securities available for sale:
Equity securities.......................... -- -- 1,113 2,141 3.00
U.S. Government and agency
obligations.............................. 8,992 7.17 47,083 46,998 6.80
Other debt securities...................... -- -- 1,401 1,400 6.11
Municipal securities....................... 200 5.43 1,430 1,422 5.42
--------- ---- -------- -------- ----
Total investment securities
available for sale..................... 9,192 7.13 51,027 51,961 6.66
--------- ---- -------- -------- ----
Mortgage-backed securities held to maturity:
Pass-through certificates.................. -- -- 14,061 14,014 6.00
CMOs....................................... -- -- 87,871 86,182 6.32
--------- ---- -------- -------- ----
Total mortgage-backed
securities held to maturity............ -- -- 101,932 100,196 6.28
--------- ---- -------- -------- ----
Mortgage-backed securities available
for sale:
CMOs..................................... -- -- 135,886 135,812 6.56
Pass-through certificates................ 49,506 7.61 52,369 53,702 7.61
--------- ---- -------- -------- ----
Total mortgage-backed securities
available for sale.................. 49,506 7.61 188,255 189,514 6.85
--------- ---- -------- -------- ----
Total investment securities and
mortgage-backed securities................. $ 58,948 7.54% $395,300 $396,212 6.65%
========= ==== ======== ======== ====
</TABLE>
18
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
the amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, operations and, if needed, advances 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 Bank's market area through the offering of a broad selection of
deposit instruments including checking accounts, passbook savings accounts,
money market deposit accounts, term certificate accounts and individual
retirement accounts. While the Bank 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 Bank regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate. The
Bank does not obtain funds through brokers, nor does it solicit funds outside
its market area.
The following table sets forth the savings activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period........... $1,283,935 $1,235,401 $1,136,116
Savings deposits......................... 660,132 699,527 594,179
Savings withdrawals...................... (648,646) (702,141) (594,008)
Net checking activity.................... 14,616 12,986 24,597
Deposits acquired........................ 95,994 -- 36,419
---------- ---------- ----------
Net increase before interest credited.. 122,096 10,372 61,187
Interest credited........................ 44,016 38,162 38,098
---------- ---------- ----------
Net increase in deposits............. 166,112 48,534 99,285
---------- ---------- ----------
Balance at end of period......... $1,450,047 $1,283,935 $1,235,401
========== ========== ==========
</TABLE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts/ offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
----------- --------------------- ---------------------
Balance Percent (1) Rate (2) Balance Percent (1) Rate (2) Balance Percent (1) Rate (2)
---------- ----------- -------- ---------- ----------- -------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts.......... $ 296,099 20.42% 3.30% $ 287,783 22.41% 3.32% $ 378,444 30.63% 3.28%
Checking accounts......... 195,019 13.45 2.01 168,813 13.15 2.07 155,863 12.62 2.09
Money market accounts..... 82,552 5.69 3.37 74,704 5.82 3.26 93,555 7.57 2.81
Certificates of deposit:
Maturing within 1 year.. 512,392 35.34 5.36 385,340 30.01 5.50 302,606 24.49 4.34
Maturing 1 to 3 years... 259,539 17.90 5.78 251,083 19.56 5.97 195,566 15.83 5.37
Maturing more than
3 years............... 104,446 7.20 6.44 116,212 9.05 6.43 109,367 8.86 6.05
---------- ----- ---- ---------- ----- ---- ---------- ------ ----
Total certificates.... 876,377 60.44 5.61 752,635 58.62 5.80 607,539 49.18 4.98
---------- ----- ---- ---------- ----- ---- ---------- ------ ----
Total deposits............ $1,450,047 100.0% 4.21% $1,283,935 100.0% 4.60% $1,235,401 100.00% 3.93%
========== ===== ==== ========== ===== ==== ========== ====== ====
</TABLE>
____________________________
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate.
19
<PAGE>
TIME DEPOSIT RATES. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Rate (In Thousands)
----
<S> <C> <C> <C>
2.00 - 2.99%......................... $ 36 $ -- $ 1,168
3.00 - 3.99%......................... 7,812 3,667 141,687
4.00 - 4.99%......................... 138,758 112,150 190,209
5.00 - 5.99%......................... 409,023 258,592 129,855
6.00 - 6.99%......................... 242,428 267,233 74,599
7.00 - 7.99%......................... 69,629 92,046 34,207
8.00% or greater..................... 8,691 18,947 35,814
-------- -------- --------
$876,377 $752,635 $607,539
======== ======== ========
</TABLE>
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 After 3
One Year Years Years Years Total
--------- ----- ----- ------- -----
Rate (In Thousands)
----
<S> <C> <C> <C> <C> <C>
2.00 - 2.99%............ $ -- $ -- $ 36 $ -- $ 36
3.00 - 3.99%............ 6,819 310 180 503 7,812
4.00 - 4.99%............ 124,908 9,127 4,567 155 138,757
5.00 - 5.99%............ 250,428 82,791 46,765 29,040 409,024
6.00 - 6.99%............ 115,026 90,231 7,662 29,509 242,428
7.00 - 7.99%............ 14,992 11,257 1,130 42,250 69,428
8.00% or greater........ 217 3,245 2,237 2,992 8,691
-------- -------- ------- -------- --------
$512,390 $196,961 $62,577 $104,449 $876,377
======== ======== ======= ======== ========
</TABLE>
LARGE CERTIFICATES OF DEPOSIT MATURITIES. The following table indicates
the amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
<S> <C>
Three months or less........................ $12,562
Three through six months.................... 12,563
Six through twelve months................... 24,955
Over twelve months.......................... 30,538
-------
Total.................................... $80,618
=======
</TABLE>
20
<PAGE>
BORROWINGS
Savings deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. The Bank also
relies upon advances from the FHLB to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans. At June 30, 1996, the Bank had $200.6 million in FHLB
advances outstanding.
The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings institutions and financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances 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 advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. All FHLB advances have fixed interest rates
and original maturities of between one day and twenty years.
<TABLE>
<CAPTION>
During the Year Ended June 30,
---------------------------------
1996 1995 1994
------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Pittsburgh advances:
Average balance outstanding........... $118,729 $ 73,022 $67,734
Maximum outstanding at end of any
month during period................. $200,603 $ 87,592 $72,350
Balance outstanding at end of period.. $200,603 $ 86,163 $65,597
Weighted average interest rate
during period....................... 5.30% 5.85% 6.41%
Weighted average interest rate at
end of period....................... 5.67% 5.81% 5.89%
Reverse repurchase agreements:
Average balance outstanding........... $ 267 $ 2,388 $ 3,685
Maximum outstanding at end of any
month during period................. $ 800 $ 7,738 $13,044
Balance outstanding at end of period.. $ -- $ 800 $ 4,175
Weighted average interest rate
during period....................... 3.40% 4.18% 3.59%
Weighted average interest rate at
end of period....................... --% 6.10% 3.67%
Other borrowings:
Average balance outstanding........... $ 12,151 $ 7,895 $ 1,472
Maximum outstanding at end of any
month during period................. $ 13,368 $ 16,476 $ 1,539
Balance outstanding at end of period.. $ 11,158 $ 16,476 $ 1,431
Weighted average interest rate
during period....................... 7.59% 8.70% 10.21%
Weighted average interest rate at
end of period....................... 7.52% 8.83% 9.52%
Total borrowings:
Average balance outstanding........... $131,147 $ 83,305 $72,891
Maximum outstanding at end of any
month during period................. $211,761 $104,181 $80,073
Balance outstanding at end of period.. $211,761 $103,439 $71,203
Weighted average interest rate
during period....................... 5.51% 6.07% 6.34%
Weighted average interest rate at
end of period....................... 5.77% 6.29% 5.83%
</TABLE>
___________________________
(1) Computed on the basis of month-end balances.
21
<PAGE>
COMPETITION
The Bank's market area in Pennsylvania has a large concentration of
financial institutions, some of which are significantly larger and have greater
financial resources than the Bank, and all of which are competitors of the Bank
to varying degrees. As a result, the Bank 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 Bank expects continued strong competition from such financial
institutions in the foreseeable future. The Bank's market area includes offices
of several commercial banks that are substantially larger than the Bank in terms
of state-wide deposits. The Bank competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Bank's market area
as well as the increased efforts by commercial banks to expand mortgage loan
originations.
The Bank 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 Bank has two wholly owned subsidiaries, Great Northwest Corporation
("Great Northwest") and Northwest Financial Services, Inc. ("Northwest Financial
Services"). Great Northwest's sole activity is holding equity investments in
government-assisted low-income housing projects in various locations in the
Bank's market area. At June 30, 1996, the Bank had an equity investment in
Great Northwest of $1.0 million. For the fiscal year ended June 30, 1996, Great
Northwest had an operating profit of $278,000.
Northwest Financial Services' principal activity is the operation of
several of the Bank's REO properties and the ownership of the common stock of
several financial institutions. In addition, Northwest Financial Services also
holds an equity investment in one government assisted low-income housing project
and owns 100% of the stock in Northwest Consumer Discount Company, Northwest
Mortgage Corporation and Northwest Capital Group, Inc. At June 30, 1996, the
Bank had an equity investment in Northwest Financial Services of $7.0 million,
and for the fiscal year ended June 30, 1996, Northwest Financial Services had
income of $200,000, which included equity income from Northwest Consumer
Discount Company of $1.3 million.
Northwest Consumer Discount Company operates 28 consumer finance offices
throughout Pennsylvania and operates one consumer finance office in New York
State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 1996, Northwest Financial Services had an equity investment
in Northwest Consumer Discount Company of $6.7 million and the income of
Northwest Consumer Discount Company for the fiscal year ended June 30, 1996 was
$1.3 million. Consumer loans entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as automobiles, mobile homes,
boats, and recreation vehicles. In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Bank adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Northwest Mortgage Corporation, a wholly owned subsidiary of Northwest
Financial Services operates two mortgage loan production offices in South
Carolina and one in Pennsylvania. At June 30, 1996, Northwest Financial
Services had an equity investment of $180,000 in Northwest Mortgage Corporation
and for the fiscal year ended June
22
<PAGE>
30, 1996 Northwest Mortgage Corporation had incurred a net loss of $915,000,
which included an equity loss of $910,000 from its wholly owned subsidiary,
Power Funding Group, Inc.
Northwest Capital Group, Inc. ("Northwest Capital") is a wholly owned
subsidiary of Northwest Financial Services. Northwest Capital is currently
inactive. At June 30, 1996, Northwest Financial Services had an equity
investment in Northwest Capital of $26,000, and for the fiscal year ended June
30, 1996, Northwest Capital Group had an operating loss of $52,000.
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial Services,
in 1986 provided the financing for a Hawaiian timeshare project. This loan,
which is collateralized by the timeshare loans receivable and unsold timeshare
intervals associated with the project, was nonperforming as of June 30, 1996.
In February 1994, the borrower filed a complaint against Rid-Fed and the Bank
for alleged business interference. Management believes the suit is without
merit. As of June 30, 1996, Northwest Financial Services had an equity
investment in Rid-Fed, Inc. of a negative $83,000, and for the fiscal year ended
June 30, 1996, Rid-Fed, Inc. incurred an operating loss of $160,000. See "--
Delinquencies and Classified Assets," and "--Legal Proceedings."
Power Funding Group, Inc., a wholly owned subsidiary of Northwest Mortgage
Corporation, is a mortgage banking company, headquartered in Buffalo, New York,
with loan production offices in Buffalo and Syracuse. Power Funding Group, Inc.
was purchased by the Bank on April 1, 1995. As of June 30, 1996, Northwest
Mortgage had an equity investment in Power Funding Group, Inc. of $83,000. For
the fiscal year ended June 30, 1996, Power Funding Group, Inc. had a net
operating loss of $910,000.
Northwest Finance Company, Inc. is a wholly owned subsidiary of Northwest
Consumer Discount Company. Northwest Finance Company operates a consumer finance
office in Jamestown, New York. As of June 30, 1996, Northwest Consumer Discount
Company's equity investment in Northwest Finance Company was a negative $33,000.
For the year ended June 30, 1996, Northwest Finance Company had a net operating
loss of $22,000.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), SAIF-insured institutions are required 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 (i) constitutes a
serious risk to the safety, soundness or stability of the savings association,
or (ii) is inconsistent with the purposes of FIRREA. 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, 1996, the Bank had 663 full-time and 133 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
REGULATION
GENERAL
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
23
<PAGE>
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 Holding Company, the Bank and their operations.
The Holding Company, as a mutual savings bank holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of the FRB. Certain of the regulatory requirements applicable to the Bank and to
the Holding Company are referred to below or elsewhere herein.
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 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.
INTERSTATE ACQUISITIONS
The Commonwealth of Pennsylvania has enacted legislation regarding the
acquisition of commercial banks, bank holding companies, savings banks, and
savings and loan associations located in Pennsylvania by institutions located
outside of Pennsylvania. The statute dealing with savings institutions
authorizes (i) a savings bank, savings and loan association, or holding company
thereof located in Delaware, the District of Columbia, Indiana, Kentucky,
Maryland, New Jersey, Ohio, Virginia and West Virginia (collectively, "regional
institutions") to acquire the voting stock of, merge or consolidate with, or
purchase assets and assume liabilities of, a Pennsylvania-chartered savings
bank, (collectively, "Pennsylvania institutions") and (ii) the establishment of
branches in Pennsylvania by regional institutions, in each case subject to
certain conditions including reciprocal legislation in the state in which the
regional institution seeking entry into Pennsylvania is located permitting
comparable entry by Pennsylvania institutions and approval by the Department.
The statute also provides for nationwide branching by Pennsylvania chartered
savings banks and savings and loan associations, subject to Department approval
and certain other conditions. Of the states within the region, Delaware,
Maryland, New Jersey, Ohio, and West Virginia currently have laws that permit
Pennsylvania institutions to branch into such states and/or acquire savings
institutions located in such states.
24
<PAGE>
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 .23% to .31% 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 will be 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.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
("BIF") of the FDIC in order to maintain the reserve ratio of the BIF at 1.25%
of BIF insured deposits. The FDIC has reported that the BIF attained the 1.25%
reserve ratio in May 1995 but that the SAIF is not likely to reach the 1.25%
reserve ratio until 2002. In August 1995, the FDIC issued final regulations to
reduce the assessment rates for the BIF. Under the revised assessment schedule,
which became effective on June 1, 1995, BIF-insured institutions paid an average
of 0.045% of deposits, with new assessment rates ranging from 0.04% of deposits
to 0.31% of deposits. The FDIC refunded any assessments collected in excess of
those due under the revised schedule. On November 14, 1995, the FDIC voted to
reduce annual BIF assessments to the legal minimum of $2,000, effective January
1, 1996 for all BIF-insured institutions except for those that were not well
capitalized or were assigned to the higher supervisory risk categories. It is
estimated that 92% of the BIF-insured institutions will pay only the minimum
annual assessment. SAIF-insured institutions will continue to pay assessments
at the current assessment rates until the SAIF attains the 1.25% reserve ratio.
The resulting disparity in deposit insurance assessments between SAIF members
and BIF members is likely to provide BIF-insured institutions with certain
competitive advantages in the pricing of loans and deposits, and in lowered
operating costs, pending any legislative action to remedy the disparity.
The proposed Balanced Budget Act of 1995 (the "Budget Act"), which was
vetoed by the President, included provisions that focused on a resolution of the
financial problems of the SAIF. Under the provisions of the Budget Act, all
SAIF member institutions would pay a special assessment to recapitalize the
SAIF, and the assessment base for the payments on bonds ("FICO bonds") that were
issued in the late 1980s by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation, would be expanded to
include the deposits of both BIF- and SAIF-insured institutions. The amount of
the special assessment required to recapitalize the SAIF has been estimated to
be approximately 80 basis points of the SAIF-assessable deposits. This estimate
of the special SAIF assessment is less than the assessment of 85 to 90 basis
points that had been previously estimated. The special assessment would have
been imposed on the first business day of January 1996, or on such other date
prescribed by the FDIC not later than 60 days after enactment of the Budget Act,
based on the amount of SAIF deposits on March
25
<PAGE>
31, 1995. The Budget Act would have also permitted BIF-insured institutions with
deposits subject to SAIF assessments to reduce such SAIF-deposits by 20% in
computing the institution's special assessment. If a 90 basis point assessment
were assessed against the Bank's deposits as of March 31, 1995, the Bank's
aggregate special SAIF assessment would be approximately $11.4 million, and an
assessment of 85 basis points would be $10.7 million. Assuming this special
assessment is tax deductible, the charge to earnings, net of income tax
benefits, will be approximately $6.8 million to $6.4 million. Future assessments
would then be anticipated to be reduced to .04% to .31% of eligible deposits,
based on the risk classification assigned to the Bank by the FDIC. The Budget
Act also would have provided that the BIF could not assess regular insurance
assessments when it has a reserve ratio of 1.25% or more except on those of its
member institutions that have been found to have "moderately severe" or
"unsatisfactory" financial, operational, or compliance weaknesses.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Bank, as a Pennsylvania savings bank, convert to a bank charter.
The above described provisions of the Budget Act were not the basis for the
President's veto, and Congressional leaders have indicated that these provisions
will be the basis for future legislation to recapitalize the SAIF. If enacted
by Congress, such legislation would have the effect of reducing the capital of
SAIF member institutions by the after-tax cost of the special SAIF assessment,
plus any related additional tax liabilities. The legislation would also have
the effect of reducing any differential that may otherwise be required in the
assessment rates for the BIF and SAIF.
As the result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations will be able to convert to a
commercial bank charter, diversify their lending, or be merged into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves will be 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
will be assessed in equal installments over the six year period beginning in
1996. However, if a thrift meets a minimum level of mortgage lending test (i.e.,
if the thrift's level of mortgage lending activity (re-financings and home
equity loans do not count) is equal to or exceeds its average mortgage lending
activity for the six years preceding 1996, adjusted for inflation), then the
thrift may suspend its tax bad debt recapture for the 1996 and 1997 tax years.
At June 30, 1996, the Bank had a balance of approximately $5.7 million of bad
debt reserves in retained income that would be recaptured under this
legislation.
CAPITAL REQUIREMENTS
Any savings association 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 association'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.
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. Under the provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), loans which exceeded the
permitted limit on the effective date of the new rules were deemed not to be in
violation of the new rules, but the aggregate principal balance of such loans
cannot be increased beyond the amount legally committed to prior to FIRREA.
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<PAGE>
PROMPT CORRECTIVE ACTION
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement the system of prompt corrective action
established by Section 38 of the FDIA, which were effective as of December 19,
1992. Under the 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%. Section 38 of the FDIA and the 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,
1996, the Bank was a "well-capitalized institution" for this purpose.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Section 24 of the FDIA, as amended by the FDICIA, 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.
The FDIC has adopted final regulations pertaining to the other activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to do so, however, if
such bank fails to meet the minimum capital requirements, or the activities
present a significant risk to the FDIC insurance funds, such application will
not be approved by the FDIC.
MISCELLANEOUS
In addition to requiring a new system of risk-based insurance assessments
and a system of prompt corrective action with respect to undercapitalized banks,
as discussed above, the FDIC requires federal banking regulators to adopt
regulations in a number of areas to ensure bank safety and soundness, including
internal controls, credit underwriting, asset growth, management compensation,
ratios of classified assets to capital, and earnings. The FDICIA also contains
provisions which are intended to enhance independent auditing requirements,
restrict the activities of state-chartered insured banks, amend various consumer
banking laws, limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve Board's discount window, require regulators to perform annual
on-site bank examinations, and set standards for real estate lending.
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<PAGE>
FEDERAL SECURITIES LAWS
Shares of the Bank's common stock are registered under Section 12(g) of the
Exchange Act with the FDIC. The proxy rules, tender offer rules, insider trading
restrictions, annual and periodic reporting, and other requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act") apply to the Bank
but under the jurisdiction of the FDIC. Such reports are available from the
FDIC's Registration and Disclosure Section, 1776 F Street, N.W., Room F-643,
Washington, D.C. 20429. The telephone number is (202) 898-8920.
REGULATORY ENFORCEMENT AUTHORITY
FIRREA included substantial enhancement to the enforcement powers available
to federal banking regulators. 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. FIRREA significantly increased the amount of, and
grounds for, civil money penalties and requires, except under certain
circumstances, public disclosure of final enforcement action by the federal
banking agencies.
DIVIDENDS
The Banking Code of the Commonwealth of Pennsylvania states, in part, that
dividends may be declared and paid 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, 1996, the Bank's retained earnings
exceeded capital by $61.1 million and the Bank was not in default of any
assessment due the FDIC. See Item 5, Market for the Bank's Common Stock and
Related Security Holder Matters.
The foregoing references to laws and regulations are brief summaries
thereof which do not purport to be complete and which are qualified in their
entirety by reference to such laws and regulations.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Bank files a
federal income tax return on a fiscal year basis. The Holding Company is not
permitted to file a consolidated federal income tax return with the Bank, and
must pay Federal income tax on 20% of the dividends received from the Bank.
Because the Holding Company has nominal assets other than the stock of the Bank,
it does not have material federal income tax liability other than the tax due on
the dividends received from the Bank.
The Holding Company and the Bank are subject to the rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended (the "Code"). Most corporations are not permitted to make
deductible additions to bad debt reserves under the Code. However, savings and
loan associations and savings banks such as the Bank, which meet certain tests
prescribed by the Code may benefit from favorable provisions regarding
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in real property, and "non-qualifying loans," which are all other loans. The
bad debt reserve deduction with respect to non-qualifying loans must be based on
actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
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The Bank has elected to use the method that results in the greatest
deduction for federal income tax purposes, which historically had been the
percentage of taxable income method. The amount of the bad debt deduction that
a thrift institution may claim with respect to additions to its reserve for bad
debts is subject to certain limitations. First, the full deduction is available
only if at least 60% of the institution's assets fall within certain designated
categories. Second, under the percentage of taxable income method the bad debt
deduction attributable to "qualifying real property loans" cannot exceed the
greater of (i) the amount deductible under the experience method or (ii) the
amount which, when added to the bad debt deduction for non-qualifying loans,
equals the amount by which 12% of the sum of the total deposits and the advance
payments by borrowers for taxes and insurance at the end of the taxable years
exceeds the sum of the surplus, undivided profits, and reserves at the beginning
of the taxable year. Third, the amount of the bad debt deduction attributable
to qualifying real property loans computed using the percentage of taxable
income method is permitted only to the extent that the institution's reserve for
losses on qualifying real property loans at the close of the taxable year does
not exceed 6% of such loans outstanding at such time.
Deferred income taxes arise from the recognition of certain items of income
and expense for tax purposes in years different from those in which they are
recognized in the financial statements. In April 1992, the FASB issued SFAS 109.
The Bank currently is accounting for income taxes in accordance with SFAS 109.
The liability method accounts for deferred income taxes by applying the enacted
statutory rates in effect at the balance sheet date to differences between the
book cost and the tax cost of assets and liabilities. The resulting deferred tax
liabilities and assets are adjusted to reflect changes in tax laws. SFAS 109 was
implemented by the Bank effective July 1, 1993.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
including the following: (i) 100% of the excess of a thrift institution's bad
debt deduction over the amount that would have been allowable on the basis of
actual experience; and (ii) interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, for purposes of the new alternative minimum tax,
the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
The Bank was audited by the Internal Revenue Service for the tax periods
ended June 30, 1989, 1990, 1991 and 1992, and the IRS is currently conducting
its routine audit for the tax periods ended June 30, 1995, 1994 and 1993. See
Notes 1 and 11 to the Consolidated Financial Statements which are part of the
Annual Report to Stockholders.
STATE TAXATION. The Bank has been 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. Three year carryforwards of
losses are allowed.
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
- --------------------
The Bank conducts its business through its main office located in Warren,
Pennsylvania and 53 other full-service offices throughout its market area in
northwest, southwest and central Pennsylvania. The Bank and its wholly owned
subsidiaries also operate two mortgage lending offices in Pennsylvania, four in
New York, and two in South Carolina, as well as 28 consumer finance offices
located throughout Pennsylvania and one consumer lending office in New York. At
June 30, 1996, the Bank's premises and equipment had an aggregate net book value
of approximately $17.8 million. The Bank believes that its current facilities
are adequate to meet the present and immediately foreseeable needs of the Bank
and Holding Company.
Listed below is the location of each of the Bank's community banking
offices.
<TABLE>
<S> <C>
Bradford (3), McKean Co. -- 85 West Washington Street
-- Bradford Mall
-- 33 Main Street Centre Hall, Centre Co.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
-- 219 North Pennsylvania Avenue Meadville (2), Crawford Co.
-- 932 Diamond Park
Clarion, Clarion Co. -- 1073 Park Avenue
-- 537 Main Street -- 880 Park Avenue
-- 601 Main Street
-- 97 West Main Street Mount Joy, Lancaster Co.
-- 24 East Main Street
Columbia, Lancaster Co.
-- 350 Locust Street Myerstown, Lebanon Co.
-- 1 West Main Avenue
Erie (9), Erie Co.
-- 2255 West 8th Street North East, Erie Co.
-- K-Mart Plaza -- 35 East Main Street
2863 West 28th Street
-- K-Mart Plaza East Oil City (3), Venango Co.
4423 Buffalo -- One East First Street
-- Millcreek Mall -- 301 Seneca Street
3805 Peach Street -- 259 Seneca Street
-- 3805 Peach Street
-- 5624 Peach Street Palmyra, Lebanon Co.
-- 401 State Street -- 1048 East Main Street
-- 121 West 28th Street
Pottsville, Schuylkill Co.
Franklin, Venango Co. -- 104 North Centre Street
-- 1301 Liberty Street
Ridgway, Elk Co.
Gibsonia, Allegheny Co. -- Main & Mill Streets
-- Village of St. Barnabas
5850 Meridian Sarver, Butler Co.
-- 735 South Pike Road
Harborcreek, Erie Co.
-- 4452 East Lake Road Springboro, Crawford Co.
-- 105 South Main Street
Hershey, Dauphin Co.
-- 10 West Chocolate Avenue St. Marys (2), Elk Co.
-- 201 Brusselles Street
Johnsonberg, Elk Co. -- St. Mary's Plaza
-- 553 Market Street
State College, Centre Co.
Kane, McKean Co. -- 201 West Beaver Avenue
-- 56 Fraley Street -- 611 University Drive
-- 1524 West College Avenue
Lake City, Erie Co.
-- 2102 Rice Avenue Titusville, Crawford Co.
-- Spring & Franklin Street
Lancaster, Lancaster County
-- 24 West Orange Street Valencia, Butler Co.
-- 1421 Pittsburgh Road
Lebanon (2), Lebanon Co.
-- 70 Cumberland Street Warren (2), Warren Co.
-- 547 South 10th Street -- Warren Mall
1680 Market Street Ext.
Lewistown, Mifflin County -- 125 Ludlow Street
-- 51 West Market Street -- Liberty at Second
</TABLE>
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<PAGE>
Wrightsville, York Co.
-- 120 North 4th Street
York, York Co.
-- Queensgate Shopping Center
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank is involved in the following proceedings, and in various legal
actions arising in the normal course of its business. In the opinion of
management, the resolution of these legal actions is not expected to have a
material adverse effect on the Bank's results of operations.
The Bank is involved in litigation with a borrower with respect to a loan
originated in September 1986 collateralized by timeshare loans and unsold
timeshare intervals in Honolulu, Hawaii. The loan has been delinquent since
1990. In February 1994 the borrower filed a complaint in the United States
District Court in Honolulu against the Bank seeking $10.0 million in damages for
alleged business interference. The Bank has filed a claim against the borrower
to collect under the borrower's note. Management believes that there is no
merit to the borrower's complaint and believes the Bank will have no material
liability as a result of the suit.
On December 13, 1994, a complaint was filed in United States District
Court, Western District of Pennsylvania, by an individual who purports to have
subscribed for stock in the Bank's mutual holding company reorganization and
stock offering (the "Offering") that was completed in November 1994. The named
defendants in the complaint are Northwest Savings Bank, Northwest Bancorp,
M.H.C., Ryan, Beck & Co., Inc., RP Financial, Inc., and the Bank's Board of
Directors. The plaintiff seeks to represent persons who subscribed for and
purchased stock in the Offering. The complaint alleges that the appraisal used
in the Bank's Offering was inappropriately increased at the completion of the
Offering, and that, among other things, the Bank violated the federal securities
laws (including section 10 of the Securities Exchange Act of 1934 and sections
12(2) and 15 of the Securities Act of 1933) and regulations thereunder, violated
Pennsylvania securities law, breached a fiduciary duty owed to plaintiff, and
breached a contract with plaintiff. Money damages and other relief is sought.
On November 17, 1995, the District Court dismissed all Federal claims against
the defendants with prejudice, and dismissed the remaining claims without
prejudice. On December 14, 1995, the plaintiff appealed the District Court's
decision to the United States Court of Appeals for the Third Circuit. Management
intends to continue to vigorously defend against this action.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of the Common Stock
are required to file certain reports with the Federal Deposit Insurance
Corporation regarding such ownership pursuant to the Securities Exchange Act of
1934. The following table sets forth, as of June 30, 1996, the shares of Common
Stock beneficially owned by directors individually, by executive officers and
directors as a group and by each person who was the beneficial owner of more
than 5% of the Bank's outstanding shares of Common Stock on the Record Date.
31
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF SHARES
OWNED AND NATURE PERCENT OF SHARE
NAME AND ADDRESS OF OF BENEFICIAL OF COMMON STOCK
BENEFICIAL OWNERS OWNERSHIP (1) OUTSTANDING
------------------- ---------------- ----------------
<S> <C> <C>
Northwest Bancorp, M.H.C. (2) 16,200,000 69.3%
Liberty and Second Streets
Warren, Pennsylvania 16365-2353
John O. Hanna 103,139 *
William J. Wagner 29,339 *
James H. Olay 46,000 *
Richard L. Carr 12,012 *
Taylor W. Foster 32,000 *
Robert L. Lasher 18,750 *
Thomas K. Creal, III 12,800 *
John J. Doyle 18,500 *
Robert G. Ferrier 36,700 *
Richard E. McDowell 36,000 *
Joseph T. Stadler 8,000 *
Walter J. Yahn 20,758 *
John S. Young 18,636 *
Gregory C. La Rocca 17,545 *
James E. Vecellio 17,678 *
All Directors and Executive Officers 427,857 1.8%
--------- ------
as a Group (15 persons)
</TABLE>
_________________________
* Less than 1%
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table, of
any shares of Common Stock if he has shared voting or investment power with
respect to such security, or has a right to acquire beneficial ownership at
any time within 60 days from August 31, 1996. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
(2) The Bank's executive officers and directors are also executive officers and
trustees of Northwest Bancorp, M.H.C.
PART II
ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
- ----------------------------------------------------------------------------
The "Market for Common Stock and Related Matters" and "Stockholder
Information" sections of the Bank's annual report to stockholders for the fiscal
year ended June 30, 1996 (the "1996 Annual Report to Stockholders") are
incorporated herein by reference. No other sections of the 1996 Annual Report to
Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The Selected Financial Data section of the 1996 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1996
Annual Report to Stockholders are incorporated herein by reference.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contained in pages 18-34 of the 1996 Annual
Report to Stockholders is incorporated herein by reference. No other sections of
the 1996 Annual Report to Stockholders are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The material identified in Item 11(a)(1) hereof is incorporated herein by
reference.
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------
The "Proposal I--Election of Directors" section of the Bank's definitive
proxy statement for the Bank's 1996 Annual Meeting of Stockholders (the "1996
Proxy Statement") is incorporated herein by reference.
ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS
- -------- ----------------------------------------
The "Proposal I--Election of Directors" section of the Bank's 1996 Proxy
Statement is incorporated herein by reference.
ITEM 11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3
- --------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following documents appear in sections of the 1996 Annual
Report to Stockholders under the same captions, and are incorporated
herein by reference. No other sections of the 1996 Annual Report to
Stockholders are incorporated herein by reference.
(A) Independent Auditors' Report
(B) Consolidated Statements of Condition - at June 30, 1996 and 1995
(C) Consolidated Statements of Income - Years ended June 30, 1996,
1995 and 1994
(D) Consolidated Statements of Changes in Shareholders' Equity -Years
ended June 30, 1996, 1995 and 1994
(E) Consolidated Statements of Cash Flows - Years ended June 30,
1996, 1995 and 1994
(F) Notes to Consolidated Financial Statements.
33
<PAGE>
(a)(2) Financial Statement Schedules
-----------------------------
Schedule I - Securities. The data required to be reported under Section
335.627, Paragraph D, Schedule I - Securities, are reported in Footnote 4 of the
audited Consolidated Financial Statements and Schedules, June 30, 1996.
Schedule II - Loans to Officers, Directors, Principal Security Holders and any
Associates of the Foregoing Persons. Northwest Savings Bank has no loans meeting
the criteria of Section 335.627, Paragraph D, Schedule II - Loans to Officers,
Directors, Principal Security Holders and any Associates of the Foregoing
Persons.
Schedule III - Loans and Lease Financing Receivables. The data required to be
reported under Section 335.627, Paragraph D, Schedule III - Loans and Lease
Financing Receivables, are reported in Footnote 5 of the audited Consolidated
Financial Statements and Schedules, June 30, 1996.
Schedule IV - Bank Premises and Equipment. The data required to be reported
under Section 335.627, Paragraph D, Schedule IV - Bank Premises and Equipment,
are reported in Footnote 9 of the audited Consolidated Financial Statements and
Schedules, June 30, 1996.
Schedule V - Investments in Income from Dividends, and Equity in Earnings or
Losses from Subsidiaries and Associated Companies. The data required to be
reported under Section 335.627, Paragraph D, Schedule V -Investments in Income
from Dividends, and Equity in Earnings or Losses from Subsidiaries and
Associated Companies, are reported in Schedules A, A-1, B, B-1 and C (pages 34
through 42) of the audited Consolidated Financial Statements and Schedules, June
30, 1996.
Schedule VI - Allowance for Possible Loan Losses. The data required to be
reported under Section 335.627, Paragraph D, Schedule VI - Allowance for
Possible Loan Losses, are reported in Footnote 7 of the audited Consolidated
Financial Statements and Schedules, June 30, 1996.
(b) Reports on Form F-3
-------------------
The Bank has not filed a Current Report on Form F-3 during the year ended
June 30, 1996.
(c) Exhibits
--------
(1) Articles of Incorporation and Bylaws*
(3) Material contracts
(A) Restated Deferred Compensation Plan for Directors**
(B) Retirement Plan for Outside Directors**
(C) Northwest Savings Bank Pension Plan**
(D) Northwest Savings Bank Nonqualified Supplemental Retirement
Plan**
(E) Defined Contribution 401(K) Profit Sharing Plan (and adoption
agreement)**
(F) Employee Stock Ownership Plan*
(G) Employment Agreement between the Bank and John A. Hanna,
President and Chief Executive Officer**
(H) Employee Severance Compensation Plan*
(6) 1996 Annual Report to Stockholders
(9) Subsidiaries of the Bank
____________
* Incorporated by reference to the Bank's Notice to Effect a Mutual Holding
Company Reorganization, filed with the FDIC pursuant to 12 C.F.R.
(S)303.15, on March 22, 1994, as amended on May 9, July 8, and July 19,
1994 (the "Notice").
** Incorporated by reference to the Bank's Form F-2 for the fiscal year ended
June 30, 1994, filed with the FDIC on October 17, 1994.
34
<PAGE>
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 SAVINGS BANK
Date: September 27, 1996 By: /s/ John O. Hanna
----------------------------
John O. Hanna, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John O. Hanna By: /s/ William J. Wagner
-------------------------------------- --------------------------
John O. Hanna, President William J. Wagner, Executive Vice
Chief Executive Officer and Director President and Director (Principal
(Principal Executive Officer) Financial/Accounting Officer)
Date: September 27, 1996 Date: September 27, 1996
By: /s/ John S. Young By: /s/ Robert L. Lasher
------------------------------------- --------------------------
John S. Young, Director Robert L. Lasher, Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Richard L. Carr By: /s/ Richard E. McDowell
------------------------------------- -------------------------
Richard L. Carr, Director Richard E. McDowell, Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Thomas K. Creal, III By: /s/ Joseph T. Stadler
------------------------------------- ------------------------
Thomas K. Creal, III, Director Joseph T. Stadler, Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ John J. Doyle By: /s/ Walter J. Yahn
------------------------------------- ------------------------
John J. Doyle, Director Walter J. Yahn, Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Robert G. Ferrier By: /s/ Taylor W. Foster
------------------------------------- -------------------------
Robert G. Ferrier, Director Taylor W. Foster, Director
Date: September 27, 1996 Date: September 27, 1996
35
<PAGE>
EXHIBIT 6
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Dear Shareholder and Customer,
Our first full year as a public company was a successful and rewarding
experience. You will find as you read through our report, assets increased $286
million (18%), deposits increased $166 million (12.9%), and loans receivable
increased $210 million (18.1%). The Bank's net interest margin, its core
earnings, remained strong increasing over 10% to $66.5 million. After tax
earnings were $17.5 million, an increase of $1.2 million (7.4%), over the prior
year and a record for the Bank. This represents a return on average assets
(ROAA) of 1.05% and a return on average equity (ROE) of 9.48%. Earnings per
share were $.77.
An area that must also be highlighted is the fine asset quality of the Bank.
You will find that the ratio of non-performing assets to total assets is a low
.81% and that loans 90 days or more past due represent only .69% of net loans
receivable. This, plus the strong growth in our loan portfolio are certainly a
tribute to the outstanding job our lending and loan servicing personnel are
doing.
Acquisitions and new offices are an integral part of the Bank's strategic plan
to expand its market in selected areas across Pennsylvania. Over $125 million of
the asset growth realized this year can be attributed to acquisitions and new
office facilities. In October we expanded our market area into Schuylkill County
through the purchase of the Pottsville office of another savings institution.
Early this year, we strengthened our position in McKean and Clarion counties by
acquiring First Federal Savings Bank of Kane and in Elk County with the opening
of a new office in Johnsonburg,Pennsylvania. In March we expanded our presence
in the State College and Centre County areas by acquiring the 1st National Bank
of Centre Hall. Our presence in Lebanon county was also enhanced by the opening
of a new office in Myerstown and the expansion of our downtown Lebanon facility
at 8th and Cumberland Avenues. We welcome the staffs and customers of these new
offices to the growing Northwest family and know that they will contribute
greatly to the continued success of the Bank.
Another major accomplishment for the year was the renovation of the four story
building attached to the Bank's corporate office facility by a pedestrian
walkway. This facility provides our growing Bank with over 35,000 square feet of
additional space for current and future needs.
Expansion will continue in 1997 with new locations to be established in
Bellefonte and State College in Centre County, in Butler County and in
Cranberry, PA in Venango County. Also, the previously announced merger with the
Bridgeville Savings Bank in Bridgeville, Pennsylvania should be completed in
early 1997. This growing southern Allegheny County area will be a new market for
the Bank.
In addition to the expansion of office facilities, Northwest is implementing new
technology in the delivery of banking services and is committed to providing
these services to its customers at a reasonable cost. Checking account customers
will soon enjoy the convenience of check imaging and debit cards, with
electronic bill paying services to soon follow. A major undertaking initiated by
the Bank this past year was the search for a new software package that will
provide financial information to customers in a convenient and efficient format
while providing the bank with the information and data processing capabilities
it will need to assure its competitive position in the future.
The competition for bank deposits by mutual funds and other alternative
investment opportunities continue to be a concern to our Bank. Despite this
increase in competition, Northwest was fortunate to record a net growth in its
deposit accounts this past year. However, this increased competition resulted in
a slightly higher cost to our deposits which has placed pressure on our net
interest margin.
<PAGE>
A second concern is the failure by Congress to find a solution to the
undercapitalization problem of the Savings Association Insurance Fund (SAIF).
The disparity that exists between the FDIC insurance premium paid by well-
capitalized institutions insured by the Bank Insurance Fund (BIF) is now .23% of
average insured deposits. This is a tremendous competitive disadvantage for SAIF
insured institutions such as Northwest. BIF insured competitors, mostly
commercial banks, are now paying only a flat $2,000 annual fee for deposit
insurance. In fiscal year 1996, Northwest Savings Bank paid over $3 million for
the same coverage. As you can see, it is critical to all SAIF insured
institutions that Congress act immediately.
A lawsuit that was initiated against the Bank as a result of the completion of
its initial public offering continues. On December 13, 1994, a complaint was
filed in United States District Court, Western District of Pennsylvania, by an
individual who purports to have subscribed for stock in the Bank's mutual
holding company reorganization and stock offering that was completed in November
1994 and alleges that the appraisal used in the Bank's Offering was
inappropriately increased at the completion of the Offering, and that, among
other things, the Bank violated the federal securities laws. On November 17,
1995, the District Court dismissed all Federal Claims against the defendants
with prejudice, and dismissed the remaining claims without prejudice. On
December 14, 1995, the plaintiff appealed the District court's decision to the
United States Court of Appeals for the Third Circuit. Management feels that the
decision of the District Court supports its belief the claims are unfounded and
will continue to vigorously defend against this action.
Since it began trading on November 7, 1994, Northwest's stock has realized a
compounded rate of return, assuming the reinvestment of dividends, of nearly
30%. In May, the Bank's Board of Directors moved to further enhance the market
value of the shares by splitting the stock in the form of a 100% stock dividend.
In July, the Board increased the annualized dividend from $.30 to $.32 per
share. Rest assured the Directors and management are committed to the
enhancement of shareholder value.
The Bank will soon proudly celebrate its 100th anniversary. Founded in Bradford,
Pennsylvania in 1896, the company has grown to a $1.8 billion institution whose
54 offices and subsidiaries now serve the residents of 16 counties in
Pennsylvania and over 300,000 customers. We hope you will take time to read the
brief history that has been provided for you in this Centennial edition of our
Annual Report and learn more about our Bank.
I would be remiss if I did not take this opportunity to express my appreciation
and thanks to all my fellow employees for a job well done. The growth and
success of the Bank can be attributed to their talent and dedication.
The success of the year was dampened by the loss of our Chairman, "Jim" Olay,
who passed away on June 29, 1996. Jim's dedication and commitment to the Bank
and his family, friends and community were unsurpassed. We miss Jim as an
associate as well as a good friend. Our most heartfelt sympathies remain with
his wife, Noma, and his family.
I would like to thank you for your support as a customer and as a shareholder,
equally important roles, as we begin our second century as a provider of
financial services to our growing family of customers.
Sincerely,
/s/John O. Hanna
John O. Hanna
President and Chief Executive Officer
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
At year end June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets $1,877,925,000 $1,591,894,000 $1,430,284,000
Loans Receivable, Net $1,374,955,000 $1,164,735,000 $1,062,533,000
Deposit Accounts $1,450,047,000 $1,283,935,000 $1,235,401,000
Shareholders' Equity $ 190,651,000 $ 178,690,000 $ 102,319,000
Book Value Per Share $8.16 $7.74 N/A
Last Trade Price $11.25 $9.63 N/A
<CAPTION>
- --------------------------------------------------------------------------------
For the year ended June 30,
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income $ 66,493,000 $ 60,032,000 $ 55,236,000
Net Income Before the
Cumulative Effect of
Change in Accounting
Principle $ 17,486,000 $ 16,294,000 $ 15,998,000
Earnings Per Share, Annualized $ .77 $ .72 N/A
Dividends Per Share $ .30 $ .125 N/A
<CAPTION>
- --------------------------------------------------------------------------------
Key Financial Ratios for the year ended June 30,
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on Average Shareholders'
Equity, Annualized 9.48% 9.29% N/A
Return on Average Assets 1.05% 1.09% 1.33%
Interest Rate Spread 3.72% 3.81% 4.00%
Nonperforming Assets to Total
Assets at End of Period .81% 1.03% 1.53%
Allowance for Loan Losses to
Nonperforming Assets at End
of Period 86.09% 72.51% 51.42%
<CAPTION>
- -------------------------------------------------------------------------------
Other Data at June 30,
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of:
Community Banking Offices 54 45 45
Consumer Finance Offices 29 28 26
Mortgage Loan Production Offices 8 8 6
</TABLE>
<PAGE>
NORTHWEST SAVINGS BANK
[MAP OF LOCATIONS OF COMMUNITY BANKING OFFICES IN PENNSYLVANIA &
NEW YORK APPEARS HERE]
CORPORATE HEADQUARTERS
- ----------------------
* Warren
Liberty Street at Second Avenue
(814) 726-2140
COMMUNITY BANKING OFFICES
- -------------------------
1. Bradford (3), McKean Co. 22. Pottsville, Schuykill Co.
Bradford Mall 104 North Centre Street
33 Main Street
85 West Washington Street 23. Ridgway, Elk Co.
Main & Mill Streets
2. Centre Hall, Centre Co.
219 North Pennsylvania Ave. 24. Sarver, Butler Co.
735 South Pike Road
3. Clarion (3), Clarion Co.
537 Main Street 25. Springboro, Crawford Co.
601 Main Street 105 South Main Street
97 West Main Street
26. St. Marys (2), Elk Co.
4. Columbia, Lancaster Co. 201 Brusselle Street
350 Locust Street St. Marys Plaza
5. Erie (9), Erie Co. 27. State College (3), Centre Co.
2256 West 8th Street 201 West Beaver Avenue
K-Mart Plaza East 611 University Drive
K-Mart Plaza West 1524 West College Avenue
Millcreek Mall
3805 Peach Street 28. Titusville, Crawford Co.
5624 Peach Street Spring & Franklin Streets
401 State Street
121 West 26th Street 29. Valencia, Butler Co.
1421 Pittsburg Road
6. Franklin, Venango Co.
1301 Liberty Street 30. Warren (3), Warren Co.
Warren Mall
7. Gibsonia, Allegheny Co. 1666 Market Street Ext.
Village of St. Barnabas 125 Ludlow Street
5850 Meridian Liberty at Second
8. Harborcreek, Erie Co. 31. Wrightsville, York Co.
4452 East Lake Road 120 North 4th Street
9. Hershey, Dauphin Co. 32. York, York Co.
10 West Chocolate Avenue Queensgate Shopping Center
10. Johnsonberg, Elk Co.
553 Market Street
11. Kane, McKean Co.
56 Fraley Street
12. Lake City, Erie Co.
2102 Rice Avenue
13. Lancaster, Lancaster Co.
24 West Orange Street
14. Lebanon (2), Lebanon Co.
70 Cumberland Street
547 South 10th Street
15. Lewistown, Mifflin Co.
51 West Market Street
16. Meadville (3), Crawford Co.
932 Diamond Park
1073 Park Avenue
880 Park Avenue
17. Mount Joy, Lancaster Co.
24 East Main Street
18. Myerstown, Lebanon Co.
1 West Main Avenue
19. North East, Erie Co.
35 Main Street
20. Oil City (3), Venango Co.
1 East First Street
301 Seneca Street
259 Seneca Street
21. Palmyra, Lebanon Co.
1048 East Main Street
2
<PAGE>
Financial Highlights
Year Ended June 30, 1996
(as originally reported and adjusted for stock splits)
. Total Assets grew by $286.0 million, or 18.0%, to $1.878 billion as the Bank
continued its tradition of controlled and profitable growth.
. Loans Receivable grew by $210.3 million, or 18.1%, to $1.375 billion as the
Bank continued to increase both its market share and increase its ratio of
loans to deposits.
. Deposits grew by $166.1 million, or 12.9%, to $1.450 billion with $95.8
million resulting from acquisitions and $70.2 million from internal growth.
. Borrowed money increased by $108.4 million, or 104.8%, to $211.8 million as
the Bank used borrowed funds to support additional lending and investment
activities and improve net interest income.
. Net income increased by $1.2 million, or 7.4%, to $17.5 million.
. Net interest income increased by $6.5 million, or 10.8%, to $66.5.
. Noninterest expense increased by $3.9 million, or 10.5%, as the Bank continued
to expand operations while controlling the increase in noninterest expense.
. Noninterest expense equalled just 60% of the increase in net interest income,
thereby increasing profitability.
. The Bank's efficiency ratio, which is operating costs divided by total income,
was 57.8%.
. The provision for loan losses increased by $400,000, or 37%, to $1.5 million
as increased loan originations made an increase in loan loss reserves
necessary.
. Asset quality remained exceptionally strong with nonperforming assets at June
30, 1996 of only $15.3 million or .81% of total assets.
. Delinquency remained low with loans ninety days or more past due representing
only .69% of net loans receivable and loans thirty days or more past due
representing only 1.30% of net loans receivable.
<TABLE>
<CAPTION>
Total Assets
(Dollars in millions)
<S> <C>
1992 $1,217
1993 $1,292
1994 $1,430
1995 $1,592
1996 $1,878
<CAPTION>
Total Loans Receivable
(Net, dollars in millions)
<S> <C>
1992 $ 896
1993 $ 999
1994 $1,063
1995 $1,165
1996 $1,375
<CAPTION>
Total Deposits
(Net, dollars in millions)
<S> <C>
1992 $1,100
1993 $1,136
1994 $1,235
1995 $1,284
1996 $1,450
</TABLE>
3
<PAGE>
Shareholder Highlights
Year Ended June 30, 1996
(as originally reported and adjusted for stock splits)
. Shareholder's Equity increased by $12.0 million, or 6.7%, to $190.7 million.
. Book value per share increased $.42, or 5.4%, to $8.16.
. The market value of the Bank's stock increased by $1.62 per share, or 16.8%,
to $11.25 per share.
. The Bank's return on average equity was 9.48% during this first full year as a
publicly traded company.
. In April 1996, the Bank's Board of Directors declared a two-for-one stock
split in the form of a stock dividend. For each share held, each shareholder
of record on May 3, 1996, received one additional share on May 15, 1996. Since
this stock split was in the form of a stock dividend, the par value of $.10
per share and the number of authorized shares, 50,000,000, did not change.
. The annualized dividend yield at June 30, 1996 was 2.84% when using
Northwest's current quarterly dividend of $.08 per share and the June 30, 1996
closing price of $11.25 per share.
. Earnings per share were $.20, $.17, $.20 and $.20 respectively for the four
quarters ended June 30, 1996 giving total earnings per share of $.77. The
decline in earnings for the second quarter primarily resulted from the
adoption of the Bank's recognition and retention plan.
. Market capitalization for the Bank's 7,176,000 publicly traded shares at June
30, 1996 was $80.7 million.
. Trading volume of the Bank's stock remained strong with an average of 207,000
shares traded each month during the fiscal year.
<TABLE>
<CAPTION>
Market Value of NWSB Stock
Month End Closing Prices
<S> <C>
J $10.125
A $10.75
S $12.00
O $12.625
N $12.625
D $12.125
J $11.688
F $11.375
M $11.125
A $12.125
M $12.25
J $11.25
<CAPTION>
Quarterly Earnings Per Share
(Dollars)
<S> <C>
1st Qtr. $0.20
2nd Qtr. $0.17
3rd Qtr. $0.20
4th Qtr. $0.20
<CAPTION>
Trading Volume
<S> <C>
J 368,627
A 225,505
S 286,926
O 382,142
N 88,525
D 254,066
J 168,354
F 90,123
M 79,487
A 149,871
M 205,842
J 184,453
</TABLE>
4
<PAGE>
The Year in Review
. October 13, 1995 - Opened new full-service bank office in Myerstown,
Lebanon County, Pennsylvania.
. November 9, 1995 - Opened new full-service bank office in downtown Lebanon,
Pennsylvania, to replace smaller facility at an adjacent location.
. November 13, 1995 - Opened full-service bank office in Pottsville, Schuykill
County, Pennsylvania after purchasing physical location and deposits of $23.8
million from another financial institution.
. November 21, 1995 - Conducted the first Annual Shareholders Meeting of
Northwest Savings Bank in Warren, Pennsylvania.
. February 29, 1996 - Opened new full-service bank in downtown Johnsonburg, Elk
County, Pennsylvania.
. March 30, 1996 - Completed merger with First Federal Savings Bank of Kane with
assets of $45.6 million and three banking offices in Kane and Clarion,
Pennsylvania.
. April 1, 1996 - Opened the 29th office of Northwest Consumer Discount Company
in Johnstown, Pennsylvania.
. April 12, 1996 - Completed merger with First National Bank of Centre
Hall with assets of $39.3 million and full-service offices in Centre Hall and
State College, Pennsylvania.
. May 3, 1996 - Declared a two-for-one stock split.
. June 28, 1996 - Completed the renovation of an additional corporate office
facility in Warren, Pennsylvania, to house the Bank's corporate departments
for lending, audit, human resources, credit review and marketing.
. June 30, 1996 - Total loans of Northwest Consumer Discount company surpassed
$100 million.
================================================================================
In Memoriam
With great sadness we report the death of James H. Olay, on June 29, 1996,
following an extended illness. Mr. Olay served as a Director of Northwest
Savings Bank since 1983 when Ridgway Federal Savings and Loan merged with
Northwest. Mr. Olay had previously served as a Director of Ridgway Federal
Savings and Loan since 1966. In 1993 Mr. Olay was elected Chairman of the Board
of Northwest and he served in that capacity until his death. We will miss Jim's
commitment to our Bank and our community. His death is a loss to all of us whose
lives he touched.
================================================================================
[Photo appears here]
Myerstown Office
[Logo appears here]
First
Federal
Savings Bank
[Logo appears here]
THE FIRST NATIONAL BANK
OF CENTRE HALL
5
<PAGE>
Corporate Philosophy
. To provide a level of service that exceeds our customers' expectations
. To provide a secure and challenging environment for our employees
. To maintain an active involvement in our communities
. To provide an attractive return on investment to our shareholders
Geographic Diversification
. 54 community banking offices in 16 counties in Pennsylvania
. 28 consumer finance offices in 17 counties in Pennsylvania and one
consumer finance office in New York
. 4 mortgage loan origination offices in New York, 2 offices in
Pennsylvania and 2 offices in South Carolina
Business Emphasis
. Provide quality customer service
. Provide a wide array of financial products
. Originate mortgage, consumer and commercial loans in our market area
. Solicit retail deposits in our market areas as our primary source of
funds
NORTHWEST SAVINGS BANK
Founded in 1896
A Century of Service
Corporate Profile
Introduction
Northwest Savings Bank was founded as the Bradford Building, Savings and
Loan Association in 1896 in Bradford, Pennsylvania, approximately forty miles
from the current corporate headquarters in Warren, Pennsylvania. Like all thrift
institutions of the 19th century, Bradford Building and Loan was formed to
promote personal savings and home ownership and serve its community. While many
things have changed over the past one hundred years, our founding fathers' dream
of promoting thrift and home ownership and serving the community has remained
the cornerstone of tradition at Northwest Savings Bank.
We celebrate our centennial year by not only remembering how far we have
come, but also by recognizing that in order to continue to succeed, our
institution must continue to advance, compete, profit and grow in an ever
changing market. In preparing for our second century we reflect on our history
and recognize both the successes and tribulations of the past. We recognize that
our success has come from a continuous effort to sustain growth in our existing
markets, to enter new markets and to acquire institutions that are anxious to
become part of the Northwest tradition. We expect this philosophy of controlled,
profitable growth to continue.
We also recognize that we owe much of our success to our employees who know
how our organization benefits our customers and our communities and who promote
Northwest as "Everything Your Bank Should Be". We thank and applaud our
employees for the successes of the past, and we challenge them to continue to
contribute to the successes of the future.
Finally, we thank our customers who have made a century of service
possible. We appreciate your confidence in our Bank as your lender, as your
depository and as your investment for the future. We look forward to continuing
this relationship as we enter our second century.
Business Strategy
Northwest Savings Bank has traditionally operated as a community-oriented
savings bank dedicated to providing quality customer service. We have emphasized
retail deposits as our primary source of funds with a majority of these funds
invested in locally-originated residential first mortgage loans. In recent
years, we have diversified our lending to include consumer and commercial loan
products to meet a wider range of borrowing needs. We generally invest funds
not invested in loans in mortgage-backed securities and other marketable
investment securities
<PAGE>
We have continued to diversify from traditional banking operations by
forming a consumer finance subsidiary, Northwest Consumer Discount Company and a
mortgage loan origination company, Northwest Mortgage Corporation. Northwest
Consumer Discount Company has grown steadily since being chartered in 1982.
During the fiscal year ended June 30, 1996 Northwest Consumer reached a
milestone when total loans surpassed $100 million. Northwest Mortgage
Corporation continues to originate mortgage loans from its offices in
Pennsylvania, South Carolina and New York which in turn provide geographic
diversity to the Bank's loan portfolio.
We believe that this business strategy will continue to serve our Bank well
into the next century. We feel that competition in the financial services
industry will continue to intensify and that we will have to remain flexible and
focused in order to continue to grow and prosper.
Asset Mix
Northwest Savings Bank constantly monitors the mix of its assets in order
to maintain an acceptable credit risk profile, minimize exposure to changes in
interest rates, and maintain an acceptable interest rate spread.
At June 30, 1996, the Bank's funds were invested in the following assets:
<TABLE>
<CAPTION>
% of
Amount Assets
------------------------------
<S> <C> <C>
Real Estate Loans 1,105,900,000 58.9%
Consumer Loans 252,063,000 13.4%
Commercial Loans 67,045,000 3.6%
Mortgage-backed Securities 291,446,000 15.5%
Investment Securities 106,047,000 5.7%
Interest-earning Deposits 30,498,000 1.6%
Other Assets 24,926,000 1.3%
------------------------------
Total $1,877,925,000 100%
==============================
</TABLE>
Of the $1.853 billion the Bank had invested in interest-bearing assets,
$465.0 million or 25.1% consisted of assets with adjustable interest rates.
Looking ahead we anticipate that the Bank will continue to offer a wide
array of loan products and aggressively price and market these products. We
intend to maintain our competitive edge in being a full-service retail lending
institution.
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Northwest Consumer
Discount Company
Total Loans at June 30
(Dollars in millions)
<S> <C>
1985 $2.1
1990 $50.2
1996 $100.9
</TABLE>
[PIE CHARTS APPEARS HERE]
<TABLE>
<CAPTION>
Asset Mix
<S> <C>
Real Estate Loans 58.9%
Deposits 1.6%
Invest. Sec. 5.7%
Mtg. backed Sec. 15.5%
Other Assets 1.3%
Commercial Loans 3.6%
Consumer Loans 13.4%
<CAPTION>
Loan Mix
<S> <C>
Home imp./equity 2.7%
Commercial 4.7%
Auto/Other 11.6%
Education 3.4%
Multi-family 5.0%
1-4 Family 72.6%
</TABLE>
<PAGE>
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Interest-bearing
Liability Mix
<S> <C>
Money Market 5.0%
Checking 11.7%
Savings 17.8%
Borrowings 12.8%
Certificates 52.7%
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Net Interest Income
(Dollars in millions)
<S> <C>
1992 $40.9
1993 $50.3
1994 $55.2
1995 $60.0
1996 $66.5
</TABLE>
Liability Mix
Historically, Northwest Savings Bank has relied on retail deposits to fund
its investment activities. To meet increasing loan demand and leverage
Northwest's capital, the Bank most recently began to increase its borrowings
from the Federal Home Loan Bank.
At June 30, 1996, the Banks major sources of funds were as follows:
<TABLE>
<CAPTION>
% of
Interest-
Bearing
Amount Liabilities
--------------------------------------
<S> <C> <C>
Savings Accounts $ 296,099,000 17.8%
Checking Accounts 195,019,000 11.7%
Money Market Accounts 82,552,000 5.0%
Certificates of Deposit 876,377,000 52.7%
Borrowed Funds 211,761,000 12.8%
--------------------------------------
Interest-bearing Liabilities $1,661,808,000 100.0%
======================================
</TABLE>
Northwest intends to remain competitive in pricing its deposit products,
and plans to expand its product line to better compete with its bank and
non-bank competitors.
Net Interest Income
Northwest Savings Bank's net interest income, the difference between
interest earned on assets and interest paid on liabilities, is the Bank's
primary source of income. The Bank has increased net interest income each year
over the past five years, and it currently excels in this area when compared to
other savings banks of similar size. This historical growth pattern has resulted
from the Bank's asset growth and from management of the mix of its assets and
liabilities. Also, the portfolio of consumer loans contributed by the Bank's
consumer finance subsidiary, Northwest Consumer Discount Company, makes a
significant contribution to the Bank's favorable net interest income. Consumer
loans typically carry interest rates well above rates on other interest-earning
assets.
The Bank plans to continue to improve on its net interest income through
growth and the aggressive management of the mix of assets and liabilities.
However, given the level of competition in today's marketplace, ongoing
improvement in this area will be one of Northwest Savings Bank's greatest
challenges.
<PAGE>
Noninterest Expense
Northwest Savings Bank's noninterest expense is the cost of operating
the Bank. Because the Bank employs a large number of employees to operate the
many facilities in the Northwest network, compensation expense forms the primary
component of noninterest expense. Other major areas of noninterest expense
include office occupancy and operation, marketing, FDIC insurance, check
processing and ATM expense.
The Bank has successfully controlled noninterest expenses in recent
years; the increase in such expense has been much less than the increase in our
primary source of income, net interest income. As a result, Northwest Savings
Bank's profitability has improved.
The Bank plans to make every effort to continue to control operating
expense. When possible, the Bank intends to use technological advances to
streamline operations and reduce related costs.
Profitability
Each year for the past five years, Northwest Savings Bank has improved
its core earnings. As previously mentioned, such improvement stems from a
combination of a substantial increase in net interest income and the control of
operating costs.
Asset Quality
We witnessed the partial demise of the thrift industry in the 1970s and
1980s when asset quality fell and loan losses grew, often delivering a final
blow to weakened institutions.
With that experience in mind, Northwest entered the 1990s resolved to
significantly reduce nonperforming assets and to emphasize credit quality in the
new loans we originated. We emphasized local lending and drastically reduced
lending outside our area. Purchases of investment securities were generally
limited to high quality mortgage-backed securities and investments issued or
guaranteed by the United States Government or its agencies.
Our results have been dramatic. The ratio of nonperforming assets to
total assets has declined to .81% at June 30, 1996 from 2.85% at June 30, 1992.
Total loans past due 60 days or more have declined to .84% of total loans
receivable at June 30, 1996 as compared to 2.47% at June 30, 1992.
Looking ahead, the Bank intends to maintain a high level of asset
quality while diversifying its lending in an effort to improve net interest
income.
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Non Interest Expense
(Dollars in millions)
<S> <C>
1992 $31.6
1993 $33.9
1994 $34.1
1995 $37.0
1996 $40.8
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Net Income
Before Extraordinary Items
(Dollars in millions)
<S> <C>
1992 $8.6
1993 $14.0
1994 $16.0
1995 $16.3
1996 $17.5
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Nonperforming Assets
(As a percent of total assets)
<S> <C>
1992 2.85%
1993 2.42%
1994 1.53%
1995 1.03%
1996 0.81%
</TABLE>
<PAGE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Capital to Asset Ratio
(Percent)
<S> <C>
1992 5.77%
1993 6.52%
1994 7.15%
1995 11.22%
1996 10.15%
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Net Interest Margin
(Percent)
<S> <C>
1992 3.60%
1993 4.15%
1994 4.22%
1995 4.15%
1996 4.15%
</TABLE>
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Variable Rate Assets
(Dollars in millions)
<S> <C>
1992 $252
1993 $307
1994 $302
1995 $402
1996 $465
</TABLE>
Capital Strength and Controlled Growth
Northwest Savings Bank has continuously emphasized controlled growth as a
way to enter new markets, expand our customer base and enhance profitability.
Since 1983, Northwest has completed 18 mergers and acquisitions while total
assets grew from $285 million to $1.878 billion. Throughout this time, we
carefully controlled our growth so that our capital position remained within
regulatory guidelines.
Northwest Savings Bank completed its initial public offering on November 4,
1994 and raised approximately $67 million in new capital. The completed
offering provided us with the capital we need to fuel the growth we project for
the future. Recognizing the need to leverage the Bank's capital to improve
return on shareholder's equity, the Bank's strategic growth strategy for the
fiscal year ended June 30, 1996 caused the Bank's capital to asset ratio to
decline to 10.15%. At June 30, 1996, the Bank comfortably exceeded all
regulatory capital requirements.
The Bank has sufficient capital to support growth similar to that of the
past five years when assets grew by 54%. The Bank still recognizes however, that
growth must be controlled to maintain appropriate capital levels and profit
margins.
Interest Rate Risk Management
Historically, the Bank's interest expense has been more sensitive than its
interest income to changes in the level of interest rates. The Bank's deposit
accounts typically react to interest rate changes more quickly than the Bank's
assets. As a result, when interest rates rise the Bank usually will experience a
decrease in net interest income. Conversely, when interest rates fall, net
interest income generally will benefit.
To manage the Bank's interest rate sensitivity, management monitors the
levels of interest-sensitive assets and liabilities while attempting to maximize
interest rate spread.
To reduce potential volatility of earnings in a changing interest rate
environment, the Bank has invested a substantial percentage of its assets in
adjustable-rate mortgage loans, variable-rate consumer loans, adjustable-rate
mortgage-backed securities and in overnight deposits at other financial
institutions. At June 30, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing within the same period by $279.0 million. While this is the largest
interest-sensitive investment position the Bank has experienced in several
years, management believes that this position is appropriate given the current
interest rate environment. Should assumptions or projections change, management
will consider adjusting the Bank's interest sensitivity by either selling
long-term fixed-rate assets or by extending the maturities of its borrowed
funds. The Bank does not currently use derivatives to manage interest rate
sensitivity.
<PAGE>
Technology
Traditionally, we have attempted to implement the technologies necessary
to provide quality customer service and to offer a full range of financial
products and services. Although our goal never has been to be on the "leading
edge" of technology, we have maintained enough technological strength to support
significant and sustained growth while continuing to meet the needs of our
customers.
Looking to the future, we recognize the important role that technology will
play in delivering financial services. With this in mind, we plan to make a
major commitment during the next two years to upgrade our data processing
systems by purchasing new hardware and software. We are currently implementing
image technology to provide imaged checking account statements to our customers,
improve customer service and reduce the costs of servicing these accounts. With
personal computer banking moving to the forefront, we plan to open a "Home Page"
on the Internet before the end of 1996 and we are researching possible future
uses of this medium as well as other remote banking services. We will continue
to follow technological developments in our industry and will make the
technological advances that we feel necessary to remain competitive and offer
the products our customers want.
<PAGE>
[LOGO OF BRADFORD BUILDING, LOAN AND SAVINGS ASSOCIATION APPEARS HERE]
[LOGO OF TUNA VALLEY SAVINGS AND LOAN INSURANCE CORPORATION APPEARS HERE]
[LOGO OF TITUSVILLE BUILDING AND LOAN ASSOCIATION APPEARS HERE]
[LOGO OF ST. MARYS SAVINGS AND LOAN ASSOCIATION APPEARS HERE]
[LOGO OF PEOPLES SAVINGS AND LOAN OF OIL CITY APPEARS HERE]
THE CENTURY IN REVIEW
In 1996, Northwest Savings Bank will celebrate its one hundredth
anniversary.
The history of our first century of service reflects both our bank's growth,
most often by merging with other local financial institutions, our local
orientation, and our drive to present an ever-widening range of services to our
customers.
.Northwest Savings Bank received its charter in August of 1896 as the Bradford
Building, Loan and Savings Association. The new institution operated from
1 Main Street in Bradford, McKean County. Our first home loan, made soon
after our founding, amounted to $720.
.To widen its services and give its depositors added protection, Northwest
joined the Federal Home Loan Bank and the Federal Savings and Loan Insurance
Corporation (later merged into the FDIC) when these federal agencies were
created in 1932 and 1933 respectively.
.In 1959, Bradford Savings merged with the Tuna Valley Savings and Loan
Association. Founded in 1930, Tuna Valley took its name from the Seneca
Indian name for a local stream. This was the first of thirteen bank mergers,
and it was here that Northwest established its policy of retaining all staff
members gained through mergers and acquisitions. Unlike many banks, Northwest
feels that cutting local staff does a disservice to everyone, staff, customers
and bank alike.
.In 1962, we changed our name to Northwest Savings & Loan Association to better
reflect our growing regional presence.
.In 1967, the Bank took advantage of the authorities granted in the newly
adopted Savings Association Code of 1967, and shortened its name to Northwest
Savings Association and became popularly known as "Northwest Savings."
.In 1969, Northwest moved its headquarters to Warren County in order to permit
its expansion into the contiguous counties of Erie, Crawford and Venango.
.Later in 1969, Northwest Savings Association merged with the Titusville
Building and Loan Association, which had served Crawford County since 1916. The
Bank now operated three operated in Bradford, Titusville and Warren.
.In 1970, the Bank opened its fourth office at the new Bradford Mall.
.To serve its customers better, Northwest established its own computer center
in 1972.
.Two mergers marked 1974. The St. Marys Savings and Loan Association,
established in 1902, and the Peoples Savings and Loan of Oil City, established
in 1901, joined the Northwest family, and expanded the bank's market area to
Elk and Venango Counties. Today, Northwest operates four offices in each of
these counties.
12
<PAGE>
. Northwest Savings passed $100,000,000 in assets in October of 1976
. During the same year, the bank took advantage of changing government
regulations to introduce Individual Retirement Accounts, Home Improvement
Loans, and Direct Deposit of Social Security and other government payments.
. Northwest entered the Franklin community with the opening of our seventh
community office in 1979.
. In 1981, the bank first offered checking accounts to its customers and
upgraded its computer system to place all community banking offices directly
on-line to our mainframe computer.
. The bank founded the Northwest Consumer Discount Company in 1982 with the
purchase of the Erie Consumer Discount Company. Today, Northwest Consumer
ranks as a major bank subsidiary, operating twenty-nine consumer discount
offices in Pennsylvania and New York State.
. Also in 1982, Northwest introduced a wide range of new financial products
including education, auto and consumer loans, Adjustable Mortgage Loans, and
Insured Money Funds.
. Ridgway became the seventh city in Northwest's growing market area in 1983
when Ridgway Federal Savings and Loan Association, which had served its home
town since 1891, merged with Northwest to become our eighth community office.
. A merger with Mutual Savings & Loan of Erie in 1984 almost doubled the bank's
size to more than $500,000,000 in assets and changed its name to Northwest
Mutual Savings Association. At the time of the merger, Mutual Savings, founded
in 1888, operated six offices in Erie. Today, Northwest serves Erie County
with twelve community banking offices.
. Northwest Mortgage Corporation, another major subsidiary of the bank, was
founded in 1984, when the bank opened its first mortgage lending office in
Jamestown, New York. The subsidiary now operates eight mortgage loan offices
in New York, Pennsylvania, and South Carolina.
. In 1985, Northwest merged with the Bakerstown Saving and Loan Association
which operated community offices in Valencia and Sarver in Butler County and a
special office in the Village of St. Barnabas, a retirement village in
Allegheny County.
. May of 1986 saw the purchase of four offices in Erie, Crawford and Warren
Counties. The purchase included the office of the former Meadville Savings and
Loan Association and introduced our bank to Meadville in Crawford County.
. Northwest moved to the east in 1988 by opening an office in Hershey, our first
in central Pennsylvania.
. The same year saw the adoption of the name Northwest Savings Bank, a name
chosen to better describe the services we offer our customers.
[LOGO OF RIDGWAY FEDERAL SAVINGS AND LOAN APPEARS HERE]
[LOGO APPEARS HERE]
[LOGO OF BAKERSTOWN SAVINGS & LOAN ASSOCIATION APPEARS HERE]
[LOGO OF HORIZON SAVINGS ASSOCIATION APPEARS HERE]
13
<PAGE>
[LOGO OF STEITZ SAVINGS & LOAN ASSOCIATION APPEARS HERE]
[LOGO OF AMERICAN FEDERAL SAVINGS APPEARS HERE]
[LOGO OF FIRST FEDERAL SAVINGS BANK APPEARS HERE]
[LOGO OF THE FIRST NATIONAL BANK OF CENTRE HALL APPEARS HERE]
. During 1990, the bank merged twice, first with Horizon Savings Association and
second with Steitz Savings & Loan Association.
. Formerly Lewistown Standard Savings and Loan Association, Horizon Savings had
been founded in 1903 and operated offices in Lewistown in Mifflin County and
State College in Centre County.
. Its founders named Steitz Savings for Steitztown, the original name of
Lebanon, Pennsylvania, when they founded the company in 1923. At the time of
the merger, Steitz Savings operated four offices in Lebanon and Lancaster
Counties.
. In March of 1991, Northwest Savings Bank passed $1,000,000,000 in assets,
having grown from the $100,000,000 level in just fifteen years.
. In the following year, 1992, Northwest merged with American Federal Savings.
Originally Venango Federal Savings and Loan Association, American Federal has
served Franklin since its founding in 1943 and operated additional offices in
Erie, Oil City, and Meadville.
. In June of 1994, the bank purchased four community banking offices in
Lancaster and York Counties which had previously comprised the local Colonial
Savings, Wrightsville Savings and Loan and West End Savings and Loan
Associations.
. November of 1994 saw the formation of Northwest Bancorp, a Mutual Holding
Company, and the initial public offering and sale of the stock of Northwest
Savings Bank.
. A year later, in 1995, the company expanded into Schuylkill County by
purchasing a banking facility in Pottsville.
. In March of 1996, Northwest merged with the First Federal Savings Bank of
Kane, adding offices in Kane in McKean County and Clarion, Clarion County, to
the Northwest family.
. One month later, the bank merged with the First National Bank of Centre Hall
which operated three offices in Centre Hall and State College. We now serve
our Centre County customers with four offices and we will open our fifth in
downtown Bellefonte in the fall of the year.
. Today, Northwest Savings Bank holds over $1.8 billion in assets and we serve
the residents of sixteen counties in central and western Pennsylvania through
a network of fifty-four community banking offices. During this, our Centennial
Year, we thank all those staff members, customers and shareholders who have
made our growth possible, and we pledge ourselves to continue our tradition of
steady, profitable growth in the future.
14
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
TABLE OF CONTENTS
Management's Discussion and Analysis................................18
Report of Management Regarding:
Internal Control Structure Over Financial Statements................36
Independent Auditor's Report........................................38
Consolidated Statements of Condition - at June 30, 1996 and
1995................................................................39
Consolidated Statements of Income - years ended June 30, 1996,
1995 and 1994.......................................................40
Consolidated Statements of Changes in Shareholder's Equity - years
ended June 30, 1996, 1995 and 1994..................................41
Consolidated Statements of Cash Flow - years ended June 30, 1996,
1995 and 1994.......................................................42
Notes to Consolidated Financial Statements..........................44
<PAGE>
Selected Financial and Other Data
Set forth below are selected consolidated financial and other data of Northwest
Savings Bank (the "Bank"). For additional information about the Bank, please
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Bank and
related notes included elsewhere herein.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
Selected Consolidated Financial (In Thousands)
<S> <C> <C> <C> <C> <C>
Condition Data (1):
Total assets............................... $1,877,925 $1,591,894 $1,430,284 $1,292,488 $1,217,474
Interest-earning deposits at
other financial institutions.............. 30,498 59,930 85,705 38,699 80,533
Investment securities held to maturity..... 54,086 65,470 33,180 2,699 4,378
Investment securities available-for-sale... 51,961 1,414 -- -- --
Mortgage-backed securities held to maturity 101,932 204,841 199,165 166,631 185,615
Mortgage-backed securities available-for-
sale...................................... 189,514 38,343 200 31,436 --
Loans receivable net:
Real estate............................... 1,066,887 906,276 864,448 819,098 730,888
Consumer.................................. 249,051 202,630 179,765 163,036 149,787
Commercial................................ 59,017 55,829 18,320 17,127 15,216
Total loans receivable, net.............. 1,374,955 1,164,735 1,062,533 999,261 895,891
Deposits................................... 1,450,047 1,283,935 1,235,401 1,136,116 1,099,895
Advances from FHLB and other borrowed
funds..................................... 211,761 103,439 71,203 53,637 29,822
Shareholders' equity and retained income... 190,651 178,690 102,319 84,251 70,203
- ----------------------------------
footnote below
<CAPTION>
Years Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
Selected Consolidated Operating Data (1): (In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income...................... $ 135,130 $ 118,158 $ 106,492 $ 106,204 $ 108,945
Total interest expense..................... 68,637 58,126 51,256 55,888 68,069
----------------------------------------------------------
Net interest income...................... 66,493 60,032 55,236 50,316 40,876
Provision for loan losses.................. 1,502 1,098 1,728 1,797 2,414
----------------------------------------------------------
Net interest income after provision for
loan losses............................. 64,991 58,934 53,508 48,519 38,462
----------------------------------------------------------
Noninterest income......................... 4,125 4,512 7,811 8,180 7,536
Noninterest expense........................ 40,827 36,971 34,130 33,898 31,599
----------------------------------------------------------
Income before income tax expense and
cumulative effect of accounting change.... 28,289 26,475 27,189 22,801 14,399
Income tax expense......................... 10,803 10,181 11,191 8,753 5,804
----------------------------------------------------------
Income before cumulative effect of
accounting change......................... 17,486 16,294 15,998 14,048 8,595
Cumulative effect of change in accounting
for income taxes.......................... -- -- 2,070 -- --
----------------------------------------------------------
Net income............................. $ 17,486 $ 16,294 $ 18,068 $ 14,048 $ 8,595
==========================================================
</TABLE>
- ------------------------------------
(1) Includes retroactive disclosure of all data for American Federal Savings,
which was merged in April 1992 and accounted for using the pooling of
interest method of accounting.
16
<PAGE>
Selected Financial and Other Data (continued)
<TABLE>
<CAPTION>
At or for the Years Ended June 30,
---------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Key Financial Ratios and Other Data:
Return on average assets (net income
divided
by average total assets)............ 1.05% 1.09% 1.33% 1.12% 0.72%
Return on average equity (net
income divided by average equity)... 9.48 11.00 19.25 18.29 13.16
Average capital to average assets..... 11.03 9.87 6.93 6.11 5.51
Capital to total assets............... 10.15 11.22 7.15 6.52 5.77
Net interest rate spread (average
yield on
interest-earning assets less
average cost
of interest-bearing liabilities).... 3.72 3.81 4.00 3.96 3.42
Net interest margin (net interest
income as a
percentage of average
interest-earning
assets)............................. 4.15 4.15 4.22 4.15 3.60
Noninterest expense to average assets. 2.44 2.46 2.52 2.70 2.66
Net interest income to noninterest
expenses............................. 1.63x 1.62x 1.62x 1.48x 1.29x
Nonperforming loans to net loans
receivable........................... .69 .89 1.33 1.72 2.28
Nonperforming assets to total assets.. .81 1.03 1.53 2.42 2.85
Allowance for loan losses to
nonperforming assets................. 86.09 72.51 51.42 35.21 29.55
Allowance for loan losses to net
loans receivable..................... .95 1.02 1.06 1.10 1.15
Average interest-bearing assets to
average
interest-bearing liabilities........ 1.10x 1.08x 1.06x 1.04x 1.03x
Number of:
Full-service offices................ 54 45 45 38 38
Consumer finance offices............ 29 28 26 26 26
Mortgage loan production offices.... 8 8 6 5 5
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FINANCIAL CONDITION
General
Total assets increased by $286.0 million, or 18.0%, to $1.878 billion at June
30, 1996 from $1.592 billion at June 30, 1995. This increase was funded
primarily by a $166.1 million increase in deposits and a $108.3 million increase
in borrowed funds. Also contributing to this increase was net income of $17.5
million for the fiscal year ended June 30, 1996. The Bank's assets increased by
$161.6 million, or 11.3%, to $1.592 billion at June 30, 1995 from $1.430 billion
at June 30, 1994. This increase was funded primarily by an $80.8 million
increase in deposits and borrowed funds and was assisted by net proceeds of
approximately $67.0 million received as a result of the Bank's initial public
offering which was completed on November 4, 1994. The additional funds from both
fiscal 1996 and 1995 were utilized to increase investments in loans receivable,
mortgage-backed securities and other investment securities.
Interest-earning deposits in other financial institutions
Interest-earning deposits in other financial institutions decreased by $29.4
million, or 49.1%, to $30.5 million at June 30, 1996 from $59.9 million at June
30, 1995. The Bank experienced a similar decline in the previous year when
interest-earning deposits in other financial institutions decreased by $25.8
million, or 30.1%, to $59.9 million at June 30, 1995 from $85.7 million at June
30, 1994. These decreases resulted as the Bank redeployed funds from interest-
earning deposits to loans receivable, mortgage-backed securities and other
investment securities which generally have higher rates of return.
Investment securities
Total investment securities increased by $39.1 million, or 58.4%, to $106.0
million at June 30, 1996 from $66.9 million at June 30, 1995. During the
previous year, investment securities increased by $33.7 million, or 101.5%, to
$66.9 million at June 30, 1995 from $33.2 million at June 30, 1994. The Bank
continues to use available funds to purchase investment securities with
maturities of two to five years in order to enhance the Bank's overall yield on
investments.
Mortgage-backed securities
Total mortgage-backed securities increased by $48.2 million, or 19.8%, to $291.4
million at June 30, 1996 from $243.2 million at June 30, 1995. In the previous
year, mortgage-backed securities increased by $43.8 million, or 22.0%, to $243.2
million at June 30, 1995 from $199.4 million at June 30, 1994. These increases
resulted primarily from the Bank borrowing funds to purchase additional
mortgage-backed securities in an effort to improve net interest income.
As of December 31, 1995, the Bank restructured its portfolio of investment
securities and mortgage-backed securities in response to a special report issued
by the Financial Accounting Standards Board which addressed Statement of
Financial Accounting Standards 115. As a result of this one time adjustment, the
Bank reclassified securities with an amortized cost of $121.2 million which were
previously classified as "held-to-maturity" to "available-for-sale." This
classification will provide the Bank with greater flexibility in managing the
investment portfolio.
Loans receivable
Net loans receivable increased by $210.3 million, or 18.1%, to $1.375 billion at
June 30, 1996 from $1.165 billion at June 30, 1995. This increase resulted
primarily from higher than normal mortgage loan growth in almost all of the
Bank's market areas. In addition, the consumer loan portfolio increased
approximately $46.0 million, with approximately half of this increase
experienced by the Bank's consumer finance subsidiary. Also contributing to the
increase in net loans receivable was the acquisitions of First Federal Savings
Bank of Kane and First National Bank of Centre Hall which added loans of $32.8
million and $31.6 million, respectively. Net loans receivable
18
<PAGE>
increased by $102.2 million, or 9.6%, to $1.165 billion at June 30, 1995 from
$1.063 billion at June 30, 1994. This increase was primarily the result of
normal loan growth but was assisted in part by the purchase of a $35.0 million
ESOP commercial loan portfolio and two consumer discount companies with consumer
loans of approximately $13.0 million.
Deposits
Deposits increased $166.1 million, or 12.9%, to $1.450 billion at June 30, 1996
from $1.284 billion at June 30, 1995. This increase in deposits is primarily the
result of normal deposit growth and the acquisitions of First Federal Savings
Bank of Kane, First National Bank of Centre Hall and an office in Pottsville,
Pennsylvania with deposits of $37.9 million, $34.3 million and $23.8 million,
respectively. In the previous year, deposits increased $48.5 million, or 4.0%,
to $1.284 billion at June 30, 1995 from $1.235 billion at June 30, 1994. This
increase represents normal deposit growth for the Bank.
Borrowings
Borrowings increased $108.4 million, or 104.8%, to $211.8 million at June 30,
1996 from $103.4 million at June 30, 1995. In the previous year, borrowings
increased $32.2 million, or 45.2%, to $103.4 million at June 30, 1995 from $71.2
million at June 30, 1994. In both years the Bank increased its borrowings from
the FHLB and invested such funds in loans, investment securities and mortgage-
backed securities in an effort to improve net interest income.
Shareholders equity
Shareholders equity increased $12.0 million, or 6.7%, to $190.7 million at June
30, 1996 from $178.7 million at June 30, 1995. This increase was primarily the
result of fiscal year net income of $17.5 million which was partially offset by
the payment of approximately $7.0 million in dividends. The remaining increase
was primarily due to the release of earned ESOP and RRP shares. Shareholders
equity increased $76.4 million, or 74.7%, to $178.7 million at June 30, 1995
from $102.3 million at June 30, 1994. The primary reason for this increase was
the receipt of capital of approximately $67.0 million as a result of the
completion of the Bank's initial public offering along with net income of $16.3
million. Partially offsetting these increases was the establishment of an ESOP
of approximately $4.4 million and the payment of approximately $2.9 million in
dividends.
Results of Operations
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest earned on the Bank's interest-earning
assets, consisting primarily of mortgage loans, consumer loans, mortgage-backed
securities and other investment securities, and the interest paid on interest-
bearing liabilities, consisting primarily of deposits and advances from the
FHLB. Net interest income is a function of the Bank'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. The Bank's earnings also are affected by its
provision for loan losses, its level of service charges, and gains on sale of
assets, as well as its level of general administrative and other expenses,
including employee compensation and benefits, occupancy and equipment costs, and
deposit insurance premiums.
General
Net income totalled $17.5 million, $16.3 million, and $18.1 million for fiscal
years ended June 30, 1996, 1995 and 1994, respectively. The increase in net
income for the fiscal year ended June 30, 1996 as compared to the fiscal year
ended June 30, 1995 resulted primarily from a $6.5 million increase in net
interest income. This increase was partially offset by a $3.9 million increase
in noninterest expense, a $400,000 increase in the provision for loan losses and
a $387,000 decrease in noninterest income. The decrease in net income for the
fiscal year ended June 30, 1995 as compared to the fiscal year ended June 30,
1994 resulted primarily from a $3.3 million decrease in the gain on the sale of
marketable securities and loans, a $2.8 million increase in noninterest expense,
and a $2.1 million increase in income taxes as the 1994 income tax expense
included a one-time reduction in expense resulting from the adoption of
19
<PAGE>
SFAS 109. These decreases were partially offset by a $4.8 million increase in
net interest income.
Interest Income
Interest income increased by $17.0 million, or 14.4%, to $135.1 million for the
fiscal year ended June 30, 1996 from $118.1 million for the fiscal year ended
June 30, 1995. The increase in interest income was primarily attributable to a
$157.9 million, or 10.9% increase in the balance of average interest-earning
assets to $1.604 billion from $1.446 billion. Also contributing to the increase
in interest income was an increase in the yield on average interest-earning
assets to 8.42% from 8.17%. The increase in the balance of average interest-
earning assets was primarily the result of growth of $150.1 million in the
average balance of the Bank's loan portfolio as the Bank aggressively deployed
funds from its growth in borrowed money and deposits to the loan portfolio which
generally earns higher rates of interest than other types of interest-earning
assets that are available to the Bank. The increase in the yield on average
interest-earning assets was primarily due to an increase in the average yield on
the Bank's loan portfolio which primarily resulted from an increase in the
recognition of deferred interest income as loan repayments and refinancings
increased substantially.
Interest income on loans receivable increased by $15.5 million, or 16.1%, to
$111.9 million for the year ended June 30, 1996 compared to $96.4 million for
the year ended June 30, 1995. This increase primarily resulted from a $150.2
million, or 13.7%, increase in average loans receivable to $1.244 billion for
the year ended June 30, 1996 compared to $1.094 billion for the year ended June
30, 1995. Also contributing to the increase in interest income on loans
receivable was an increase in the yield on average loans receivable to 9.00%
from 8.82%. The increase in average loans receivable resulted from higher than
normal loan growth in almost all of the Bank's market areas and, to a lesser
extent, from the fourth quarter acquisitions of First Federal Savings Bank of
Kane and First National Bank of Centre Hall. The higher average yield on loans
for the fiscal year ended June 30, 1996 compared to the same period in 1995
reflected the increased recognition of interest income previously deferred in
accordance with SFAS 91 as loan repayments and refinancings increased
substantially over the prior year. Interest income on mortgage-backed securities
increased by $2.8 million, or 19.3%, to $17.3 million for the year ended June
30, 1996 from $14.5 million for the year ended June 30, 1995. This increase
resulted primarily from a $40.3 million, or 18.4%, increase in the average
balance of mortgage-backed securities as the average yield increased
insignificantly to 6.69% for the fiscal year ended June 30, 1996 compared to
6.64% during the previous year. The increase in average balance resulted
primarily from the Bank borrowing funds to purchase additional mortgage-backed
securities to improve its net interest income. Interest income on investment
securities increased by $1.3 million, or 34.2%, to $5.1 million for the year
ended June 30, 1996 from $3.8 million for the year ended June 30, 1995. This
increase resulted primarily from a $14.4 million, or 23.4%, increase in average
balance of investment securities to $75.9 million for the year ended June 30,
1996 from $61.5 million for the year ended June 30, 1995. Also contributing to
the increase was an increase in average yield to 6.70% from 6.24%. Both the
increase in average balance and the increase in average yield resulted from the
Bank purchasing additional investment securities at interest rate levels which
were higher than the existing portfolio yield in an effort to improve the Bank's
overall yield on assets. Interest income on interest earning deposits decreased
$2.6 million, or 78.8%, to $742,000 for the year ended June 30, 1996 from $3.3
million for the year ended June 30, 1995. This decrease was primarily the result
of a $47.0 million, or 65.1%, decrease in the average balance to $25.2 million
for the year ended June 30, 1996 from $72.2 million for the year ended June 30,
1995 as the Bank reallocated funds from its interest earning deposit portfolio
to loans receivable which generally have higher interest rates. Also
contributing to the decrease was a decrease in the average yield on interest
earning deposits to 2.94% from 4.61% which resulted from a general decrease in
short-term interest rates between comparable periods.
Interest income increased by $11.6 million, or 10.9%, to $118.1 million for the
fiscal year ended June 30, 1995 from $106.5 million for the fiscal year ended
June 30, 1994. The increase in interest income was primarily attributable to a
$135.9 million, or 10.4%, increase in the balance of average interest-earning
assets to $1.446 billion from $1.310 billion,
20
<PAGE>
as the average yield on average interest-earning assets remained relatively
unchanged at between 8.13% and 8.17% respectively. The increase in average
interest-earning assets resulted from normal internal growth combined with
proceeds of approximately $67.0 million received as a result of the Bank's
initial public offering which was completed on November 4, 1994. The yield on
the Bank's average interest-earning assets remained relatively unchanged as a
reduction in the average yield on the Bank's loan portfolio was offset by
increases in the average yields on the Bank's mortgage-backed securities,
investment securities, and interest-earning deposits. The average yield on the
Bank's loan portfolio decreased as the proceeds from loan prepayments from high-
yielding loans were reinvested in new loans with lower interest rates. The
average yields on mortgage-backed securities, investment securities and
interest-earning deposits increased because a majority of these assets are
variable-rate and the rates adjusted upward during a period of generally higher
interest rates.
Interest income on loans receivable increased by $3.2 million, or 3.4%, to $96.4
million for the year ended June 30, 1995 compared to $93.2 million for the year
ended June 30, 1994, primarily because of a $56.8 million, or 5.5%, increase in
average loans receivable to $1.094 billion for the year ended June 30, 1995
compared to $1.037 billion for the year ended June 30, 1994. This increase was
partially offset by a decrease in the average yield to 8.82% from 8.99%. The
increase in average loans receivable resulted from normal portfolio growth and
was assisted in part by the purchase of a $35.0 million ESOP loan portfolio from
the receiver for a New York trust company and the purchase of two consumer
discount companies with combined loans receivable of approximately $13.0
million. The lower average yield on loans for the fiscal year ended June 30,
1995 as compared to the same period in 1994 reflected the receipt of prepayments
from high-yielding loans the proceeds from which were invested in loans with
generally lower interest rates. Interest income on mortgage-backed securities
increased by $3.8 million, or 35.5%, to $14.5 million for the year ended June
30, 1995 from $10.7 million for the year ended June 30, 1994. This increase
resulted primarily from a $38.1 million, or 21.1%, increase in the average
balance of mortgage-backed securities, and an increase in the average yield to
6.64% from 5.92%. The increase in average balance resulted primarily from the
Bank purchasing $30.0 million of floating rate CMOs using funds borrowed on a
floating rate basis from the FHLB. The increase in average yield primarily
resulted from upward adjustments in the interest rates on adjustable-rate
securities. Interest income on investment securities increased by $3.2 million,
or 511.1%, to $3.8 million for the year ended June 30, 1995 from $628,000 for
the year ended June 30, 1994. This increase resulted primarily from a $41.6
million, or 209.1%, increase in the average balance of investment securities, to
$61.5 million for the year ended June 30, 1995, from $19.9 million for the year
ended June 30, 1994, and an increase in average yield to 6.24% from 3.15%. Both
the increase in average balances and the increase in average yield resulted from
the Bank deploying some of the proceeds from its initial public offering into
governmental securities with terms of three to five years during a period of
generally higher interest rates in order to enhance the Bank's yield on
interest-earning assets. Interest income on interest earning deposits increased
$1.3 million, or 65.0%, to $3.3 million for the year ended June 30, 1995, from
$2.0 million for the year ended June 30, 1994, primarily because the average
yield increased to 4.61% from 2.74% during a period of generally higher interest
rates. The average balance of interest-earning deposits decreased slightly by
$.7 million, or .9%, to $72.2 million for the year ended June 30, 1995, compared
to $72.9 million for the year ended June 30, 1994.
Interest Expense
Interest expense increased by $10.5 million, or 18.1%, to $68.6 million for the
year ended June 30, 1996 from $58.1 million for the year ended June 30, 1995.
The increase resulted primarily from a $128.1 million, or 9.6%, increase in
average interest bearing liabilities to $1.462 billion for the year ended June
30, 1996 from $1.334 billion for the year ended June 30, 1995. This increase in
average interest bearing liabilities resulted primarily from normal deposit
growth along with three acquisitions completed during the fiscal year: deposits
acquired as part of the purchase of an office in Pottsville, Pennsylvania
contributed approximately $23.8 million in deposits, the acquisition of First
Federal Savings Bank of Kane which was completed on March 30, 1996 contributed
approximately $37.9 million in deposits and the acquisition of First National
Bank of Centre Hall which was completed
21
<PAGE>
on April 12, 1996 contributed approximately $34.3 million in deposits. Also
contributing to the increase in interest expense was a $41.4 million, or 46.6%,
increase in average borrowed funds to $130.3 million for the year ended June 30,
1996 from $88.9 million for the year ended June 30, 1995, as additional funds
were borrowed from the Federal Home Loan Bank and were used to increase the
Bank's portfolio of loans and marketable securities in order to improve the
Bank's net interest income. Also contributing to the increase in interest
expense was an increase in the average cost of funds to 4.70% in the current
year from 4.36% in the prior year. This increase in average cost of funds
primarily resulted from the Bank's deposit customers shifting funds from
passbook accounts to certificates of deposit which generally have higher
interest rates. Also contributing to the increase in cost of funds was an
increase in competition for retail deposits that caused the market rates offered
for certificates of deposit to increase relative to market interest rates in
general.
Interest expense increased $6.8 million, or 13.3%, to $58.1 million for the year
ended June 30, 1995 from $51.3 million for the year ended June 30, 1994. This
increase was primarily attributable to a $92.7 million, or 7.5%, increase in
average interest-bearing liabilities to $1.334 billion for the year ended June
30, 1995 from $1.241 billion for the year ended June 30, 1994, and an increase
in the average cost of funds to 4.36% from 4.13%. The increase in average
balance resulted primarily from a $75.9 million, or 6.5%, increase in average
deposit accounts to $1.244 billion for the year ended June 30, 1995 from $1.168
billion for the year ended June 30, 1994. The 6.5% increase in deposits
represents normal deposit growth for the Bank. The increase in cost of funds
resulted primarily from the disintermediation of deposits from lower yielding
passbook and money market accounts to higher yielding certificates of deposit.
Net Interest Income.
Net interest income increased $6.5 million, or 10.8%, to $66.5 million for the
year ended June 30, 1996 from $60.0 million for the year ended June 30, 1995.
This increase primarily resulted from a $29.8 million, or 26.5%, increase in net
interest-earning assets (interest-earning assets minus interest-bearing
liabilities) to $142.2 million for the year ended June 30, 1996 from $112.4
million for the previous year. This increase in net interest-earning assets
primarily resulted from the Bank having full-year utilization during the current
year of the $67.0 million of net proceeds from the stock conversion which was
completed on November 4, 1994. The favorable effects of the increase in net
interest-earning assets were partially offset by a reduction in the Bank's
average net interest spread to 3.72% for the year ended June 30, 1996 from 3.81%
during the previous year. The reduction in average interest rate spread was the
result of the Bank's average cost of funds rising more rapidly than its average
yield on assets during a period of general increasing interest rates.
Net interest income increased $4.8 million, or 8.7%, to $60.0 million for the
year ended June 30, 1995 from $55.2 million for the year ended June 30, 1994.
The principal reason for the increase was an increase in the Bank's ratio of
interest-earning assets to interest-bearing liabilities, partially offset by a
reduction in the Bank's average net interest spread to 3.81% for the year ended
June 30, 1995 from 4.00% for the year ended June 30, 1994. The ratio of
interest-earning assets to interest-bearing liabilities increased as a result of
the Bank receiving approximately $67.0 million of capital from its initial
public offering. These funds were subsequently invested in interest-earning
assets.
Provision for Loan Losses
Under the Bank's procedures and standards, general valuation allowances,
representing possible but not yet identified losses inherent in the Bank's loan
portfolio, are recognized for financial reporting purposes. In providing such
allowances, management of the Bank considers, among other factors, economic
trends within its market area, concentrations of credit risk and trends
affecting the valuation of collateral for the Bank's loans. The Bank provided
$1.5 million, $1.1 million, and $1.7 million in loan loss provisions for the
fiscal year ended June 30, 1996, 1995, and 1994.
The financial statements of the Bank are prepared in accordance with generally
accepted accounting principles and, accordingly, the allowance for loan losses
is based on management's estimate of the fair value of collateral, the Bank's
actual loss experience, as well as standards applied by the Department of
Banking of
22
<PAGE>
the Commonwealth of Pennsylvania and the FDIC in their regulatory examinations
of the Bank. The Bank provides both general valuation allowances and specific
valuation allowances with respect to its loan portfolio. General valuation
allowances are included, subject to limitation, in the Bank's regulatory capital
for purposes of computing the Bank's regulatory risk-based capital. The Bank
regularly reviews its loan portfolio, including problem loans, to determine
whether any loans require classification or the establishment of appropriate
valuation allowances.
Noninterest Income
Noninterest income decreased $387,000, or 8.6%, to $4.1 million for the year
ended June 30, 1996 from $4.5 million for the year ended June 30, 1995. This
decrease in noninterest income resulted primarily from an increase in the net
losses incurred from the origination and sale of loans by the Bank's mortgage
banking subsidiaries. The Bank continues to review this business segment in an
effort to improve operational efficiencies and reduce operating losses. The net
loss on the origination and sale of loans increased $739,000, or 261.1%, to $1.0
million for the year ended June 30, 1996 compared to $283,000 for the year ended
June 30, 1995. This increase in losses resulted from a general increase in
mortgage-banking activities as the Bank realized a full year of operations from
a mortgage banking company that was acquired in April 1995.
Noninterest income declined substantially by $3.3 million, or 42.3%, to $4.5
million for the year ended June 30, 1995 from $7.8 million for the year ended
June 30, 1994. This decrease in noninterest income resulted primarily from a
$3.7 million decrease in the gains on sale of loans, mortgage-backed securities,
and real estate owned. The decrease in the gain on sale of these assets resulted
primarily from the Bank selling, at a premium, $32.8 million of high-coupon,
fixed-rate mortgage-backed securities during the previous year. There were no
mortgage-backed securities sold during the year ended June 30, 1995.
Noninterest Expense
Noninterest expense increased $3.9 million, or 10.5%, to $40.8 million for the
year ended June 30, 1996 from $36.9 million for the year ended June 30, 1995.
The primary reason for this increase was an increase in compensation and
employee benefits of $1.2 million of which approximately $1.0 million was
attributable to the adoption of the Bank's Recognition and Retention Stock
Benefit Plan which was approved by the Bank's shareholders in November 1995.
Also contributing to the increase in noninterest expense with normal increases
in all other areas of the Bank's expenses, except for other (miscellaneous)
noninterest expense, which increased $1.2 million to $7.7 million for the year
ended June 30, 1996 from $6.5 million for the year ended June 30, 1995. This
increase resulted primarily from a $500,000 increase in real estate owned losses
as well as an increase of approximately $300,000 in office operations expense
relating to additional full service banking and consumer discount company branch
offices.
Noninterest expense increased $2.8 million, or 8.2%, to $36.9 million for the
year ended June 30, 1995 from $34.1 million for the year ended June 30, 1994.
This increase resulted primarily from $4.1 million, or 25%, increase in
compensation expense to $20.5 million for the year ended June 30, 1995 from
$16.4 million for the year ended June 30, 1994. Of this increase in
compensation, $1.8 million resulted from the adoption of an Employee Stock
Ownership Plan at the time of the Bank's initial public offering. The remaining
increase in compensation expense represents normal salary and benefit increases.
All other areas of the Bank's expenses experienced normal increases, except for
other (miscellaneous) noninterest expense, which decreased by $1.4 million to
$6.5 million for the year ended June 30, 1995 from $7.9 million for the year
ended June 30, 1994. This decrease resulted primarily from a $1.1 million
decline in loss on sale of real estate owned, as the Bank realized substantially
fewer losses and write-downs on real estate acquired by foreclosure.
Income Taxes
Income tax expense increased by $622,000, or 6.1%, to $10.8 million for the year
ended June 30, 1996 from $10.2 million for the year ended June 30, 1995. This
increase was a direct result of the increase in income subject to tax, as the
effective tax rate remained relatively constant at approximately 38%.
Income tax expense decreased by $1.0 million, or 8.9%, to $10.2 million for the
year ended June 30, 1995 from
23
<PAGE>
$11.2 million for the year ended June 30, 1994. This reduction resulted from a
$700,000 decline in income subject to income tax, and also because the previous
year the Bank had recorded income tax expense of $353,000 to recognize a
settlement with the IRS. This settlement by the IRS related to the amortization,
for tax purposes, of a core deposit premium on deposits that were purchased from
another financial institution in 1986. The IRS, during its normal examination of
the Bank's income tax returns contested the Bank's amortization of this
intangible. However, as a result of recent tax legislation which allows for the
amortization of such intangibles, the IRS offered a global settlement on all
such issues outstanding. In June 1994 management accepted the settlement offer
and recorded the amount of the settlement as well as $145,000 for interest owed
to the IRS.
Effective July 1, 1993, the Bank adopted the provisions of SFAS 109 "Accounting
for Income Taxes" which requires, among other things, a change from the deferred
method to the asset and liability method of accounting for deferred taxes. The
cumulative effect of this change, which was reported separately as a change in
accounting principle, was to increase net income by $2.1 million for the fiscal
year ended June 30, 1994. See Notes to the Consolidated Financial Statements for
additional information on income taxes.
Deposit Insurance Premiums
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund (the "SAIF"), which along with the Bank Insurance Fund (the
"BIF"), is one of the two insurance funds administered by the Federal Deposit
Insurance Corporation. Financial institutions which are members of the BIF are
experiencing substantially lower deposit insurance premiums because the BIF has
achieved its required level of reserves while the SAIF has not yet achieved its
required level of reserves. A number of proposals are being considered to
recapitalize the SAIF in order to eliminate this disparity. One plan currently
being considered by the Treasury Department, the FDIC, the OTS and Congress
provides for a one-time assessment of .85% to .90% to be imposed on all SAIF-
insured deposits as of March 31, 1995, including those held by commercial banks,
and for BIF deposit insurance premiums to be used to pay the Financing
Corporation bond interest on a pro rata basis together with SAIF premiums. Under
this plan BIF and SAIF would be merged into one fund as soon as practicable, but
no later than January 1, 1998. There can be no assurance that any particular
proposal will be implemented or that premiums for either BIF or SAIF members
will not be adjusted in the future by the FDIC or by legislative action. If the
legislation is enacted, the Bank will be assessed approximately $10.7 million to
$11.4 million. Assuming the special assessment is tax deductible, the cost, net
of income tax benefits, will be approximately $6.4 million to $6.8 million.
Future assessments would then be anticipated to be assigned to the Bank by FDIC.
24
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank'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
month-end balances.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............. $1,243,758 $ 111,957 9.00% $1,093,602 $ 96,473 8.82%
Mortgage-backed
securities................... 259,090 17,342 6.69 218,747 14,520 6.64
Interest-earning deposits.... 25,220 742 2.94 72,204 3,327 4.61
Investment securities........ 75,911 5,089 6.70 61,547 3,838 6.24
---------------------------------------------------------------------
Total interest-earning
assets................. 1,603,979 135,130 8.42 1,446,100 118,158 8.17
Noninterest-earning assets....... 69,150 54,871
---------------------------------------------------------------------
Total assets......... $1,673,129 $1,500,971
=====================================================================
Interest-bearing liabilities:
Passbook and statement
savings...................... $ 277,339 9,322 3.36 $ 316,197 10,414 3.29
Checking accounts............ 170,514 3,396 1.99 155,949 3,163 2.03
Money market demand
accounts..................... 78,024 2,595 3.33 82,092 2,555 3.11
Certificate accounts......... 805,558 46,348 5.75 690,604 37,150 5.38
FHLB advances and other
borrowed money........... 130,337 6,976 5.35 88,868 4,844 5.45
---------------------------------------------------------------------
Total
interest-bearing
liabilities........ 1,461,772 68,637 4.70 1,333,710 58,126 4.36
---------------------------------------------------------------------
Noninterest-bearing liabilities.... 26,826 19,127
---------------------------------------------------------------------
Total liabilities.... 1,488,598 1,352,837
Capital.......................... 184,531 148,134
---------------------------------------------------------------------
Total liabilities and
Capital.............. $1,673,129 $1,500,971
=====================================================================
Net interest income.............. $ 66,493 $ 60,032
=====================================================================
Net interest rate spread (1)..... 3.72% 3.81%
=====================================================================
Net interest earning assets...... 142,207 112,390
Net interest margin (2).......... 4.15% 4.15%
=====================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 1.10x 1.08x
=====================================================================
<CAPTION>
Years Ended June 30,
--------------------------------
1994
--------------------------------
Average
Average Yield/
Balance Interest Cost
--------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable............. $1,036,819 $ 93,171 8.99%
Mortgage-backed
securities................... 180,617 10,693 5.92
Interest-earning deposits.... 72,875 2,000 2.74
Investment securities........ 19,937 628 3.15
--------------------------------
Total interest-earning
assets................. 1,310,248 106,492 8.13
Noninterest-earning assets....... 43,867
--------------------------------
Total assets......... $1,354,115
================================
Interest-bearing liabilities:
Passbook and statement
savings...................... $ 376,798 10,499 2.79
Checking accounts............ 144,866 3,099 2.14
Money market demand
accounts..................... 95,961 2,758 2.87
Certificate accounts......... 550,504 30,280 5.50
FHLB advances and other
borrowed money........... 72,891 4,620 6.34
--------------------------------
Total
interest-bearing
liabilities........ 1,241,020 51,256 4.13
--------------------------------
Noninterest-bearing liabilities.. 19,256
--------------------------------
Total liabilities.... 1,260,276
Capital.......................... 93,839
--------------------------------
Total liabilities and
Capital.............. $1,354,115
================================
Net interest income.............. $ 55,236
================================
Net interest rate spread (1)..... 4.00
================================
Net interest earning assets...... 69,228
Net interest margin (2).......... 4.22
================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 1.06x
================================
- --------------------
</TABLE>
(1) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
25
<PAGE>
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 Bank's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), (iii) changes in rate-volume (changes in rate multiplied by
changes in volume), and (iv) the net change.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------------------------------------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $1,968 $13,246 $270 $15,484 $(1,707) $5,102 $(93) $3,302
Mortgage-backed securities 122 2,678 22 2,822 1,296 2,257 274 3,827
Investment securities 288 896 67 1,251 615 1,311 1,284 3,210
Interest-earning deposits (1,203) (2,165) 783 (2,585) 1,358 (18) (13) 1,327
------------------------------------------------------------------------------------------
Total interest-earning assets 1,175 14,655 1,142 16,972 1,562 8,652 1,452 11,666
Interest-bearing liabilities:
Passbook and statement savings $214 (1,280) (26) (1,092) 1,911 (1,689) (307) (85)
Checking accounts (57) 295 (5) 233 (161) 237 (12) 64
Money market demand
accounts 176 (127) (9) 40 229 (399) (33) (203)
Certificate accounts 2,584 6,184 430 9,198 (666) 7,706 (170) 6,870
FHLB advances and other
borrowed money (88) 2,261 (41) 2,132 (648) 1,014 (142) 224
------------------------------------------------------------------------------------------
Total interest-bearing 2,829 7,333 349 10,511 665 6,869 (664) 6,870
liabilities ------------------------------------------------------------------------------------------
Net change in net
interest income $(1,654) $7,322 $793 $6,461 $897 $1,783 $2,116 $4,796
==========================================================================================
</TABLE>
26
<PAGE>
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 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 Bank'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 Bank (i) emphasizes the origination of
short-term, fixed-rate consumer loans, and at June 30, 1996, such loans
constituted $166.1 million, or 11.7% of the Bank'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, 1996, totalled $209.4 million or 14.7%
of the Bank's total loan portfolio. Of the Bank's $1.851 billion of interest-
earning assets of June 30, 1996, $465.0 million, or 25.1%, consisted of assets
with adjustable-rates of interest. However, the origination of adjustable-rate
loans was very limited during the fiscal year ended June 30, 1996. The Bank 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. The
percentage of the Bank's savings deposits represented by certificates maturing
in more than three years increased from 4.9% of total deposits at June 30, 1992,
to 7.2% of total deposits at June 30, 1996. The Bank does not solicit high-rate
jumbo certificates (certificates of $100,000 or more) or brokered funds.
At June 30, 1996, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $279.0 million, representing a cumulative negative one-year
gap ratio of 14.86%. The Bank has an Asset-Liability Management Committee
comprised of certain members of the Board of Directors which is responsible for
reviewing the Bank's asset and liability management policies. The Committee
meets quarterly and reviews interest rate risks and trends, the Bank's interest
sensitivity position and the liquidity and market value of the Bank's investment
portfolio.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996, 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.
27
<PAGE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
---------------------------------------------------------------------------------
Within 1-3 3-5 5-10 10-20 Over 20
1 Year Years Years Years Years Years Total
---------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Interest-earning deposits $30,498 $-- $-- $-- $-- $-- $30,498
Mortgage-backed securities:
Fixed 13,693 18,693 8,965 14,144 9,511 -- 65,006
Variable 225,181 -- -- -- -- -- 225,181
Investment securities 12,013 46,082 35,452 1,010 9,443 1,113 105,113
Real estate loans:
Adjustable-rate 80,192 14,234 -- -- -- -- 94,426
Fixed-rate 162,810 236,130 168,646 266,591 146,350 30,947 1,011,474
Home equity and home improvement 38,146 -- -- -- -- -- 38,146
Education loans 47,842 -- -- -- -- -- 47,842
Other consumer loans 83,186 64,391 18,498 -- -- -- 166,075
Commercial loans 43,364 8,045 5,126 6,903 3,607 -- 67,045
--------------------------------------------------------------------------------
Total rate-sensitive assets $736,925 $387,575 $236,687 $288,648 $168,911 32,060 $1,850,806
================================================================================
Rate-sensitive liabilities:
Fixed maturity deposits $512,392 $259,539 $84,462 $19,544 $440 $-- $876,377
Money market deposit accounts 82,552 -- -- -- -- -- 82,552
Passbook accounts 197,399 98,700 -- -- -- -- 296,099
Checking accounts 65,006 130,013 -- -- -- -- 195,019
FHLB advances 147,459 50,000 2,000 911 233 -- 200,603
Other borrowings 11,158 -- -- -- -- -- 11,158
--------------------------------------------------------------------------------
Total rate-sensitive liabilities $1,015,966 $538,252 $86,462 $20,455 $673 $-- $1,661,808
================================================================================
Interest sensitivity gap per period $(279,041) $(150,677) $150,225 $268,193 $168,238 $32,060 $188,998
================================================================================
Cumulative interest sensitivity gap $(279,041) $(429,718) $(279,493) $(11,300) $156,938 $188,998 $188,998
================================================================================
Cumulative interest sensitivity
gap as a percentage of total assets (14.86)% (22.88)% (14.88)% (.60)% 8.36% 10.06%
================================================================================
</TABLE>
In preparing the table above, it has been assumed, in assessing the interest
rate sensitivity of the Bank that: (i) adjustable-rate mortgage loans and fixed-
rate mortgage loans will prepay at an annual rate of 10.0%, (ii) commercial
loans will prepay at an annual rate of 10.0%; (iii) consumer loans will prepay
at an annual rate of 20.0%; (iv) fixed maturity deposits will not be withdrawn
prior to maturity; (v) money market accounts are immediately rate sensitive; and
(vi) passbook 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 Conservatively estimated that one-third of the
Bank's checking accounts and two-thirds of the Bank's passbook accounts will
reprice in one year or less, and that the remainder will reprice between one and
three years.
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 Bank. 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.
28
<PAGE>
For the foregoing reasons, the Bank relies on simulation models to determine the
effect of immediate incremental increases or decreases in interest rates on net
interest income. The Board of Directors annually establishes a range of
percentage changes as an acceptable interest rate risk. The Bank considers this
measurement of interest rate risk to be a useful supplement to gap analysis.
Regulatory Capital Requirements
The Federal Deposit Insurance Corporation (the "FDIC") has promulgated
regulations and adopted a statement of policy regarding the capital adequacy of
state-chartered banks which, like the Bank, are not members of the Federal
Reserve System. 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, 1996, the
Bank met each of 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 Federal Deposit Insurance Act and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final cease-and-
desist order.
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
requires, among other things, that each federal banking agency revise its risk-
based capital standards for insured institutions to ensure that those standards
take adequate account of interest-rate risk ("IRR"), concentration of credit
risk, and the risks of nontraditional activities, as well as to reflect the
actual performance and expected risk of loss on multi-family residential loans.
In September 1993, the FDIC, the Office of the Comptroller of the Currency and
the Federal Reserve Board jointly proposed for comment procedures for measuring
IRR exposure and two alternative methods for determining what amount of
additional capital, if any, a bank may be required to maintain for IRR. Under
the proposal, exposure to IRR would be measured as the effect that a specified
change in market interest rates would have on the net economic value of a bank.
The change in an institution's net economic value is defined as the change in
the present value of its assets minus the change in the present value of its
liabilities plus the change in the present value of its off-balance-sheet
positions. The banking agencies propose to measure an institution's expense
using either a supervisory model or the bank's own internal model. During each
examination or at request of a bank, the banking agency, under its sole
discretion, will examine the bank's internal measure of interest rate risk to
determine if it is acceptable to the agency using several specified criteria.
Otherwise, the bank's measured exposure will be calculated under the supervisory
model. The alternative methods for determining IRR consist of (i) the minimum
capital standard approach, pursuant to which certain institutions would be
required to hold capital to cover their excess exposure, which is defined as the
aggregate dollar decline in the net economic value of the institution, as
measured either by the supervisory or the internal bank model, that exceeds the
proposed supervisory threshold of one percent of total assets and (ii) the risk
assessment approach, pursuant to which the level of measured IRR would be just
one of several factors that examiners would consider when determining a bank's
IRR and the need for additional capital, which would be based on the examiner's
judgment after taking into account guidance provided by the federal banking
agencies.
The following table summarizes the Bank's total stockholders' equity, FDIC
regulatory capital, total FDIC risk-based assets including off-balance sheet
items, leverage and risk-based regulatory ratios at June 30, 1996.
<TABLE>
<CAPTION>
June 30, 1996
--------------
<S> <C>
Total shareholders' equity or GAAP capital........... $ 190,651
Less: unrealized gain on securities available for
sale................................................ (1,325)
Less: intangible assets.............................. (9,549)
----------
FDIC leverage capital................................ 179,777
Plus: FDIC tier 2 capital (1)........................ 12,086
----------
Total FDIC risk-based capital........................ $ 191,863
==========
FDIC quarterly average total assets for leverage
ratio............................................... $1,823,585
==========
FDIC net risk-weighted assets including
off-balance sheet items............................ $ 965,860
==========
</TABLE>
FDIC leverage capital ratio 9.86%
Minimum requirement 3.00% to 5.00% (2)
FDIC risk-based capital ratio 19.86%
Minimum requirement 8.00%
_____________________________
(1) Tier 2 capital consists entirely of the allowance for loan losses,
which is limited to 1.25% of total risk-weighted assets as
detailed under regulations of the FDIC.
(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. As of June 30,
1996, the Bank had not been advised of any additional requirements
in this regard.
The Bank is also subject to Pennsylvania Department of Banking ("Department")
capital guidelines. Although not adopted in regulation form, the Department
utilizes capital standards requiring a minimum 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.
<PAGE>
Liquidity and Capital Resources
The Bank is 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
Bank, to be eligible for liquidity. The Bank's 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 liquidity ratio was 26.4% as of
June 30, 1996. The Bank adjusts its liquidity levels in order to meet funding
needs of deposit outflows, repayment of borrowings and loan commitments. The
Bank also adjusts liquidity as appropriate to meet its asset and liability
management objectives.
The Bank's primary sources of funds are the amortization and prepayment 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 Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-earning deposits with the FHLB of Pittsburgh
amounted to $30.5 million at June 30, 1996. Other assets qualifying for
liquidity outstanding at June 30, 1996, amounted to $408.7 million. For
additional information about cash flows from the Bank's operating, financing,
and investing activities, see Statements of Cash Flows included in the
Consolidated Financial Statements.
A major portion of the Bank'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 Bank 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, 1996, the Bank had $200.6 million in advances from
the FHLB. The Bank borrows from the FHLB principally to reduce interest rate
risk, rather than for liquidity purposes.
At June 30, 1996, the Bank's customers had $53.6 million of unused lines of
credit available. 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, 1996, totalled $512.4 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with the Bank.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Bank 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 Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
Impact of New Accounting Standards
In February 1992, the Financial Accounting Standards Board (the "FASB") issued
SFAS 109, "Accounting for Income Taxes," which replaces APB 11, which provided
for deferred tax based on differences in taxable income versus book income as
opposed to the liability method, which is required by SFAS 109. The liability
method accounts for deferred income taxes by applying the enacted statutory
rates in effect at the balance sheet date to differences between the book cost
and the tax cost of assets and liabilities. The resulting deferred tax
liabilities and assets are adjusted to reflect changes in tax laws. SFAS 109 was
adopted by the
<PAGE>
Bank as of July 1, 1993 and resulted in a $2.1 million increase in net income.
The Bank adopted the provisions of SFAS 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure" on July 1, 1995. Under
SFAS 114, generally, all nonaccrual loans are deemed to be impaired. In
addition, management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In evaluating whether
a loan is impaired, management considers not only the amount that the Bank
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. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. The Bank excludes smaller balance,
homogenous loans (e.g., primarily consumer and residential mortgages) from the
evaluation for impairment. Impairment losses are included in the allowance for
possible loan losses. Impaired loans are charged-off when management believes
that the ultimate collectibility of a loan is not likely.
Interest income on impaired loans is generally recorded as payments are
collected. Interest on impaired loans that are contractually past due ninety
days and over is reserved in accordance with regulatory requirements.
In May 1993, the FASB issued SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." Essentially, this promulgation
requires securities to be carried at market value, if such securities are
trading securities or available for sale. Unrealized holding gains and losses
for trading securities are to be included in earnings. Unrealized holding gains
and losses for securities that are available for sale are to be excluded from
earnings and reported as a net amount in a separate component of shareholders'
equity until realized. Securities designated as held-to-maturity are reported at
amortized cost. While the Bank does not trade in securities, it has from time to
time sold securities as part of its interest rate risk management activities.
The Bank adopted Statement 115 effective July 1, 1994. The effects of such
adoption had no material impact on retained income.
In October 1995, the FASB released FAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes a fair value based method for stock-based
compensation plans. SFAS 123 permits entities to expense an estimated fair
value of employee stock options or to continue to measure compensation cost for
these plans using the intrinsic value accounting method contained in APB Opinion
No. 25. Entities that elect to continue to use the intrinsic value method must
provide pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. This standard will become
effective in fiscal 1997. The Bank is currently analyzing the impact of
adoption of the standard on the consolidated finacial statements; however, the
adoption and concurrent application is not expected to have a material impact.
In June 1996, the FASB released SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125).
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under SFAS 125, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and does not recognize
financial assets it no longer controls and liabilities that have been
extinguished. This financial-components approach focuses on the assets and
liabilities that exist after the transfer. SFAS 125 also extends the "available-
for-sale" or "trading" approach in SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," to non-security financial assets that can
contractually be prepaid or otherwise settled in such a way that the holder of
the asset would not recover substantially all of its recorded investment. Thus,
non-security financial assets that are subject to prepayment risk that could
prevent recovery of substantially all of the recorded amount are to be reported
at fair value with the change in fair value
<PAGE>
accounted for depending on the asset's classification as "available-for-sale" or
"trading." SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Also, the extension of SFAS 115 approach to certain
non-security financial assets and the amendment to SFAS 115 is effective for
financial assets held on or acquired after January 1, 1997. The adoption of SFAS
125 is not expected to be material to the consolidated financial statements of
the Bank.
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for fiscal years beginning
after December 15, 1993. SOP 93-6 applied to the Bank for the fiscal years ended
June 30, 1996 and 1995. SOP 93-6 applies to shares acquired by ESOPs after
December 31, 1992 but not yet committed to be released as of the beginning of
the year SOP 93-6 is adopted. SOP 93-6 changed the measure of compensation
expense recorded by employers for leveraged ESOPs from the cost of ESOP shares
to the fair value of ESOP shares. Under SOP 93-6, the Bank recognizes
compensation cost equal to the fair value of the ESOP shares during the periods
in which they become committed to be released. To the extent that fair value of
the Bank's ESOP shares differ from the cost of such shares, this differential
will be charged or credited to equity.
MARKET FOR COMMON STOCK AND RELATED MATTERS
Effective November 2, 1994, the Bank reorganized from mutual to stock form and
established Northwest Bancorp, M.H.C., a mutual holding company (the "Holding
Company"). In the Bank's initial public offering of Common Stock, which closed
on November 4, 1994, 8,100,000 shares of Common Stock were issued to the Holding
Company, and 3,450,000 shares were issued and sold to the Bank's customers at a
price of $20.00 per share. On November 7, 1994, the Bank's Common Stock began to
trade over-the-counter on the Nasdaq National Market using the symbol "NWSB."
The Bank completed a 2 for 1 stock split on May 23, 1996. The following table
sets forth the high and low trading prices of the Bank's common stock during the
fiscal years ended June 30, 1995 and 1996, together with the cash dividends
declared, both as adjusted for the stock split.
<TABLE>
<CAPTION>
Fiscal Year Ended Cash Dividends
June 30, 1995 High Low Declared
- -------------------------------------------------------------
<S> <C> <C> <C>
Second quarter $ 9.625 $ 7.250 $.050
Third quarter 8.875 7.500 .075
Fourth quarter 9.875 8.375 .075
<CAPTION>
Fiscal Year Ended Cash Dividends
June 30, 1996 High Low Declared
- -------------------------------------------------------------
<S> <C> <C> <C>
First quarter $12.000 $ 9.625 $.075
Second quarter 13.500 11.750 .075
Third quarter 12.750 11.125 .075
Fourth quarter 12.500 11.125 .080
</TABLE>
As of June 30, 1996, the Bank had 4,542 stockholders of record and 23,376,000
outstanding shares of Common Stock, with 16,200,000 of the outstanding shares
owned by the Bank's mutual holding company. This number does not reflect the
number of persons whose stock is in nominee or "street" name accounts through
brokers.
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 Bank'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.
<PAGE>
Dividend Waivers by the
Holding Company
The Federal Reserve Board the ("FRB") approved the Bank's reorganization into
the mutual holding company structure and the Holding Company's acquisition of
the majority of the Bank's common stock on the following conditions:
1. The Holding Company agrees that it will make prior application to the FRB
for approval to waive any dividends declared on the capital stock of the
Bank and that the FRB shall have the authority to approve or deny any
dividend waiver request in its discretion. Such application will be made on
an annual basis with respect to any year in which the Holding Company
intends to waive such dividends;
2. If a waiver is granted, dividends waived by the Holding Company will
not be available for payment to minority shareholders (i.e., shareholders
other than the Holding Company), and will be excluded from the capital
accounts of the Bank for purposes of calculating any dividend payments to
minority shareholders;
3. If a waiver is granted, the Bank will, so long as the Holding Company
remains a mutual holding company, establish a restricted capital account in
the cumulative amount of any dividends waived by the Holding Company for
the benefit of the mutual members of the Holding Company. The restricted
capital account would be senior to the claims of minority stockholders of
the Bank and would not decrease notwithstanding changes in depositors of
the Bank. This restricted capital account would be added to any
liquidation account in the Bank established in connection with a conversion
of the Holding Company to stock form and would not be available for
distribution to minority shareholders. The liquidation account and
restricted capital account would be maintained in accordance with the
policy, rules and regulations of the Office of Thrift Supervision,
notwithstanding any sale, merger, or conversion of the Holding Company;
4. In any conversion of the mutual holding company from mutual to stock form,
the Holding Company will comply with the rules and regulations of the Office
of Thrift Supervision, as if the Bank and the Holding Company were a savings
association and a savings and loan holding company, respectively, except that
such rules shall be administered by the FRB; and
5. In the event that the FRB adopts regulations regarding dividend waivers by
mutual holding companies, the Holding Company will comply with the applicable
requirements of such regulations.
Although mutual holding companies frequently waive dividends declared by their
majority-owned savings institution subsidiaries, the Holding Company did not
waive dividends paid by the Bank during the fiscal years ended June 30, 1996 and
1995.
The payment of dividends to the Holding Company will depend on a number of
factors, including the Holding Company's capital needs and the investment
alternatives available to the Holding Company, which may include, among others,
purchasing additional shares of the Bank's common stock. Accordingly, there can
be no assurance (i) that in the future the Holding Company will file
applications to the FRB requesting approval to waive dividends paid by the Bank,
(ii) that the FRB will approve any dividend waiver application by the Holding
Company should such application be filed, (iii) as to the terms that may be
imposed by the FRB on any future waiver, and (iv) that the Holding Company will
waive dividends paid by the Bank.
34
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 11:00 a.m., on October 30,
1996, at the Knights of Columbus Hall, 219 2nd Avenue, Warren, Pennsylvania
16365.
Stock Listing
The Bank's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "NWSB."
Special Counsel
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Independent Auditors
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
Transfer Agent
Address changes and all stockholder inquiries should be directed to:
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
Annual Report on Form F-2
A copy of the Bank's Form F-2 for the fiscal year ended June 30, 1996, will be
furnished without charge to stockholders of record. On September 10, 1996, upon
written request to the Secretary, Northwest Savings Bank, Liberty and Second
Streets, Warren, Pennsylvania 16365.
35
<PAGE>
Report of Management Regarding: Internal Control
Structure Over Financial Statements and FDICIA Designed
Laws and Regulations
MANAGEMENT REPORT
Financial Statements
Northwest Savings Bank (the Bank) is responsible for the preparation, integrity
and fair presentation of its published statements as of June 30, 1996, and the
year then ended. The financial statements have been prepared in accordance with
generally accepted accounting principles, and as such, include amounts, some of
which are based on judgments and estimates of management.
Internal Control Structure Over Financial Reporting.
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting (presented in conformity with
generally accepted accounting principles and the Federal Financial Institutions
Examination Council instructions for Consolidated Reports of Condition and
Income (call report instructions)). The structure contains monitoring
mechanisms, and actions taken to correct deficiencies, if identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention of
overriding controls. Accordingly, even an effective internal control structure
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control structure may vary over time.
Management assessed the Bank's internal control structure over financial
reporting (presented in conformity with generally accepted accounting
principles) as of June 30, 1996. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control...Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of June 30, 1996, Northwest Saving Bank maintained an
effective internal control structure over financial reporting presented in
conformity with generally accepted accounting principles.
Compliance With Laws and Regulations
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Northwest Savings Bank is striving to comply, in all significant respects,
with the designated laws and regulations relating to safety and soundness as of
the year ended June 30, 1996.
August 23, 1996
/s/John O. Hanna
Chief Executive Officer
John O. Hanna
/s/William J. Wagner
Chief Financial Officer
William J. Wagner
/s/Richard F. Seibel
Corporate Auditor
Richard F. Seibel
<PAGE>
NORTHWEST SAVINGS BANK
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES
June 30, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Northwest Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Northwest Savings Bank and subsidiaries as of June 30, 1996 and
1995, 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, 1996. These consolidated financial statements are the
responsibility of the Bank'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 generally accepted auditing
standards. 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
Savings Bank and subsidiaries at June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Bank
adopted the Financial Accounting Standards Board's Statements of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," effective July 1,
1993, and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective July 1, 1994.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
August 26, 1996
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 13,806 10,131
Interest-bearing deposits in other financial institutions 30,498 59,930
Marketable securities available-for-sale 241,475 39,757
Marketable securities held-to-maturity (market value
of $154,737 and $267,967) (notes 4 and 11) 156,018 270,311
Loans receivable, net of allowance for estimated
losses of $13,130 and $11,833 (notes 5,7 and 11) 1,374,955 1,164,735
Accrued interest receivable (note 6) 9,499 7,327
Real estate owned, net 5,771 5,895
Federal Home Loan Bank stock, at cost
(notes 8 and 11) 10,811 9,145
Premises and equipment, net (note 9) 17,768 14,521
Goodwill and other intangibles 9,648 2,697
Other assets 7,676 7,445
-------------------------------------------
Total assets $1,877,925 1,591,894
===========================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 10) 1,450,047 1,283,935
Borrowed funds (note 11) 211,761 103,439
Advances by borrowers for taxes and insurance 12,268 11,935
Accrued interest payable 4,128 4,104
Other liabilities 9,070 9,791
-------------------------------------------
Total liabilities 1,687,274 1,413,204
Shareholders' equity (note 13):
Common stock, $.10 par value, authorized 50,000,000
shares; 23,376,000 and 23,100,000 issued and outstanding 2,338 1,155
Paid-in capital 67,671 65,596
Retained earnings 125,239 114,724
Unrealized gain on securities available-for-sale,
net of income taxes 1,325 1,527
Unearned employee stock ownership plan shares (note 14) (3,328) (4,312)
Unearned recognition and retention plan shares (note 14) (2,594) -
-------------------------------------------
Total shareholders' equity 190,651 178,690
-------------------------------------------
Total liabilities and shareholders' equity $1,877,925 1,591,894
===========================================
See accompanying notes to consolidated financial statements.
39
</TABLE>
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1996, 1995 and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable $ 111,957 96,473 93,171
Mortgage-backed securities 17,342 14,520 10,693
Investment securities 5,089 3,838 628
Interest-bearing deposits 742 3,327 2,000
----------------------------------------------------------
Total interest income 135,130 118,158 106,492
----------------------------------------------------------
Interest expense:
Deposits (note 10) 61,661 53,282 46,636
Borrowed funds 6,976 4,844 4,620
----------------------------------------------------------
Total interest expense 68,637 58,126 51,256
----------------------------------------------------------
Net interest income 66,493 60,032 55,236
Provision for possible loan losses (note 7) 1,502 1,098 1,728
----------------------------------------------------------
Net interest income after provision
for possible loan losses 64,991 58,934 53,508
----------------------------------------------------------
Noninterest income:
Loan fees and service charges 1,952 1,740 1,584
Gain (loss) on sales of marketable securities, net -- (36) 3,029
Loss on sale of loans (1,022) (283) --
Gain on sale of real estate owned 274 317 717
Other operating income 2,921 2,774 2,481
----------------------------------------------------------
Total noninterest income 4,125 4,512 7,811
Noninterest expense;
Compensation and employee benefits (note 14) 21,756 20,548 16,427
Premises and occupancy costs 4,536 4,047 4,198
Federal insurance premiums 3,019 2,764 2,645
Data processing 1,170 1,043 1,040
Check processing expenses 1,391 1,088 1,097
Advertising 1,197 949 844
Other expenses 7,758 6,532 7,879
----------------------------------------------------------
Total noninterest expense 40,827 36,971 34,130
----------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 28,289 26,475 27,189
Income taxes (note 12)
Federal 8,855 8,660 8,904
State 1,948 1,521 2,287
----------------------------------------------------------
Total income taxes 10,803 10,181 11,191
----------------------------------------------------------
Net income before cumulative effect of change
in accounting principles 17,486 16,294 15,998
Cumulative effect at July 1, 1993, of change in
accounting principle (notes 1 and 12) -- -- 2,070
----------------------------------------------------------
Net income $ 17,486 16,294 18,068
==========================================================
Earnings per share (note 1) $ .77 .47 N/A
==========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 1996, 1995 and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of fiscal year $ 1,155 -- --
Issuance of common stock (note 13) -- 1,155 --
Issuance of recognition and retention plan shares 14 -- --
Adjustment resulting from two-for-one stock split 1,169 -- --
----------------------------------------
Balance at June 30 2,338 1,155 --
Paid in capital:
Balance at beginning of fiscal year 65,596 -- --
Issuance of common stock -- 65,822 --
Issuance of recognition and retention plan shares 3,229 -- --
Adjustment resulting from two-for-one stock split (1,169) -- --
Excess of cost above fair value of ESOP shares released 15 (226) --
----------------------------------------
Balance at June 30 67,671 65,596 --
Retained earnings:
Balance at beginning of fiscal year 114,724 102,319 84,251
Net income 17,486 16,294 18,068
Capitalization of Northwest Bancorp, MHC -- (1,000) --
Dividends ($.30 per share in 1996 and
$.125 per share in 1995) (6,971) (2,889) --
----------------------------------------
Balance at June 30 125,239 114,724 102,319
Unrealized gain on securities available-for-sale:
Balance at beginning of fiscal year 1,527 -- --
Effect of change in accounting for certain debt and
equity securities at date of adoption,
net of deferred taxes (note 1) -- 135 --
Net change in unrealized gain on securities,
net of deferred taxes (202) 1,392 --
----------------------------------------
Balance at June 30 1,325 1,527 --
Unearned employee stock ownership plan (ESOP) shares:
Balance at beginning of fiscal year (4,312) -- --
Common shares acquired by ESOP -- (5,452) --
ESOP shares released 984 1,140 --
----------------------------------------
Balance at June 30 (3,328) (4,312) --
Unearned recognition and retention plan (RRP) shares:
Balance at beginning of fiscal year -- -- --
Common shares acquired by RRP (3,243) -- --
RRP shares released 649 -- --
----------------------------------------
Balance at June 30 (2,594) -- --
----------------------------------------
Total shareholders' equity $ 190,651 178,690 102,319
========================================
</TABLE>
See accompanying notes to consolidated financial statements. 41
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 17,486 16,294 18,068
Adjustments to reconcile net income to net
cash provided by operations:
Provision for possible loan losses 1,502 1,098 1,728
Net loss (gain) on sales of assets 748 38 (3,750)
Depreciation of premises and equipment 1,645 1,570 1,468
Amortization of deferred loan fees (1,297) (925) (1,978)
Increase in other assets (538) (2,240) (3,060)
Increase in other liabilities 413 1,733 1,995
Amortization of discounts on
marketable securities (421) (352) (16)
Noncash compensation expense related
to stock benefit plans 1,648 914 --
Other 163 282 547
----------------------------------------
Net cash provided by operating activities 21,349 18,412 15,002
Investing activities:
Purchase of marketable securities held-to-maturity (18,684) (75,857) (145,822)
Purchase of marketable securities available-for-sale (80,504) (19,513) --
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 16,663 19,349 81,278
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 9,881 1,320 --
Proceeds from sales of marketable securities -- -- 35,800
Loan originations (564,380) (304,974) (331,938)
Purchases of loans -- (36,943) --
Proceeds from loan maturities and
principal reductions 316,574 229,731 248,805
Proceeds from loan sales 99,062 19,956 20,435
Purchase of Federal Home Loan Bank stock (1,142) (547) (309)
Proceeds from sale of real estate owned 2,169 4,419 5,672
Purchase of real estate for investment (358) (468) (282)
Purchase of premises and equipment (3,928) (3,213) (1,731)
Acquisitions, net of cash acquired (note 3) 11,182 (3,996) --
----------------------------------------
Net cash used by investing activities (213,465) (170,736) (88,092)
</TABLE>
(Continued)
42
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Financing activities:
Increase in deposits, net $ 70,118 48,541 99,285
Proceeds from borrowings 834,180 38,289 35,248
Repayments of borrowings (729,019) (16,391) (17,682)
Increase in advances by borrowers
for taxes and insurance 76 704 883
Common stock aquired by ESOP -- (5,452) --
Cash dividends paid (8,996) (863) --
Proceeds from sale of common stock -- 66,977 --
Capitalization of Northwest Bancorp, MHC -- (1,000) --
-------------------------------------------
Net cash provided by financing activities 166,359 130,805 117,734
-------------------------------------------
Net increase (decrease) in cash and
cash equivalents $ (25,757) (21,519) 44,644
===========================================
Cash and cash equivalents at beginning of year 70,061 91,580 46,936
Net increase (decrease) in cash and cash equivalents (25,757) (21,519) 44,644
-------------------------------------------
Cash and cash equivalents at end of year $ 44,304 70,061 91,580
===========================================
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of $47,385,
$38,162 and $38,098, respectively) $ 68,218 57,512 51,216
===========================================
Income taxes $ 11,408 10,939 11,321
===========================================
Noncash activities:
Business acquisitions:
Fair value of assets acquired $ 115,220 17,392 --
Cash paid $ (15,028) (6,520) --
===========================================
Liabilities assumed $ 100,192 10,872 --
===========================================
Loans transferred to real estate owned $ 2,072 2,011 2,316
===========================================
Sale of real estate owned financed by the bank $ 700 2,117 949
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
(All dollar amounts presented in tables are in thousands)
(1) Summary of Significant Accounting Policies
Nature of Operations
Northwest Savings Bank, (the "Bank") headquartered in Warren, Pennsylvania, is a
retail-oriented financial institution which offers traditional deposit and loan
products through its 54 community banking offices in Pennsylvania. Northwest
Savings Bank and its subsidiaries also offer consumer finance products through
28 consumer finance offices in Pennsylvania and one in New York. The Bank
maintains geographic diversification in its real estate loan portfolio by
operating, through a subsidiary, four mortgage loan production offices in New
York, two in Pennsylvania and two in South Carolina.
Consolidation
The consolidated financial statements include the accounts of the Bank and its
wholly owned subsidiaries after elimination of all significant intercompany
accounts and transactions.
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.
Marketable Securities
The Bank classifies marketable securities at the time of their purchase as
either held-to-maturity, available-for-sale or trading securities in accordance
with Statement of Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which it adopted as of July 1, 1994.
If it is management's intent and the Bank has the ability to hold such
securities until their maturity, these securities are classified as held-to-
maturity and are carried on the Bank's books at cost, adjusted for amortization
of premium and accretion of discount on a level yield basis. Alternatively, 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 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. The Bank has no securities classified as trading.
On December 31, 1995, the Bank reclassified marketable securities with an
amortized cost of $121.2 million from held-to-maturity to available-for-sale.
The net unrealized gain on the marketable securities reclassified was $758,000,
net of income taxes, at the time of reclassification. The reclassification was
in accordance with the Financial Accounting Standards Board ("FASB") special
report, "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities," that permitted this one-time
reassessment.
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.
Loans Receivable
Loans are stated at their unpaid principal balance net of any deferred
origination fees or costs. Interest income on loans is credited to income as
earned. Interest earned on loans for which no payments were received during the
month is accrued at month end. Interest accrued on loans more than ninety days
delinquent is offset by a reserve for uncollected interest, and such loans are
placed on a nonaccrual status.
44
<PAGE>
The Bank 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, 1996 and 1995.
Loan fees and certain direct loan origination costs are deferred, and the net
deferred income or cost is then recognized using the level-yield method over
the contractual life of the loans, adjusted for estimated prepayments.
Real Estate
Real estate owned (acquired by foreclosure or voluntarily conveyed by delinquent
borrowers) is initially recorded at fair value at the time of acquisition and
subsequently reported at the lower of its new cost basis or fair value less
estimated costs to sell. Losses on real estate owned are charged to
operations.
Provision for Loan Losses
Provisions for estimated losses on specific loans are charged to the allowance
for loan losses when, in the opinion of management, a significant decline
reduces the estimated fair value of the underlying collateral to less than its
current carrying value. Provisions for estimated losses on the loan
portfolios, other than those specifically identified, are charged to earnings
in an amount that results in a general loss allowance sufficient, in
management's judgment, to cover anticipated losses based on past and expected
future loss experience and economic conditions.
The Bank adopted the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure," on July 1, 1995.
Generally, all nonaccrual loans are deemed to be impaired. In addition,
management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In evaluating whether
a loan is impaired, management considers not only the amount that the Bank
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. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. Smaller balance, homogeneous loans
(e.g., primarily consumer and residential mortgages) are evaluated collectively
for impairment. Impairment losses are included in the allowance for possible
loan losses. Impaired loans are charged-off when management believes that the
ultimate collectibility of a loan is not likely.
Interest income on impaired loans is recognized using the cash basis method.
Interest on impaired loans that are contractually past due ninety days and over
is reserved.
The effects of the adoption of SFAS 114 and SFAS 118 were not material to the
Bank's financial position or results of operations.
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 are forty to
fifty years for buildings, five years for automobiles and five to twenty
years for furniture and other equipment. 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.
Savings Deposits
Interest on savings deposits is accrued and charged to expense monthly and is
paid or credited in accordance with the terms of the accounts.
45
<PAGE>
INCOME TAXES
Income tax expense is recognized after giving effect to special rules applicable
to thrift institutions. The Bank joins with its wholly owned subsidiaries in
filing a consolidated federal income tax return.
During fiscal 1994, the Bank adopted the FASB's SFAS No. 109, "Accounting for
Income Taxes" (SFAS 109). The cumulative effect of this change in accounting was
recognized in the 1994 consolidated statement of income.
Pension Plan
The Bank has a noncontributory defined benefit pension plan. The net periodic
pension cost has been calculated in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pension."
Reclassification of Prior Year's Statements
Certain items previously reported have been reclassified to conform with the
current year's reporting format.
The number of shares and related earnings per share have been restated to
reflect a two-for-one stock split (see note 13).
Derivative Financial Instruments
In October 1994, the FASB issued SFAS No. 119, "Disclosures About Derivative
Financial Instruments and Fair Value of Financial Instruments" (SFAS 119). SFAS
119 is effective for years ending after December 15, 1994. The Bank has no
involvement with financial instruments that meet the definition of a derivative
as defined by SFAS 119.
Earnings Per Share
Primary and fully diluted earnings per share are based on the weighted average
number of common shares and common equivalent shares (using the treasury share
method) outstanding during each period. The Bank's common equivalent shares
consist of shares earned under the ESOP and the assumed conversion of
outstanding stock options. The resulting number of shares used in computing
primary and fully diluted earnings per share was 22,856,329 for the year ended
June 30, 1996, and 22,634,800 for the period from November 5, 1994 (see note 2),
to June 30, 1995. Earnings per share totaled $.77 for the year ended June 30,
1996, and $.47 per share for the period from November 5, 1994, to June 30, 1995.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Estimates are used when accounting for
allowance for loan losses, realization of deferred tax assets, fair values of
certain assets and liabilities, determination and carrying value of impaired
loans, carrying value of real estate owned, carrying value and amortization of
goodwill and other intangibles and employee benefit plans.
(2) Corporate Reorganization and Stock Issuance
On September 9, 1993, the Pennsylvania Department of Banking approved the Bank's
conversion from a Pennsylvania-chartered mutual savings association to a
Pennsylvania-chartered mutual saving bank. The conversion was effective as of
September 10, 1993. On February 16, 1994, the Bank adopted a plan of
reorganization into a Pennsylvania-chartered mutual holding company. The Bank
received the approval of the Federal Reserve, the Department of Banking and the
FDIC for transactions contemplated by the plan of reorganization, which
authorized the Bank to offer stock in one or more public stock offerings up to a
maximum of 49% of the issued and outstanding shares of its common stock. As a
result of the offering in November 1994, Northwest Bancorp, MHC (mutual holding
company) received 16,200,000 shares (70.1%) of Northwest Savings Bank (stock
bank) stock. The Bank's ESOP purchased 552,000 shares.
46
<PAGE>
Also as a result of the stock offering, Northwest Savings Bank received
gross proceeds of $69,000,000. Expenses associated with the offering
totaled $2,023,000, resulting in net capital additions to the Bank of
$66,977,000. The Bank recorded common stock at par of $1,155,000 and
paid-in capital of $65,822,000 from the stock issuance.
(3) Business Combinations
During fiscal 1996, the Bank completed the acquisition of two financial
institutions: a commercial bank with assets of approximately $39,300,000
for $7,798,000 in cash and a savings bank with assets of approximately
$45,600,000 for $7,230,000 in cash.
The acquisitions were recorded using the purchase method of accounting
resulting in goodwill of approximately $6,500,000 which is being amortized
over a 15-year period on a straight-line basis. The Bank also purchased
a retail office facility and assumed deposits of $23,800,000 from another
financial institution. The resulting deposit premium intangible of
approximately $1,100,000 is also being amortized over a 15-year period on
a straight-line basis.
During fiscal 1995, the Bank completed two minor acquisitions of: a consumer
discount company with assets of approximately $13,000,000 and a mortgage banking
company with assets of approximately $4,000,000. The acquisitions were recorded
using the purchase method of accounting resulting in goodwill of approximately
$1,900,000 which is being amortized over a 15-year period on a straight-line
basis.
<PAGE>
(4) Marketable Securities
<TABLE>
<CAPTION>
Marketable securities at June 30, 1996, are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government and agencies:
Due in one year or less $ 11,192 14 (15) 11,191
Due after one year -- five years 42,644 587 (162) 43,069
Corporate debt issues due after ten years 250 31 -- 281
Mortgage-backed securities:
Fixed rate pass-through 11,063 -- (200) 10,863
Variable rate pass-through 2,998 153 -- 3,151
Fixed rate CMO 761 -- (25) 736
Variable rate CMO 87,110 654 (2,318) 85,446
--------------------------------------------------------------------
Total mortgage-backed securities 101,932 807 (2,543) 100,196
--------------------------------------------------------------------
Total securities held-to-maturity $ 156,018 1,439 (2,720) 154,737
====================================================================
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 450 -- (2) 448
Due after one year -- five years 37,540 546 (178) 37,908
Due after five years -- ten years 100 -- (1) 99
Due after ten years 8,993 -- (450) 8,543
Equity securities 1,113 1,040 (12) 2,141
Corporate debt issues:
Due in one year or less 1,098 2 (1) 1,099
Due after one year to five years 303 -- (2) 301
Municipal securities:
Due in one year or less 20 -- -- 20
Due after five years -- ten years 1,310 11 (16) 1,305
Due after ten years 100 -- (3) 97
Mortgage-backed securities:
Fixed rate pass-through 51,328 1,496 (169) 52,655
Variable rate pass-through 1,041 8 (2) 1,047
Fixed rate CMO 1,854 12 (12) 1,854
Variable rate CMO 134,032 1,794 (1,868) 133,958
--------------------------------------------------------------------
Total mortgage-backed securities 188,255 3,310 (2,051) 189,514
--------------------------------------------------------------------
Total securities available-for-sale $ 239,282 4,909 (2,716) 241,475
====================================================================
</TABLE>
(Continued)
48
<PAGE>
Marketable securities at June 30, 1995, are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government and agencies:
Due in one year or less $ 7,003 31 (26) 7,008
Due after one year--five years 45,775 1,131 (54) 46,852
Due after five years--ten years 12,402 823 -- 13,225
Corporate debt issues due after ten years 290 -- -- 290
Mortgage-backed securities:
Fixed rate pass-through 26,900 497 (110) 27,287
Variable rate pass-through 3,726 98 -- 3,824
Fixed rate CMO 3,122 30 (39) 3,113
Variable rate CMO 171,093 580 (5,305) 166,368
--------------------------------------------------------------
Total mortgage-backed securities 204,841 1,205 (5,454) 200,592
--------------------------------------------------------------
Total securities held-to-maturity $ 270,311 3,190 (5,534) 267,967
==============================================================
Available-for-sale:
Equity securities 688 726 -- 1,414
Mortgage-backed securities:
Fixed rate pass-through 36,046 1,712 -- 37,758
Variable rate pass-through 519 66 -- 585
--------------------------------------------------------------
Total mortgage-backed securities 36,565 1,778 -- 38,343
--------------------------------------------------------------
Total securities available-for-sale $ 37,253 2,504 -- 39,757
==============================================================
</TABLE>
Expected maturities for mortgage-backed securities will 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 Bank's mortgage-backed securities:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Mortgage-backed securities:
FNMA $ 140,566 110,718
GNMA 39,729 38,187
FHLMC 109,438 91,704
Other (nonagency) 1,713 2,575
--------------------------------
Total mortgage-backed securities $ 291,446 243,184
================================
</TABLE>
Marketable securities having a carrying value of $49,820,000 at June 30, 1996,
were pledged to secure public deposits. During fiscal years 1996 and 1995, the
Bank did not sell any marketable securities. During fiscal year 1994, the Bank
sold marketable securities available-for-sale for $35,800,000 realizing a gross
pretax profit of $3,029,000.
49
<PAGE>
(5) Loans Receivable
<TABLE>
<CAPTION>
Loans receivable at June 30, 1996 and 1995, are summarized in the table below:
1996 1995
------------------------------
<S> <C> <C>
Real estate loans:
One-to four-family $ 1,034,242 880,110
Multi-family and commercial 71,658 53,022
------------------------------
Total real estate loans 1,105,900 933,132
Consumer loans:
Home equity and home improvement 38,146 40,547
Education loans 47,842 39,315
Loans on savings accounts 6,543 5,930
Other 159,532 119,611
------------------------------
Total consumer loans 252,063 205,403
Commercial loans 67,045 56,788
------------------------------
Total loans receivable, gross 1,425,008 1,195,323
Deferred loan fees (3,495) (3,772)
Undisbursed loan proceeds (real estate loans) (33,428) (14,983)
Allowance for loan losses (real estate loans) (9,662) (8,102)
Allowance for loan losses (other loans) (3,468) (3,731)
------------------------------
Total loans receivable, net $ 1,374,955 1,164,735
==============================
</TABLE>
As of June 30, 1996 and 1995, the Bank serviced loans for others approximating
$85,865,000 and $60,303,000, respectively. These loans serviced for others are
not assets of the Bank and are appropriately excluded from the Bank's financial
statements.
At June 30, 1996, approximately 90% of the Bank's net loan portfolio was
secured by properties located in Pennsylvania. The Bank 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, 1996, include $207,156,000 of adjustable rate loans
and $1,217,852,000 of fixed rate loans.
In the normal course of business, the Bank extends credit in the form of
mortgage commitments, undisbursed lines of credit and standby letters of
credit. These off-balance sheet instruments involve, to various degrees,
elements of credit and interest rate risk not reported in the consolidated
statement of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to these financial instruments is represented by the contract amount of
the financial instrument. The Bank 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, 1996 and 1995, are presented in the following table:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Mortgage loan commitments $22,682 18,618
Undisbursed lines of credit 53,620 51,100
Standby letters of credit 1,889 2,702
-------------------------
$78,191 72,420
=========================
</TABLE>
50
<PAGE>
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 Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary, by
the Bank 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, 1996, for fixed and
adjustable rate loans, are $21,286,000 and $1,396,000, respecitvely. The
interest rates on these commitments approximate market rates at June 30, 1996.
As discussed in note 1 on July 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." All of the Bank's non-accrual loans, which totalled $9,481,000 at
June 30, 1996, are considered to be impaired loans. Average impaired loans
during 1996 were $10,394,000. All of the Bank's impaired loans at June 30, 1996
were collateral dependent. Since at June 30, 1996, the value of the collateral
for each impaired loan exceeded the carrying value of the impaired loan, no
impairment reserve was established.
Nonaccrual loans at June 30, 1995, were $10,424,000. The foregone interest on
nonaccrual loans for the years ended June 30, 1995 and 1994, was $870,000 and
$1,033,000, 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, 1996 and 1995, is presented in the
following table:
<TABLE>
<CAPTION>
1996 1995
---------------------
<S> <C> <C>
Investment securities $ 1,787 1,401
Mortgage-backed securities 1,114 784
Loans receivable 6,598 5,142
---------------------
$ 9,499 7,327
=====================
</TABLE>
(7) Allowance for Estimated Losses
Changes in the allowance for losses on loans receivable for the years ended June
30, 1996, 1995 and 1994, are presented in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Balance, beginning of fiscal year $ 11,833 11,238 10,999
Provision 1,502 1,098 1,728
Charge-offs (1,333) (1,071) (1,620)
Acquisitions 700 235 --
Recoveries 428 333 131
----------------------------------
Balance, end of fiscal year $ 13,130 11,833 11,238
==================================
</TABLE>
51
<PAGE>
Management believes that the allowance for estimated losses is adequate as of
June 30, 1996. 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 Bank's allowance for
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
(8) Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank system. As a member, the Bank
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh, at cost, in an amount not less than 1% of its outstanding home loans
or 1/20 of its outstanding notes payable to the Federal Home Loan Bank of
Pittsburgh, whichever is greater, as calculated at December 31 of each year.
(9) Premises and Equipment
Premises and equipment at June 30, 1996 and 1995, are summarized by major
classification in the following table:
<TABLE>
<CAPTION>
1996 1995
---------------------
<S> <C> <C>
Land and land improvements $ 2,250 1,976
Office buildings and improvements 18,437 14,832
Furniture, fixtures and equipment 13,156 12,081
Leasehold improvements 2,862 2,752
---------------------
Total, at cost 36,705 31,641
Less accumulated depreciation and amortization 18,937 17,120
---------------------
Premises and equipment, net $ 17,768 14,521
=====================
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1996, 1995
and 1994, was $1,645,000, $1,570,000 and $1,468,000, respectively.
Premises used by certain of the Bank's branches are occupied under formal
operating lease arrangements. The leases expire on various dates through 2012.
Minimum annual rentals by fiscal year are summarized in the following table:
<TABLE>
<S> <C>
1997 $ 1,128
1998 971
1999 612
2000 474
2001 243
Thereafter 934
-------
Total $ 4,362
=======
</TABLE>
Rental expense for the years ended June 30, 1996, 1995 and 1994, was $1,268,000,
$1,016,000 and $908,000, respectively.
52
<PAGE>
(10) Savings Deposits
Savings deposit balances at June 30, 1996 and 1995, are as shown in the table
below:
<TABLE>
<CAPTION>
Weighted Weighted
average rate 1996 average rate 1995
at June 30, 1996 Amount at June 30, 1995 Amount
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts % 3.30 $ 296,099 % 3.32 $ 287,783
Interest-bearing checking accounts 2.01 195,019 2.07 168,813
Money market deposit accounts 3.37 82,552 3.26 74,704
Certificates of deposit
2.00% to 2.99% 2.25 36 -- --
3.00% to 3.99% 3.56 7,812 3.38 3,667
4.00% to 4.99% 4.66 138,758 4.45 112,150
5.00% to 5.99% 5.35 409,023 5.34 258,592
6.00% to 6.99% 6.16 242,428 6.20 267,233
7.00% to 7.99% 7.07 69,629 7.13 92,046
8.00% and greater 8.41 8,691 8.15 18,947
----------------------------------------------------------------
$ 1,450,047 $ 1,283,935
================================================================
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $80,618,000 at June 30, 1996.
The following table summarizes the contractual maturity of the certificate
accounts:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Due within 12 months $ 512,392 385,340
Due between 12 and 24 months 196,962 147,268
Due between 24 and 36 months 62,577 103,815
After 36 months 104,446 116,212
------------------------
$ 876,377 752,635
========================
</TABLE>
The following table summarizes the interest expense incurred on the respective
savings deposits:
<TABLE>
<CAPTION>
Years ended
June 30,
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 9,322 10,414 10,499
Interest-bearing checking accounts 3,396 3,163 3,099
Money market deposit accounts 2,595 2,555 2,758
Certificate accounts 46,348 37,150 30,280
--------------------------------------
$ 61,661 53,282 46,636
======================================
</TABLE>
53
<PAGE>
(11) Borrowed Funds
Borrowed funds at June 30, 1996 and 1995, are presented in the following table:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
<S> <C> <C>
Notes payable to the Federal Home Loan
Bank of Pittsburgh:
5.56%, due 07/01/96 $ 10,000 --
5.39%, due 07/02/96 25,000 --
5.44%, due 07/05/96 20,000 --
5.41%, due 07/11/96 20,000 --
5.46%, due 07/12/96 20,000 --
5.48%, due 07/29/96 20,000 --
4.49%, due 08/02/96 1,459 --
5.61%, due 10/15/96 20,000 --
5.64%, due 07/03/95 -- 2,000
4.82%, due 02/20/96 -- 20,000
4.73%, due 07/09/96 3,000 3,000
4.78%, due 07/15/96 4,000 4,000
8.95%, due 09/11/96 1,000 1,000
6.88%, due 01/17/97 2,000 2,000
7.17%, due 04/08/97 2,000 2,000
6.64%, due 07/01/97 2,000 2,000
5.20%, due 07/09/97 3,000 3,000
5.21%, due 07/14/97 4,000 4,000
8.95%, due 09/11/97 1,000 1,000
5.45%, due 07/09/98 3,000 3,000
5.46%, due 07/14/98 4,000 4,000
5.85%, due 08/10/98 10,000 10,000
5.52%, due 08/10/98 20,000 20,000
7.56%, due 04/08/99 2,000 2,000
7.18%, due 07/01/99 2,000 2,000
3.00%, due 01/22/03 200 200
4.00%, due 02/25/04 150 150
3.50%, due 03/23/14 234 240
5.00%, due 05/12/15 560 572
-----------------------------------
200,603 86,162
ESOP note payable, variable rate equal
to prime, payable in 5 annual
installments of $862 excluding interest
beginning January 1996 (note 14) 3,328 4,312
Revolving lines of credit, aggregate
limit of $5,200, due on demand,
weighted average rate of 8.54% at
June 30, 1995 -- 2,979
Investor notes payable, weighted average
rate of .15% and 9.07%, due various
dates through 1996 7,830 9,186
Securities sold under agreements to
repurchase, 6.10%, due November 4, 1995 -- 800
-----------------------------------
$ 211,761 103,439
===================================
</TABLE>
54
<PAGE>
Advances from the Federal Home Loan Bank of Pittsburgh are secured by the Bank's
investment securities, mortgage-backed securities and qualifying residential
first mortgage loans, to the extent that the defined statutory value must be at
least 120% of the amount of the notes outstanding. Certain of these advances are
subject to restrictions or penalties in the event of prepayment.
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 year 1996 was $266,667. The maximum amount of security repurchase
agreements outstanding during fiscal year 1996 was $800,000.
(12) Income Taxes
The Bank adopted SFAS 109 effective July 1, 1993, on a prospective basis, with
the cumulative effect of this accounting change resulting in an increase in the
financial statement deferred tax asset of $2,070,000, with a corresponding
credit to net income.
Total income tax expense (benefit) was allocated for the years ended
June 30, 1996, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes and
cumulative effect of accounting change $ 10,803 10,181 11,191
Shareholders' equity for unrealized gain on securities (109) 939 --
------------------------------------------------------
$ 10,694 11,120 11,191
======================================================
Income tax expense (benefit) applicable to income before taxes consists of:
<CAPTION>
Year ended
June 30,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Current $ 10,203 10,101 11,197
Deferred 600 80 (6)
------------------------------------------------------
$ 10,803 10,181 11,191
======================================================
The significant components of deferred income tax expense (benefit) are as
follows:
<CAPTION>
June 30,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax expense (benefit) $ 571 (44) (151)
NOL carryforward 29 124 145
------------------------------------------------------
$ 600 80 (6)
</TABLE>
55
<PAGE>
A reconciliation from the expected federal statutory income tax rate to the
effective rate, expressed as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
Years ended
June 30,
---------------------------------------------------
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (1.9) (1.1) (.5)
State income tax, net of federal and state taxes 4.7 3.8 5.5
Other differences, net .4 .8 1.2
---------------------------------------------------
Effective tax rate % 38.2 38.5 41.2
===================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1996 and
1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred fee income $ 830 1,319
Deferred compensation expense 762 745
Net operating loss carryforwards 257 285
Bad debts 963 1,336
Pension expense 166 74
Other 1,278 1,109
--------------------------------
4,256 4,868
Deferred tax liabilities:
Marketable securities 830 939
Other 202 214
--------------------------------
1,032 1,153
--------------------------------
Net deferred tax asset $ 3,224 3,715
================================
</TABLE>
The Bank has determined that no valuation reserve is necessary for the deferred
tax asset since it is more likely than not that the deferred tax asset 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 Bank 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, the Bank has approximately
$735,000 of net operating losses which expire in years 2005 through 2008. These
net operating losses which are subject to an annual use limitation were acquired
from institutions that were previously merged into the Bank.
On August 20, 1996, federal legislation was enacted which will eliminate the
percentage of taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also requires a
thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Bank has previously provided deferred
taxes on this amount, no financial statement tax expense should result from this
new legislation.
56
<PAGE>
(13) Shareholders' Equity
In April 1996, the Board of Directors of the Bank authorized a two-for-one
common stock split in the form of a stock dividend. The additional shares
resulting from the split were distributed on May 15, 1996, to shareholders of
record on May 3, 1996.
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require the Bank to maintain
certain statutory reserves. The Bank may not pay dividends on or repurchase any
of its common stock if the effect thereof would reduce net worth below the level
of adequate capitalization as defined by the Federal Deposit Insurance
Corporation (FDIC) and the Pennsylvania Department of Banking.
The Bank was permitted, as of June 30, 1996, 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 the Bank does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided prior
to 1987. Retained income at June 30, 1996, includes approximately $25,584,000
representing such bad debt deductions for which no deferred income taxes have
been provided.
(14) Employee Benefit Plans
Pension Plans
The Bank maintains noncontributory defined benefit pension plans covering
substantially all of the Bank's employees and the members of the Board of
Directors. In addition, the Bank has an unfunded Supplemental Executive
Retirement Plan (SERP) to compensate those executive participants eligible for
the Bank's defined benefit pension plan whose benefits are limited by section
415 of the Code of the Internal Revenue Service (which caps annual benefits at
$150,000 beginning in 1994).
The Bank also sponsors a retirement savings plan in which substantially all
employees participate. The Bank provides a matching contribution of 50% of
employee contributions to a maximum of 6% of employee compensation.
Total expense for all retirement plans, including defined benefit pension, was
approximately $1,762,000, $1,426,000 and $1,350,000 for the years ended
June 30, 1996, 1995 and 1994, respectively. Net periodic pension cost for the
Bank's defined benefit pension plans consist of the following:
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Service cost $ 670 631 749
Interest cost 775 627 538
Actual return
on plan assets (1,291) (473) (427)
Net amortization
and deferral 1,076 337 227
------------------------------
Net periodic
pension cost $ 1,230 1,122 1,087
==============================
</TABLE>
57
<PAGE>
The following table sets forth, for the Bank's defined benefit pension plans,
the Plans' funded status and amounts recognized in the Bank's consolidated
statements of financial condition at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $9,512 and
$8,114, respectively $ (9,953) (8,511)
============================
Projected benefit obligation (12,881) (11,135)
Plan assets at fair value 10,245 8,124
----------------------------
Projected benefit obligation
in excess of plan assets (2,636) (3,011)
Unrecognized transition asset (459) (500)
Unrecognized net loss 1,351 1,712
Unrecognized prior service cost 1,082 1,400
Adjustment to recognize minimum liability (64) (347)
----------------------------
Prepaid (accrued) pension cost $ (726) (746)
============================
</TABLE>
The following table sets forth the assumptions used to develop the net pension
cost:
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Discount rate % 7 7 7
Expected long-term rate of return on assets 7 7 7
Rate increase in compensation levels 4 4 4
</TABLE>
Postretirement Healthcare Plan
In addition to pension benefits, the Bank provides postretirement healthcare
benefits for certain employees who were employed as of October 1, 1993, and were
at least 55 years of age on that date. Effective July 1, 1993, the Bank adopted
Statement of Financial 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.
Previously, the Bank accounted for these benefits on a pay-as-you-go (cash)
basis. At the time of the adoption of SFAS 106, the Bank recorded the entire
transition obligation of $574,000.
Net periodic cost for the Bank's postretirement healthcare benefits consist of
the following:
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Service cost $ 71 64 60
Interest cost 81 65 56
Recognition of transition obligation -- -- 574
-----------------------------------
Net periodic cost $ 152 129 690
===================================
</TABLE>
58
<PAGE>
The following table sets forth the funded status of the Bank's postretirement
healthcare benefit plan and the amounts recognized in the Bank's consolidated
statements of financial condition at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Accumulated benefit obligation $ (997) (856)
Plan assets at fair value --- ---
-----------------------
Accumulated benefit obligation in excess
of plan assets (997) (856)
Unrecognized net loss 2 37
-----------------------
Accrued postretirement benefit cost $ (995) (819)
=======================
</TABLE>
The assumptions used to develop the preceding information for postretirement
healthcare benefits are as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Discount rate % 7 7 7
Monthly cost of healthcare insurance
per beneficiary $ 102.74 93.40 81.00
Annual increase in healthcare costs % 8 8 8
</TABLE>
Employee Stock Ownership Plan
The Bank has established a 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 Bank during which they worked at least 1,000 hours. The Bank
makes annual contributions to the ESOP equal to the ESOP's debt service less the
dividends received on unearned ESOP shares. The ESOP shares are pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and become eligible for allocation to employee accounts. Actual ESOP
share allocations to employee accounts are based on each employee's relative
portion of the Bank's total eligible compensation recorded during the year
shares are earned.
The Bank accounts for its ESOP in accordance with AICPA Statement of Position
93-6. Accordingly, the debt of the ESOP is recorded as debt and the shares
pledged as collateral are reported as unearned ESOP shares in the Bank's
consolidated statement of financial condition. As shares are earned, the Bank
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings-per-share computations. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are paid to the trustee for debt service.
ESOP compensation expense was $1,359,000 and $1,300,000 for the fiscal years
ended June 30, 1996 and 1995, respectively.
The ESOP shares as of June 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Allocated shares 215,104 115,412
Shares released for
allocation -- --
Earned shares not yet
released for allocation -- --
Unearned shares 336,896 436,588
----------------------
552,000 552,000
======================
Fair value of unearned
shares at June 30 $ 3,790 4,202
======================
</TABLE>
Recognition and Retention Plan
On November 21, 1995, the Bank established the Northwest Savings Bank
Recognition and Retention Plan for Employees and Outside Directors (RRP). The
objective of the RRP is to enable the Bank to provide directors, officers and
employees with a proprietary interest in the Bank as an incentive to contribute
to its success. The number of common shares issued and granted under the RRP was
276,000 (total market value of $3,243,000 at issuance date). Shares of common
stock granted pursuant to the RRP will be in the form of restricted stock and
generally will be 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
59
<PAGE>
fair market value of the common stock at the date of the grant, will be
recognized pro rata over the five years during which the shares are payable. A
recipient will be 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.
Stock Option Plan
On November 21, 1995, the Bank adopted the Northwest Savings Bank 1995 Stock
Option Plan (Stock Option Plan). The objective of the Stock Option Plan is to
provide an additional performance incentive to the Bank's employees and outside
directors. The Stock Option Plan authorizes the grant of stock options and
limited stock appreciation rights for 690,000 shares of the Bank's common stock.
On December 20, 1995, the Bank granted 121,000 nonstatutory stock options to its
outside directors at an exercise price of $11.16 per share (95% of the Bank's
common stock fair market value per share at grant date) and 463,000 incentive
stock options to employees at an exercise price of $11.75 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 remaining 106,000 options are to be granted to employees as incentive stock
options at an exercise price equal to the Bank's common stock fair value per
share at grant date. During the year ended June 30, 1996, no options were
exercised.
SFAS No. 123, "Accounting for Stock-Based Compensation"
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a fair value based method of
accounting for stock-based compensation plans. SFAS 123 permits entities to
expense an estimated fair value of employee stock options or to continue to
measure compensation cost for these plans using the intrinsic value accounting
method contained in APB Opinion No. 25. Entities that elect to continue to use
the intrinsic value method must provide pro forma disclosures of net income and
earnings per share as if the fair value method of accounting has been applied.
This standard will become effective in fiscal 1997.
The Bank is currently analyzing the impact of adoption of the standard on the
consolidated financial statements; however, the adoption and concurrent
application is not expected to have a material impact.
(15) Disclosure About Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value Financial Instruments" (SFAS 107),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated statement of financial condition.
SFAS 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank. The carrying
amounts reported in the consolidated statement of financial condition
approximate fair value for the following financial instruments: cash on hand and
non-interest-earning deposits in other institutions, accrued interest receivable
and accrued interest payable.
The market value of marketable securities exceeded book value by $1,281,000 and
$2,344,000 at June 30, 1996 and 1995, respectively. Estimated market values are
based on quoted market prices, dealer quotes and prices obtained from
independent pricing services. Refer to note 4 of the consolidated financial
statements for the detail of type of investment products.
The net carrying value of loans exceed the market value at June 30, 1996, by
approximately $12,008,0000 and was $13,100,000 less than the market value of
loans at June 30, 1995. Loans with comparable characteristics including
collateral and repricing structures were segregated for valuation purposes.
Each loan pool was separately valued utilizing a discounted cash flow analysis.
Projected monthly cash flows were discounted to present value using a market
rate for comparable loans. Characteristics of comparable loans included
remaining term, coupon interest and estimated prepayment speeds. Delinquent
loans were evaluated separately given the impact delinquency has on the
projected future cash flow of the loan and the approximate discount or market
rate.
60
<PAGE>
The carrying amounts and estimated fair values of deposits at June 30, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------------------------------------------------
<S> <C> <C> <C> <C>
NOW and MMDA accounts $ 277,571 277,571 243,517 243,517
Passbook accounts 296,099 296,099 287,783 287,783
Time deposits 876,377 871,873 752,635 75,227
-------------------------------------------------------
Total Deposits $1,450,047 1,445,543 1,283,935 1,283,572
</TABLE>
The carrying amounts of NOW, MMDA and passbook accounts approximate their fair
values. The fair value estimates above do not include the benefit that results
from the low-cost funding provided by the deposit liabilities 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.
The carrying amounts of borrowed funds exceeded their estimated fair value at
June 30, 1996 and 1995, by $1,384,000 and $1,400,000, respectively. Variable
rate advances, investor notes payable and lease payable were estimated to
approximate their carrying amounts. The fixed rate advances were valued by
comparing their contractual cost to the prevailing market cost.
(16) Contingent Liabilities
The Bank is subject to a number of asserted and unasserted claims encountered in
the normal course of business. One of the claims involves an individual who
purports to have subscribed for stock when the Bank reorganized into a mutual
holding company and who seeks to represent all persons who subscribed for and
purchased stock during the reorganization. The plaintiff alleges that the Bank's
offering circular, which was issued as part of the reorganization, was
deficient. On November 17, 1995, the District Court dismissed all federal claims
against the defendants with prejudice and dismissed the remaining claims without
prejudice. On December 14, 1995, the plaintiff appealed the District Court's
decision to the United States Court of Appeals for the Third Circuit. Management
intends to continue to vigorously defend against this action. The ultimate
outcome of this litigation cannot presently be determined. Accordingly no
provision for liability, if any, that may result has been recorded in the
consolidated financial statements.
The undercapitalized status of the FDIC's Savings Association Insurance Fund
(SAIF) has resulted in various legislative proposals to recapitalize the SAIF
which, if enacted, would require thrifts like Northwest Savings Bank to pay a
one-time charge of $.85 to $.90 for every $100 of deposits as of March 31, 1995,
to recapitalize the depleted insurance fund. This could result in a one-time
charge of approximately $10,7000,000 to $11,400,000 on a pre-tax basis
($6,400,000 to $6,800,000 after tax) to the Bank.
(17) Regulatory Capital
Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
61
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank 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 (as defined) to average
assets (as defined). As of June 30, 1996, the Bank exceeds all capital adequacy
requirements to which it is subject.
As of February 28, 1996, the most recent notification from the FDIC categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios as of June 30, 1996, are presented
in the following table:
<TABLE> To be well
<CAPTION> Actual Required Capital capitalized
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996
Total capital
(to risk-
weighted assets) $ 191,863 % 19.9 $ 77,269 $ 8.0 $ 96,586 % 10.0
Tier I capital
(to risk-
weighted assets) 179,777 18.6 38,634 4.0 57,952 6.0
Tier I capital
(to average assets) 179,777 9.9 54,708 3.0/(1)/ 91,179 5.0
</TABLE>
/(1)/ 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, 1996, the Bank had not
been advised of any additional requirements in this regard.
<PAGE>
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------
September 30 December 31 March 31 June 30
----------------------------------------------------------
(in thousands, except per share data)
----------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Interest income $ 92,328 32,743 33,716 36,343
Interest expense 16,309 16,723 17,098 18,507
----------------------------------------------------------
Net interest income 16,019 16,020 16,618 17,836
Provision for possible loan losses 280 115 190 917
Noninterest income 1,086 1,026 1,059 954
Noninterest expenses 9,320 10,324 9,906 11,277
----------------------------------------------------------
Income before income taxes 7,505 6,607 7,581 6,596
Provision for income taxes 2,987 2,697 3,027 2,092
----------------------------------------------------------
Net income $ 4,518 3,910 4,554 4,504
==========================================================
Earnings per share $ .20 .17 .20 .20
==========================================================
<CAPTION>
Three months ended
----------------------------------------------------------
September 30 December 31 March 31 June 30
----------------------------------------------------------
(in thousands, except per share data)
----------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest income $ 28,052 29,064 29,883 31,159
Interest expense 13,599 13,957 14,510 16,060
----------------------------------------------------------
Net interest income 14,453 15,107 15,373 15,099
Provision for possible loan losses 208 281 291 318
Noninterest income 1,139 1,067 1,188 1,118
Noninterest expenses 9,012 9,097 9,387 9,475
----------------------------------------------------------
Income before income taxes 6,372 6,796 6,883 6,424
Provision for income taxes 2,537 2,686 2,535 2,423
----------------------------------------------------------
Net income $ 3,835 4,110 4,348 4,001
==========================================================
Earnings per share (1) $ --- .10 .19 .18
==========================================================
</TABLE>
(1) Earnings per share information is only applicable for the last three
quarters of fiscal 1995 as the Bank did not complete its stock offering until
November 4, 1994. See note 1, "Earnings Per Share."
63
<PAGE>
N O R T H W E S T S A V I N G S B A N K
Corporate Information
- ---------------------
Annual Meeting:
October 30, 1996
11:00 A.M.
Knights of Columbus Hall
219 Second Avenue
Warren, Pennsylvania 16365
Stock Listing:
Northwest Savings Bank's common stock
is traded in the NASDAQ National
Stock Market under the symbol "NWSB."
The stock is listed as NWSvgBK" in the
NASDAQ section in the financial pages of
most major newspapers.
Transfer Agent and Registrar
Address changes and all shareholder
inquires should be directed to:
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
1-800-937-5449
Investor Information
Analysts, investors and others
requesting additional financial
information may contact:
William J. Wagner
Executive Vice President and Chief Financial Officer
Northwest Savings Bank
Liberty Street at Second Avenue
P.O. Box 128
Warren, Pennsylvania 16365
814-726-2140
Auditors:
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
Securities Counsel:
Luse, Lehman, Gorman, Pomerenk & Schick
5335 Wisconsin Avenue N.W.
Suite 400
Washington, D.C. 20015
64
<PAGE>
Board of Directors
John O. Hanna President, Chief Executive Officer
of Northwest Savings Bank
William J. Wagner Executive Vice President, Chief
Financial Officer and Treasurer of
Northwest Savings Bank
Richard L. Carr Retired Superintendent of Titusville
Area School District
Thomas K. Creal, III Partner in architectural firm of Creal,
Hyde & Larson
John J. Doyle President of Perry Construction Company
Robert G. Ferrier President of Ferrier Hardware, Inc. and
Drexel Realty
Taylor W. Foster Retired Vice President and General Manager
of News-Herald Printing Co. and Venango Newspapers
Dr. Robert L. Lasher Retired physician and surgeon, Surgical
Associates of Erie
Dr. Richard E. McDowell President of the University of Pittsburg at
Bradford
James H. Olay Retired Chairman of the Board and Chief Executive
Officer for Ridgeway Powdered Metals, Inc.
Mr. Olay passed away in June, 1996.
Joseph T. Stadler Retired Vice President - Manufacturing of
Superior Bronze Corporation
Walter J. Yahn Chairman of the Board, Founder & Chief Executive
of Erie Advanced Manufacturing Company
John S. Young Retired President and Sales Manager for
Young Brothers Electronics, Inc.
65
<PAGE>
Corporate Officers
John O. Hanna President, Chief Executive Officer
William J. Wagner Executive Vice President, Chief Financial
Officer, Treasurer
James E. Vecellio Senior Vice President, Operations
Gregory C. LaRocca Vice President, Administration
John M. Blair Vice President, Mortgage Lending
Raymond R. Parry Vice President, Consumer Lending
Timothy A. Huber Vice President, Commercial Lending
Robert G. Norton Vice President, Human Resources
Robert A. Ordiway Vice President, Region Manager
Donald C. Meyers Vice President, Erie Region Manager
Douglas P. Wilson Vice President, Chief Appraiser
Richard F. Seibel Corporate Auditor
Northwest Consumer
Discount Company
Raymond R. Parry President
Robert J. Irvin Senior Vice President
John E. Hall Assistant Vice President, Regional Manager
Northwest Mortgage
Corporation
Robert O. Rogers President
<PAGE>
SUBSIDIARIES OF THE BANK
- ------------------------
Northwest Financial Services, Inc., a Pennsylvania corporation
Great Northwest Corporation, a Pennsylvania corporation
Northwest Consumer Discount Company, Inc., a Pennsylvania corporation which
operates under this name in four location in Western and Central Pennsylvania
and also operates:
d/b/a Northwest Finance Company in Jamestown, NY,
a New York Corporation
d/b/a Butler Consumer Discount Company in eight locations in
Southwestern PA
d/b/a Preis Consumer Discount Company in five locations in Central PA
d/b/a Uniontown Financial Services in Uniontown, PA
d/b/a Erie Consumer Discount in Erie, PA
d/b/a Franklin Consumer Discount in Franklin, PA
d/b/a Corry Consumer Discount in Corry, PA
d/b/a Community Consumer Discount in Warren, PA
d/b/a Thrift Financial Services in Indiana, PA
d/b/a Clearfield Consumer Discount in Clearfield, PA
d/b/a Titusville Consumer Discount in Titusville, PA
d/b/a Lewistown Consumer Discount in Lewistown, PA
d/b/a Friendly Loan Consumer Discount in Jeannette, PA
d/b/a Zelie Consumer Discount in Zelienople, PA
d/b/a Johnstown Consumer Discount in Johnstown, PA
Northwest Mortgage Corporation, a Delaware corporation
Northwest Capital Group, Inc., a Pennsylvania corporation
Rid-Fed Inc., a Pennsylvania corporation
Power Funding Group, Inc., a New York corporation
67
<PAGE>
EXHIBIT 9
SUBSIDIARIES OF THE BANK
<PAGE>
SUBSIDIARIES OF THE BANK
------------------------
Northwest Financial Services, Inc., a Pennsylvania corporation
Great Northwest Corporation, a Pennsylvania corporation
Northwest Consumer Discount Company, Inc., a Pennsylvania corporation which
operates under this name in four locations in Western and Central Pennsylvania
and also operates:
d/b/a Northwest Finance Company in Jamestown, NY, a New York Corporation
d/b/a Butler Consumer Discount Company in eight locations in Southwestern
PA
d/b/a Press Consumer Discount Company in five locations in Central PA
d/b/a Uniontown Financial Services in Uniontown, PA
d/b/a Erie Consumer Discount in Erie, PA
d/b/a Franklin Consumer Discount in Franklin, PA
d/b/a Corry Consumer Discount in Corry, PA
d/b/a Community Consumer Discount in Warren, PA
d/b/a Thrift Financial Services in Indiana, PA
d/b/a Clearfield Consumer Discount in Clearfield, PA
d/b/a Titusville Consumer Discount in Clearfield, PA
d/b/a Lewistown Consumer Discount in Lewistown, PA
d/b/a Friendly Loan Consumer Discount in Jeannette, PA
d/b/a Zelie Consumer Discount in Zelienople, PA
Northwest Mortgage Corporation, a Delaware corporation
Northwest Capital Group Inc., a Pennsylvania corporation
Rid-Fed Inc., a Pennsylvania corporation
Power Funding Group, Inc., a New York corporation
<PAGE>
EXHIBIT NO. 99.2
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996
FDIC Certificate No. 28 178-6
--------
Northwest Savings Bank
----------------------------------------------
(Exact name of bank as specified in its charter)
Pennsylvania
--------------------------------
(State or jurisdiction of incorporation or organization)
23-2790930
------------------------------
(I.R.S. Employer Identification No.)
Second at Liberty Avenue
Warren, Pennsylvania 16365
- ------------------------- -----
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (814)726-2140
Not applicable
-----------------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 23,376,000
shares of the Bank's common stock outstanding as of September 30, 1996.
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 1 - 5
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 6 - 11
Financial Condition and Results of
Operations
PART II OTHER INFORMATION 12 - 14
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1996 1996
- ----------------------------------------------------------- --------------- ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 17,425 $ 13,806
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 18,826 30,498
MARKETABLE SECURITIES AVAILABLE FOR SALE 237,948 241,475
MARKETABLE SECURITIES HELD-TO-MATURITY (MARKET VALUE
OF $150,659 AND $154,737) 152,573 156,018
TOTAL CASH, INTEREST-BEARING DEPOSITS AND --------------- -----------
MARKETABLE SECURITIES 426,772 441,797
LOANS RECEIVABLE, NET OF ALLOWANCE FOR ESTIMATED
LOSSES OF $13,284 AND $13,130 1,410,851 1,374,955
ACCRUED INTEREST RECEIVABLE 10,112 9,499
REAL ESTATE OWNED 4,760 5,771
FEDERAL HOME LOAN BANK STOCK, AT COST 10,811 10,811
PREMISES AND EQUIPMENT, NET 18,051 17,768
INTANGIBLES 9,130 9,648
OTHER ASSETS 11,045 7,676
--------------- -----------
TOTAL ASSETS $ 1,901,532 1,877,925
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
LIABILITIES:
DEPOSITS $ 1,532,931 1,450,047
BORROWED FUNDS 148,558 211,761
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 6,384 12,268
ACCRUED INTEREST PAYABLE 5,032 4,128
OTHER LIABILITIES 21,460 9,070
--------------- -----------
TOTAL LIABILITIES 1,714,365 1,687,274
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 50,000,000 SHARES
AUTHORIZED, 23,376,000 ISSUED AND OUTSTANDING 2,338 2,338
PAID-IN CAPITAL 67,671 67,671
RETAINED EARNINGS 122,537 125,239
NET UNREALIZED GAIN/(LOSS) ON SECURITIES AVAILABLE-
FOR- SALE, NET OF INCOME TAXES 434 1,325
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN SHARES (3,328) (3,328)
UNEARNED RECOGNITION AND RETENTION PLAN SHARES (2,485) (2,594)
--------------- -----------
187,167 190,651
--------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,901,532 $ 1,877,925
=============== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
1
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
-------- --------
<S> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE $30,504 26,526
MORTGAGE-BACKED SECURITIES 4,785 4,124
INVESTMENT SECURITIES 1,639 1,138
INTEREST EARNING DEPOSITS 112 543
-------- --------
TOTAL INTEREST INCOME 37,040 32,331
INTEREST EXPENSE:
SAVINGS DEPOSITS 17,367 14,884
BORROWED FUNDS 2,274 1,427
-------- --------
TOTAL INTEREST EXPENSE 19,641 16,311
-------- --------
NET INTEREST INCOME 17,399 16,020
PROVISION FOR POSSIBLE LOAN LOSSES 217 281
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 17,182 15,739
-------- --------
NONINTEREST INCOME:
LOAN SERVICE CHARGES 277 176
SERVICE FEES ON DEPOSIT ACCOUNTS 339 299
GAIN ON SALE OF MARKETABLE SECURITIES (NET) 0 0
GAIN ON SALE OF LOANS (NET) (54) (186)
GAIN ON SALE OF REAL ESTATE OWNED 230 122
DIVIDENDS ON FHLB STOCK 173 156
OTHER OPERATING INCOME 638 520
-------- --------
TOTAL NONINTEREST INCOME 1,603 1,087
NONINTEREST EXPENSES:
COMPENSATION AND EMPLOYEE BENEFITS 6,341 4,967
PREMISES AND OCCUPANCY COSTS 1,219 1,067
OFFICE OPERATIONS EXPENSE 647 542
SAIF RECAPITALIZATION ASSESSMENT 8,565 0
FEDERAL INSURANCE PREMIUMS 804 728
DATA PROCESSING 260 272
CHECK PROCESSING AND ATM EXPENSE 391 306
BANK SERVICE CHARGES 227 183
MARKETING 266 180
LEGAL, AUDIT AND PROFESSIONAL EXPENSE 247 423
PROVISION FOR FORECLOSED REAL ESTATE 32 101
REAL ESTATE OWNED EXPENSE 141 154
OTHER EXPENSES 841 397
-------- --------
TOTAL NONINTEREST EXPENSE 19,981 9,320
-------- --------
INCOME BEFORE INCOME TAXES (1,196) 7,506
STATE AND FEDERAL INCOME TAXES (364) 2,988
-------- --------
NET INCOME (832) 4,518
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidate Statement of Cash Flows
For the Three Months Ending September 30, 1996 and 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Quarter
Ending Ending
9/30/96 9/30/95
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ (832) $ 4,518
Adjustments to reconcile net income to net cash
provided by operations
Provision for possible loan losses 217 281
Net loss (gain) on sales of assets (199) (57)
Depreciation of premises and equipment 460 399
Amortization of deferred loan fees (249) (184)
Decrease (increase) in other assets (2,076) 2,163
Increase (decrease) in other liabilities 13,294 (2,710)
Amortization of premiums (discounts)
on marketable securities (112) (100)
Noncash compensation expense related to
stock benefit plans 109 0
Other 0 (46)
----------- -----------
Net cash provided by operating activities 10,612 4,264
INVESTING ACTIVITIES
Purchase of marketable securities held-to-maturity 0 (3,000)
Purchase of marketable securities available-for-sale (1,646) (5,091)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 4,322 2,103
Proceeds form maturities and principal reductions
of marketable securities available-for-sale 2,402 842
Proceeds from sales of marketable securities 0 0
Loan originations (144,220) (121,175)
Proceeds from loan maturities and principal reductions 89,855 69,637
Proceeds from loan sales 18,560 20,117
Purchase of Federal Home Loan Bank Stock 0 0
Proceeds from sale of real estate owned 1,151 358
Purchase of real estate for investment (273) (234)
Purchase of premises and equipment (743) (1,787)
Payment for acquisitions, net of cash acquired 0 0
----------- -----------
Net cash used by investing activities (30,592) (38,230)
</TABLE>
(Continued)
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
Quarter Quarter
Ending Ending
9/30/96 9/30/95
--------- ---------
<S> <C> <C>
FINANCIAL ACTIVITIES
Increase in deposits, net $ 82,884 $ (3,252)
Net increase (decrease) in borrowings (63,203) (3,415)
Increase (decrease) in advances by borrowers for
taxes and insurance (5,884) (5,241)
Common stock acquired by ESOP 0 0
Cash dividends paid (1,870) (1,733)
Proceeds from sale of stock 0 0
Capitalization of Northwest Bancorp, MHC 0 0
-------- -------
Net cash provided by financing activities 11,927 (13,641)
Net increase (decrease) in cash and cash equivalents $ (8,053) $(47,607)
======== =======
Cash and cash equivalents at beginning of period $ 44,304 $ 70,061
Net increase (decrease) in cash and cash equivalents $ (8,053) $(47,607)
-------- -------
Cash and cash equivalents at end of period $ 36,251 $ 22,454
======== =======
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for a fair presentation of financial position and results of
operations. The consolidated statements have been prepared using the accounting
policies described in the financial statements included in Northwest Savings
Bank's Annual Report and on Form F-2 for the fiscal year ended June 30, 1996.
Certain items previously reported have been reclassified to conform with the
current year's reporting format. The results of operations for the three months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire year.
(2) PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Northwest Savings Bank and its wholly owned subsidiaries, Northwest
Financial Services, Inc., Northwest Consumer Discount Company, Northwest
Mortgage Corporation, Northwest Capital Group, Inc., Rid Fed, Inc., Northwest
Finance Company, Great Northwest Corporation and Power Funding Group, Inc. All
significant intercompany items have been eliminated.
(3) RECAPITALIZATION OF SAIF
------------------------
On September 30, 1996 Congress enacted into law a one-time special assessment to
recapitalize the FDIC's Savings Association Insurance Fund. All institutions
holding SAIF insured deposits as of March 31, 1995 will pay a one-time
assessment on November 27, 1996 of .657% on those deposits. Accordingly, based
on Northwest's level of assessable deposits, the respective SAIF assessment will
be $8.5 million. Under generally accepted accounting procedures, this
assessment was required to be recorded as of September 30, 1996. The effect of
this assessment on the income of Northwest Savings Bank for the quarter ended
September 30, 1996 was $5.4 million after tax. Effective October 1, 1996, as a
result of the SAIF now being fully funded, the premium Northwest pays for
deposit insurance fell to .064% of insured deposits from the previous level of
.23%. Based upon the Bank's current amount of insured deposits, the reduction
in premium will result in an increase in annualized after-tax earnings of
approximately $1.5 million. For the fiscal year ended June 30, 1997, this
reduction in FDIC insurance premium will increase annualized after tax earnings
by approximately $1.1 million.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 1996 TO SEPTEMBER 30,
- -----------------------------------------------------------------------------
1996
- ----
ASSETS
- ------
At September 30, 1996, the Bank had total assets of $1.902 billion, an increase
of approximately $23.6 million from June 30, 1996. This increase was funded
primarily from an $82.9 million increase in deposits which was partially offset
by a $63.2 million decrease in borrowed funds.
Cash and cash equivalents, interest-bearing deposits and marketable securities
totalled $426.8 million at September 30, 1996, a decrease of $15.0 million, or
3.4%, from $441.8 million at June 30, 1996. This decrease resulted primarily
from the Bank shifting funds from interest-bearing deposits to loans receivable
which generally have higher interest rates. Net loans receivable increased by
$35.9 million, or 2.6%, to $1.411 billion at September 30, 1996 from $1.375
billion at June 30, 1996 as loan demand remained strong in all of the Bank's
market areas.
LIABILITIES
- -----------
Deposits increased by $82.9 million, or 5.7%, to $1.533 billion at September 30,
1996 from $1.450 billion at June 30, 1996. This favorable increase resulted
from the successful promotion of certificates of deposit as well as the
successful integration and growth of new branches. Borrowed funds decreased
$63.2 million, or 29.8%, to $148.6 million at September 30, 1996 from $211.8
million at June 30, 1996. This decrease primarily resulted from the repayment
of overnight borrowings from the FHLB because of the previously mentioned strong
growth in deposits. Advances by borrowers for taxes and insurance decreased by
$5.9 million, or 48.0%, to $6.4 million at September 30, 1996 from $12.3 million
at June 30, 1996. This substantial decrease typically occurs in the third
calendar quarter of each year as real estate taxes are paid for a substantial
number of the Bank's mortgage customers. Other liabilities increased $12.4
million, or 136.3%, to $21.5 million at September 30, 1996 from $9.1 million at
June 30, 1996. The primary reason for this increase was an accrual in the
amount of $8.5 million at September 30, 1996 relating to the one-time SAIF
assessment as previously mentioned.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total capital at September 30, 1996 was $187.2 million, a decrease of $3.5
million, or 1.8%, from $190.7 million at June 30, 1996. This decrease was
attributable to a net operating loss of $832,000 for the three months ended
September 30, 1996 along with the payment of stock
6
<PAGE>
dividends in the amount of $1.9 million. Also contributing to this decrease was
a reduction in the net unrealized gain on securities available-for-sale in the
amount of $891,000.
As of September 30, 1996, all capital requirements were exceeded. The required,
actual, and excess capital levels as of September 30, 1996 are as follows: (in
thousands)
<TABLE>
<CAPTION>
Required Actual
-------- ------
% of
Assets Excess of
or Risk- Actual Over
% of Based Regulatory
Amount Assets Amount Assets Requirements
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
GAAP Capital - - 187,167 9.90% -
Total Risk-Based
Capital Ratio 79,388 8.00% 190,210 19.17% 110,822
Tier 1 Leverage
Capital Ratio 56,713 3.00% 177,795 9.41% 121,082
Tier 1 Risk-Based
Capital Ratio 39,694 4.00% 177,795 17.92% 138,101
</TABLE>
At September 30, 1996 the Bank was required by FDIC regulations to maintain
minimum levels of liquid assets. The Bank's internal liquidity requirement is
based upon a percentage of deposits and borrowings ("liquidity ratio"). The
Bank historically has maintained a level of liquid assets in excess of
regulatory and internal requirements, and the Bank's liquidity ratio at
September 30, 1996 was 25.32%. The Bank adjusts its liquidity levels in order
to meet funding needs for deposit outflows, payment of real estate taxes and
insurance on mortgage loan escrow accounts, repayment of borrowings, when
applicable, and loan commitments.
NONPERFORMING ASSETS
- --------------------
The following table sets forth information with respect to the Bank's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are placed on nonaccrual status when they are more
than 90 days contractually delinquent. Other nonperforming assets represent
property acquired by the Bank through foreclosure or repossession. Foreclosed
property is carried at the lower of its fair value or the principal balance of
the related loan. Nonperforming assets increased $1.0 million, or 6.5%, to
$16.3 million at September 30, 1996 from $15.3 million at June 30, 1996.
Management believes that this increase is seasonal and does not indicate a
downward trend in the Bank's asset quality.
7
<PAGE>
<TABLE>
<CAPTION>
September, 1996 June 30, 1996
---------------- --------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential and Commercial Real Estate 8,791 7,617
Consumer and Commercial 2,802 1,864
------ ------
Total 11,593 9,481
Total real estate acquired through
foreclosure and other real estate owned: 4,760 5,771
------ ------
Total nonperforming assets 16,353 15,252
------ ------
Total nonperforming assets as a
percentage of total assets: .86% .81%
------ ------
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------
AND 1995
- --------
GENERAL
- -------
Northwest Savings Bank's net income for the three months ended September 30,
1996 was $4.4 million excluding a one-time assessment by Congress to
recapitalize the Savings Association Insurance Fund (SAIF). This closely
compares with net income of $4.5 million for the three months ended September
30, 1995. This slight decrease is due to a $350,000 one-time charge for the
restructuring of the Bank's mortgage banking operation.
NET INTEREST INCOME
- -------------------
For the three months ended September 30, 1996, total interest income increased
by $4.7 million, or 14.6%, to $37.0 million compared to $32.3 million for the
three months ended September 30, 1995. This increase primarily resulted from a
$287.1 million, or 18.8%, increase in average interest earning assets to $1.813
billion for the three months ended September 30, 1996 from $1.526 billion for
the three months ended September 30, 1995. Partially offsetting this increase
was a decrease in the yield on average interest earning assets to 8.17% for the
three months ended September 30, 1996 compared to 8.47% for the same period last
year. In addition to internal growth, the increase in average interest earning
assets was assisted by the acquisition of First Federal Savings Bank of Kane
("Kane") on March 30, 1996 with assets of approximately
8
<PAGE>
$45.6 million and First National Bank of Centre Hall ("Centre Hall") on April
12, 1996 with assets of approximately $39.3 million.
Interest on loans increased by $4.0 million, or 15.1%, to $30.5 million for the
quarter ended September 30, 1996 compared to $26.5 million during the same
quarter last year. This increase resulted primarily from a $211.5 million, or
17.9%, increase in average loans outstanding to $1.392 billion for the quarter
ended September 30, 1996 from $1.181 billion for the first quarter last year.
Loan balances increased because of strong loan demand throughout fiscal 1996 and
into the first quarter of 1997 as well as the acquisition of Kane and Centre
Hall contributing approximately $32.8 million and $31.6 million of net loans,
respectively. Partially offsetting the increase in interest on loans due to the
increase in average balance was a decrease in the yield on average loans to
8.76% for the quarter ended September 30, 1996 from 8.99% for the comparable
period last year. The decrease in average yield was primarily a result of the
prepayment of higher interest rate loans, the proceeds from which were invested
in loans with lower interest rates. Also contributing to the decrease in yield
was the substantial growth of the loan portfolio during a period of generally
lower interest rates.
Interest on mortgage-backed securities increased by $661,000, or 16.0%, to $4.8
million for the three months ended September 30, 1996 from $4.1 million for the
three months ended September 30, 1995. This increase resulted from a $46.5
million, or 19.1%, increase in the average balance of mortgage-backed securities
to $289.5 million for the first quarter of fiscal 1997 from $243.0 million for
the first quarter of fiscal 1996 as the Bank leveraged its capital by borrowing
funds and purchasing mortgage-backed securities to realize an interest rate
spread. Partially offsetting this increase was a decrease in the average yield
to 6.61% during the quarter ended September 30, 1996 from 6.79% the previous
year. This decrease in average yield resulted from the yields on variable rate
mortgage-backed securities, representing approximately 75% of the portfolio,
adjusting to lower levels than the prior year when market interest rates were
generally higher.
Interest on investment securities increased $501,000, or 44%, to $1.6 million
for the three months ended September 30, 1996 from $1.1 million for the three
months ended September 30, 1995. This increase primarily resulted from a $36.5
million, or 53.8%, increase in the average balance of investment securities to
$104.4 million for the quarter ended September 30, 1996 from $67.9 million for
the same quarter last year. This increase in average balance resulted from the
Bank purchasing additional securities for the investment portfolio to increase
net interest income as well as approximately $9.3 million received from the Kane
acquisition and $5.1 million as part of the Centre Hall acquisition. Partially
offsetting the increase in volume was a decrease in average yield to 6.28% for
the period ending September 30, 1996 from 6.71% for the period ending September
30, 1995. This decrease in average yield was the result of adding the
aforementioned securities which had interest rates lower than the existing
portfolio yield.
Interest income on interest earning deposits decreased by $431,000, or 79.4%, to
$112,000 for the quarter ended September 30, 1996 from $543,000 for the quarter
ended September 30, 1995.
9
<PAGE>
This decrease was primarily the result of a $7.4 million, or 21.4%, decrease in
the average balance to $27.1 million for the quarter ended September 30, 1996
from $34.5 million in the comparable period last year. This decrease in average
balance resulted from the Bank reallocating funds from its interest earning
deposit portfolio to loans which generally have higher interest rates. Also
contributing to the decrease was a decrease in the average yield to 1.65% from
6.29%. This decrease in average yield resulted from a general decrease in short-
term interest rates between comparable periods.
The Bank's interest expense increased by $3.3 million, or 20.2%, to $19.6
million for the three months ended September 30, 1996 from $16.3 million for the
three months ended September 30, 1995. This increase resulted almost entirely
from a $289.6 million, or 21.0%, increase in the average balances of interest-
bearing liabilities to $1.670 billion for the quarter ended September 30, 1996
from $1.381 billion for the quarter ended September 30, 1995. The average cost
of funds for the two comparable periods remained relatively constant at 4.70%
for the three months ended September 30, 1996 compared to 4.73% for the three
months ended September 30, 1995. The increase in average interest-bearing
liabilities resulted from internal deposit growth along with the positive effect
of the following three acquisitions: the purchase of a full service office in
Pottsville with deposits of $23.8 million in November 1995, the acquisition of
Kane with deposits of $37.9 million and the acquisition of Centre Hall with
deposits of $34.3 million. Also contributing to the growth of interest-bearing
liabilities was a $71.1 million increase in average borrowed funds to $172.4
million for the quarter ended September 30, 1996 from $101.3 million for the
quarter ended September 30, 1995. Additional borrowings consisted primarily of
Federal Home Loan Bank advances which were used to increase the Bank's portfolio
of marketable securities in order to improve the Bank's net interest income.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.4 million, or 8.8%, to $17.4 million for the
three months ended September 30, 1996 compared to $16.0 million for the three
months ended September 30, 1995.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses decreased to $217,000 for the three months ended
September 30, 1996 from $281,000 for the three months ended September 30, 1995.
These consistently low levels of loss provisions resulted from the Bank having
accumulated sufficient general valuation allowances which, when coupled with
continued high asset quality, resulted in little required additions to the
Bank's allowance for losses.
NONINTEREST INCOME
- ------------------
Noninterest income increased by $516,000, or 47.5%, to $1.6 million for the
three months ended September 30, 1996 from $1.1 million for the three months
ended September 30, 1995. All components of the Bank's noninterest income
improved from the prior year including service
10
<PAGE>
fee income from loans and deposits which increased $141,000, or 29.7%, to
$616,000 for the three months ended September 30, 1996 from $475,000 for the
three months ended September 30, 1995 as a result of substantial growth in loans
and deposits. Gain on sale of real estate owned (REO) increased $108,000, or
88.5%, to $230,000 for the first quarter of fiscal 1997 from $122,000 for the
first quarter of the prior year as a result of the successful sale of several
foreclosed properties. Loss on sale of loans improved $132,000, or 71.0%, to
$54,000 for the period ended September 30, 1996 from $186,000 for the same
period last year. Approximately $98,000 of this improvement on the sale of loans
resulted from the adoption of SFAS No. 122 "Accounting for Mortgage Servicing
Rights" by the Bank effective July 1, 1996. This pronouncement requires the
capitalization of mortgage servicing rights and recognition of related income.
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased by $2.2 million, or 23.2%, excluding a one-time
assessment by Congress to recapitalize the SAIF. Including the SAIF assessment,
noninterest expense increased by $10.7 million, or 115.1%, to $20.0 million for
the three months ended September 30, 1996 from $9.3 million for the three months
ended September 30, 1995. In addition to the one-time special assessment of
$8.5 million to recapitalize the SAIF, other increases over the prior year
included a $1.4 million, or 28.6%, increase in compensation and benefits expense
to $6.3 million for the three months ended September 30, 1996 from $4.9 million
for the three months ended September 30, 1995. This increase in compensation
and benefits primarily resulted from the Bank's expansion during the past year
and from normal salary growth. Occupancy and other office operations expenses
increased by $257,000, or 16.0%, to $1.9 million for the current fiscal quarter
from $1.6 million during the comparable period last year. These expenses also
increased primarily as a result of the Bank's expansion. Other expenses
increased by $444,000, or 111.8%, to $841,000 for the three months ended
September 30, 1996 from $397,000 for the three months ended September 30, 1995.
The primary reason for this increase in other expenses was a one-time charge of
$350,000 recorded by the Bank during the current fiscal quarter related to the
restructuring of the Bank's mortgage banking operations.
INCOME TAXES
- ------------
The provision for income taxes for the three months ended September 30, 1996
decreased $3.4 million, or 112.2%, to a benefit of $364,000 compared to a $2.9
million expense for the same period last year. This decrease primarily resulted
from a decrease in income before taxes of $8.7 million due to the one-time SAIF
assessment of $8.5 million accrued for in the first fiscal quarter of 1997.
11
<PAGE>
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
- -----------------
On December 13, 1994, a complaint was filed in United States District Court,
Western District of Pennsylvania, by an individual who purports to have
subscribed for stock in the Bank's mutual holding company reorganization and
stock offering (the "Offering") that was completed in November 1994. The named
defendants in the complaint are Northwest Savings Bank, Northwest Bancorp,
M.H.C., Ryan, Beck & Co., Inc., RP Financial, Inc., and the Bank's Board of
Directors. The plaintiff seeks to represent persons who subscribed for and
purchased stock in the Offering. The complaint alleges that the appraisal used
in the Bank's Offering was inappropriately increased at the completion of the
Offering, and that, among other things, the Bank violated the federal securities
laws (including section 10 of the Securities Exchange Act of 1934 and sections
12(2) and 15 of the Securities Act of 1933) and regulations thereunder, violated
Pennsylvania securities law, breached a fiduciary duty owed to plaintiff, and
breached a contract with plaintiff. Money damages and other relief is sought.
On November 17, 1995, the District Court dismissed all Federal claims against
the defendants with prejudice, and dismissed the remaining claims without
prejudice. On December 14, 1995, the plaintiff appealed the District Court's
decision to the United States Court of Appeals for the Third Circuit.
Management intends to continue to vigorously defend against this action.
There are various other claims and lawsuits involving the Bank that are
incidental to the Bank's business. In the opinion of management, no material
loss is expected from any of these pending claims or lawsuits.
ACQUISITION OF BRIDGEVILLE SAVINGS BANK
- ---------------------------------------
In June 1996, the Bank entered into a definitive agreement to acquire
Bridgeville Savings Bank which has one office in Bridgeville, Pennsylvania and
assets of approximately $56.0 million. It is expected that this acquisition
will be consummated in the first calendar quarter of 1997 and will be recorded
using the purchase method of accounting. This acquisition is not expected to
have a material effect on the consolidated financial statements of Northwest
Savings Bank.
12
<PAGE>
EXHIBITS AND REPORT ON FORM 8-K
- -------------------------------
No Form 8-K reports were filed during the quarter.
CHANGES IN SECURITIES
- ---------------------
Not applicable.
DEFAULTS UPON SENIOR SECURITIES
- -------------------------------
Not applicable.
(Balance of page intentionally left blank)
13
<PAGE>
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------
None
EXHIBITS AND REPORTS
- --------------------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST SAVINGS BANK
Date: Nov, 13, 1996 By: /s/ John O. Hanna
------- ---------------------------------
John O. Hanna
President and Chief Executive Officer
Date: Nov, 13, 1996 By: /s/ William J. Wagner
------- ---------------------------------
William J. Wagner
Chief Financial Officer
14
<PAGE>
EXHIBIT NO. 99.3
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 1996
FDIC Certificate No. 28 178-6
--------
Northwest Savings Bank
------------------------------------
(Exact name of bank as specified in its charter)
Pennsylvania
---------------------
(State or jurisdiction of incorporation or organization)
23-2790930
---------------------
(I.R.S. Employer Identification No.)
Second at Liberty Avenue
Warren, Pennsylvania 16365
- ------------------------ -----
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (814)726-2140
Not applicable
----------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ______
------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 23,376,000
shares of the Bank's common stock outstanding as of December 31, 1996.
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 1 - 5
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 6 - 13
Financial Condition and Results of
Operations
PART II OTHER INFORMATION 14 -15
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30,
ASSETS 1996 1996 1996
- ----------------------------------------------------------- -------------- --------------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 18,852 $ 17,425 $ 13,806
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 19,609 18,826 30,498
MARKETABLE SECURITIES AVAILABLE FOR SALE 220,182 237,948 241,475
MARKETABLE SECURITIES HELD-TO-MATURITY (MARKET VALUE
OF $147,676, $150,659 AND $154,737) 149,967 152,573 156,018
TOTAL CASH, INTEREST-BEARING DEPOSITS AND -------------- --------------- -----------
MARKETABLE SECURITIES 408,610 426,772 441,797
LOANS RECEIVABLE, NET OF ALLOWANCE FOR ESTIMATED
LOSSES OF $13,171, $13,284 AND $13,130 1,442,555 1,410,851 1,374,955
ACCRUED INTEREST RECEIVABLE 9,970 10,112 9,499
REAL ESTATE OWNED 4,755 4,760 5,771
FEDERAL HOME LOAN BANK STOCK, AT COST 10,811 10,811 10,811
PREMISES AND EQUIPMENT, NET 18,481 18,051 17,768
INTANGIBLES 8,908 9,130 9,648
OTHER ASSETS 7,888 11,045 7,676
-------------- --------------- -----------
TOTAL ASSETS $ 1,911,978 $ 1,901,532 $1,877,925
============== =============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
LIABILITIES:
DEPOSITS $ 1,543,917 $ 1,532,931 $1,450,047
BORROWED FUNDS 153,611 148,558 211,761
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 10,895 6,384 12,268
ACCRUED INTEREST PAYABLE 3,715 5,032 4,128
OTHER LIABILITIES 8,759 21,460 9,070
-------------- --------------- -----------
TOTAL LIABILITIES 1,720,897 1,714,365 1,687,274
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 50,000,000 SHARES
AUTHORIZED, 23,376,000 ISSUED AND OUTSTANDING 2,338 2,338 2,338
PAID-IN CAPITAL 67,671 67,671 67,671
RETAINED EARNINGS 125,531 122,537 125,239
NET UNREALIZED GAIN/(LOSS) ON SECURITIES AVAILABLE-
FOR- SALE, NET OF INCOME TAXES 790 434 1,325
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN SHARES (3,328) (3,328) (3,328)
UNEARNED RECOGNITION AND RETENTION PLAN SHARES (1,921) (2,485) (2,594)
-------------- --------------- -----------
191,081 187,167 190,651
-------------- --------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,911,978 $ 1,901,532 $1,877,925
============== =============== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
1
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE $ 30,846 27,377 61,350 53,903
MORTGAGE-BACKED SECURITIES 4,772 4,269 9,557 8,393
INVESTMENT SECURITIES 1,627 1,161 3,266 2,299
INTEREST EARNING DEPOSITS 155 (64) 267 479
-------- -------- -------- --------
TOTAL INTEREST INCOME 37,400 32,743 74,440 65,074
INTEREST EXPENSE:
SAVINGS DEPOSITS 18,042 15,321 35,409 30,205
BORROWED FUNDS 2,045 1,402 4,319 2,829
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 20,087 16,723 39,728 33,034
-------- -------- -------- --------
NET INTEREST INCOME 17,313 16,020 34,712 32,040
PROVISION FOR POSSIBLE LOAN LOSSES 394 114 611 395
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 16,919 15,906 34,101 31,645
-------- -------- -------- --------
NONINTEREST INCOME:
LOAN SERVICE CHARGES 224 173 501 349
SERVICE FEES ON DEPOSIT ACCOUNTS 364 297 703 596
GAIN ON SALE OF MARKETABLE SECURITIES (NET) 901 0 901 0
LOSS ON SALE OF LOANS (NET) (228) (237) (282) (423)
GAIN ON SALE OF REAL ESTATE OWNED (NET) 151 24 381 146
DIVIDENDS ON FHLB STOCK 170 157 343 313
OTHER OPERATING INCOME 639 611 1,277 1,131
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 2,221 1,025 3,824 2,112
NONINTEREST EXPENSES:
COMPENSATION AND EMPLOYEE BENEFITS 6,438 5,805 12,779 10,772
PREMISES AND OCCUPANCY COSTS 1,255 1,084 2,474 2,151
OFFICE OPERATIONS EXPENSE 756 634 1,403 1,176
SAIF RECAPITALIZATION ASSESSMENT 0 0 8,565 0
FEDERAL INSURANCE PREMIUMS 0 766 804 1,494
DATA PROCESSING 253 223 513 495
CHECK PROCESSING AND ATM EXPENSE 384 304 775 610
BANK SERVICE CHARGES 239 190 466 373
MARKETING 450 417 716 597
LEGAL, AUDIT AND PROFESSIONAL EXPENSE 215 83 462 506
PROVISION FOR FORECLOSED REAL ESTATE 28 250 60 351
REAL ESTATE OWNED EXPENSE 284 139 425 293
AMORTIZATION OF INTANGIBLES 229 109 794 198
OTHER EXPENSES 355 320 631 628
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 10,886 10,324 30,867 19,644
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 8,254 6,607 7,058 14,113
STATE AND FEDERAL INCOME TAXES 3,390 2,697 3,026 5,685
-------- -------- -------- --------
NET INCOME $ 4,864 3,910 4,032 8,428
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three and Six Months Ending December 31, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Quarter Quarter 6 Months 6 Months
Ending Ending Ending Ending
12/31/96 12/31/95 12/31/96 12/31/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,864 $ 3,910 $ 4,032 $ 8,428
Adjustments to reconcile net income to net cash
provided by operations
Provision for possible loan losses 394 114 611 395
Net loss (gain) on sales of assets (916) (1,034) (1,115) (847)
Depreciation of premises and equipment 418 254 878 653
Amortization of deferred loan fees (182) (122) (431) (306)
Decrease (increase) in other assets 3,542 (1,141) 1,466 1,022
Increase (decrease) in other liabilities (13,888) (3,795) (594) (6,505)
Amortization of premiums (discounts) on marketable
securities (106) (99) (218) (199)
Noncash compensation expense related to stock
benefit plans 564 446 673 446
Other (247) (289) (247) (355)
----------- ----------- ----------- -----------
Net cash provided by operating activities (5,557) (1,756) 5,055 2,732
INVESTING ACTIVITIES
Purchase of marketable securities held-to-maturity 0 (91) 0 (3,091)
Purchase of marketable securities available-for-sale (500) (960) (2,146) (6,051)
Proceeds from maturities and principal reductions of
marketable securities held-to-maturity 4,444 4,591 8,766 6,694
Proceeds from maturities and principal reductions of
marketable securities available-for-sale 2,583 1,535 4,985 2,377
Proceeds from sales of marketable securities 15,455 0 15,455 0
Loan originations (142,694) (130,281) (286,914) (251,456)
Proceeds from loan maturities and principal reductions 97,632 79,940 187,487 149,577
Proceeds from loan sales 12.778 18,338 31,338 38,211
Purchase of Federal Home Loan Bank Stock 0 0 0 0
Proceeds from sale of real estate owned 396 772 1,547 1,130
Purchase of real estate investment (28) (262) (301) (496)
Purchase of premises and equipment (849) (498) (1,592) (2,285)
Payment for acquisitions, net of cash acquired 0 (1,065) 0 (1,065)
----------- ----------- ----------- -----------
Net cash used by investing activities (10,783) (27,981) (41,375) (66,455)
</TABLE>
(Continued)
3
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Quarter Quarter 6 Months 6 Months
Ending Ending Ending Ending
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Increase in deposits, net $ 10,986 $ 43,380 $ 93,870 $ 40,128
Proceeds from long-term borrowings 51,100 0 66,100 0
Repayments of long-term borrowings (36,151) (560) (45,883) (3,975)
Net increase (decrease) in short-term borrowings (10,026) (800) (78,497) (800)
Increase (decrease) in advances by borrowers for
taxes and insurance 4,511 4,327 (1,373) (914)
Cash dividends paid (1,870) (1,732) (3,740) (3,465)
-------- -------- -------- --------
Net cash provided by financing activities 18,550 44,615 30,477 30,974
Net increase (decrease) in cash and cash equivalents $ 2,210 $ 14,878 $ (5,843) $ (32,749)
======== ======== ======== ========
Cash and cash equivalents at beginning of period $ 36,251 $ 22,434 $ 44,304 $ 70,061
Net increase (decrease) in cash and cash equivalents $ 2,210 $ 14,878 $ (5,843) $ (32,749)
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 38,461 $ 37,312 $ 38,461 $ 37,312
======== ======== ======== ========
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for a fair presentation of financial position and results of
operations. The consolidated statements have been prepared using the accounting
policies described in the financial statements included in Northwest Savings
Bank's Annual Report and on Form F-2 for the fiscal year ended June 30, 1996.
Certain items previously reported have been reclassified to conform with the
current year's reporting format. The results of operations for the three months
and six months ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year.
(2) PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Northwest Savings Bank and its wholly owned subsidiaries, Northwest
Financial Services, Inc., Northwest Consumer Discount Company, Northwest
Mortgage Corporation, Northwest Capital Group, Inc., Rid Fed, Inc., Northwest
Finance Company, Great Northwest Corporation and Power Funding Group, Inc. All
significant intercompany items have been eliminated.
(3) RECAPITALIZATION OF SAIF
------------------------
On September 30, 1996 Congress enacted into law a one-time special assessment to
recapitalize the FDIC's Savings Association Insurance Fund. All institutions
holding SAIF insured deposits as of March 31, 1995 paid a one-time assessment on
November 27, 1996 of .657% on those deposits. Accordingly, based on Northwest's
level of assessable deposits, the respective SAIF assessment was $8.6 million.
Under generally accepted accounting principles, this assessment was required to
be recorded as of September 30, 1996. The effect of this assessment on the
income of Northwest Savings Bank for the six months ended December 31, 1996 was
$5.4 million after tax. As a result of the recapitalization of SAIF, Northwest
was not required to pay a regular deposit insurance premium for the three months
ended December 31, 1996. The after-tax effect of this waiver of premiums on the
income of Northwest Savings Bank, assuming the historical assessment level of
.23% of insured deposits, was approximately $530,000 for both the three months
and six months ended December 31, 1996. Effective January 1, 1997, as a result
of the SAIF now being fully funded, the premium Northwest pays for deposit
insurance fell to .064% of insured deposits from the previous level of .23%.
Based upon the Bank's current amount of insured deposits, the reduction in
premium will result in an increase in annualized after-tax earnings in future
periods of approximately $1.5 million. For the six months ended June 30, 1997,
this reduction in FDIC insurance premium will increase after-tax earnings by
approximately $760,000.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 1996 TO DECEMBER 31,
- ----------------------------------------------------------------------------
1996
- ----
ASSETS
- ------
At December 31, 1996, the Bank had total assets of $1.912 billion, an increase
of approximately $34.1 million, or 1.8%, from $1.879 billion at June 30, 1996.
This increase was funded primarily from a $93.9 million increase in deposits
which was partially offset by a $58.2 million decrease in borrowed funds.
Cash and cash equivalents, interest-bearing deposits and marketable securities
totalled $408.6 million at December 31, 1996, a decrease of $33.2 million, or
7.5%, from $441.8 million at June 30, 1996. The primary reason for this
decrease was the sale of $14.5 million of mortgage-backed securities as well as
the maturity of approximately $7.5 million of other investment securities. In
addition the Bank has shifted funds from interest-bearing deposits in other
financial institutions to loans receivable which generally have higher interest
rates. Net loans receivable increased by $67.6 million, or 4.99%, to $1.443
billion at December 31, 1996 from $1.375 billion at June 30, 1996 as loan demand
remained strong in all of the Bank's market areas. Real estate owned decreased
by approximately $1.0 million, or 17.2%, to $4.8 million at December 31, 1996
from $5.8 million at June 30, 1996 as a result of the sale of several foreclosed
properties.
LIABILITIES
- -----------
Deposits increased by $93.9 million, or 6.5%, to $1.544 billion at December 31,
1996 from $1.450 billion at June 30, 1996. This increase resulted from the
Bank's promotion of certificates of deposit in all market areas as well as the
integration and growth in the Bank's newer offices. Borrowed funds decreased
$58.2 million, or 27.5%, to $153.6 million at December 31, 1996 from $211.8
million at June 30, 1996. This decrease primarily resulted from the repayment
of overnight borrowings from the FHLB using the proceeds of longer term deposits
in an effort to reduce the Bank's exposure to increases in interest rates.
Advances by borrowers for taxes and insurance decreased by $1.4 million, or
11.4%, to $10.9 million at December 31, 1996 from $12.3 million at June 30,
1996. This decrease typically occurs during the second half of each calendar
year as real estate taxes are paid for a substantial number of the Bank's
mortgage customers.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total capital at December 31, 1996 was $191.1 million, an increase of $430,000,
or .23%, from $190.7 million at June 30, 1996. This increase was primarily
attributable to earnings for the six month period of $4.0 million which were
partially offset by the payment of dividends in the amount of $3.7 million.
6
<PAGE>
As of December 31, 1996, all capital requirements were exceeded. The required,
actual, and excess capital levels as of December 31, 1996 are as follows: (in
thousands)
<TABLE>
<CAPTION>
Required Actual
-------- ------
% of % of
Assets Assets Excess of
or Risk- or Risk- Actual Over
Based Based
Regulatory
Amount Assets Amount Assets Requirements
------ -------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
GAAP Capital - - 191,081 10.00% -
Total Risk-Based
Capital Ratio 80,905 8.00% 194,198 19.20% 113,293
Tier 1 Leverage
Capital Ratio 57,218 3.00% 181,550 9.57% 124,332
Tier 1 Risk-Based
Capital Ratio 40,452 4.00% 181,550 17.95% 141,098
</TABLE>
At December 31, 1996 the Bank was required by FDIC regulations to maintain
minimum levels of liquid assets. The Bank's internal liquidity requirement is
based upon a percentage of deposits and borrowings ("liquidity ratio"). The Bank
historically has maintained a level of liquid assets in excess of regulatory and
internal requirements, and the Bank's liquidity ratio at December 31, 1996 was
23.87%. The Bank adjusts its liquidity levels in order to meet funding needs for
deposit outflows, payment of real estate taxes and insurance on mortgage loan
escrow accounts, repayment of borrowings, when applicable, and loan commitments.
NONPERFORMING ASSETS
- --------------------
The following table sets forth information with respect to the Bank's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are placed on nonaccrual status when they are more
than 90 days contractually delinquent. Other nonperforming assets represent
property acquired by the Bank through foreclosure or repossession. Foreclosed
property is carried at the lower of its fair value or the principal balance of
the related loan. Nonperforming assets increased $2.1 million, or 13.7%, to
$17.4 million at December 31, 1996 from $15.3 million at June 30, 1996.
Management believes that this increase is seasonal and does not indicate a
downward trend in the Bank's asset quality.
7
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
------------------ --------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential and Commercial Real Estate 9,161 7,617
Consumer and Commercial 3,495 1,864
------ ------
Total 12,656 9,481
Total real estate acquired through
foreclosure and other real estate owned: 4,755 5,771
------ ------
Total nonperforming assets 17,411 15,252
====== ======
Total nonperforming assets as a
percentage of total assets: .91% .81%
------ ------
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THREE AND SIX MONTHS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
AND 1995
- --------
GENERAL
- -------
Northwest Savings Bank's net income for the three months ended December 31, 1996
was $4.9 million compared to $3.9 million for the three months ended December
31, 1995. This $1.0 million increase resulted primarily from a $900,000 gain
from the sale of mortgage-backed securities and an increase of $1.3 million in
net interest income. These increases in income were partially offset by a
$562,000 increase in noninterest expense resulting primarily from the addition
of six full-service offices to the Bank's network over the past year.
NET INTEREST INCOME
- -------------------
For the three months ended December 31, 1996, total interest income increased by
$4.7 million, or 14.4%, to $37.4 million compared to $32.7 million for the three
months ended December 31, 1995. This increase primarily resulted from a $286.1
million, or 18.6%, increase in average interest earning assets to $1.826 billion
for the three months ended December 31, 1996 from $1.540 billion for the three
months ended December 31, 1995. Partially offsetting this increase was a
decrease in the yield on average interest earning assets to 8.19% for the three
months ended December 31, 1996 compared to 8.50% for the same period last year.
In addition to significant internal growth, the increase in average interest
earning assets was assisted by the acquisition of First Federal Savings Bank of
Kane ("Kane") on March 30, 1996 with assets of approximately $45.6 million and
First National Bank of Centre Hall ("Centre Hall") on April 12, 1996 with assets
of approximately $39.3 million. The decrease in yield on average assets was
primarily a result of the prepayment of higher interest rate loans, the proceeds
from which were invested in loans with lower interest rates.
8
<PAGE>
Interest on loans increased by $3.4 million, or 12.4%, to $30.8 million for the
quarter ended December 31, 1996 compared to $27.4 million during the same
quarter last year. This increase resulted primarily from a $212.8 million, or
17.5%, increase in average loans outstanding to $1.428 billion for the quarter
ended December 31, 1996 from $1.216 billion for the second quarter last year.
Loan balances increased because of strong loan demand throughout the Bank's
market during the past twelve months and because of the acquisition of Kane and
Centre Hall which contributed approximately $32.8 million and $31.6 million of
net loans, respectively. Partially offsetting the positive effects of the
increase in average balance was a decrease in the average yield on loans to
8.64% for the quarter ended December 31, 1996 from 9.01% for the comparable
period last year. The decrease in average yield was primarily a result of the
prepayment of higher interest rate loans, the proceeds from which were invested
in loans with lower interest rates. Also contributing to the decrease in yield
was the substantial growth of the loan portfolio during a period of generally
lower interest rates.
Interest on mortgage-backed securities increased by $503,000, or 11.7%, to $4.8
million for the three months ended December 31, 1996 from $4.3 million for the
three months ended December 31, 1995. This increase resulted from a $36.4
million, or 15.0%, increase in the average balance of mortgage-backed securities
to $279.0 million as the Bank borrowed funds and purchased mortgage-backed
securities to realize an interest rate spread. Partially offsetting this
increase was a decrease in the average yield to 6.84% during the three months
ended December 31, 1996 from 7.04% the previous year. This decrease in average
yield resulted from a greater percentage of the portfolio being invested in
variable rate mortgage-backed securities during a period of relatively low
market interest rates.
Interest on investment securities increased by $466,000, or 38.8%, to $1.6
million for the three months ended December 31, 1996 from $1.2 million for the
three months ended December 31, 1995. This increase primarily resulted from a
$32.5 million, or 47.4%, increase in the average balance of investment
securities to $101.0 million for the quarter ended December 31, 1996 from $68.5
million for the same quarter last year. This increase in average balance
resulted from the Bank utilizing the proceeds from deposit inflows to purchase
additional securities for the investment portfolio and was assisted in part by
the acquisition of Kane and Centre Hall which added $14.4 million of securities.
Partially offsetting the increase in average balance was a decrease in average
yield to 6.44% for the period ending December 31, 1996 from 6.78% for the period
ending December 31, 1995. This decrease in average yield was the result of
adding the aforementioned securities which had interest rates which were lower
than the existing portfolio yield.
Interest income on interest earning deposits increased by $219,000, or 342.2%,
to $155,000 for the three months ended December 31, 1996 from a negative $64,000
for the three months ended December 31, 1995. Interest income on interest
earning deposits was negative in the prior year period because the Bank recorded
an adjustment of $180,000 relating to interest collected on deposits held as
collateral for commercial loans which was incorrectly recorded as interest
income rather than a liability by the Bank during the three months ended
September of 1995. Excluding this adjustment, interest income on interest
earning deposits increased by $39,000. This increase resulted primarily from a
$4.5 million, or
9
<PAGE>
33.1%, increase in the average balance of interest earning deposits to $18.1
million for the quarter ended December 31, 1996 from $13.6 million in the
comparable period last year. The average yield between comparable second quarter
periods remained constant at approximately 3.42%.
The Bank's interest expense increased by $3.4 million, or 20.4%, to $20.1
million for the three months ended December 31, 1996 from $16.7 million for the
three months ended December 31, 1995. The increase resulted from a $287.8
million, or 20.5%, increase in the average balance of interest-bearing
liabilities to $1.826 billion for the quarter ended December 31, 1996 from
$1.540 billion for the quarter ended December 31, 1995. The average cost of
funds for the two comparable periods declined slightly to 4.76% for the three
months ended December 31, 1996 from 4.78% for the three months ended December
31, 1995. The increase in average interest-bearing liabilities resulted from
above average deposit growth combined with the acquisition of Kane with deposits
of $37.9 million and Centre Hall with deposits of $34.3 million. Also
contributing to the growth of interest-bearing liabilities was a $48.7 million,
or 47.7%, increase in average borrowed funds to $150.9 million for the quarter
ended December 31, 1996 from $102.2 million for the quarter ended December 31,
1995. These additional borrowings consisted primarily of Federal Home Loan Bank
advances which were used to increase the Bank's portfolio of marketable
securities in an effort to increase the Bank's net interest income.
As a result of the aforementioned changes in interest income and interest
expense, net interest income increased by $1.3 million, or 8.1%, to $17.3
million for the three months ended December 31, 1996 compared to $16.0 million
for the three months ended December 31, 1995.
For the six months ended December 31, 1996, total interest income increased by
$9.3 million, or 14.3%, to $74.4 million compared to $65.1 million for the six
months ended December 31, 1995. This increase resulted primarily from a $284.7
million, or 18.5%, increase in average interest earning assets to $1.820 billion
for the six months ended December 31, 1996 compared to $1.535 billion for the
six months ended December 31, 1995. Partially offsetting this increase was a
decrease in the average yield on interest earning assets to 8.18% for the six
months ended December 31, 1996 from 8.48% for the comparable period last year.
This decrease in average yield was the result of adding interest earning assets
during a period of generally lower interest rates.
Interest on loans receivable for the six months ended December 31, 1996
increased by $7.5 million, or 13.9%, compared to the prior year primarily as a
result of a $212.2 million, or 17.7%, increase in the average balance of loans.
Loan balances increased because of strong loan demand as well as the acquisition
of Kane and Centre Hall. Partially offsetting the increase in average balances
was a decrease in the average yield to 8.70% for the six months ended December
31, 1996 from 9.00% for the six months ended December 31, 1995. Interest on
mortgage-backed securities increased by $1.2 million, or 14.3%, to $9.6 million
for the six months ended December 31, 1996 from $8.4 million in the prior year.
This increase resulted from a $41.0 million, or 16.9%, increase in the average
balance which was partially offset by a decrease in the average yield to 6.74%
from 6.92%. Interest on investment securities increased by $967,000, or 42.1%,
to $3.3 million for the six months ended December 31, 1996 compared to $2.3
million for the six
10
<PAGE>
months ended December 31, 1995. This increase resulted from a $34.6 million, or
50.9%, increase in the average balance which was partially offset by a decrease
in the average yield to 6.36% from 6.76%. Interest on interest-bearing deposits
decreased by $212,000, or 44.3%, to $267,000 for the six months ended December
31, 1996 from $479,000 in the previous year. This decrease resulted from a $3.1
million, or 11.8%, decrease in the average balance along with a decrease in the
average yield to 2.30% from 3.64%.
The Bank's interest expense increased by $6.7 million, or 20.3%, to $39.7
million for the six months ended December 31, 1996 from $33.0 million for the
six months ended December 31, 1995. This increase resulted primarily from a
$286.9 million, or 20.6%, increase in the average balance of interest-bearing
liabilities to $1.679 billion for the six months ended December 31, 1996 from
$1.392 billion for the comparable six-month period last year. The average cost
of funds for the two comparable periods remained relatively constant at 4.73%
for the six months ended December 31, 1996 compared to 4.75% for the six months
ended December 31, 1995. The increase in average interest-bearing liabilities
resulted primarily from above-average internal deposit growth along with the
aforementioned acquisitions of Kane and Centre Hall. Also contributing to the
growth of interest-bearing liabilities was a $61.5 million, or 60.3%, increase
in average borrowed funds to $163.5 million for the six months ended December
31, 1996 from $102.0 million in the prior year. Additional borrowings consisted
primarily of Federal Home Loan Bank advances which were used to increase the
Bank's portfolio of marketable securities in an effort to improve the Bank's net
interest income.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for possible loan losses increased to $394,000 for the three
months ended December 31, 1996 from $114,000 for the three months ended December
31, 1995. The Bank has increased its provision for loan losses as a result of
the significant growth in its loan portfolio which has occurred over the past
twelve months.
For the six months ended December 31, 1996 the provision for loan losses was
$611,000, an increase of $216,000, or 54.7%, compared to $395,000 for the six
months ended December 31, 1995. This increase also resulted from the significant
growth in the Bank's loan portfolio.
NONINTEREST INCOME
- ------------------
Noninterest income increased by $1.2 million, or 120.0%, to $2.2 million for the
three months ended December 31, 1996 from $1.0 million for the three months
ended December 31, 1995. This increase resulted primarily from a gain of
$900,000 from the sale of approximately $14.5 million of long-term, fixed-rate
mortgage-backed securities. These securities were sold to reduce the Bank's
exposure to increases in interest rates. Also contributing to the increase in
noninterest income was an increase in service charges resulting from the
acquisition of Kane and Centre Hall.
11
<PAGE>
For the six months ended December 31, 1996 noninterest income increased by $1.7
million, or 81.0%, to $3.8 million from $2.1 million for the six months ended
December 31, 1995. The primary reason for this increase was the $900,000 gain
on the sale of mortgage-backed securities as previously discussed. All other
components of the Bank's noninterest income also improved from the prior year
including service fee income from loans and deposits which increased $259,000,
or 27.4%, to $1.2 million for the six months ended December 31, 1996 from
$945,000 for the six months ended December 31, 1995. Gain on sale of real
estate owned (REO) increased by $235,000, or 161.0%, to $381,000 from $146,000
as a result of the sale of several foreclosed properties.
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased by $562,000, or 5.4%, to $10.9 million for the
three months ended December 31, 1996 from $10.3 million for the three months
ended December 31, 1995. This increase was primarily due to normal increases in
most of the Bank's expense categories principally as a result of the Bank's
expansion. Such increases included a $633,000, or 10.9%, increase in
compensation and benefits expense to $6.4 million for the three months ended
December 31, 1996 from $5.8 million for the three months ended December 31,
1995. Premises and occupancy expense increased by $171,000, or 15.8%, to $1.3
million for the three months ended December 31, 1996 from $1.1 million for the
three months ended December 31, 1995. In addition, the amortization of
intangibles expense increased by $120,000, or 110.1%, to $229,000 for the three
months ended December 31, 1996 from $109,000 in the previous year due to the
amortization of intangibles recorded as a result of the acquisition of Kane and
Centre Hall. Partially offsetting these increases was a decrease of $766,000, or
100.0%, in federal insurance premiums as no regular premium was assessed for the
quarter ended December 31, 1996 as a result of the previously mentioned SAIF
recapitalization. The FDIC insurance premium will resume in January, 1997 at a
rate of .064% of insured deposits compared to the previous level of .23%.
For the six months ended December 31, 1996 noninterest expense increased by $2.7
million, or 13.8%, excluding a one-time assessment of $8.6 million to
recapitalize the SAIF. Including the SAIF assessment, noninterest expense
increased by $11.3 million, or 57.7%, to $30.9 million for the six months ended
December 31, 1996 from $19.6 million for the six months ended December 31, 1995.
Contributing to this increase was a $2.0 million, or 18.5%, increase in
compensation and benefits expense to $12.8 million for the six months ended
December 31, 1996 from $10.8 million for the six months ended December 31, 1995.
This increase in compensation and benefits expense primarily resulted from the
Bank's expansion during the past year and from normal salary growth. Premises
and occupancy expense increased by $323,000, or 15.0%, to $2.5 million for the
six months ended December 31, 1996 from $2.2 million during the comparable
period last year. These expenses also increased primarily as a result of the
Bank's expansion. The amortization of intangibles expense increased by $596,000,
or 301.0%, to $794,000 for the six months ended December 31, 1996 from $198,000
for the six months ended December 31, 1995. The primary reason for this increase
in amortization expense was a one-time charge of $350,000 related to the
restructuring of the Bank's mortgage banking operations. Additionally, the Bank
had a higher amortization expense in the current year due to the
12
<PAGE>
amortization of intangibles recorded as a result of the acquisition of Kane and
Centre Hall. Partially offsetting these increases in noninterest expense was a
decrease of $690,000 in federal insurance premiums resulting primarily from the
aforementioned SAIF resolution, and a decrease of $291,000 in the provision
expense for foreclosed real estate.
INCOME TAXES
- ------------
The provision for income taxes for the three months ended December 31, 1996
increased $693,000, or 25.7%, to $3.4 million compared to $2.7 million for the
same period last year. This increase resulted primarily from an increase in
income before taxes of approximately $1.6 million.
For the six months ended December 31, 1996, income taxes decreased by $2.7
million, or 47.4%, to $3.0 million compared to $5.7 million last year. This
decrease primarily resulted from a decrease in income before taxes of $7.1
million due to the one-time SAIF assessment of $8.6 million accrued for in the
first quarter of fiscal 1997. Partially offsetting this decrease was an
increase in the Bank's effective tax rate to approximately 43% for fiscal 1997
from approximately 40% in the prior year. This increase in the effective tax
rate is due primarily to the nondeductibility for income tax purposes of the
amortization expense of several intangible assets.
13
<PAGE>
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
- -----------------
On December 13, 1994, a complaint was filed in United States District Court,
Western District of Pennsylvania, by an individual who purports to have
subscribed for stock in the Bank's mutual holding company reorganization and
stock offering (the "Offering") that was completed in November 1994. The named
defendants in the complaint are Northwest Savings Bank, Northwest Bancorp,
M.H.C., Ryan, Beck & Co., Inc., RP Financial, Inc., and the Bank's Board of
Directors. The plaintiff seeks to represent persons who subscribed for and
purchased stock in the Offering. The complaint alleges that the appraisal used
in the Bank's Offering was inappropriately increased at the completion of the
Offering, and that, among other things, the Bank violated the federal securities
laws (including section 10 of the Securities Exchange Act of 1934 and sections
12(2) and 15 of the Securities Act of 1933) and regulations thereunder, violated
Pennsylvania securities law, breached a fiduciary duty owed to plaintiff, and
breached a contract with plaintiff. Money damages and other relief is sought.
On November 17, 1995, the District Court dismissed all Federal claims against
the defendants with prejudice, and dismissed the remaining claims without
prejudice. On December 14, 1995, the plaintiff appealed the District Court's
decision to the United States Court of Appeals for the Third Circuit. On January
21, 1997 the Appeals Court heard arguments from both the plaintiff and the
defendants, and a decision is still pending. Management intends to continue to
vigorously defend against this action.
There are various other claims and lawsuits involving the Bank that are
incidental to the Bank's business. In the opinion of management, no material
loss is expected from any of these pending claims or lawsuits.
ACQUISITION OF BRIDGEVILLE SAVINGS BANK
- ---------------------------------------
In June of 1996, the Bank entered into a definitive agreement to acquire
Bridgeville Savings Bank which has one office in Bridgeville, Pennsylvania and
assets of approximately $56.0 million. It is expected that this acquisition will
be consummated in the first calendar quarter of 1997 and will be recorded using
the purchase method of accounting. This acquisition is not expected to have a
material effect on the consolidated financial statements of Northwest Savings
Bank.
EXHIBITS AND REPORT ON FORM 8-K
No Form 8-K reports were filed during the quarter.
14
<PAGE>
CHANGES IN SECURITIES
- ---------------------
Not applicable.
DEFAULTS UPON SENIOR SECURITIES
- -------------------------------
Not applicable.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------
None
EXHIBITS AND REPORTS
- --------------------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST SAVINGS BANK
Date: ____________, 1997 By:_________________________
John O. Hanna
President and Chief Executive Officer
Date: ____________, 1997 By:_________________________
William J. Wagner
Chief Financial Officer
15
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1997
FDIC Certificate No. 28 178-6
--------
Northwest Savings Bank
-----------------------------------------------
(Exact name of bank as specified in its charter)
Pennsylvania
--------------------------------
(State or jurisdiction of incorporation or organization)
23-2790930
------------------------------
(I.R.S. Employer Identification No.)
Second at Liberty Avenue
Warren, Pennsylvania 16365
- -------------------------- -----
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (814)726-2140
Not applicable
------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the Bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: There were
23,376,000 shares of the Bank's common stock outstanding as of March 31, 1997.
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1 - 6
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 7 - 15
Financial Condition and Results of
Operations
PART II OTHER INFORMATION 16 - 18
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
ASSETS 1997 1996 1996
- --------------------------------------------------------------- ----------- -------------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 14,279 $ 18,852 $ 13,806
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 26,557 19,609 30,498
MARKETABLE SECURITIES AVAILABLE FOR SALE 246,339 220,182 241,475
MARKETABLE SECURITIES HELD-TO-MATURITY (MARKET VALUE
OF $155,049, $147,676 AND $154,737) 156,650 149,967 156,018
TOTAL CASH, INTEREST-BEARING DEPOSITS AND ----------- -------------- -----------
MARKETABLE SECURITIES 443,825 408,610 441,797
LOANS RECEIVABLE, NET OF ALLOWANCE FOR ESTIMATED
LOSSES OF $13,391, $13,171 AND $13,130 1,487,381 1,442,555 1,374,955
ACCRUED INTEREST RECEIVABLE 10,416 9,970 9,499
REAL ESTATE OWNED 4,204 4,755 5,771
FEDERAL HOME LOAN BANK STOCK, AT COST 12,144 10,811 10,811
PREMISES AND EQUIPMENT, NET 19,849 18,481 17,768
INTANGIBLES 11,823 8,908 9,648
OTHER ASSETS 7,921 7,888 7,676
----------- -------------- -----------
TOTAL ASSETS $ 1,997,563 $ 1,911,978 $ 1,877,925
=========== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
LIABILITIES:
DEPOSITS $ 1,622,860 $ 1,543,917 $ 1,450,047
BORROWED FUNDS 154,158 153,611 211,761
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 10,476 10,895 12,268
ACCRUED INTEREST PAYABLE 5,591 3,715 4,128
OTHER LIABILITIES 10,380 8,759 9,070
----------- -------------- -----------
TOTAL LIABILITIES 1,803,465 1,720,897 1,687,274
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 50,000,000 SHARES
AUTHORIZED, 23,376,000 ISSUED AND OUTSTANDING 2,338 2,338 2,338
PAID-IN CAPITAL 67,854 67,671 67,671
RETAINED EARNINGS 128,256 125,531 125,239
NET UNREALIZED GAIN/(LOSS) ON SECURITIES AVAILABLE-
FOR-SALE, NET OF INCOME TAXES (203) 790 1,325
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN SHARES (2,358) (3,328) (3,328)
UNEARNED RECOGNITION AND RETENTION PLAN SHARES (1,789) (1,921) (2,594)
----------- -------------- -----------
194,098 191,081 190,651
----------- -------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,997,563 $ 1,911,978 $ 1,877,925
=========== ============== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
1
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE $ 32,001 28,211 93,351 82,114
MORTGAGE-BACKED SECURITIES 4,604 4,153 14,161 12,546
INVESTMENT SECURITIES 1,607 1,233 4,873 3,532
INTEREST EARNING DEPOSITS 94 117 361 596
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 38,306 33,714 112,746 98,788
INTEREST EXPENSE:
SAVINGS DEPOSITS 18,354 15,356 53,763 45,561
BORROWED FUNDS 1,849 1,740 6,168 4,569
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 20,203 17,096 59,931 50,130
------------ ------------ ------------ ------------
NET INTEREST INCOME 18,103 16,618 52,815 48,658
PROVISION FOR POSSIBLE LOAN LOSSES 574 190 1,185 585
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 17,529 16,428 51,630 48,073
------------ ------------ ------------ ------------
NONINTEREST INCOME:
LOAN SERVICE CHARGES 248 207 749 556
SERVICE FEES ON DEPOSIT ACCOUNTS 337 277 1,040 873
GAIN ON SALE OF MARKETABLE SECURITIES (NET) 0 0 901 0
LOSS ON SALE OF LOANS (NET) (84) (211) (366) (634)
GAIN ON SALE OF REAL ESTATE OWNED (NET) 101 106 482 252
DIVIDENDS ON FHLB STOCK 173 143 516 456
OTHER OPERATING INCOME 710 537 1,987 1,668
------------ ------------ ------------ ------------
TOTAL NONINTEREST INCOME 1,485 1,059 5,309 3,171
NONINTEREST EXPENSES:
COMPENSATION AND EMPLOYEE BENEFITS 6,461 5,407 19,240 16,179
PREMISES AND OCCUPANCY COSTS 1,417 1,119 3,891 3,270
OFFICE OPERATIONS EXPENSE 785 626 2,188 1,802
SAIF RECAPITALIZATION ASSESSMENT 0 0 8,565 0
FEDERAL INSURANCE PREMIUMS (footnote 3) 245 742 1,049 2,236
DATA PROCESSING 382 336 895 831
CHECK PROCESSING AND ATM EXPENSE 328 344 1,103 954
BANK SERVICE CHARGES 220 184 686 557
MARKETING 544 302 1,260 899
LEGAL, AUDIT AND PROFESSIONAL EXPENSE 198 171 660 677
PROVISION FOR FORECLOSED REAL ESTATE 10 167 70 518
REAL ESTATE OWNED EXPENSE 93 137 518 430
AMORTIZATION OF INTANGIBLES 240 130 1,034 328
OTHER EXPENSES 518 241 1,149 869
------------ ------------ ------------ ------------
TOTAL NONINTEREST EXPENSE 11,441 9,906 42,308 29,550
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 7,573 7,581 14,631 21,694
STATE AND FEDERAL INCOME TAXES 2,977 3,027 6,003 8,712
------------ ------------ ------------ ------------
NET INCOME $ 4,596 4,554 8,628 12,982
============ ============ ============ ============
Earnings per share before SAIF recapitalization (footnote 3) $0.20 $0.20 $0.60 $0.56
Earnings per share after SAIF recapitalization $0.20 $0.20 $0.37 $0.56
Common stock and stock equivalents 23,211,157 23,029,452 23,211,157 23,029,452
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three and Nine Months Ending March 31, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Quarter Quarter 9 Months 9 Months
Ending Ending Ending Ending
3/31/97 3/31/96 3/31/97 3/31/96
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,596 $ 4,554 $ 8,628 $ 12,982
Adjustments to reconcile net income to net cash
provided by operations
Provision for possible loan losses 574 190 1,185 585
Net loss (gain) on sales of assets (17) 118 (1,017) (729)
Depreciation of premises and equipment 701 393 1,579 1,046
Amortization of deferred loan fees (75) (117) (506) (423)
Decrease (increase) in other assets 2,573 (1,567) 4,039 (545)
Increase (decrease) in other liabilities 3,343 (1,333) 2,749 (7,838)
Amortization of premiums (discounts)
on marketable securities (107) (101) (325) (300)
Noncash compensation expense related to
stock benefit benefit plans 520 1,080 1,193 1,526
Other (15) 255 (377) (100)
------------ ---------- ---------- ----------
Net cash provided by operating activities 12,093 3,472 17,148 6,204
INVESTING ACTIVITIES
Purchase of marketable securities held-to-maturity 0 (5,773) 0 (8,864)
Purchase of marketable securities available-for-sale (14,245) (65,206) (16,391) (71,257)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 6,210 5,357 14,976 12,051
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 1,594 2,483 6,579 4,860
Proceeds from sales of marketable securities 0 0 15,455 0
Loan originations (124,617) (132,767) (411,531) (384,223)
Proceeds from loan maturities and principal reductions 91,695 79,064 279,182 228,641
Proceeds from loan sales 7,821 26,329 39,159 64,540
Purchase of Federal Home Loan Bank Stock (973) (1,142) (973) (1,142)
Proceeds from sale of real estate owned 442 647 1,989 1,777
Purchase of real estate for investment 0 110 (301) (386)
Purchase of premises and equipment (1,186) (1,282) (2,778) (3,567)
Payment for acquisitions, net of cash acquired (13,959) 1,534 (13,959) 469
------------ ---------- ---------- ----------
Net cash used by investing activities (47,218) (90,646) (88,593) (157,101)
</TABLE>
(Continued)
3
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Quarter Quarter 9 Months 9 Months
Ending Ending Ending Ending
3/31/97 3/31/96 3/31/97 3/31/96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Increase in deposits, net $ 44,349 $ 26,396 $ 138,219 $ 66,524
Proceeds from long-term borrowings 0 0 66,100 0
Repayments of long-term borrowings (2,515) (22,891) (48,398) (26,866)
Net increase (decrease) in short-term borrowings (1,807) 83,000 (80,304) 82,200
Increase (decrease) in advances by borrowers for
taxes and insurance (656) (339) (2,029) (1,253)
Cash dividends paid (1,871) (1,753) (5,611) (5,218)
----------- ----------- ----------- -----------
Net cash provided by financing activities 37,500 84,413 67,977 115,387
Net increase (decrease) in cash and cash equivalents $ 2,375 $ (2,761) $ (3,468) $ (35,510)
=========== =========== =========== ===========
Cash and cash equivalents at beginning of period $ 38,461 $ 37,312 $ 44,304 $ 70,061
Net increase (decrease) in cash and cash equivalents 2,375 (2,761) (3,468) (35,510)
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 40,836 $ 34,551 $ 40,836 $ 34,551
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for a fair presentation of financial position and results of
operations. The consolidated statements have been prepared using the accounting
policies described in the financial statements included in Northwest Savings
Bank's Annual Report and on Form F-2 for the fiscal year ended June 30, 1996.
Certain items previously reported have been reclassified to conform with the
current year's reporting format. The results of operations for the three months
and nine months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the entire year.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Northwest Savings Bank and its wholly owned subsidiaries, Northwest
Financial Services, Inc., Northwest Consumer Discount Company, Northwest
Mortgage Corporation, Northwest Capital Group, Inc., Rid Fed, Inc., Northwest
Finance Company, Great Northwest Corporation and Power Funding Group, Inc. All
significant intercompany items have been eliminated.
(3) Recapitalization of SAIF
------------------------
On September 30, 1996 Congress enacted into law a one-time special assessment to
recapitalize the FDIC's Savings Association Insurance Fund. All institutions
holding SAIF insured deposits as of March 31, 1995 paid a one-time assessment
due November 27, 1996 of .657% on those deposits. Accordingly, based on
Northwest's level of assessable deposits, the Bank's respective SAIF assessment
was $8.6 million. Under generally accepted accounting principles, this
assessment was required to be accrued as of September 30, 1996. The effect of
this assessment on the income of Northwest Savings Bank for the nine months
ended March 31, 1997 was $5.4 million after tax. As a result of the
recapitalization of the SAIF, Northwest was not required to pay a regular
deposit insurance premium for the three months ended December 31, 1996. The
after-tax effect of this waiver of premiums on the income of Northwest Savings
Bank, assuming the historical assessment level of .23% of insured deposits, was
approximately $530,000 for the nine months ended March 31, 1997. Effective
January 1, 1997, as a result of the SAIF now being fully funded, the premium
Northwest pays for deposit insurance fell to .064% of insured deposits from the
previous level of .23%. Based upon the Bank's current amount of insured
deposits, the reduction in premium will
5
<PAGE>
result in an increase in annualized after-tax earnings in future periods of
approximately $1.6 million. For the three months ended March 31, 1997, this
reduction in FDIC insurance premium resulted in an increase of approximately
$400,000 in after-tax earnings.
(4) Acquisitions
------------
On February 21, 1997, the Bank completed its acquisition of Bridgeville Savings
Bank ("Bridgeville") which had one office located in Bridgeville, Pennsylvania
with assets of $56.0 million. This acquisition was recorded using the purchase
method of accounting which does not provide for the inclusion of Bridgeville's
prior period operations in the financial statements presented herein.
On March 30, 1996 the Bank acquired First Federal Savings Bank of Kane ("Kane")
with assets of $45.6 million which operated an office in Kane and two offices in
Clarion, Pennsylvania. On April 12, 1996 the Bank acquired First National Bank
of Centre Hall ("Centre Hall") with assets of $39.3 million which operated an
office in Centre Hall and two offices in State College, Pennsylvania. Both of
these acquisitions were also recorded using the purchase method of accounting.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1996 to March 31, 1997
- ------------------------------------------------------------------------------
Assets
- ------
At March 31, 1997, the Bank had total assets of $1.998 billion, an increase of
approximately $119.6 million, or 6.4%, from $1.879 billion at June 30, 1996.
This increase was funded primarily from a $172.8 million increase in deposits
which was partially offset by a $57.6 million decrease in borrowed funds.
Cash and cash equivalents, interest-bearing deposits and marketable securities
totaled $443.8 million at March 31, 1997 an increase of $2.0 million, or .5%,
from $441.8 million at June 30, 1996. This increase resulted primarily from the
acquisition of $32.0 million of cash and investments attributable to Bridgeville
Savings Bank and was partially offset by the sale of $14.5 million of mortgage-
backed securities and the maturity of $6.4 of investment securities. In
addition, the Bank has continued to reallocate funds from cash and interest-
bearing deposits in other financial institutions to loans receivable which
generally have higher interest rates. Net loans receivable increased by $112.4
million, or 8.2%, to $1.487 billion at March 31, 1997 from $1.375 billion at
June 30, 1996. This above average increase resulted primarily from strong loan
demand in all of the Bank's market areas and was assisted in part by the
acquisition of $20.0 million of mortgage loans from the Bridgeville merger.
Federal Home Loan Bank stock increased by $1.3 million, or 12.0%, to $12.1
million at March 31, 1997 from $10.8 million at June 30, 1996 as a result of the
purchase of $972,900 of additional shares and the Bridgeville acquisition which
contributed shares valued at $359,700. Premises and equipment increased by $2.0
million or 11.2%, to $19.8 million at March 31, 1997 from $17.8 million at June
30, 1996. This increase resulted from the addition of two offices and the
acquisition of one office as a result of the Bridgeville Savings Bank merger.
Intangible assets increased by $2.2 million, or 22.5%, primarily resulting from
the recording of $3.0 million of goodwill relating to the Bridgeville
acquisition. Real estate owned decreased by $1.6 million, or 27.6%, to $4.2
million at March 31, 1997 from $5.8 million at June 30, 1996 as a result of the
sale of several foreclosed properties.
Liabilities
- -----------
Deposits increased by $172.8 million, or 11.9%, to $1.623 billion at March 31,
1997 from $1.450 billion at June 30, 1996. This increase resulted primarily
from the Bank's promotion of certificates of deposit in all market areas. In
addition, the Bridgeville acquisition contributed deposits of $34.6 million.
Borrowed funds decreased $57.6 million, or 27.2%, to $154.2 million at March 31,
1997 from $211.8 million at June 30, 1996. This decrease resulted primarily
from the repayment of overnight borrowings from the FHLB as the Bank relied more
heavily on deposit inflows to fund the growth in its assets.
7
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Shareholders equity at March 31, 1997 was $194.1 million, an increase of $3.4
million, or 1.8%, from $190.7 million at June 30, 1996. This increase was
primarily attributable to earnings for the nine month period of $8.6 million
which were partially offset by the payment of dividends in the amount of $5.6
million. In addition, an increase in shareholders equity of $1.8 million
relating to the release of shares for the Bank's stock benefit plans was
partially offset by a $1.5 million reduction in the unrealized market value
adjustment of investment securities held as available for sale.
As of March 31, 1997, all capital requirements were exceeded. The required,
actual, and excess capital levels as of March 31, 1997 are as follows: (in
thousands)
<TABLE>
<CAPTION>
Required Actual
------------------------------ -------------------------
% of % of
Assets Assets Excess of
or Risk- or Risk- Actual Over
Based Based Regulatory
Amount Assets Amount Assets Requirements
------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C>
GAAP Capital - - 194,098 9.72% -
Total Risk-Based
Capital Ratio 83,308 8.00% 195,733 18.80% 112,425
Tier 1 Leverage
Capital Ratio 58,618 3.00% 182,711 9.35% 124,093
Tier 1 Risk-Based
Capital Ratio 41,654 4.00% 182,711 17.55% 141,057
</TABLE>
At March 31, 1997 the Bank was required by FDIC regulations to maintain minimum
levels of liquid assets. The Bank's internal liquidity requirement is based
upon a percentage of deposits and borrowings ("liquidity ratio"). The Bank
historically has maintained a level of liquid assets in excess of regulatory and
internal requirements, and the Bank's liquidity ratio at March 31, 1997 was
24.83%. The Bank adjusts its liquidity levels in order to meet funding needs
for deposit outflows, payment of real estate taxes and insurance on mortgage
loan escrow accounts, repayment of borrowings, when applicable, and loan
commitments.
8
<PAGE>
Nonperforming Assets
- --------------------
The following table sets forth information with respect to the Bank's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are placed on nonaccrual status when they are more
than 90 days contractually delinquent. Other nonperforming assets represent
property acquired by the Bank through foreclosure or repossession. Foreclosed
property is carried at the lower of its fair value or the principal balance of
the related loan. Nonperforming assets increased by $1.4 million, or 9.2%, to
$16.7 million at March 31, 1997 from $15.3 million at June 30, 1996.
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
--------------- --------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential and Commercial Real Estate 9,740 7,617
Consumer and Commercial 2,760 1,864
------ ------
Total 12,500 9,481
Total real estate acquired through
foreclosure and other real estate owned: 4,204 5,771
------ ------
Total nonperforming assets 16,704 15,252
====== ======
Total nonperforming assets as a
percentage of total assets: .84% .81%
====== ======
</TABLE>
Comparison of Operating Results for Three and Nine Months Ended March 31, 1997
- ------------------------------------------------------------------------------
and March 31, 1996
- ------------------
General
- -------
Northwest Savings Bank's net income for the three months ended March 31, 1997
was $4.6 million which was unchanged from the three months ended March 31, 1996.
Major changes in the components of net income consisted of a $1.5 million
increase in net interest income, primarily due to significant growth in the
Bank's interest earning assets, which was offset by a $1.5 million increase in
noninterest expense. This increase in noninterest expense resulted primarily
from normal increases in compensation and occupancy costs combined with expected
increases associated with recent acquisitions and the expansion of various
segments of the Bank's business.
9
<PAGE>
Net Interest Income
- -------------------
For the three months ended March 31, 1997, total interest income increased by
$4.6 million, or 13.6%, to $38.3 million compared to $33.7 million for the three
months ended March 31, 1996. This increase resulted primarily from a $285.1
million, or 17.9%, increase in average interest earning assets to $1.881 billion
for the three months ended March 31, 1997 from $1.596 billion for the three
months ended March 31, 1996. Partially offsetting this increase was a decrease
in the yield on average interest earning assets to 8.15% for the three months
ended March 31, 1997 from 8.45% for the same period last year. In addition to
significant internal growth, the increase in average interest earning assets was
assisted by the acquisition of Kane, Centre Hall and Bridgeville with assets of
$45.6 million, $39.3 million and $56.0 million, respectively. The decrease in
yield on average assets was primarily a result of the prepayment of higher
interest rate loans, the proceeds from which were invested in loans with lower
interest rates.
Interest income on loans increased by $3.8 million, or 13.5%, to $32.0 million
for the quarter ended March 31, 1997 compared to $28.2 million during the same
quarter last year. This increase resulted primarily from a $221.2 million, or
17.8%, increase in average loans outstanding to $1.464 billion for the quarter
ended March 31, 1997 from $1.243 billion for the third quarter last year. Loan
balances increased because of strong loan demand throughout the Bank's market
during the past twelve months and because of the acquisition of Kane, Centre
Hall and Bridgeville which contributed approximately $32.7 million, $31.6
million and $20.3 million of net loans, respectively. Partially offsetting the
positive effects of the increase in average balance was a decrease in the
average yield on loans to 8.74% for the quarter ended March 31, 1997 from 9.08%
for the comparable period last year. The decrease in average yield was
primarily a result of the prepayment of higher interest rate loans, the proceeds
from which were invested in loans with lower interest rates.
Interest income on mortgage-backed securities increased by $451,000, or 10.9%,
to $4.6 million for the three months ended March 31, 1997 from $4.2 million for
the three months ended March 31, 1996. This increase resulted from a $22.6
million, or 8.7%, increase in the average balance of mortgage-backed securities
to $282.7 million for the three months ended March 31, 1997 from $260.1 million
for the three months ended March 31, 1996. This increase in the average balance
of mortgage-backed securities was primarily due to the Bridgeville acquisition
which contributed $20.6 million of mortgage-backed securities. Also
contributing to this increase in interest income on mortgage-backed securities
was an increase in the average yield to 6.51% for the three months ended March
31,1 997 from 6.39% for the same period in the previous year. This increase
resulted primarily from an increase in the general level of interest rates which
increased the yield on adjustable-rate securities which comprise a majority of
the subject portfolio.
Interest income on investment securities increased by $374,000, or 30.3%, to
$1.6 million for the three months ended March 31, 1997 from $1.2 million for the
three months ended March 31, 1996. This increase resulted primarily from a $29.4
million, or 39.7%, increase in the average balance of investment securities to
$103.3 million for the quarter ended March 31, 1997 from $74.0 million for
10
<PAGE>
the same quarter last year. This increase in average balance resulted from the
Bank utilizing the proceeds from deposit inflows to purchase additional
securities for the investment portfolio and was assisted in part by the
acquisition of Kane, Centre Hall and Bridgeville which added approximately $23.0
million of securities. Partially offsetting the increase in average balance was
a decrease in the average yield to 6.22% for the quarter ended March 31, 1997
from 6.67% for the quarter ended March 31, 1996. This decrease in average yield
was the result of adding the aforementioned securities which had interest rates
which were generally lower than the existing portfolio yield.
Interest income on interest earning deposits decreased by $23,000, or 19.7% to
$94,000 for the three months ended March 31, 1997 from $117,000 for the three
months ended March 31, 1996. This decrease resulted primarily from a decrease
in average yield to 1.22% for the three months ended March 31, 1997 from 2.46%
for the same period in the previous year. This decrease between periods and
relatively low yield percentage in both periods resulted from the delay in which
the Bank's deposits begin to earn interest. This delay generally has a greater
impact on the Bank's yield during periods when the Bank maintains low balances
in these types of interest-bearing deposits.
The Bank's interest expense increased by $3.1 million, or 18.1%, to $20.2
million for the three months ended March 31, 1997 from $17.1 million for the
three months ended March 31, 1996. The increase resulted from a $284.7 million,
or 19.6%, increase in the average balance of interest-bearing liabilities to
$1.738 billion for the quarter ended March 31, 1997 from $1.453 billion for the
quarter ended March 31, 1996 and was partially offset by a decrease in the
average cost of funds to 4.65% for the three months ended March 31, 1997 from
4.71% for the three months ended March 31, 1996. The increase in average
interest-bearing liabilities resulted from above average deposit growth combined
with the acquisition of Kane, Centre Hall and Bridgeville with deposits of $37.9
million, $34.3 million and $34.6 million, respectively. Also contributing to
the growth of interest-bearing liabilities was a $31.3 million, or 26.0%,
increase in average borrowed funds to $151.5 million for the quarter ended March
31, 1997 from $120.2 million for the quarter ended March 31, 1996. These
additional borrowings consisted primarily of Federal Home Loan Bank advances
which were used to increase the Bank's portfolio of marketable securities in an
effort to increase the Bank's net interest income.
As a result of the aforementioned changes in interest income and interest
expense, net interest income increased by $1.5 million, or 9.0%, to $18.1
million for the three months ended March 31, 1997 compared to $16.6 million for
the three months ended March 31, 1996.
For the nine months ended March 31, 1997, total interest income increased by
$13.9 million, or 14.1%, to $112.7 million compared to $98.8 million for the
nine months ended March 31, 1996. This increase resulted primarily from a $286.3
million, or 18.4%, increase in average interest earning assets to $1.843 billion
for the nine months ended March 31, 1997 compared to $1.557 billion for the nine
months ended March 31, 1996. Partially offsetting this increase was a decrease
in the average yield on interest earning assets to 8.16% for the nine months
ended March 31, 1997 from 8.46% for the comparable period last year. The
primary reason for the increase in average interest earning assets was the
aforementioned internal growth and the acquisition of Kane, Centre Hall and
11
<PAGE>
Bridgeville. The decrease in average yield was the result of adding interest
earning assets at rates lower than the existing portfolio yield.
Interest on loans receivable for the nine months ended March 31, 1997 increased
by $11.3 million, or 13.8%, to $93.4 million compared to $82.1 million in the
prior year primarily as a result of a $215.8 million, or 17.8%, increase in the
average balance of loans. Loan balances increased because of the aforementioned
strong loan demand and the acquisitions of Kane, Centre Hall and Bridegville.
Partially offsetting the increase in average balances was a decrease in the
average yield to 8.71% for the nine months ended March 31, 1997 from 9.03% for
the nine months ended March 31, 1996. Interest on mortgage-backed securities
increased by $1.7 million, or 13.6%, to $14.2 million for the nine months ended
March 31, 1997 from $12.5 million in the prior year. This increase resulted
from a $34.9 million, or 14.0%, increase in the average balance which was
partially offset by a decrease in the average yield to 6.63% from 6.70%.
Interest on investment securities increased by $1.4 million, or 40.0%, to $4.9
million for the nine months ended March 31, 1997 compared to $3.5 million for
the nine months ended March 31, 1996. This increase resulted from a $32.6
million, or 46.2%, increase in the average balance which was partially offset by
a decrease in the average yield to 6.29% from 6.67%. Interest on interest-
bearing deposits decreased by $235,000, or 39.4%, to $361,000 for the nine
months ended March 31, 1997 from $596,000 in the previous year. This decrease
resulted from a decrease in the average yield to 1.81% from 3.35%, which was
partially offset by a $2.9 million, or 12.2%, increase in the average balance.
The Bank's interest expense increased by $9.8 million, or 19.6%, to $59.9
million for the nine months ended March 31, 1997 from $50.1 million for the nine
months ended March 31, 1996. This increase resulted primarily from a $287.3
million, or 20.3%, increase in the average balance of interest-bearing
liabilities to $1.701 billion for the nine months ended March 31, 1997 from
$1.413 billion for the comparable nine month period last year. The average
cost of funds for the two comparable periods decreased slightly to 4.70% for the
nine months ended March 31, 1997 from 4.73% for the nine months ended March 31,
1996. The increase in average interest-bearing liabilities resulted primarily
from above-average internal deposit growth along with the aforementioned
acquisitions of Kane, Centre Hall and Bridgeville. Also contributing to the
growth of interest-bearing liabilities was a $50.1 million, or 45.7%, increase
in average borrowed funds to $159.7 million for the nine months ended March 31,
1997 from $109.6 million in the prior year. Additional borrowings consisted
primarily of Federal Home Loan Bank advances which were used to increase the
Bank's portfolio of marketable securities in an effort to increase the Bank's
net interest income.
12
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for possible loan losses increased to $574,000 for the three
months ended March 31, 1997 from $190,000 for the three months ended March 31,
1996 as the Bank increased its provision for loan losses in response to the
significant growth in its loan portfolio.
For the nine months ended March 31, 1997 the provision for loan losses increased
$600,000, or 114.3%, to $1.2 million from $585,000 for the nine months ended
March 31, 1996. This increase was also responsive to the significant growth in
the Bank's loan portfolio.
Noninterest Income
- ------------------
Noninterest income increased by $426,000, or 40.2%, to $1.5 million for the
three months ended March 31, 1997 from $1.1 million for the three months ended
March 31, 1996 as the Bank experienced increases in essentially all of its
sources of noninterest income. These increases reflected the expansion of the
Bank's business activities and an improvement in the operation of its mortgage
banking activities.
For the nine months ended March 31, 1997 noninterest income increased by $2.1
million, or 65.6%, to $5.3 million from $3.2 million for the nine months ended
March 31, 1996. The primary reason for this increase was a gain of $900,000
from the sale of approximately $14.5 million of long-term, fixed rate mortgage-
backed securities. These securities were sold to reduce the Bank's exposure to
increases in interest rates. All other components of the Bank's noninterest
income also improved from the prior year as a result of the aforementioned
business expansion and operating improvements.
Noninterest Expense
- -------------------
Noninterest expense increased by $1.5 million, or 15.2%, to $11.4 million for
the three months ended March 31, 1997 from $9.9 million for the three months
ended March 31, 1996. This increase was primarily due to normal increases in
most of the Bank's expense categories as well as additional compensation and
occupancy expense incurred as part of the Bank's expansion. These increases
included a $1.1 million, or 20.4%, increase in compensation and benefits expense
to $6.5 million for the three months ended March 31, 1997 from $5.4 million for
the three months ended March 31, 1996. Premises and occupancy expense increased
by $298,000, or 26.6%, to $1.4 million for the three months ended March 31, 1997
from $1.1 million for the three months ended March 31, 1996. Other operating
expense increased by $277,000, or 114.9%, to $518,000 for the three months ended
March 31, 1997 from $241,000 for the same period last year. Approximately
$115,000 of this increase was related to the annual recognition of losses from
the Bank's investment in low income housing limited partnerships. Marketing
expense increased by $242,000, or 80.1%, to $544,000 for the three months ended
March 31, 1997 from $302,000 for the three months ended March 31, 1996.
13
<PAGE>
This increase was primarily the result of additional expense to promote both the
Bank's centennial year celebration and the acquisition of Bridgeville. In
addition, the amortization of intangibles expense increased by $110,000, or
84.6%, to $240,000 for the three months ended March 31, 1997 from $130,000 in
the previous year due to the amortization of intangibles recorded as a result of
the acquisition of Kane, Centre Hall and Bridgeville. Partially offsetting
these increases was a decrease of $497,000, or 67.0%, in federal insurance
premiums. As part of the SAIF recapitalization, the FDIC reduced the insurance
premiums beginning in January, 1997 to .064% of insured deposits compared to the
previous level of .23%.
For the nine months ended March 31, 1997 noninterest expense increased by $4.1
million, or 13.8%, excluding a one-time assessment of $8.6 million to
recapitalize the SAIF. Including the SAIF assessment, noninterest expense
increased by $12.7 million, or 42.9%, to $42.3 million for the nine months ended
March 31, 1997 from $29.6 million for the nine months ended March 31, 1996.
Contributing to this increase was a $3.0 million, or 18.5%, increase in
compensation and benefits expense to $19.2 million for the nine months ended
March 31, 1997 from $16.2 million for the nine months ended March 31, 1996.
This increase in compensation and benefits expense resulted primarily from the
Bank's expansion during the past year and from normal salary growth. Premises
and occupancy expense increased by $621,000, or 19.0%, to $3.9 million for the
nine months ended March 31, 1997 from $3.3 million during the comparable period
last year. These expenses also increased primarily as a result of the Bank's
expansion. The amortization of intangibles expense increased by $706,000, or
215.2%, to $1.0 million for the nine months ended March 31, 1997 from $328,000
for the nine months ended March 31, 1996. The primary reason for this increase
in amortization expense was a one-time charge of $350,000 relating to the
restructuring of the Bank's mortgage banking operations. Additionally, the Bank
had a higher amortization expense in the current year due to the amortization of
intangibles recorded as a result of the acquisition of Kane, Centre Hall and
Bridgeville. Marketing expense increased by $361,000, or 40.2%, to $1.3 million
for the nine months ended March 31, 1997 from $899,000 for the same period last
year. Marketing expense increased primarily as a result of additional
advertising to commemorate the Bank's centennial year celebration and to promote
the acquisition of Kane, Centre Hall and Bridgeville. Partially offsetting these
increases in noninterest expense was a decrease of $1.2 million in federal
insurance premiums resulting primarily from the aforementioned SAIF resolution,
and a decrease of $448,000 in the provision expense for foreclosed real estate.
Income Taxes
- ------------
The provision for income taxes was $3.0 million for both the three month period
ended March 31, 1997 and the three month period ended March 31, 1996, as the
income before tax was $7.6 million for both periods.
For the nine months ended March 31, 1997, income taxes decreased by $2.7
million, or 31.0%, to $6.0 million compared to $8.7 million last year. This
decrease resulted primarily from a $7.1 million decrease in income before income
taxes due primarily to the one-time SAIF assessment of $8.6
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<PAGE>
million recorded in the first quarter of fiscal 1997. Partially offsetting this
decrease was a slight increase in the Bank's effective income tax rate due
primarily to the nondeductibility for income tax purposes of the amortization
expense of several intangible assets.
15
<PAGE>
PART II. OTHER INFORMATION
Legal Proceedings
- -----------------
On December 13, 1994, a complaint was filed in United States District Court,
Western District of Pennsylvania, by an individual who purports to have
subscribed for stock in the Bank's mutual holding company reorganization and
stock offering (the "Offering") that was completed in November 1994. The named
defendants in the complaint are Northwest Savings Bank, Northwest Bancorp,
M.H.C., Ryan, Beck & Co., Inc., RP Financial, Inc., and the Bank's Board of
Directors. The plaintiff seeks to represent persons who subscribed for and
purchased stock in the Offering. The complaint alleges that the appraisal used
in the Bank's Offering was inappropriately increased at the completion of the
Offering, and that, among other things, the Bank violated the federal securities
laws (including section 10 of the Securities Exchange Act of 1934 and sections
12(2) and 15 of the Securities Act of 1933) and regulations thereunder, violated
Pennsylvania securities law, breached a fiduciary duty owed to plaintiff, and
breached a contract with plaintiff. Money damages and other relief is sought.
On November 17, 1995, the District Court dismissed all Federal claims against
the defendants with prejudice, and dismissed the remaining claims without
prejudice. On February 13, 1997, the United States Court of Appeals for the
Third Circuit denied the plaintiff's appeal of the District Court's dismissal,
and on April 7, 1997, it denied the plaintiff's petition for a rehearing. As of
May 1, 1997, the plaintiff has not sought further review or initiated additional
proceedings. Management intends to continue to vigorously defend any such
proceedings.
There are various other claims and lawsuits involving the Bank that are
incidental to the Bank's business. In the opinion of management, no material
loss is expected from any of these pending claims or lawsuits.
Holding Company Reorganization
- ------------------------------
The Board of Directors of Northwest Savings Bank has approved a plan to
reorganize the Bank into a two-tier holding company structure. The proposed
plan calls for the formation of a new, state chartered, stock holding company,
which will own 100% of the Bank's common stock. The plan also provides that
the Bank's existing shareholders, including Northwest Bancorp, MHC, the Bank's
mutual holding company, will exchange their shares of Bank stock for shares in
the new stock holding company. This two-tier holding company structure will
give Northwest greater flexibility by maintaining the benefits of the mutual
holding company while capitalizing on the additional opportunities available to
stock holding companies.
The reorganization plan will be implemented upon adoption by the Bank's
shareholders and the receipt of all applicable regulatory approvals.
16
<PAGE>
Exhibits and Report on Form 8-K
- -------------------------------
No Form 8-K reports were filed during the quarter.
- --------------------------------------------------
Changes in Securities
- ---------------------
Not applicable.
Defaults Upon Senior Securities
- -------------------------------
Not applicable.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
None
Exhibits and Reports
- --------------------
None
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned hereunto
duly authorized.
NORTHWEST SAVINGS BANK
Date: May 7, 1997 By: /s/ John O. Hanna
--------------------------------
John O. Hanna
President and Chief Executive Officer
Date: May 7, 1997 By: /s/ William J. Wagner
--------------------------------
William J. Wagner
Chief Financial Officer
18
