<PAGE>
Registration No. 333-31687
As filed with the Securities and Exchange Commission on November 4, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
AMENDMENT NO. 2 TO
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)
Liberty and Second Streets
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Title of each class of Amount to Proposed maximum Proposed maximum Amount of
securities to be registered be registered offering price per unit offering price registration fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value 7,300,000 shares $16.25 /(1)/ $118,625,000 $35,947
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value 690,000 shares $11.70 /(2)/ $ 8,073,000 $ 2,447
- -----------------------------------------------------------------------------------------------------------------------
Total Fee Paid $38,394/(3)/
=======================================================================================================================
</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 21, 1997, the date of the original filing of the Form S-4.
/(2)/ Represents shares underlying options. Such options have an exercise price
of $11.70 per share.
/(3)/ Fee previously paid with original filing on July 21, 1997.
<PAGE>
[NORTHWEST LOGO]
October 30, 1997
Dear Stockholder:
We cordially invite you to attend the 1997 Annual Meeting of Stockholders of
Northwest Savings Bank (the "Bank"). The Annual Meeting will be held at the
Knights of Columbus Hall, located at 219 2nd Avenue, Warren, Pennsylvania, at
11:00 a.m. (Pennsylvania time) on December 10, 1997.
The enclosed Notice of Annual Meeting and Proxy Statement/Prospectus describe
the formal business to be transacted. During the Annual Meeting we will also
report on the operations of the Bank. Directors and officers of the Bank, as
well as a representative of our independent auditors, will be present to respond
to any questions that stockholders may have.
The business to be conducted at the Annual Meeting includes the election of two
directors, and consideration of the proposal relating to an Agreement and Plan
of Reorganization pursuant to which the Bank will reorganize into a "two-tier"
mutual holding company structure (the "Reorganization"). In addition,
stockholders will be requested to ratify the appointment of KPMG Peat Marwick
LLP as auditors for the Bank's 1998 fiscal year.
Please make note of the following important considerations in connection with
the Reorganization:
. Operations of the Bank and Northwest Bancorp, MHC (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.
. Reasons for the Reorganization. The Board of Directors of the Bank
believes that forming a stock holding company 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. Forming a stock holding company will enhance the ability to
make investments, acquire other institutions, and repurchase shares of
common stock. See "Proposal II--The Approval of the Agreement and Plan of
Reorganization--Reasons for the Stock Holding Company Reorganization."
. 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
Proxy Statement/Prospectus titled "Proposal II--The Approval of the
Agreement and Plan of Reorganization-- Tax Consequences."
. Conditions to the Reorganization. The Agreement and Plan of
Reorganization which governs the 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 the Bank's 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. "Proposal II--The Approval of the Agreement and Plan of
Reorganization-- 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.
<PAGE>
The Board of Directors of the Bank has determined that the matters to be
considered at the Annual Meeting are in the best interest of the Bank and its
stockholders. For the reasons set forth in the Proxy Statement/Prospectus, the
Board of Directors unanimously recommends a vote "FOR" each matter to be
considered.
Also enclosed for your review is our 1997 Annual Report to Stockholders, which
serves as the Bank's annual disclosure statement required by FDIC regulations,
and contains detailed information concerning the activities and operating
performance of the Bank. On behalf of the Board of Directors, we urge you to
sign, date and return the enclosed proxy card as soon as possible even if you
currently plan to attend the Annual Meeting. This will not prevent you from
voting in person, but will assure that your vote is counted if you are unable to
attend the Annual Meeting.
Sincerely,
John O. Hanna
President and Chief Executive Officer
<PAGE>
NORTHWEST SAVINGS BANK
Liberty and Second Streets
Warren, Pennsylvania 16365-2353
(814) 726-2140
NOTICE OF
1997 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On December 10, 1997
Notice is hereby given that the 1997 Annual Meeting of Northwest Savings
Bank, (the "Bank") will be held at the Knights of Columbus Hall, 219 2nd Avenue,
Warren, Pennsylvania, on December 10, 1997 at 11:00 a.m. Pennsylvania time.
A Proxy Card and a Proxy Statement/Prospectus for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of two directors of the Bank;
2. 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.
The Stock Holding Company will be majority owned by Northwest Bancorp,
MHC (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;
3. The ratification of the appointment of KPMG Peat Marwick LLP as
auditors for the Bank for the fiscal year ending June 30, 1998; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on the
date specified above, or on any date or dates to which the Meeting may be
adjourned. Stockholders of record at the close of business on November 1, 1997,
are the stockholders entitled to vote at the Meeting, and any adjournments
thereof.
EACH STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY THE STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING
WITH THE SECRETARY OF THE BANK A WRITTEN REVOCATION OR A DULY EXECUTED PROXY
BEARING A LATER DATE. ANY STOCKHOLDER PRESENT AT THE MEETING MAY REVOKE HIS OR
HER PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE MEETING.
HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN
NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE
PERSONALLY AT THE MEETING.
By Order of the Board of Directors
Gregory C. LaRocca
Senior Vice President and Corporate Secretary
Warren, Pennsylvania
October 30, 1997
- --------------------------------------------------------------------------
A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
- --------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
REVOCATION OF PROXIES 2
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF 2
MARKET INFORMATION 3
DIVIDEND POLICY 4
General 4
Dividend Waivers by the Holding Company 4
PROPOSAL I--ELECTION OF DIRECTORS 5
Executive Officers who are not Directors 7
Meetings and Committees of the Board of Directors 7
Ownership Reports by Officers and Directors 8
Compensation Committee Interlocks and Insider Participation 8
Report of the Board of Directors on Executive Compensation 9
Performance Graph 9
Executive Compensation 12
Directors' Compensation 13
Employment Agreement 14
Defined Benefit Plan 15
Supplemental Executive Retirement Plan 16
1995 Stock Option Plan 16
Transactions With Certain Related Persons 17
PROPOSAL II--THE APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION 18
Summary 18
Reasons for the Stock Holding Company Reorganization 18
Plan of Reorganization 19
Capitalization 20
The Corry Acquisition 22
Regulatory Capital 23
Effective Date 23
Optional Exchange of Stock Certificates 23
Rights of Dissenting Stockholders 24
Tax Consequences 24
Consequences Under Federal Securities Laws 24
Conditions to the Reorganization 25
Effect of the Reorganization on any Future Mutual-to-Stock Conversion
of the Mutual Holding Company 25
Effect of the Reorganization on Stock Benefit Plans of the Bank 25
Amendment, Termination or Waiver 25
Business of the Stock Holding Company 25
Management of the Stock Holding Company 26
Indemnification of Officers and Directors and Limitation of Liability 26
Comparison of Stockholder Rights and Certain Anti-Takeover Provisions 30
Regulation of the Stock Holding Company 33
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Description of Capital Stock of the Stock Holding Company 35
Common Stock 35
Preferred Stock 36
Accounting Treatment 36
Vote Required 36
PROPOSAL III--RATIFICATION OF APPOINTMENT OF AUDITORS 36
STOCKHOLDER PROPOSALS 37
MISCELLANEOUS 37
EXPERTS 37
AVAILABLE INFORMATION 37
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 38
EXHIBIT A--Agreement and Plan of Reorganization
EXHIBIT B--Articles of Incorporation of Northwest Bancorp, Inc.
EXHIBIT C--Bylaws of Northwest Bancorp, Inc.
</TABLE>
<PAGE>
PROXY STATEMENT/PROSPECTUS
NORTHWEST SAVINGS BANK
Liberty and Second Streets
Warren, Pennsylvania 16365-2353
(814) 726-2140
1997 ANNUAL MEETING OF STOCKHOLDERS
December 10, 1997
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Northwest Savings
Bank (the "Bank") to be used at the 1997 Annual Meeting of Stockholders of
Northwest Savings Bank (the "Meeting"), which will be held at the Knights of
Columbus Hall, 219 2nd Avenue, Warren, Pennsylvania, on December 10, 1997, at
11:00 a.m., Pennsylvania time, and all adjournments of the Meeting. The
accompanying Notice of Annual Meeting of Stockholders and this Proxy
Statement/Prospectus are first being mailed to stockholders on or about November
7, 1997.
One of the proposals to be submitted to a vote of securityholders pursuant
to this Proxy Statement/Prospectus relates to the approval of a Plan of
Reorganization that involves the issuance of shares of common stock. In
connection with this issuance please make note of the following:
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.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE." THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN REQUEST FROM GREGORY C.
LAROCCA, CORPORATE SECRETARY, LIBERTY AND SECOND STREETS, 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 DAYS PRIOR TO THE
DATE OF THE ANNUAL MEETING.
<PAGE>
REVOCATION OF PROXIES
Stockholders who execute proxies in the form solicited hereby retain the
right to revoke them in the manner described below. Unless so revoked, the
shares represented by such proxies will be voted at the Meeting and all
adjournments thereof. Proxies solicited on behalf of the Board of Directors of
the Bank will be voted in accordance with the directions given thereon. YOU MUST
SIGN AND RETURN YOUR PROXY TO THE BANK IN ORDER FOR YOUR VOTE TO BE COUNTED.
PROXIES RECEIVED BY THE BANK WHICH ARE SIGNED, BUT CONTAIN NO INSTRUCTIONS FOR
VOTING WILL BE VOTED "FOR" THE PROPOSALS SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS FOR CONSIDERATION AT THE MEETING.
Proxies may be revoked by sending written notice of revocation to the
Secretary of the Bank, Gregory C. LaRocca, at the address of the Bank shown
above, or by returning a duly executed proxy bearing a later date. The presence
at the Meeting of any stockholder who had given a proxy shall not revoke such
proxy unless the stockholder delivers his or her ballot in person at the Meeting
or delivers a written revocation to the Secretary of the Bank prior to the
voting of such proxy.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Holders of record of the Bank's common stock, par value $.10 per share (the
"Bank Common Stock"), as of the close of business on November 1, 1997 (the
"Record Date") are entitled to one vote for each share then held. As of the
Record Date, there were 23,379,280 shares of Bank Common Stock issued and
outstanding, 16,200,000 of which were held by Northwest Bancorp, MHC (the
"Mutual Holding Company"), and 7,179,280 of which were held by stockholders
other than the Holding Company ("Minority Stockholders"). November 1, 1997, is
also the record date for the Bank's two-for-one stock split to be paid on
November 14, 1997, in the form of a 100% stock dividend. The information
presented herein has not been adjusted to reflect such stock split. 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 Meeting.
Directors are elected by a plurality of votes cast. The affirmative vote of two-
thirds of the votes eligible to be cast by the Bank's stockholders, in person or
by proxy, is required for approval of the Plan of Reorganization. Shares
represented by all properly executed proxies received prior to the Meeting and
not revoked prior to exercise will be voted in the manner specified by the
holder thereof. Executed proxies which do not contain voting instructions will
be voted in favor of approval of the Plan of Reorganization. Abstentions may be
specified on the Proxy Card. Nonvoting shares, abstention and proxies without
specified instructions delivered to brokers by beneficial owners of shares held
in street name by such brokers ("broker non-votes") will not be counted as votes
cast for purposes of determining whether a majority has been attained and
therefore will have no effect of the vote to approve the Plan of Reorganization.
The affirmative vote of holders of a majority of the total votes present at the
Meeting in person or by proxy, without regard to broker non-votes, is required
for the ratification of KPMG Peat Marwick LLP as auditors for the fiscal year
ending June 30, 1998. Shares as to which the "Abstain" box has been selected on
the proxy card will be counted as shares present and entitled to vote and will
have the same effect of a vote against the matter. The Mutual Holding Company
intends to vote in favor of all of the items being presented to a vote of
stockholders, and, accordingly approval of all proposals is assured.
Persons and groups who beneficially own in excess of 5% of the Bank
Common Stock are required to file certain reports with the Federal Deposit
Insurance Corporation (the "FDIC") regarding such ownership pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"). The following table sets
forth, as of August 1, 1997, 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 Common Stock.
2
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF SHARES
OWNED AND NATURE PERCENT OF SHARES
NAME AND ADDRESS OF OF BENEFICIAL OF COMMON STOCK
BENEFICIAL OWNERS OWNERSHIP (1) OUTSTANDING
- ------------------------------------ ----------------- ------------------
<S> <C> <C>
Northwest Bancorp, MHC (2) 16,200,000 69.3%
Liberty and Second Streets
Warren, Pennsylvania 16365-2353
Northwest Bancorp, MHC, and 16,736,984 71.6%
all the Bank's directors and
executive officers as a group
(15 directors and officers) (2)
</TABLE>
- -----------------------
(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 Bank 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 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, and 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 or investment power. The information
presented has not been adjusted to reflect the Bank's November 14, 1997
two-for-one stock split.
(2) Includes 16,2000,000 shares of Bank Common Stock held by Northwest Bancorp,
MHC, of which the Bank's executive officers and directors are also
executive officers and trustees. Excluding shares of Bank Common Stock
held by Northwest Bancorp, MHC, the Bank's executive officers and directors
owned 536,984 shares of Bank Common Stock, or 2.3% of the outstanding
shares.
MARKET INFORMATION
The Bank Common Stock is listed on the Nasdaq National Market under the
symbol "NWSB." As of August 1, 1997, the Bank had eight registered market
makers, 4,362 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
23,374,560 shares outstanding. 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, but has not been adjusted to reflect the
Bank's November 14, 1997 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
1997
----
March 31 $15 5/8 $15 $.08
June 30 $15 3/4 $14 1/4 $.08
September 30 $27 1/4 $22 $.08
</TABLE>
The last trade of the Bank Common Stock on November 12, 1996, the date
immediately prior to the Bank's
3
<PAGE>
announcement of its intention to reorganize pursuant to the Plan of
Reorganization, was at a price of $12 5/8 per share. The last trade of Bank
Common Stock on October 31, 1997 was at a price of $30 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 "Proposal II--Approval of the
Agreement and Plan of Reorganization."
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 "Proposal II--Approval of the
Agreement and Plan of Reorganization."
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 the date hereof, 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, if such waiver is approved by the FRB, 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
4
<PAGE>
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.
PROPOSAL I--ELECTION OF DIRECTORS
The Bank's Board of Directors consists of ten members. The Bank's bylaws
provide that approximately one-third of the directors are to be elected
annually. Directors of the Bank are generally elected to serve for a three-year
period or until their respective successors shall have been elected and shall
qualify. Two directors will be elected at the Meeting and will serve until
their successors have been elected and qualified. The Nominating Committee has
nominated John O. Hanna and Richard L. Carr to serve as directors for a three
year term. Both nominees are currently members of the Board of Directors.
The table below sets forth certain information regarding the composition of
the Bank's Board of Directors as of June 30, 1997, including the terms of office
of Board members. It is intended that the proxies solicited on behalf of the
Board of Directors (other than proxies in which the vote is withheld as to the
nominee) will be voted at the Meeting for the election of the nominees
identified below. If the nominee is unable to serve, the shares represented by
all such proxies will be voted for the election of such substitute as the Board
of Directors may recommend. At this time, the Board of Directors knows of no
reason why the nominees might be unable to serve, if elected. Except as
indicated herein, there are no arrangements or understandings between the
nominees and any other person pursuant to which such nominees were selected.
<TABLE>
<CAPTION>
Shares of
Positions Held in the Director Current Term Beneficially Percent
Name (1) Age Percent in the Bank Since (2) to Expire Common Stock Of Class
-------- --- -------------------------- --------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
NOMINEE
John O. Hanna 65 President, Chief Executive 1970 1997 164,487(4) *
Officer and Director
Richard L. Carr 56 Director 1982 1997 16,412(5) *
DIRECTORS CONTINUING IN OFFICE
William J. Wagner 43 Executive Vice President, 1994 1999 47,107(6) *
Chief Operating Officer,
Chief Financial Officer
and Director
Robert G. Ferrier 57 Director 1980 1998 25,900(5) *
Richard E. McDowell 53 Director 1972 1998 40,400(5) *
Joseph T. Stadler 65 Director 1970 1998 12,400(5) *
Walter J. Yahn 69 Director 1972 1998 25,258(5) *
Thomas K. Creal, III 58 Director 1982 1999 14,000(5) *
John J. Doyle 69 Director 1970 1999 20,400(5) *
John S. Young 70 Director 1972 1999 23,036(5) *
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
John M. Blair 61 Senior Vice President- N/A N/A 32,212(7) *
Mortgage Lending
Gregory C. LaRocca 46 Senior Vice President- N/A N/A 26,808(8) *
Administration and
Corporate Secretary
Robert A. Ordiway 49 Senior Vice President- N/A N/A 29,423(8) *
Community Banking
Raymond R. Parry 60 Senior Vice President- N/A N/A 32,692(7) *
Consumer Lending
James E. Vecellio 49 Senior Vice President- N/A N/A 26,449(9) *
Operations
</TABLE>
5
<PAGE>
- -------------------
* Less than 1%.
(1) The mailing address for each person listed is Liberty Street and Second
Avenue, Warren, Pennsylvania 16365-2353.
(2) Reflects initial appointment to the Board of Trustees of the Bank's mutual
predecessor. Each director of the Bank is also a trustee of Northwest
Bancorp, MHC, which owns the majority of the issued and outstanding shares
of Bank Common Stock.
(3) See definition of "beneficial ownership" in the table in "Voting Securities
and Principal Holders Thereof." The information presented has not been
adjusted to reflect the Bank's November 14, 1997 two-for-one stock
split.
(4) Includes options to purchase 60,000 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 34,500 restricted shares which had not vested as of
the date beneficial ownership is being determined.
(5) Includes options to purchase 4,400 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 3,600 restricted shares which had not vested as of the
date beneficial ownership is being determined.
(6) Includes options to purchase 16,000 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 9,600 restricted shares which had not vested as of the
date beneficial ownership is being determined.
(7) Includes options to purchase 8,000 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 6,000 restricted shares which had not vested as of the
date beneficial ownership is being determined.
(8) Includes options to purchase 5,600 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 4,200 restricted shares which had not vested as of the
date beneficial ownership is being determined.
(9) Includes options to purchase 8,800 shares of Bank Common Stock which are
exercisable within 60 days of the date as of which beneficial ownership is
being determined and 6,600 restricted shares which had not vested as of the
date beneficial ownership is being determined.
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.
John O. Hanna has been employed by the Bank since 1960, and has been Chief
Executive Officer since 1972. 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. Mr. Hanna is also a Director of Jamestown
Savings Bank, the majority owned subsidiary of the Mutual Holding Company.
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. Mr. Wagner is also a
Director of Jamestown Savings Bank.
Thomas K. Creal, III has been a partner in the architectural firm of Creal,
Hyde & Larson, in Warren, Pennsylvania since 1969.
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 served as Superintendent of the Titusville Area School
District, Titusville, Pennsylvania from 1986 until his retirement in 1996.
Since his retirement, he has served as a consultant to the University of Findlay
located in Findlay, Ohio.
Robert G. Ferrier has been President of Ferrier Hardware, Inc. since 1957
and President of Drexel Realty, Erie, Pennsylvania since 1972.
6
<PAGE>
Richard E. McDowell has served as President of the University of Pittsburgh
at Bradford, Bradford, Pennsylvania since 1970. 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. Prior to that time, he served
as Vice President-Manufacturing of Superior Bronze Corporation in Erie,
Pennsylvania.
Walter J. Yahn is Chairman of the Board, founder, and Chief Executive
Officer of the Erie Advanced Manufacturing Company, Erie, Pennsylvania. He has
served in this capacity since 1971.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
John M. Blair has been employed by the Bank since 1961, most recently as
Senior Vice President in charge of Mortgage Lending.
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.
Robert A. Ordiway has been employed by the Bank since 1975, most recently
as Senior Vice President of Community Banking. Mr. Ordiway is also a Director
of Jamestown Savings Bank.
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.
James E. Vecellio has been employed by the Bank since 1977, most recently
as Senior Vice President-Operations.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Bank is conducted at regular and special meetings of
the full Board and its standing committees. The standing committees consist of
the Executive, Audit, Personnel and Pension, Asset/Liability, Long Range
Planning and Community Reinvestment Committees. The full Board of Directors
acts as Nominating Committee for the Bank. Mr. Hanna, President of the Bank, is
an ex officio member of each of the committees, except for the Audit Committee.
During the fiscal year ended June 30, 1997, the Board of Directors met at 12
regular meetings and 2 special meetings called in accordance with the Bylaws.
No member of the Board or any committee thereof attended less than 75% of said
meetings.
The Executive Committee of the Board of Directors consists of Directors
Hanna, who serves as Chairman, Wagner, Creal, McDowell, Yahn and Stadler, and
meets to conduct the business and affairs of the Bank during the interval
between meetings of the Board. All actions of the Executive Committee are
reviewed by the entire Board; however, the Executive Committee has decision-
making authority as assigned by the Board. The Executive Committee met 10 times
during the fiscal year ended June 30, 1997.
The Audit Committee consists of Directors Carr, who serves as Chairman,
Doyle, Young and Stadler. This committee meets with the internal auditor to
review audit programs and the results of audits of specific areas as well as
other regulatory compliance issues. In addition, the Audit Committee meets with
the independent certified public accountants to review the results of the annual
audit and other related matters. The Audit Committee met four times during the
fiscal year ended June 30, 1997.
The Personnel and Pension Committee of the Board of Directors consists of
Directors Young, who serves as Chairman, Hanna, Carr, Creal and Stadler. The
committee meets when needed to review all employment policies
7
<PAGE>
and the performance and remuneration of the officers and employees of the Bank,
and to review and approve all compensation and benefit programs implemented by
the Bank and all matters relating to pension plan administration. The committee
met 2 times during the fiscal year ended June 30, 1997.
The Risk Management Committee consists of Directors Creal, Doyle, Hanna,
Wagner, Yahn and Young. This committee meets quarterly to review the maturity
and repricing of the Bank's assets and liabilities in an effort to manage the
Bank's interest rate risk, ensure compliance with the Bank's interest rate risk
policy and review and amend strategies for interest rate risk management. The
committee met four times during the fiscal year ended June 30, 1997. In
September 1997, this committee became the Risk Management Committee.
Other Board committees include the Long Range Planning Committee, which
consists of Directors Ferrier, who serves as Chairman, Hanna, Carr, Doyle, Yahn,
and Wagner, and the Community Reinvestment Committee, which consists of
Directors Ferrier, who serves as Chairman, Hanna, Young, Carr and Doyle.
OWNERSHIP REPORTS BY OFFICERS AND DIRECTORS
The Bank Common Stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act"). The officers and
directors of the Bank and beneficial owners of greater than 10% of the Bank's
Common Stock ("10% beneficial owners") are required to file reports on Forms F-
7, F-8 and F-8A with the FDIC disclosing beneficial ownership and changes in
beneficial ownership of the Common Stock. FDIC rules require disclosure in the
Bank's Proxy Statement/Prospectus and Annual Report on Form 10-K of the failure
of an officer, director or 10% beneficial owner of the Bank's Common Stock to
file a Form F-7, F-8 or F-8A on a timely basis. Based on the Bank's review of
such ownership reports, Mr. Vecellio failed to file on a timely basis one report
relating to one transaction involving the purchase by an affiliate of 1,000
shares of Bank Common Stock, and no other officer, director or 10% beneficial
owner of the Bank failed to file such ownership reports on a timely basis for
the fiscal year ended June 30, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Bank's Personnel and Pension Committee determines the salaries to be
paid each year to the officers of the Bank. The Personnel and Pension Committee
consists of Directors Young, who serves as Chairman, Hanna, Carr, Creal and
Stadler. Mr. Hanna is also President and Chief Executive Officer of the Bank.
The Bank leases approximately 13,000 square feet of office space from Mr. Hanna
at an annual rent of $47,600. 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.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Under rules established by the Securities and Exchange Commission, as
administered by the FDIC, the Bank is required to provide certain data and
information in regard to the compensation and benefits provided to its Chief
Executive Officer and other executive officers. The disclosure requirements for
the Chief Executive Officer and other executive officers include the use of
tables and a report explaining the rationale and considerations that led to
fundamental executive compensation decisions affecting those individuals. In
fulfillment of this requirement, the Bank's Personnel and Pension Committee, has
prepared the following report for inclusion in this Proxy Statement/Prospectus.
The Personnel and Pension Committee annually reviews the performance of the
Chief Executive Officer and other executive officers, and approves changes to
base compensation as well as the level of bonus, if any, to be awarded to
executive officers other than Mr. Hanna. Mr. Hanna's compensation is adjusted
annually through 1998 by a formula fixed by the terms of his employment
agreement. In addition, the Personnel and Pension Committee recommends bonuses
to be awarded to Mr. Hanna based on a numerical formula relating to the Bank's
return on
8
<PAGE>
average assets. Based on this formula, and the Bank's return on average assets
for the fiscal year ended June 30, 1996, a 22% bonus was awarded to Mr. Hanna,
most of which was paid during the fiscal year ended June 30, 1997. Based on the
same formula, and the Bank's return on average assets for the fiscal year ended
June 30, 1997, a 20% bonus will be paid to Mr. Hanna during the fiscal year
ended June 30, 1998. Mr. Hanna was also paid the holiday bonus discussed below.
Differences between the amount of these bonuses and the amounts set forth in the
"Executive Compensation" table relate largely to the timing of the payment of
bonuses. In determining whether the base salary of other executive officers
should be adjusted, the Bank's Personnel and Pension Committee takes into
account individual performance, performance of the Bank, the size of the Bank
and the complexity of its operations, and information regarding compensation
paid to executives performing similar duties for financial institutions in the
Bank's market area. In addition, officers generally receive a holiday bonus
equal to approximately 5% of base compensation.
While the Personnel and Pension Committee does not use strict numerical
formulas to determine changes in compensation and while it weighs a variety of
different factors in its deliberations, it has emphasized and will continue to
emphasize earnings, profitability, capital position and income level, and return
on average assets as factors in setting the compensation. Other non-
quantitative factors considered by the Bank's Personnel and Pension Committee in
fiscal 1997 included general management oversight of the Bank, the quality of
communication with the Personnel and Pension Committee, and the productivity of
employees. Finally, the Personnel and Pension Committee considered the standing
of the Bank with customers and the community, as evidenced by the level of
customer/community complaints and compliments. While each of the quantitative
and non-quantitative factors described above was considered by the Personnel and
Pension Committee, such factors were not assigned a specific weight in
evaluating the performance of the Bank's executives. Rather, all factors were
considered, and based upon the effectiveness of such officers in addressing each
of the factors, and the range of compensation paid to officers of peer
institutions, the Personnel and Pension Committee approved salary increases for
the Bank's three executive officers not covered by an employment agreement.
This report has been provided by the Personnel and Pension Committee
consisting of Directors John S. Young, Chairman, and John O. Hanna, John J.
Carr, Thomas K. Creal, III and Joseph T. Stadler.
PERFORMANCE GRAPH
Set forth hereunder is a performance graph comparing (a) the cumulative
total return on the Bank's Common Stock for the period beginning with the last
trade of the Bank's stock on November 7, 1994, or $9.00 per share (as adjusted),
as reported by the Nasdaq National Market, through June 30, 1997, (b) the
cumulative total return on stocks included in the Nasdaq Bank Index over such
period, and (c) the cumulative total return on stocks included in the Nasdaq
Composite Index over such period. Cumulative return assumes the reinvestment of
dividends, and is expressed in dollars based on an assumed investment of $100.
There can be no assurance that the Bank's stock performance will continue
in the future with the same or similar trend depicted in the graph. The Bank
will not make or endorse any predictions as to future stock performance.
9
<PAGE>
PERFORMANCE GRAPH APPEARS HERE
CUMULATIVE RETURN ON THE BANK'S COMMON STOCK
<TABLE>
<CAPTION>
NASDAQ NASDAQ NORTHWEST
Measurement Period COMPOSITE BANK SAVINGS
(Fiscal Year Covered) INDEX INDEX BANK
- --------------------- --------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-11/07/1994 $100 $100 $100
FYE 06/30/1995 $123 $118 $109
FYE 06/30/1996 $158 $154 $130
FYE 06/30/1997 $193 $241 $184
</TABLE>
10
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended June 30, 1997,
1996, and 1995, certain information as to the total remuneration paid by the
Bank to the President and Chief Executive Officer, and Executive Vice President
and Chief Financial Officer of the Bank, and for the fiscal year ended June 30,
1997 certain information is to the total renumeration paid by the Bank to the
five most highly compensated executive officers other than the Chief Executive
Officer and the Executive Vice President ("Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSENSATION LONG-TERM COMPENSATION
--------------------------------------------- -------------------------------
AWARDS (4)
OTHER --------------------- PAYOUTS
NAME AND YEAR OTHER ANNUAL RESTRICTED --------- ALL OTHER
PRINCIPAL POSITION ENDED SALARY (#) COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION ($)
(1) 6/30 (2) BONUS (#) (3) AWARDS (#) SARS (#) PAYOUTS (5)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John O. Hanna 1997 399,984 107,990 -- -- -- -- 40,266
President and Chief 1996 374,819 101,500 -- 58,000 (6) 150,000 (7) -- 43,137
Executive Officer 1995 374,800 98,500 -- -- (6) -- 39,700
--
William J. Wagner 1997 171,826 41,966 -- -- -- -- 20,721
Executive Vice 1996 146,615 35,830 -- 16,000 (6) 40,000 (7) -- 20,177
President, Chief Operating 1995 125,000 35,800 -- -- -- -- 20,800
Officer and Chief
Financial Officer
John M. Blair 1997 87,966 18,673 -- -- -- -- 10,228
Senior Vice President-
Mortgage Lending (8)
Gregory C. LaRocca 1997 87,968 18,698 -- -- -- -- 10,269
Senior Vice President
and Corporate Secretary (8)
Robert A. Ordiway 1997 87,915 17,345 -- -- -- -- 9,722
Senior Vice President-
Community Banking (8)
Raymond R. Parry 1997 87,956 18,623 -- -- -- -- 10,172
Senior Vice President-
Consumer Lending (8)
James E. Vecellio 1997 92,471 19,736 -- -- -- -- 11,131
Senior Vice President-
Operations (8)
</TABLE>
(1) No other executive officer received salary and bonuses that in the aggregate
exceeded $100,000.
(2) Includes amounts deferred at the election of named officers pursuant to the
Northwest Retirement Savings Plan (the "401(k) Plan").
(3) For the fiscal years ended June 30, 1997, 1996 and 1995, there were no
perquisites exceeding the lesser of $50,000 or 10% of the individual's total
salary and bonus for the year.
(4) Adjusted for the May 22, 1996, two-for-one stock split.
(5) Includes shares awarded pursuant to the Bank's employee stock ownership
plan, amounts paid for life insurance premiums, and Bank contributions to
the 401(k) Plan.
(6) Includes shares of common stock awarded pursuant to the Northwest Savings
Bank and Northwest Bancorp, MHC 1995 Recognition and Retention Plan for
Employees and Outside Directors (the "Recognition Plan"), for which no cash
consideration was paid by the recipient. The awards vest in five annual
installments. Dividends on such shares are paid to the recipient. The value
of such shares was determined by multiplying the number of shares awarded by
the last sale price of Bank Common Stock on the day prior to the award. At
June 30, 1997, Messers. Hanna, Wagner, Blair, LaRocca, Ordiway, Parry and
Vecellio held 34,500, 9,600, 6,000, 4,200, 4,200, 6,000 and 6,600 shares of
Bank Common Stock, respectively, that remain subject to restrictions under
the Recognition Plan. The fair market value of such restricted stock on
such date
11
<PAGE>
(based on the price of the last sale reported on the Nasdaq National Market)
was approximately $534,750, $148,800, $93,000, $65,100, $65,100, $93,000 and
$102,300, respectively. The information presented has not been adjusted to
reflect the Bank's November 14, 1997 two-for-one stock split.
(7) Includes options awarded pursuant to the Northwest Savings Bank and
Northwest Bancorp, MHC 1995 Stock Option Plan. The options vest in five
equal annual installments, and the exercise price of such options is $11.75.
(8) No disclosure is provided for the fiscal years ended June 30, 1996 and 1995,
as such executive officer's total annual salary and bonus did not exceed
$100,000.
DIRECTORS' COMPENSATION
As of July 1, 1997, nonemployee directors are paid an annual retainer of
$7,800 plus $900 per board meeting attended or $800 if participating via
conference call. Nonemployee members of the Executive, Audit, Asset/Liability,
Long Range Planning, Personnel and Pension, and Community Reinvestment
Committees are paid $500 per meeting attended, or $400 per meeting if such
committee meeting is held on a day of a regularly scheduled Board meeting or if
the meeting is held via conference call.
The Bank sponsors a non-tax qualified deferred compensation plan for directors
(the "Deferred Compensation Plan") that enables a director to elect to defer all
or a portion of his directors' fees. The amounts deferred are credited with
interest at the rate paid on the Bank's five year certificate of deposit.
Deferred amounts are payable upon retirement of a director on or after attaining
age 59-1/2 but no later than age 72, in the form of a lump sum or in five or ten
equal installments. Payments to a director, or to his designated beneficiary,
may also be made from the Deferred Compensation Plan upon the director's death,
total and permanent disability, or termination of service from the Board.
Participants in the Deferred Compensation Plan would not recognize taxable
income with respect to the Deferred Compensation Plan benefits until the assets
are actually distributed.
The Bank maintains a retirement plan for outside directors (the "Directors
Plan"). Directors who have served the Board for five years or more and are not
Bank employees are eligible to receive benefits under the Directors Plan. Upon
a director's retirement from the Board on or after five years of service and the
attainment of age 60, the director is entitled to receive a retirement benefit
equal to sixty percent of the annual retainer paid immediately prior to
retirement plus sixty percent of the board meeting fees paid for the director's
attendance at board meetings at the annual rate which was in effect immediately
prior to his retirement. If a director retires after five years or more of
service but before attaining age 60, the director is entitled to one-half of the
benefits otherwise available to him. Retirement benefits commence on the first
day of the calendar quarter following the director's attainment of age 65, or if
retirement occurs later, on the first day of the calendar quarter following
retirement. Such retirement benefits are paid for a period equal to the lesser
of the number of a director's completed full years of service, his life, or ten
years. No survivor benefits are payable under the Directors Plan. During the
fiscal year ended June 30, 1997, the expense to the Bank of the Directors Plan
was $47,982.
1995 Stock Option Plan. During the fiscal year ended June 30, 1996, the Bank
adopted the Northwest Savings Bank and Northwest Bancorp, MHC 1995 Stock Option
Plan (the "1995 Stock Option Plan"). The 1995 Stock Option Plan was approved by
a majority of the Bank's Minority Stockholders present at the 1995 Annual
Meeting. The 1995 Stock Option Plan is a self-administering plan that granted to
nonemployee Directors Ferrier, McDowell, Stadler, Yahn, Creal, Doyle, Young,
Carr and three former directors nonstatutory options for each such director to
purchase 11,000 (split adjusted) shares of Bank Common Stock. Such shares vest
in five equal annual installments over a five year period beginning on December
20, 1995. The 1995 Stock Option Plan further provides that each new non-employee
director shall be granted options to purchase 500 shares of Bank Common Stock to
the extent options remain available in, or are returned to, the 1995 Stock
Option Plan. The exercise price per share for each option is equal to 95% of the
fair market value of the Bank Common Stock on the date the option was granted,
or in the case of all options awarded during the fiscal year ended June 30,
1996, $11.16 per share (as adjusted for the May 22, 1996 stock split, but not
adjusted for the November 14, 1997 stock split). All options granted under the
1995 Stock Option Plan expire upon the earlier of ten years following the date
of grant or one year following the date the optionee ceases to be a director.
However, in the event of termination of service or employment due to death,
disability, normal retirement or a change of control of the Bank, nonstatutory
stock options may be exercised for up to five years.
12
<PAGE>
1995 Directors Recognition and Retention Plan. During the fiscal year ended
June 30, 1996, the Bank adopted the Northwest Savings Bank and Northwest
Bancorp, MHC Recognition and Retention Plan for Employees and Outside Directors
(the "1995 Recognition Plan"). The 1995 Recognition Plan was approved by a
majority of Minority Stockholders present at the 1995 Annual Meeting. During the
fiscal year ended June 30, 1996, the Bank contributed sufficient funds to the
1995 Recognition Plan to enable it to purchase 138,000 shares of Bank Common
Stock from the Bank, a total of 66,000 (as adjusted for the May 22, 1996 stock
split, but not adjusted for the November 14, 1997 stock split) shares of which
were awarded to nonemployee Directors Ferrier, McDowell, Stadler, Yahn, Creal,
Doyle, Young, Carr and three former directors. Such awards of Bank Common Stock
("Restricted Stock") are restricted by the terms of the 1995 Recognition Plan.
Participants earn (become vested in) shares of Restricted Stock covered by an
award, and all restrictions lapse in five equal annual installments, commencing
on either December 20, 1995 or January 5, 1996. Awards become fully vested upon
a participant's disability, death, or following termination of service in
connection with a change in control of the Bank. Unvested shares of Restricted
Stock are forfeited by a director who is not an employee upon failure to seek
reelection, failure to be reelected, or resignation from the Board. Prior to
vesting, recipients of awards under the 1995 Recognition Plan receives dividends
and may vote the shares of Restricted Stock allocated to them. The Committee
will vote shares as to which no instructions are received and any unallocated
shares in the same proportion as allocated shares for which instructions are
given.
EMPLOYMENT AGREEMENT
As of November 1993 the Bank renewed a five-year employment agreement with
John O. Hanna, President and Chief Executive Officer of the Bank, which was
originally entered into in November 1985. The current employment agreement
provides for a five-year term, and continues through November 1998. The
agreement provides that the base salary of Mr. Hanna shall be at the top
quartile of compensation of executives in the Bank's peer group. As of June 30,
1997, Mr. Hanna's base salary was $400,000. In addition to the base salary, the
employment agreement provides that Mr. Hanna is to receive in lieu of the group
life insurance benefit, a life insurance benefit equal to $1.0 million plus one
year's annual salary. Under the employment agreement, Mr. Hanna is also
entitled to certain perquisites and other personal benefits. In the event of
his death, the employment agreement requires the Bank to continue to pay Mr.
Hanna's salary to his beneficiaries for one year, and continue medical benefits
for his spouse for her lifetime. A benefit will also be paid under the
employment agreement in the event of Mr. Hanna's disability prior to retirement.
The employment agreement provides for termination by the Bank for just cause
at any time, and in such event, no compensation or other benefits would be due
under the agreement. The Bank may terminate his employment for reasons other
than just cause upon twelve months written notice to the executive. In such
event, Mr. Hanna would be entitled to 100% of his annual compensation for the
two-year period following termination, computed in accordance with the formula
used to increase the executive's salary each year during employment (as
determined in accordance with the Compensation Survey); 60% of his compensation
for the third year following termination; and 40% of his compensation for the
fourth year following such termination. In the event of a reorganization,
merger, or consolidation, as defined in the employment agreement, the executive
is entitled to terminate his employment upon twelve months written notice to the
Bank, and receive a lump-sum payment equal to three times his annual
compensation. Payments under the employment agreement are limited so that they
will not constitute an excess parachute payment under Section 280G of the
Internal Revenue Code of 1986.
Under the employment agreement, as amended, on completion of 30 years' service
after age 60 but before November 30, 1997, Mr. Hanna may terminate his
employment upon 12 months notice to the Bank. In such event, he is entitled to
receive his present salary and all benefits (other than bonuses) for two years
following termination. The employment agreement provides for a reduction or
complete elimination of benefits should the executive
13
<PAGE>
commence employment for another employer during the two-year period after
termination of employment with the Bank.
DEFINED BENEFIT PLAN
The Bank maintains a noncontributory defined benefit plan ("Retirement Plan").
All employees age 21 or older who have worked at the Bank for a period of one
year and have been credited with 1,000 or more hours of employment with the Bank
during the year are eligible to accrue benefits under the Retirement Plan. The
Bank annually contributes an amount to the Retirement Plan necessary to satisfy
the actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). At June
30, 1997, the Retirement Plan fully met its funding requirements under Section
412 of the Code.
At the normal retirement age of 65, the plan is designed to provide a life
annuity for a minimum payment period of ten years. The retirement benefit
provided is an amount equal to 1.6% of a participant's average monthly salary
based on the average of the five consecutive years of the last ten calendar
years providing the highest monthly average multiplied by the participant's
years of service to the normal retirement date (up to a maximum of 25 years)
plus: (i) .6% of such average monthly compensation in excess of one-twelfth of
covered compensation (as defined in the plan) multiplied by the participant's
total number of years of service up to a maximum of 25 years, and (ii) for
participants who retire on or after June 1, 1995, .6% of such participant's
average monthly compensation multiplied by the participant's number of years of
service between 25 years and 35 years. Retirement benefits are also payable
upon retirement due to early and late retirement, disability or death. A
reduced benefit is payable upon early retirement at or after age 55 and the
completion of fifteen years of service with the Bank (or after 25 years of
service and no minimum age). Upon termination of employment other than as
specified above, a participant who was employed by the Bank for a minimum of
five years is eligible to receive his or her accrued benefit commencing,
generally, on such participant's normal retirement date. Benefits under the
Retirement Plan are payable in various annuity forms. For the plan year ended
December 31, 1996, the Bank made a contribution to the Retirement Plan of
$1,000,900.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1996, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
Years of Service and Annual Benefit Payable at Retirement
Average ---------------------------------------------------------
Compensation 15 20 25 30 35 40
- --------------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
$25,000 $ 6,000 $ 8,000 $10,000 $10,750 $11,500 $11,500
$50,000 $12,000 $16,000 $20,000 $21,500 $23,000 $23,000
$75,000 $19,821 $26,428 $33,035 $35,285 $37,535 $37,535
$100,000 $28,071 $37,428 $46,785 $49,785 $52,785 $52,785
$125,000 $36,321 $48,428 $60,535 $64,285 $68,035 $68,035
$150,000 plus $44,571 $59,428 $74,285 $78,785 $83,285 $83,285
</TABLE>
As of the plan year ended December 31, 1996, Messers. Hanna, Wagner, Blair,
LaRocca, Ordiway, Parry and Vecellio had 35, 14, 35, 12, 23, 16 and 21 years of
credited service (i.e., benefit service), respectively.
The accrued annual pension benefit as of June 30, 1997 for Messers. Hanna,
Wagner, Blair, LaRocca, Ordiway, Parry and Vecellio are $109,980, $36,612,
$36,825, $12,847, $22,962, $21,398 and $28,830, respectively. Mr. Hanna's
benefit is greater than indicated in the table above because his pre-1994
average monthly compensation is grandfathered and not limited by the $150,000
cap on compensation which became effective beginning January 1, 1994.
14
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Bank has adopted a non-qualified supplemental executive retirement plan
("SERP") for certain executives of the Bank to compensate those executive
participants in the Bank's Retirement Plan whose benefits are limited by Section
415 of the Code (which caps annual benefits at $120,000 in 1996) or Section
401(a)(17) of the Code (which caps compensation at $150,000 beginning in 1994).
The SERP provides the designated executives with retirement benefits generally
equal to the difference between the benefit that would be available under the
Retirement Plan but for the limitations imposed by Code Sections 401(a)(17) and
415 and that which is actually funded as a result of the limitations.
Pre-retirement survivor benefits are provided for designated beneficiaries
of participants who do not survive until retirement in an amount equal to the
lump sum actuarial equivalent of the participant's accrued benefit under the
SERP. Pre-retirement benefits are payable in 120 equal monthly installments.
The SERP is considered an unfunded plan for tax and ERISA purposes. All
obligations arising under the SERP are payable from the general assets of the
Bank.
The benefits paid under the SERP supplement the benefits paid by the
Retirement Plan. The following table indicates the expected aggregate annual
retirement benefit payable from the Retirement Plan and SERP to SERP
participants, expressed in the form of a single life annuity with a 10-year
guaranteed payment for the final average salary and benefit service
classifications specified below:
<TABLE>
<CAPTION>
Years of Service and Benefit Payable at Retirement
Average ----------------------------------------------------------
Compensation 15 20 25 30 35 40
- --------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 28,071 $ 37,428 $ 46,785 $ 49,785 $ 52,785 $ 52,785
$125,000 $ 36,321 $ 48,428 $ 60,535 $ 64,285 $ 68,035 $ 68,035
$150,000 $ 44,571 $ 59,428 $ 74,285 $ 78,785 $ 83,285 $ 83,285
$175,000 $ 52,821 $ 70,428 $ 88,035 $ 93,285 $98,535 $98,535
$200,000 $ 61,071 $ 81,428 $101,785 $107,785 $113,785 $113,785
$250,000 $ 77,571 $103,428 $129,285 $136,785 $144,285 $144,285
$300,000 $ 94,071 $125,428 $156,785 $165,785 $174,785 $174,785
$350,000 $110,571 $147,428 $184,285 $194,785 $205,285 $205,285
$400,000 $127,071 $169,428 $211,785 $223,785 $235,785 $235,785
</TABLE>
At June 30, 1997, John O. Hanna had 37 years of credited service under the
SERP. Mr. Wagner is a new participant in the SERP because his income exceeded
the amounts permitted under Sections 401(a)(17) of the Code. The Bank's pension
cost attributable to the SERP was approximately $67,624 for the fiscal year
ended June 30, 1997.
1995 STOCK OPTION PLAN
During the fiscal year ended June 30, 1996, the Bank adopted the Northwest
Savings Bank and Northwest Bancorp, MHC 1995 Stock Option Plan (the "1995 Stock
Option Plan"). The 1995 Stock Option Plan was approved at the 1995 Annual
Meeting by the majority of the Bank's Minority Stockholders present at such
meeting. No options were granted to the Named Executive Officers under the 1995
Stock Option Plan during the fiscal year ended June 30, 1997. Set forth below
is certain information concerning exercised and unexercisable options during the
fiscal year ended June 30, 1997, by the Named Executive Officers.
15
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
FISCAL YEAR-END (1) FISCAL YEAR-END (2)
SHARES ACQUIRED VALUE
NAME UPON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John O. Hanna -- -- 60,000/90,000 $225,000/$337,500
William J. Wagner -- -- 16,000 /24,000 $ 60,000/$90,000
John M. Blair -- -- 8,000/12,000 $ 30,000/$45,000
Gregory C. LaRocca -- -- 5,600/8,400 $ 21,000/$31,500
Raymond R. Parry -- -- 8,000/12,000 $ 30,000/$45,000
Robert A. Ordiway -- -- 5,600/8,400 $ 21,000/$31,500
James E. Vecellio -- -- 8,800/13,200 $ 33,000/$49,500
</TABLE>
_____________________________
(1) Adjusted for the May 22, 1996, two-for-one stock split. The information
presented has not been adjusted to reflect the Bank's November 14, 1997
two-for-one stock split.
(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Bank Common Stock that
would be received upon exercise, assuming such exercise occurred on June
30, 1997, at which date the last sale of the Bank Common Stock as quoted on
the Nasdaq National Market was at $15.50
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal law requires 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. However, recent
regulations now permit executive officers and directors to receive the same
terms through benefit or compensation plans that are widely available to other
employees, as long as the director or executive officer is not given
preferential treatment compared to the other participating employees. The
Bank's policy is that loans made to a director in excess of $100,000 for non-
residential purposes must be approved in advance by a majority of the
disinterested members of the Board of Directors. Loans to executive officers
must be approved by the full Board of Directors regardless of amounts. In
addition, loans to the Bank's current directors, principal officers, nominees
for election as directors, securityholders known by the Bank to own more than 5%
of the Bank's outstanding common stock, or associates of such persons
(together, "specified persons"), are also made in the ordinary course of
business on substantially the same terms as those prevailing at the time for
comparable transactions with other than specified persons, and do not involve
more than a normal risk of collectibility or present other unfavorable features.
The aggregate amount of extensions of credit outstanding at any time during the
fiscal year ended June 30, 1996, to a specified person did not exceed $5.0
million.
In addition, the Bank leases approximately 13,000 square feet of office space
from Mr. Hanna at an annual rent of $47,600. 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 FHLBB (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, except as described above, 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.
16
<PAGE>
PROPOSAL II--THE APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION
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 Minority Stockholders will
become 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, not to Minority Stockholders. 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
17
<PAGE>
excess tax bad debt reserves. Since 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."
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 has been 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.
18
<PAGE>
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 Minority
Stockholders
(30.7% of Bank
Common Stock)
--------------------------- --------------
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. Minority
(100% of Bank Stockholders
Common Stock) (30.7% of
Holding
Company
Common Stock)
---------------------------- -------------------
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.
19
<PAGE>
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 stockholders'
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 June 30, 1997.
Set forth below is the historical and pro forma capitalization of the Bank
as of June 30, 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
--------------- --------------- -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Liabilities:
Deposits................................... $1,640,815 $1,640,815 $1,640,815
Borrowed funds............................. 223,458 223,458 223,458
Other liabilities.......................... 28,596 28,596 28,596
---------- ---------- ----------
Total liabilities............................ $1,892,869 $1,892,869 $1,892,869
========== ========== ==========
Capital Stock:
Common Stock, par value
$.10 per share (1)....................... $ 2,338 $ 2,338 $ 2,338
Paid in capital............................ 67,854 67,854 77,854
Retained earnings.......................... 131,423 121,423 121,423
Net unrealized gain (loss) on securities
available for sale, net of income taxes.. 1,026 1,026 1,026
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)............... $ 198,494 $ 188,494 $ 198,494
========== ========== ==========
Stockholders' equity per share............... $8.49 $8.06 $8.49
========== ========== ==========
</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 June 30, 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, therefore, the table does not reflect a redemption to
stockholders' equity for such expenses.
(3) The information presented has not been adjusted to reflect the Bank's
November 14, 1997 two-for-one stock split.
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 (see "--The Corry
Acquisition"), the Board of Directors of the Stock Holding Company has adopted
no plan or agreement with respect to any future issuance of securities.
Furthermore, under Pennsylvania law, as long as the Mutual Holding Company is in
existence it must own a majority of the Stock Holding Company's outstanding
voting stock. Accordingly, the Stock Holding Company would not be permitted to
issue shares of voting stock to persons other than the Mutual Holding Company if
the issuance of such shares would result in the Mutual Holding Company owning
less than a majority of such shares.
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
20
<PAGE>
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 will continue to utilize the name "Northwest Savings
Bank." The corporate existence of the Bank will be unaffected by the
Reorganization.
THE CORRY ACQUISITION
On June 19, 1997, the Bank and Corry Savings Bank ("Corry"), a Pennsylvania
mutual savings bank with assets of $28.7 million and a net worth of $3.0 million
as of June 30, 1997, entered into an agreement and plan of merger (the "Corry
Agreement"). Pursuant to the Corry Agreement, Corry will be merged with and
into the Bank, with the Bank as the surviving institution (the "Corry Merger").
Upon the consummation of the Corry Merger, the separate existence of Corry shall
cease, and the Bank shall continue as the surviving institution. In connection
with the Corry Merger, the Bank, or, should the Reorganization be completed
prior to such time, the Stock Holding Company, intends to offer for sale shares
of the common stock of the Bank or the Stock Holding Company (the "Northwest
Common Stock") to certain Corry depositors and the Bank's tax-qualified employee
plans, pursuant to rules of the FDIC and the Department (the "Corry Stock
Offering"). As part of the Corry Stock Offering, Corry will obtain an
independent valuation (the "Corry Valuation") of its pro forma market value
assuming a merger into the Bank. The Bank intends to issue a number of shares
of Northwest Common Stock equal to the Corry Valuation divided by the trading
price of the Northwest Common Stock, as determined pursuant to the Corry
Agreement. The Bank currently intends to offer for sale a portion of such shares
of Northwest Common Stock to Corry depositors (some of whom may be permitted to
purchase such shares at a 10% discount), and issue remaining shares to the
Mutual Holding Company. Pursuant to the Corry Agreement, the Bank may modify
the structure of the Corry Merger.
In addition, the Bank and Corry intend to establish a charitable foundation
(the "Charitable Foundation") for the purpose of providing charitable
contributions to Corry, Pennsylvania and in other market areas served by the
Bank. The Corry Advisory Board established pursuant to the Corry Agreement will
advise the foundation manager of the Charitable Foundation on appropriate
charities and appropriate distribution of the annual income, and such principal
as may be deemed appropriate, from the Charitable Foundation.
The Corry Merger will require the approval or nonobjection of the FDIC and
the Department, and may require the approval of the FRB. There can be no
assurances that such approvals will be abtained. In addition, the Corry
Agreement will be put to a vote of Corry's depositors at a special meeting of
depositors, and approval of the Corry Agreement will require the affirmative
vote of a majority of the total votes entitled to be cast. The Corry Agreement
will also require the affirmative vote of at least two-thirds of the
stockholders of the Bank. If the Reorganization is completed prior to the
completion of the Corry Merger, the Stock Holding Company will own 100% of the
common stock of the Bank and will be able to vote all its shares in favor of the
Corry Agreement, and current stockholders will not have the opportunity to vote.
If the Reorganization is not completed prior to the completion of the Corry
Merger, the Mutual Holding Company will own more than two-thirds of the Bank's
common stock and will be able to vote all its shares in favor of the Corry
Agreement (which would assure stockholder approval) although Minority
Stockholders would also have the opportunity to vote.
21
<PAGE>
Because of the size of Corry in relation to the Bank (Corry's assets will
represent less than 1.4% of the combined entity following the Corry Merger), and
the size of the Corry Stock Offering (the shares issued in the Corry Stock
Offering are expected to be less than 2.0% of the total shares of Northwest
Common Stock outstanding after the Corry Merger), the Bank does not believe that
the Corry Merger will have a material effect on the operations and financial
condition of the Bank, or a material dilutive effect on current stockholders'
interests.
REGULATORY CAPITAL
Set forth below is a summary of the Bank's historical and pro forma
regulatory capital at June 30, 1997. The table does not give effect to the Corry
Acquisition. Following completion of the Reorganization, based on the following
computations of the Bank, the Bank will exceed all regulatory capital
requirements imposed by the FDIC.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------- -------------
<S> <C> <C>
Total stockholders' equity or GAAP capital.............. $ 198,494 $ 188,494
Less: unrealized gain on securities available for sale.. (1,026) (1,026)
Less: intangible assets................................. (11,278) (11,278)
---------- ----------
FDIC leverage capital................................... 186,190 176,190
Plus: FDIC tier 2 capital (1)........................... 13,605 13,605
---------- ----------
Total FDIC risk-based capital........................... $ 199,795 $ 189,795
========== ==========
FDIC quarterly average total assets for leverage ratio.. $2,043,977 $2,033,977
========== ==========
FDIC net risk-weighted assets including off-balance
sheet items........................................... $1,088,391 $1,088,391
========== ==========
FDIC leverage capital ratio............................. 9.11% 8.66%
Minimum requirement..................................... 3.00% to 5.00% (2) 3.00% to 5.00%(2)
FDIC risk-based capital ratio........................... 18.36% 17.44%
Minimum requirement..................................... 8.00% 8.00%
- ---------------------------
</TABLE>
(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, 1997, 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 utilized 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.
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.
22
<PAGE>
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 (telephone number 814/726-2140).
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 stockholders. 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.
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
23
<PAGE>
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. All required regulatory approvals have been
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.
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.
24
<PAGE>
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, which fee will be based on the amount of time such property
is utilized for matters relating to the business of the Stock Holding Company.
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 financial 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.
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
25
<PAGE>
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 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
26
<PAGE>
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 Proxy Statement/Prospectus, 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 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 stockholders.
27
<PAGE>
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 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.
28
<PAGE>
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-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 is a general description of the material provisions of
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 100,000,000 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 Merger, 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. Under
Pennsylvania law, 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. Accordingly, Pennsylvania law would not permit the Stock Holding
Company to issue shares of voting stock if after such issuance stockholders
other than the Mutual Holding Company would own more than a majority of the
Stock Holding Company's outstanding voting stock.
29
<PAGE>
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 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 stockholders entitled to cast at least one-fifth of the votes
which all stockholders 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
30
<PAGE>
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 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
31
<PAGE>
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 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
32
<PAGE>
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 stockholders'
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% 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
33
<PAGE>
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.
DESCRIPTION OF CAPITAL STOCK OF THE STOCK HOLDING COMPANY
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.
34
<PAGE>
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 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. The Bank's 1997 Annual Report to Stockholders which includes
the consolidated financial statements of the Bank, is incorporated by reference
into this Proxy Statement/Prospectus. Financial statements of the Stock Holding
Company are not included because 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.
A representative of KPMG Peat Marwick LLP is expected to attend the Meeting
to respond to appropriate questions and to make a statement if he so desires.
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 MATERIAL TERMS 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 PROXY STATEMENT/PROSPECTUS.
35
<PAGE>
PROPOSAL III--RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors of the Bank has approved the engagement of KPMG Peat
Marwick LLP to be the Bank's auditors for the fiscal year ending June 30, 1998,
subject to the ratification of the engagement by the Bank's stockholders. At
the Meeting, the stockholders will consider and vote on the ratification of the
engagement of KPMG Peat Marwick LLP for the Bank's fiscal year ending June 30,
1998. A representative of KPMG Peat Marwick LLP is expected to attend the
Meeting to respond to appropriate questions and to make a statement if he so
desires.
In order to ratify the selection of KPMG Peat Marwick LLP as the auditors
for the fiscal year ending June 30, 1998, the proposal must receive at least a
majority of the votes cast, without regard to broker non-votes, either in person
or by proxy, in favor of such ratification. The Board of Directors recommends a
vote "FOR" the ratification of KPMG Peat Marwick LLP as auditors for the 1998
fiscal year.
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 July 10, 1998. Any such proposals shall be subject to the
requirements of the proxy rules adopted under the Exchange Act as administered
by the FDIC. In the event that the Reorganization is completed and the Stock
Holding Company holds an annual meeting of stockholders in 1998, to be eligible
for inclusion in the Stock Holding Company's proxy materials for the Stock
Holding Company's 1998 Annual Meeting of Stockholders, any stockholder proposal
to take action at such meeting must be received at the Stock Holding Company's
executive office, 301 Second Avenue, Warren, Pennsylvania 16365, no later than
July 10, 1998. Any such proposals shall be subject to the requirements of the
proxy rules adopted under the Exchange Act as administered by the SEC.
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 Proxy
Statement/Prospectus.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries,
included in the Annual Report on Form 10-K of the Bank for the fiscal year ended
June 30, 1997, which have been filed by the Stock Holding Company as an exhibit
to the registration statement of which this Proxy Statement/Prospectus is a
part, have been audited by KPMG Peat Marwick LLP, independent accountants, as
set forth in their report dated August 15, 1997 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.
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
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 Proxy Statement/Prospectus is a
part, under the Securities Act. As permitted by the rules and regulations of
the SEC, this Proxy 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
36
<PAGE>
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's Registration, Disclosure and Securities
Operations Unit, 550 17th Street, N.W., Washington, D.C (telephone number
202/898-8911 or -8913, facsimile number 202/898-3909). 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 Bank's Annual Report on Form 10-K for the year ended June 30, 1997
filed with the FDIC by the Bank pursuant to the Exchange Act and filed by the
Stock Holding Company as an exhibit to the Registration Statement, is
incorporated by reference in this Proxy Statement/Prospectus.
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
Proxy Statement/Prospectus 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 Proxy Statement/Prospectus 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 Proxy
Statement/Prospectus 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 Proxy Statement/Prospectus.
This Proxy Statement/Prospectus 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).
37
<PAGE>
A COPY OF THE BANK'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE
30, 1997, WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE
UPON WRITTEN REQUEST TO GREGORY C. LAROCCA, SECRETARY, NORTHWEST SAVINGS BANK,
LIBERTY AT SECOND, WARREN, PENNSYLVANIA 16365-2353 (TELEPHONE NUMBER 814/726-
2140). THE 10-K ALSO CONSTITUTES THE BANK'S ANNUAL DISCLOSURE STATEMENT AS
REQUIRED BY 12 C.F.R. PART 350.
BY ORDER OF THE BOARD OF DIRECTORS
Gregory C. La Rocca
Secretary
Warren, Pennsylvania
October 30, 1997
38
<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, chooses 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
ARTICLES OF INCORPORATION OF NORTHWEST BANCORP, INC.
<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
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.
<PAGE>
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
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.
2
<PAGE>
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.
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 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.
3
<PAGE>
(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
(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
4
<PAGE>
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.
(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.
5
<PAGE>
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 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
6
<PAGE>
EXHIBIT C
BYLAWS OF NORTHWEST BANCORP, INC.
<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 at such 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.
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.
<PAGE>
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 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
-------
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
<PAGE>
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 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 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
<PAGE>
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.
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
4
<PAGE>
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 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.
5
<PAGE>
(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 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, and a President, Secretary, 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. He shall supervise the carrying out of the policies adopted or
approved by the Board of Directors.
5.4 PRESIDENT. The President shall preside over all meetings of
---------
stockholders and in the absence of the Chairman of the Board shall preside at
all meetings of the Board of Directors. 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.
6
<PAGE>
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 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
7
<PAGE>
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:
(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.
8
<PAGE>
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 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;
(c) The form of certification and information to be contained therein;
9
<PAGE>
(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 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
10
<PAGE>
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.
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.
11
<PAGE>
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:
<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:
<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.
<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 October 24,
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
Executive Officer and Director Vice President, Chief
(Principal Executive Officer) Financial Officer, Chief
Operating Officer and Director
(Principal Financial and
Accounting Officer)
Date: October 24, 1997 Date: October 24, 1997
By: /s/ Richard L. Carr By: /s/ Thomas K. Creal, III
------------------------------- ------------------------------
Richard L. Carr, Director Thomas K. Creal, III, Director
Date: October 24, 1997 Date: October 24, 1997
By: /s/ John J. Doyle By: /s/ Robert G. Ferrier
------------------------------- ------------------------------
John J. Doyle, Director Robert G. Ferrier, Director
Date: October 24, 1997 Date: October 24, 1997
By: /s/ Richard E. McDowell By: /s/ Joseph T. Stadler
------------------------------- ------------------------------
Richard E. McDowell, Director Joseph T. Stadler, Director
Date: October 24, 1997 Date: October 24, 1997
By: /s/ Walter J. Yahn By: /s/ John S. Young
------------------------------- ------------------------------
Walter J. Yahn, Director John S. Young, Director
Date: October 24, 1997 Date: October 24, 1997
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
2 Agreement and Plan of Reorganization*
3.1 Articles of Incorporation of Northwest Bancorp, Inc.*
3.2 Bylaws of Northwest Bancorp, Inc.*
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*
24.2 Consent of KPMG Peat Marwick LLP
24.3 Power of Attorney*
99.1 Northwest Savings Bank Annual Report on Form 10-K for fiscal
year ended June 30, 1997
- ----------------
*Previously filed
<PAGE>
EXHIBIT 5.2
<PAGE>
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.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 4
(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.
(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
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 6
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
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.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 7
(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.
(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.
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 8
(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.
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)).
_________________
/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
(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)).
(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)).
<PAGE>
Board of Directors
Northwest Savings Bank
__________, 1997
Page 10
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.
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
and its stockholders 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 24.2
<PAGE>
KPMG PEAT MARWICK
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Northwest Savings Bank:
We consent to the inclusion in this amendment No. 2 to the Registration
Statement on Form S-4 of Northwest Bancorp, Inc., of our report dated August 15,
1997, with respect to the consolidated financial statements of Northwest Savings
Bank and subsidiaries as of June 30, 1997 and 1996, and for each of the years in
the three-year period ended June 30, 1997, and to the reference to our firm
under the heading "Experts" in the Proxy Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
October 31, 1997
<PAGE>
EXHIBIT 99.1
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
1776 F STREET, N.W.
WASHINGTON, D.C. 20429
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- ----------------------
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 Executive Offices) Zip Code
(814) 726-2140
-------------------------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.10 PER SHARE
--------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO .
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
As of June 30, 1997, there were issued and outstanding 7,176,000 shares of
the Registrant's Common Stock, not including 16,200,000 shares held by Northwest
Bancorp, M.H.C., the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on June 30, 1997, as
reported by the Nasdaq National Market, was approximately $111.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the fiscal year ended June 30, 1997
(Parts II and IV).
2. Proxy Statement for the November 1997 Annual Meeting of Stockholders (Part
III).
<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 22, 1996, the Bank completed a two-for-one
stock split in the form of a stock dividend. Total shares outstanding at June
30, 1997 were 23,376,000 with 16,200,000 shares owned by the Holding Company.
At June 30, 1997, the Bank had total assets of $2.091 billion, total
deposits of $1.641 billion and shareholders equity of $198.5 million. As of
June 30, 1997, the Bank operated 57 community banking offices throughout its
market area in northwest, southwest and central Pennsylvania. The Bank and its
wholly owned subsidiaries also operate one mortgage lending office in
Pennsylvania, four 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 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, 1997, $1.096 billion, or 68.8%, 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, 1997, such loans totalled $310.8 million,
or 19.5%, of the Bank's total loans receivable. To a lesser extent, the Bank
also originates multifamily residential and commercial real estate loans, which
totalled $100.9 million, or 6.3%, of the Bank's total loans receivable at June
30, 1997, and commercial business loans, which totalled $86.1 million, or 5.4%,
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 $291.6 million,
or 13.9%, of total assets at June 30, 1997. 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 $193.6 million, or 9.3%, of total assets at June 30, 1997.
The Bank's principal sources of funds are deposits, borrowed funds and the
principal and interest payments on loans and mortgage-backed securities. 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.
2
<PAGE>
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, 1997, the Bank operated in
Pennsylvania 57 community banking offices, one mortgage lending office and 29
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, Washington, Westmoreland and York.
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
financial 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 February 1997, the Bank acquired Bridgeville
Savings Bank which had one office in Bridgeville, Pennsylvania and assets of
$55.7 million. In March of 1997, the Bank acquired St. Marys Consumers Discount
Company in St. Marys, Pennsylvania with assets of approximately $1.0 million.
In April of 1997, the Bank opened an office in Cranberry Township, Venango
County, Pennsylvania and in June opened an office in Hanover, Pennsylvania. In
June 1997, the Bank announced that it had entered into a definitive agreement to
acquire Corry Savings Bank, a Pennsylvania-chartered mutual savings bank
headquartered in Corry, Pennsylvania with assets of approximately $29.0 million.
3
<PAGE>
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
interest-earning assets more interest rate sensitive by originating adjustable-
rate loans, such as adjustable-rate mortgage loans, home equity loans, and
education loans, and by originating short-term and medium-term fixed-rate
consumer loans. The Bank also purchases mortgage-backed securities that
generally have adjustable interest rates. At June 30, 1997, approximately
$195.9 million, or 12.3%, of the Bank's total loan portfolio, and $241.3
million, or 82.8%, 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 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
identified as available-for-sale. 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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family (1).. $1,096,315 68.8% $1,008,288 70.8% $ 880,110 73.6% $ 837,896 75.7% $ 764,522 74.1%
Multifamily and
commercial.............. 100,912 6.3 97,612 6.8 53,022 4.4 65,539 5.9 85,240 8.2
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- -----
Total real estate loans 1,197,227 75.1 1,105,900 77.6 933,132 78.0 903,435 81.6 849,762 82.3
Consumer:
Home equity and home
improvement............ 37,607 2.4 38,146 2.7 40,547 3.4 41,053 3.7 42,009 4.1
Education loans........... 53,542 3.3 47,842 3.4 39,315 3.3 31,827 2.9 26,000 2.5
Loans on savings accounts. 7,176 .5 6,543 .5 5,930 .5 5,313 .5 5,894 0.5
Other (2)................. 212,472 13.3 159,532 11.2 119,611 10.0 103,945 9.4 91,595 8.9
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- -----
Total consumer
loans (3)............ 310,797 19.5 252,063 17.7 205,403 17.2 182,138 16.5 165,498 16.0
Commercial business........ 86,087 5.4 67,045 4.7 56,788 4.8 20,945 1.9 17,127 1.7
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- -----
Total loans
receivable, gross... 1,594,111 100.0% 1,425,008 100.0% 1,195,323 100.0% 1,106,518 100.0% 1,032,387 100.0%
====== ====== ====== ====== =====
Deferred loan fees......... (2,384) (3,495) (3,772) (4,184) (4,473)
Undisbursed loan proceeds.. (41,618) (33,428) (14,982) (28,563) (17,654)
Allowance for loan losses
(real estate loans)...... (6,898) (9,133) (8,102) (8,340) (8,537)
Allowance for loan losses
(other loans)............ (6,713) (3,997) (3,732) (2,898) (2,462)
---------- ---------- ---------- ---------- ----------
Total loans
receivable, net..... $1,536,498 $1,374,955 $1,164,735 $1,062,333 $ 999,261
========== ========== ========== ========== ==========
</TABLE>
- -------------
(1) Includes $47.0 million of loans originated and held by the Bank's
subsidiaries at June 30, 1997.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $66.7 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 1997.
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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------ ------------------ ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Adjustable............... $ 78,568 4.9% $ 94,426 6.6% $ 111,184 9.3% $ 104,717 9.5% $ 134,908 13.1%
Fixed.................... 1,118,659 70.2 1,011,474 71.0 821,948 68.8 798,718 72.1 714,854 69.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage loans... 1,197,227 75.1 1,105,900 77.6 933,132 78.1 903,435 81.6 849,762 82.3
Other loans:
Adjustable............... 117,301 7.4 114,943 8.1 117,323 9.8 72,880 6.6 68,009 6.6
Fixed.................... 279,583 17.5 204,165 14.3 144,868 12.1 130,203 11.8 114,616 11.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other loans...... 396,884 24.9 319,108 22.4 262,191 21.9 203,083 18.4 182,625 17.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$1,594,111 100.0% $1,425,008 100.0% $1,195,323 100.0% $1,106,518 100.0% $1,032,387 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</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, 1997.
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.. $ 76,518 $ 25,314 $ 70,610 $210,790 $379,648 $333,435 $1,096,315
Multifamily and commercial....... 25,450 6,054 4,234 19,183 42,933 3,058 100,912
Consumer loans.................... 134,778 72,686 76,431 25,094 1,808 -- 310,797
Commercial business loans......... 23,196 9,677 10,607 26,231 16,376 -- 86,087
-------- -------- -------- -------- -------- -------- ----------
Total loans..................... $259,942 $113,731 $161,882 $281,298 $440,765 $336,493 $1,594,111
======== ======== ======== ======== ======== ======== ==========
</TABLE>
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 1997, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 1998. 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.. $1,050,251 $ 11,096 $1,061,347
Multifamily and commercial....... 73,248 2,214 75,462
Consumer......................... 185,385 78,792 264,177
Commercial....................... 37,373 25,518 62,891
---------- -------- ----------
Total............................ $1,346,257 $117,620 $1,463,877
========== ======== ==========
</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, 1997, $1.096 billion, or 68.8%, 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.
6
<PAGE>
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 the loan is originated. One- to four-
family residential adjustable-rate mortgage loans totalled $75.8 million, or
4.8% of the Bank's total loan portfolio at June 30, 1997.
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, 1997, the Bank's portfolio of loans serviced by others totalled $5.2
million. The Bank currently has no formal plans to enter into new loan
participations.
Included in the Bank's $1.096 billion of one- to four-family residential
real estate loans are $41.4 million, or 2.6% 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.
7
<PAGE>
MULTIFAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. Loans
collateralized by multifamily residential and commercial real estate constituted
approximately $100.9 million, or 6.3%, of the Bank's total loan portfolio at
June 30, 1997. 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, 1997, 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, 1997,
had a principal balance of $4.5 million, and was collateralized by a personal
care facility in Erie County, Pennsylvania. The Bank's largest commercial real
estate loan at June 30, 1997, had a principal balance of $6.5 million and was
collateralized by a retail store in Erie 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, 1997, consumer loans totalled $310.8
million, or 19.5%, 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, 1997, the
disbursed portion of home equity lines of credit totalled $37.6 million, or
12.1%, of consumer loans, with $53.2 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, 1997, the Bank had 700 commercial business loans outstanding with an
aggregate balance of $86.1 million, or 5.4% of the Bank's total loan portfolio.
As of June 30, 1997, the average commercial business loan balance was
8
<PAGE>
approximately $123,000. 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, 1997 of $5.0
million and the borrower is the ESOP of a bank in New Jersey. The average
balance of the loans in the portfolio was approximately $1.0 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 marketable
securities. Commercial business loans are offered with both fixed and
adjustable interest rates and with terms of up to 15 years.
Underwriting standards employed by the 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 Directors. Loans exceeding the limits established for the Senior
Loan Committee must be approved by the Executive Committee of the Board of
Directors or by the entire Board of Directors. The 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, 1997, the Bank had commitments
to originate $80.3 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,
---------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net, at beginning of period.... $1,374,955 $1,164,735 $1,059,643
Originations:
Real estate loans.............................. 290,778 351,146 180,503
Consumer and commercial business loans......... 272,410 213,234 124,471
---------- ---------- ----------
Total loan originations.................... 563,188 564,380 304,974
Principal repayments:
Real estate loans.............................. (172,847) (144,680) (116,280)
Consumer and commercial business loans......... (198,448) (171,894) (113,451)
---------- ---------- ----------
Total repayments............................. (371,295) (316,574) (229,731)
Loan purchases including acquisitions............ 19,289 63,548 51,816
Loan sales....................................... (47,985) (99,062) (19,956)
Transfer to REO.................................. (1,654) (2,072) (2,011)
---------- ---------- ----------
Loans receivable, net, at end of period.. $1,536,498 $1,374,955 $1,164,735
========== ========== ==========
</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, 1997, the Bank had $2.4 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 $2.4 million, $2.0
million and $1.7 million, for the fiscal years ended June 30, 1997, 1996 and
1995, 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, 1997, the largest
aggregate amount loaned by the Bank to one borrower totaled $6.5 million and was
secured by commercial real estate. The Bank's second largest lending
relationship totaled $5.0 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 third largest lending relationship totaled $4.5 million and was
secured by a personal care facility in Erie County, Pennsylvania. The Bank's
fourth largest lending relationship totaled $4.1 million and was secured by a
limited care apartment facility in Warren County, Pennsylvania. The Bank's
fifth largest lending relationship totaled $3.5 million and was secured by a
personal care facility in McKean County, Pennsylvania.
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 or by telephone, to strengthen the collection
process and obtain reasons for the delinquency. Also, plans to arrange a
10
<PAGE>
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, 1997, the Bank had nonperforming loans of $10.4
million, and a ratio of nonperforming loans to net loans receivable of .68%.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as Real Estate Owned ("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, 1997, the Bank had approximately $4.5 million of property acquired
as the result of foreclosure, and classified as REO. At June 30, 1997, the Bank
had non-performing assets of $15.0 million and a ratio of nonperforming assets
to total assets of .72%.
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,
---------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ------- ------- ------- -------
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........ 90 $ 3,224 $ 3,031 $ 2,140 $ 4,354 $ 3,610
Multifamily and commercial loans............. -- -- 423 281 -- 240
Consumer loans............................... 555 2,477 2,178 1,135 1,111 922
Commercial business loans.................... 5 183 240 -- 76 --
----- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days.. 650 $ 5,884 $ 5,872 3,556 $ 5,541 $ 4,772
----- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans........ 44 1,491 1,153 1,165 1,065 2,317
Multifamily and commercial loans............. -- -- 21 139 -- --
Consumer loans............................... 208 908 1,143 443 398 401
Commercial business loans.................... 5 180 148 45 4 --
----- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days.. 257 2,579 2,465 1,792 1,467 2,718
----- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans........ 140 6,229 4,913 6,473 6,432 7,947
Multifamily and commercial loans............. 4 2,585 2,704 3,262 6,797 8,149
Consumer loans............................... 264 1,161 772 539 652 934
Commercial business loans.................... 2 455 1,092 150 273 108
----- ------- ------- ------- ------- -------
Total loans past due 90 days or more..... 410 10,430 9,481 10,424 14,154 17,138
----- ------- ------- ------- ------- -------
Total loans 30 days or more past due............. 1,317 18,893 17,818 15,772 $21,162 $24,628
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due (1)......... 410 $10,430 $ 9,481 $10,424 $14,154 $17,138
Total REO........................................ 41 4,549 5,771 5,895 7,701 14,100
----- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO..... 450 $14,979 $15,252 $16,319 $21,855 $31,238
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable......................... .68% .69% .89% 1.33% 1.72%
Total loans 90 days or more past due
and REO to total assets...................... .72% .81% 1.03% 1.53% 2.42%
</TABLE>
____________________________________
(1) The Bank classifies as nonperforming all loans 90 days or more delinquent.
During the fiscal year ended June 30, 1997, gross interest income of
approximately $819,000 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 $305,000 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, 1997:
The Bank's largest nonperforming asset at June 30, 1997, consisted of a
loan collateralized by a recreational facility and surrounding undeveloped land
located in St. George, Utah with a carrying value of $1.8 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, 1997, the borrower made payments of
$683,000 to the Bank. The Bank applied $378,000 of these payments to the loans'
principal balance and $305,000 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, 1997.
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, 1997, 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, 1997.
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, 1997, the Bank had four loans, with an
aggregate principal balance of $3.9 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,
-------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Substandard assets.......... 24,242 $19,594 $20,344
Doubtful assets............. 260 95 95
Loss assets................. 133 -- --
------- ------- -------
Total classified assets.. $24,635 $19,689 $20,439
======= ======= =======
</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.
The Bank provided $2.5 million, $1.5 million, and $1.1 million, to its
allowance for loan losses for the fiscal years ended June 30, 1997, 1996 and
1995, respectively. At June 30, 1997, the total allowance was $13.6 million,
which amounted to.89% of total net loans and 130.5% 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, 1997, 1996 and 1995, the Bank had charge-offs of $2.5 million,
$1.3 million and $1.1 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,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net loans receivable...................................... $1,536,498 $1,374,955 $1,164,735 $1,062,533 $999,261
Average loans outstanding................................. 1,449,807 1,243,758 1,093,602 1,036,819 937,315
Allowance for loan losses balance at beginning of period.. 13,130 11,833 11,238 10,999 10,258
Provision for loan losses................................. 2,491 1,502 1,098 1,728 1,797
Charge-offs:
Real estate loans:...................................... (383) (141) (53) (587) (100)
Consumer loans.......................................... (2,004) (1,192) (830) (873) (1,012)
Commercial loans........................................ (150) -- (188) (160) (12)
---------- ---------- ---------- ---------- --------
Total charge-offs..................................... (2,537) (1,333) (1,071) (1,620) (1,124)
---------- ---------- ---------- ---------- --------
Recoveries:
Real estate loans....................................... 10 176 -- -- --
Consumer loans.......................................... 363 250 332 90 68
Commercial loans........................................ 1 2 1 41 --
---------- ---------- ---------- ---------- --------
Total recoveries...................................... 374 428 333 131 68
Acquired through acquisition.............................. 153 700 235 -- --
---------- ---------- ---------- ---------- --------
Allowance for loan losses balance at end of period.... $ 13,611 $ 13,130 $ 11,833 $ 11,238 $ 10,999
========== ========== ========== ========== ========
Allowance for loan losses as a percentage
of net loans receivable................................. .89% .95% 1.02% 1.06% 1.10%
Net loans charged-off as a percentage
of average loans outstanding(1)......................... .17% .11% .10% .16% 0.12%
Allowance for loan losses as a percentage
of nonperforming loans.................................. 130.50% 138.49% 113.52% 79.40% 64.18%
Allowance for loan losses as a percentage
of nonperforming loans and REO.......................... 90.87% 86.09% 72.51% 51.42% 35.21%
</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,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real estate loans....... $ 6,898 75.1% $ 9,133 77.6% $ 8,101 78.0% $ 8,475 81.6% $ 8,537 82.3%
Consumer loans.......... 4,499 19.5 3,009 17.7 2,773 17.2 2,350 16.5 2,249 16.0
Commercial business
loans.................. 2,214 5.4 988 4.7 959 4.8 413 1.9 213 1.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for
loan losses........... $13,611 100.0% $13,130 100.0% $11,833 100.0% $11,238 100.0% $10,999 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ------------------------------------
(1) Represents percentage of loans in each category to total loans.
15
<PAGE>
INVESTMENT ACTIVITIES
The Bank's investment portfolio comprises mortgage-backed securities,
investment securities, and cash and cash equivalents. In recent years, the Bank
generally has increased both the percentage of its assets held in its investment
securities portfolio, and the percentage of assets held in the mortgage-backed
securities portfolio. This increase in investment securities and mortgage-
backed securities resulted from the Bank leveraging its capital by borrowing
funds and investing the proceeds in marketable securities in order to improve
net interest income. 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,
1997, the carrying value of mortgage-backed securities totalled $291.6 million
compared to $291.4 million at June 30, 1996. Of this $291.6 million, $241.3
million had adjustable-rates and $50.3 million had fixed-rates and $290.8
million were either issued by or collateralized by GNMA, FNMA or FHLMC.
The carrying value of the Bank's investment securities totalled $122.1
million at June 30, 1997, compared to $106.0 million at June 30, 1996. The
Bank's cash and cash equivalents, consisting of cash and due from banks, and
interest-earning deposits with other financial institutions, totalled $71.5
million at June 30, 1997, compared to $44.3 million at June 30, 1996.
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,
----------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities balance at beginning of period (1)......... $291,446 $243,184 $199,365
Purchases............................................................. 10,892 59,453 51,579
Sales................................................................. (14,554) -- --
Securities acquired by business combination........................... 18,788 4,854 --
Increase (decrease) in market value of securities available for sale.. (1,532) (519) 1,782
Principal payments and amortization of premiums and discounts......... (13,443) (15,526) (9,542)
-------- -------- --------
Mortgage-backed securities balance at end of period (1)............... $291,597 $291,446 $243,184
======== ======== ========
Investment securities balance at beginning of period (2).............. $106,047 $ 66,884 $ 33,180
Purchases............................................................. 19,100 40,120 44,143
Sales................................................................. -- -- (1,164)
Securities acquired by business combination........................... 9,120 8,834 --
Increase in market value of securities available for sale............. 969 208 725
Maturities and amortization of premiums and discounts................. (13,133) (9,999) (10,000)
-------- -------- --------
Investment securities balance at end of period (2).................... $122,103 $106,047 $ 66,884
======== ======== ========
</TABLE>
_____________________________________
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
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,
-------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
Fixed-rate pass through certificates..................... $ 10,853 $ 10,771 $ 11,063 $ 10,863 $ 26,900 $ 27,287
Variable-rate pass through certificates.................. 13,397 13,690 2,998 3,151 3,726 3,824
Fixed-rate collateralized mortgage obligations ("CMOs").. 1,400 1,399 761 736 3,122 3,113
Variable-rate CMOs....................................... 84,911 82,999 87,110 85,446 171,093 166,368
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity.... 110,561 108,859 101,932 100,196 204,841 200,592
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates..................... 36,782 37,896 51,328 52,655 35,980 37,758
Variable-rate pass through certificates.................. 770 784 1,041 1,047 585 585
Fixed-rate collateralized mortgage obligations (CMOs).... 99 107 1,854 1,854 -- --
Variable-rate CMOs....................................... 143,658 142,249 134,032 133,958 -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale.. 181,309 181,036 188,255 189,514 36,565 38,343
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities................. $291,870 $289,895 $290,187 $289,710 $241,406 $238,935
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency................................. $ 42,868 $ 43,334 $ 53,836 $ 54,260 $ 65,180 $ 67,085
Corporate debt issues...................................... 551 551 250 281 290 290
Equity securities.......................................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity............. $ 43,419 $ 43,885 $ 54,086 $ 54,541 $ 65,470 $ 67,375
======== ======== ======== ======== ======== ========
Investment securities available for sale:
Equity securities.......................................... $ 2,169 $ 3,923 $ 1,113 $ 2,141 $ 688 $ 1,414
U.S. Government and agency................................. 63,290 63,272 47,083 46,998 -- --
Corporate debt issues...................................... -- -- 1,401 1,400 -- --
Municipal securities....................................... 11,322 11,489 1,430 1,422 -- --
-------- -------- -------- -------- -------- --------
Total investment securities available for sale........... $ 76,781 $ 78,684 $ 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,
-------------------------------
1997 1996 1995
----------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
FNMA.................................... $140,775 $142,757 $110,718
GNMA.................................... 29,338 39,513 38,187
Freddie Mac............................. 120,400 107,463 91,704
Other (non-agency)...................... 1,084 1,713 2,575
-------- -------- --------
Total mortgage-backed securities $291,597 $291,446 $243,184
======== ======== ========
</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, 1997. Adjustable-rate mortgage-backed
securities are included in the period in which interest rates are next scheduled
to adjust.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------
One Year of 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...... $ 12,057 6.73% $30,811 6.99% $ -- --%
Other debt securities....................... 201 5.48 100 5.30 -- --
-------- ---- ------- ---- ------- -----
Total investment securities held
to maturity........................... 12,258 6.71 30,911 6.98 -- --
-------- ---- ------- ---- ------- -----
Investment securities available for sale:
Equity securities........................... -- -- -- -- -- --
U.S. Government and agency obligations...... 3,197 6.77 34,730 6.75 -- --
Municipal securities........................ -- -- 2,403 5.26 5,824 5.59
-------- ---- ------- ---- ------- -----
Total investment securities available
for sale.............................. 3,197 6.77 37,133 6.65 5,824 5.59
-------- ---- ------- ---- ------- -----
Mortgage-backed securities held to maturity:
Pass-through certificates................... 16,111 6.73 -- -- 6,317 5.75
CMOs........................................ 84,988 6.44 -- -- 1,323 5.91
-------- ---- ------- ---- ------- -----
Total mortgage-backed securities held
to maturity.......................... 101,099 6.49 -- -- 7,640 5.78
-------- ---- ------- ---- ------- -----
Mortgage-backed securities available
for sale:
Pass through certificates................. 977 7.19 2,200 5.79 7,734 7.83
CMOs...................................... 143,658 6.66 -- -- 99 17.60
-------- ---- ------- ---- ------- -----
Total mortgage-backed securities
available for sale................... 144,635 6.66 2,200 5.79 7,833 7.95
-------- ---- ------- ---- ------- -----
Total investment securities and
mortgage-backed securities.................. $261,189 6.60% $70,244 6.77% $21,297 6.53%
======== ==== ======= ==== ======= =====
<CAPTION>
At June 30, 1997
--------------------------------------------------------
More than Ten Years Total
--------------------- ---------------------------------
Annualized Annualized
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ---------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency obligations...... $ -- --% $ 42,868 $ 43,334 6.92%
Other debt securities....................... 250 9.00 551 551 7.04
------- ---- -------- -------- ----
Total investment securities held
to maturity........................... 250 9.00% 43,419 43,885 6.92
------- ---- -------- -------- ----
Investment securities available for sale:
Equity securities........................... -- -- 2,169 3,923 1.80
U.S. Government and agency obligations...... 25,363 7.53 63,290 63,272 7.06
Municipal securities........................ 3,095 5.75 11,322 11,489 5.56
Total investment securities available ------- ---- -------- -------- ----
for sale.............................. 28,458 7.34 76,781 78,684 6.69
------- ---- -------- -------- ----
Mortgage-backed securities held to maturity:
Pass-through certificates................... 1,822 7.29 24,250 24,461 6.52
CMOs........................................ -- -- 86,311 84,398 6.44
------- ---- -------- -------- ----
Total mortgage-backed securities held
to maturity.......................... 1,822 7.29 110,561 108,859 6.46
------- ---- -------- -------- ----
Mortgage-backed securities available
for sale:
Pass through certificates................. 26,641 7.94 37,552 38,680 7.77
CMOs...................................... -- -- 143,757 142,356 6.76
------- ---- -------- -------- ----
Total mortgage-backed securities
available for sale................... 26,641 7.94 181,309 181,036 6.97
------- ---- -------- -------- ----
Total investment securities and
mortgage-backed securities.................. $57,171 7.63% $412,070 $412,464 6.81%
======= ==== ======== ======== ====
</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, borrowings from
the FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the 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,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period........... $1,450,047 $1,283,935 $1,235,401
Savings deposits......................... 993,411 660,132 699,527
Savings withdrawals...................... (913,573) (648,646) (702,141)
Net checking activity.................... 23,671 14,616 12,986
Deposits acquired........................ 34,594 95,994 --
---------- ---------- ----------
Net increase before interest credited.. 138,103 122,096 10,372
Interest credited........................ 52,665 44,016 38,162
---------- ---------- ----------
Net increase in deposits............. 190,768 166,112 48,534
---------- ---------- ----------
Balance at end of period......... $1,640,815 $1,450,047 $1,283,935
========== ========== ==========
</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,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ----------------------------------
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.......... $ 299,365 18.24% 3.30% $ 296,099 20.42% 3.30% $ 287,783 22.41% 3.32%
Checking accounts......... 222,845 13.58 2.12 195,019 13.45 2.12 168,813 13.15 2.07
Money market accounts..... 83,609 5.10 3.37 82,552 5.69 3.37 74,704 5.82 3.26
Certificates of deposit:
Maturing within 1 year.. 607,421 37.02 5.61 512,392 35.34 5.36 385,340 30.01 5.50
Maturing 1 to 3 years... 357,070 21.76 6.01 259,539 17.90 5.78 251,083 19.56 5.97
Maturing more than
3 years............... 70,505 4.30 6.03 104,446 7.20 6.44 116,212 9.05 6.43
---------- ------ ---- ---------- ----- ---- ---------- ----- ----
Total certificates.... 1,034,996 63.08 5.78 876,377 60.44 5.61 752,635 58.62 5.80
---------- ------ ---- ---------- ----- ---- ---------- ----- ----
Total deposits............ $1,640,815 100.00% 4.71% $1,450,047 100.0% 4.21% $1,283,935 100.0% 4.60%
========== ====== ==== ========== ===== ==== ========== ===== ====
</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,
-------------------------------------
1997 1996 1995
---------- ---------- ------------
Rate (In Thousands)
- ------------------
<S> <C> <C> <C>
2.00 - 2.99%...... $ 37 $ 36 $ --
3.00 - 3.99%...... 1,234 7,812 3,667
4.00 - 4.99%...... 63,668 138,758 112,150
5.00 - 5.99%...... 576,850 409,023 258,592
6.00 - 6.99%...... 329,083 242,428 267,233
7.00 - 7.99%...... 55,170 69,629 92,046
8.00% or greater.. 8,954 8,691 18,947
---------- -------- --------
$1,034,996 $876,377 $752,635
========== ======== ========
</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%...... $ -- $ 37 $ -- $ -- $ 37
3.00 - 3.99%...... 459 165 133 477 1,234
4.00 - 4.99%...... 58,239 5,296 31 102 63,668
5.00 - 5.99%...... 356,311 163,128 25,123 32,288 576,850
6.00 - 6.99%...... 177,793 91,975 32,837 26,478 329,083
7.00 - 7.99%...... 11,205 1,202 32,602 10,161 55,170
8.00% or greater.. 3,414 2,314 2,227 999 8,954
-------- -------- ------- ------- ----------
$607,421 $264,117 $92,953 $70,505 $1,034,996
======== ======== ======= ======= ==========
</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, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
- --------------------------- --------------
(In Thousands)
<S> <C>
Three months or less....... $ 18,119
Three through six months... 18,120
Six through twelve months.. 27,749
Over twelve months......... 47,374
--------
Total..................... $111,362
========
</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 borrowings from the FHLB to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Borrowings from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans. At June 30, 1997, the Bank had $164.2 million of
borrowings from the FHLB 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 borrowings on the security of such stock and certain of its first mortgage
loans and other assets (principally, securities that are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Borrowings are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of borrowings
are based either on a fixed percentage of a member institution's net worth or on
the FHLB's assessment of the institution's creditworthiness. All FHLB
borrowings have fixed interest rates and original maturities of between one day
and twenty years.
<TABLE>
<CAPTION>
During the Year Ended June 30,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Pittsburgh borrowings:
Average balance outstanding (1)........................ $141,108 $117,919 $ 78,585
Maximum outstanding at end of any month during period.. $164,212 $200,603 $ 87,592
Balance outstanding at end of period................... $164,212 $200,603 $ 86,163
Weighted average interest rate during period........... 5.73% 5.30% 5.85%
Weighted average interest rate at end of period........ 6.12% 5.67% 5.81%
Reverse repurchase agreements:
Average balance outstanding (1)........................ $ 16,578 $ 267 $ 2,388
Maximum outstanding at end of any month during period.. $ 50,116 $ 800 $ 7,738
Balance outstanding at end of period................... $ 50,116 $ -- $ 800
Weighted average interest rate during period........... 5.86% 3.40% 4.18%
Weighted average interest rate at end of period........ 5.60% --% 6.10%
Other borrowings:
Average balance outstanding (1)........................ $ 10,075 $ 12,151 $ 7,895
Maximum outstanding at end of any month during period.. $ 11,462 $ 13,368 $ 16,476
Balance outstanding at end of period................... $ 9,130 $ 11,158 $ 16,476
Weighted average interest rate during period........... 6.95% 7.59% 8.70%
Weighted average interest rate at end of period........ 6.96% 7.52% 8.83%
Total borrowings:
Average balance outstanding (1)........................ $167,761 $130,337 $ 88,868
Maximum outstanding at end of any month during period.. $223,458 $211,761 $104,181
Balance outstanding at end of period................... $223,458 $211,761 $103,439
Weighted average interest rate during period........... 5.24% 5.35% 5.45%
Weighted average interest rate at end of period........ 6.04% 5.77% 6.29%
</TABLE>
- ------------------------------
(1) Computed on the basis of month-end balances.
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.
21
<PAGE>
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 six wholly owned subsidiaries, Great Northwest Corporation,
Northwest Financial Services, Inc., Northwest Consumer Discount Company,
Northwest Mortgage Corporation, Northwest Capital Group, Inc. and Power Funding
Group, Inc. 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, 1997, the Bank had an equity investment in
Great Northwest of $1.7 million. For the fiscal year ended June 30, 1997, Great
Northwest had an operating profit of $558,000.
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 Rid-Fed, Inc. At June 30, 1997, the Bank had an
equity investment in Northwest Financial Services of $4.9 million, and for the
fiscal year ended June 30, 1997, Northwest Financial Services had income of $1.5
million, which included equity income from Rid-Fed, Inc. of $435,000.
Northwest Consumer Discount Company operates 29 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, 1997, the Bank had an equity investment in Northwest
Consumer Discount Company of $7.8 million and the income of Northwest Consumer
Discount Company for the fiscal year ended June 30, 1997 was $1.1 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 operates two mortgage loan production
offices in South Carolina and one in Pennsylvania. At June 30, 1997, the Bank
had an equity investment of $678,000 in Northwest Mortgage Corporation and for
the fiscal year ended June 30, 1997 Northwest Mortgage Corporation had net
income of $498,000.
Northwest Capital Group's principal activity is the development and sale of
a timeshare project in Honolulu, Hawaii which was acquired by deed in lieu of
foreclosure in 1997. At June 30, 1997 the Bank had an equity investment of
$26,000 in Northwest Capital Group and for the fiscal year ended June 30, 1997
Northwest Capital Group reported no income.
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial Services,
has as its sole activity a commercial real estate loan to Northwest Capital
Group which was made to finance the sale of real estate from Rid-Fed to
22
<PAGE>
Northwest Capital. At June 30, 1997 Northwest Financial Services had an equity
investment of $982,000 in Rid-Fed, Inc. and for the fiscal year ended June 30,
1997 Rid-Fed, Inc. had net income of $435,000.
Power Funding Group, Inc. is a mortgage banking company, headquartered in
Buffalo, New York, with loan production offices in Buffalo and Binghamton.
Power Funding Group, Inc. was purchased by the Bank on April 1, 1995. As of
June 30, 1997, the Bank had an equity investment in Power Funding Group, Inc. of
$289,000. For the fiscal year ended June 30, 1997, Power Funding Group, Inc.
had a net operating loss of $394,000.
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, 1997, Northwest Consumer Discount
Company's equity investment in Northwest Finance Company was a negative $89,000.
For the year ended June 30, 1997, Northwest Finance Company had a net operating
loss of $56,000.
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, 1997, the Bank had 716 full-time and 141 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 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.
23
<PAGE>
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 stateswithin 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.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings banks,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from 0% to .27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets
24
<PAGE>
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.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
27, 1996 and amounted to $8.6 million for the Bank. In addition, beginning
January 1, 1997, interest payments on FICO bonds issued in the late 1980's by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation will be paid jointly by Bank Insurance Fund ("BIF")
insured institutions and SAIF-insured institutions. The FICO assessment is 1.29
basis points per $100 for BIF deposits and 6.44 basis points per $100 for SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid
pro rata by banks and thrifts based on deposits (approximately 2.4 basis points
per $100 in deposits).
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Bank met the minimum level of mortgage lending test (i.e.,
the Bank's level of mortgage lending activity (re-financings and home equity
loans do not count) exceeded its average mortgage lending activity for the six
years preceding fiscal 1997, adjusted for inflation), the Bank was able to
suspend its tax bad debt recapture for the 1997 tax year. At June 30, 1997, the
Bank had a balance of approximately $7.9 million of bad debt reserves in
retained income that is subject to recapture 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.
25
<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,
1997, 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.
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.
FEDERAL SECURITIES LAWS
Shares of the Bank's common stock are registered with the FDIC under
Section 12(g) of the Exchange Act. 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
26
<PAGE>
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, 1997, the Bank's retained earnings
exceeded capital by $65.4 million and the Bank was not in default of any
assessment due the FDIC.
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 Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the Bank
must change from the reserve method to the specific charge-off method to compute
its bad debt deduction. In addition, the Bank is required generally to
recapture into income the portion of its bad debt reserve (other than the
supplemental reserve) that exceeds its base year reserves, approximately $7.9
million.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. If the Bank meets a
"residential loan requirement" for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax year. Thus, recapture
can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior to
1996. Refinancings and home equity loans are excluded.
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.
27
<PAGE>
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 recently completed its
routine audit for the tax periods ended June 30, 1993, 1994 and November 4,
1994. See Notes 1 and 12 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 56 other full-service offices throughout its market area in
northwest, southwest and central Pennsylvania. The Bank and its wholly owned
subsidiaries also operate one mortgage lending office in Pennsylvania, four in
New York, and two in South Carolina, as well as 29 consumer finance offices
located throughout Pennsylvania and one consumer lending office in New York. At
June 30, 1997, the Bank's premises and equipment had an aggregate net book value
of approximately $21.5 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.
Bradford (3), McKean Co.
-- Bradford Mall
-- 33 Main Street
-- 85 West Washington Street
Bellefonte, Centre Co.
-- 117 North Allegheny
Bridgeville, Allegheny Co.
-- 431 Washington Avenue
Centre Hall, Centre Co.
-- 219 North Pennsylvania Avenue
Clarion (2), Clarion Co.
-- 601 Main Street
-- 97 West Main Street
Columbia, Lancaster Co.
-- 350 Locust Street
Cranberry Twp, Venango Co.
-- Cranberry Mall
Erie (9), Erie Co.
-- 2256 West 8th Street
-- K-Mart Plaza West
2863 West 26th Street
-- K-Mart Plaza East
4423 Buffalo Street
-- Millcreek Mall
3805 Peach Street
-- 3805 Peach Street
-- 5624 Peach Street
-- 401 State Street
-- 121 West 26th Street
-- 1328 East Grandview Blvd.
28
<PAGE>
Franklin, Venango Co.
-- 1301 Liberty StreetGibsonia, Allegheny Co.
-- Village of St. Barnabas
5850 Meridian
Hanover, York Co.
-- 1 Center Square
Harborcreek, Erie Co.
-- 4452 East Lake Road
Hershey, Dauphin Co.
-- 10 West Chocolate Avenue
Johnsonburg, Elk Co.
-- 553 Market Street
Kane, McKean Co.
-- 56 Fraley Street
Lake City, Erie Co.
-- 2102 Rice Avenue
Lancaster, Lancaster County
-- 24 West Orange Street
Lebanon (2), Lebanon Co.
-- 770 Cumberland Street
-- 547 South 10th Street
Lewistown, Mifflin County
-- 51 West Market Street
Meadville (3), Crawford Co.
-- 932 Diamond Park
-- 1073 Park Avenue
-- 880 Park Avenue
Mount Joy, Lancaster Co.
-- 24 East Main Street
Myerstown, Lebanon Co.
-- 1 West Main Avenue
North East, Erie Co.
-- 35 East Main Street
Oil City (3), Venango Co.
-- One East First Street
-- 301 Seneca Street
-- 259 Seneca Street
Palmyra, Lebanon Co.
-- 1048 East Main Street
Pottsville, Schuylkill Co.
-- 104 North Centre Street
Ridgway, Elk Co.
-- Main & Mill Streets
Sarver, Butler Co.
-- 735 South Pike Road
Springboro, Crawford Co.
-- 105 South Main Street
St. Marys (2), Elk Co.
-- 201 Brusselles Street
-- St. Mary's Plaza
State College (3), Centre Co.
-- 201 West Beaver Avenue
-- 611 University Drive
-- 1524 West College Avenue
Titusville, Crawford Co.
-- Spring & Franklin Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Warren (3), Warren Co.
-- Warren Mall
1680 Market Street Ext.
-- 125 Ludlow Street
-- Liberty at Second
Wrightsville, York Co.
-- 120 North 4th Street
York, York Co.
-- Queensgate Shopping Center
29
<PAGE>
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.
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 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 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 was 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 Courts dismissal,
and on April 7, 1997 it denied the plaintiff's petition for a rehearing. As of
June 30, 1997 the plaintiff has not sought further review or initiated
additional proceedings. Management intends to continue to vigorously defend
against this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
-----------------------------------------------------
During the fourth quarter of the fiscal year covered by this report, the
Bank did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
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, 1997 (the "1997 Annual Report to Stockholders") are
incorporated herein by reference. No other sections of the 1997 Annual Report to
Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Selected Financial Data section of the 1997 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1997
Annual Report to Stockholders are incorporated herein by reference.
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 the 1997 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1997
Annual Report to Stockholders are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contained in the 1997 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1997
Annual Report to Stockholders are incorporated herein by reference.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The material identified in Item 11(a)(1) hereof is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The "Proposal I--Election of Directors" section of the Bank's definitive
proxy statement for the Bank's 1997 Annual Meeting of Stockholders (the "1997
Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The "Proposal I--Election of Directors" section of the Bank's 1997 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Bank's 1997 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The "Transactions with Certain Related Persons" section of the Bank's 1997
Proxy Statement is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following documents appear in sections of the 1997 Annual
Report to Stockholders under the same captions, and are incorporated
herein by reference. No other sections of the 1997 Annual Report to
Stockholders are incorporated herein by reference.
(A) Independent Auditors' Report
(B) Consolidated Statements of Condition - at June 30, 1997 and 1996
(C) Consolidated Statements of Income - Years ended June 30, 1997,
1996 and 1995
(D) Consolidated Statements of Changes in Shareholders' Equity - Years
ended June 30, 1997, 1996 and 1995
(E) Consolidated Statements of Cash Flows - Years ended June 30, 1997,
1996 and 1995
(F) Notes to Consolidated Financial Statements.
31
<PAGE>
(a)(2) Financial Statement Schedules
-----------------------------
(b) Reports on Form 8-K
-------------------
The Bank has not filed a Current Report on Form F-3 or 8-K during the year
ended June 30, 1997.
(c) Exhibits
--------
(a) (3) Exhibits:
-----------------
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- ------------------------------------------ ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 Articles of Incorporation and Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Restated Deferred Compensation Plan for **
Directors
10.2 Retirement Plan for Outside Directors **
10.3 Northwest Savings Bank Pension Plan **
10.4 Northwest Savings Bank Nonqualified **
Supplemental Retirement Plan
10.5 Defined Contribution 401(k) Profit **
Sharing
Plan (and adoption agreement)
10.6 Employee Stock Ownership Plan *
10.7 Employment Agreement between the Bank **
and John O. Hanna, President and Chief
Executive Officer
10.8 Employee Severance Compensation Plan *
11 Statement re: computation of per share None
earnings
12 Statement re: computation or ratios Not required
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- ------------------------------------------ ---------------
<S> <C> <C>
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountant
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel Not Required
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
</TABLE>
____________
* 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.
33
<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 26, 1997 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
Chief Executive Officer and Director Vice President and Director
(Principal Executive Officer) (Principal Financial/
Accounting Officer)
Date: September 26, 1997 Date: September 26, 1997
By: /s/ Richard L. Carr By: /s/ Richard E. McDowell
------------------- -----------------------
Richard L. Carr, Director Richard E. McDowell, Director
Date: September 26, 1997 Date: September 26, 1997
By: /s/ Thomas K. Creal, III By: /s/ Joseph T. Stadler
------------------------ ---------------------
Thomas K. Creal, III, Director Joseph T. Stadler, Director
Date: September 26, 1997 Date: September 26, 1997
By: /s/ John J. Doyle By: /s/ Walter J. Yahn
----------------- ------------------
John J. Doyle, Director Walter J. Yahn, Director
Date: September 26, 1997 Date: September 26, 1997
By: /s/ Robert G. Ferrier By: /s/ John S. Young
--------------------- -----------------
Robert G. Ferrier, Director John S. Young, Director
Date: September 26, 1997 Date: September 26, 1997
34
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Message of President and Chief Executive Officer .......................... i
Financial Highlights ...................................................... 1
Shareholder Highlights .................................................... 4
Year in Review ............................................................ 5
Corporate Profile ......................................................... 6
Selected Financial and Other Data ......................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 14
Market for Common Stock and Related Matters ............................... 31
Independent Auditor's Report .............................................. 36
Consolidated Statements of Financial Condition ............................ 37
Consolidated Statements of Income ......................................... 38
Consolidated Statements of Changes in Shareholders' Equity ................ 39
Consolidated Statements of Cash Flow ...................................... 40
Notes to Consolidated Financial Statements ................................ 42
</TABLE>
<PAGE>
Dear Shareholder:
It is my pleasure to report that Northwest Savings Bank had an exciting and
productive fiscal 1997. During the year we celebrated our 100th anniversary with
a centennial theme and several special promotions along with Bank sponsored
community events featuring the centennial throughout our entire market area. The
past twelve months marked record earnings and continued growth for the Bank.
Assets increased $213.4 million (11.4%), loans receivable increased $161.5
million (11.7%), and deposits increased $190.8 million (13.2%). Although the
Bank's net interest margin narrowed from 4.15% to 3.87%, net interest income
increased $5.6 million (8.4%) to $72.1 million. After tax earnings before
consideration of the one time SAIF assessment were $18.8 million, an increase of
$1.3 million (7.4%) over 1996. The special FDIC assessment resulted in an $8.6
million charge to the Bank on September 30, 1996 and resulted in a decrease in
after tax income of approximately $5.1 million. Although this had a significant
impact on the current year's operations, going forward, the Bank will realize a
substantial benefit from the reduction in the annual deposit insurance
premium.
We were pleased with the growth in both loans receivable and deposits recorded
by the Bank's network of banking offices. This is a noteworthy accomplishment
when consideration is given to the high level of competition being encountered
for those services from other financial institutions, as well as the products
being offered by non-banks in our market areas. Asset quality remains one of the
Bank's strong points and is also a noteworthy topic. Nonperforming assets, as of
June 30, were only .72% of total assets and loans ninety days or more past due
were only .68% of net loans receivable.
During the year we continued to expand our franchise by opening three new
offices. The Bank increased its presence in Venango County with a newly
constructed full service office at the Cranberry Mall; in Centre County with a
new office in Bellefonte; and in York County with a new office on the square in
downtown Hanover. The Bank was also pleased to acquire Bridgeville Savings Bank,
Bridgeville, PA which allowed for expansion into southern Allegheny County. We
intend to continue this growth and the broadening of our customer base in the
current fiscal year. A new facility has been opened in Lititz, Lancaster County,
Pennsylvania and new office openings are planned for Butler, Butler County;
Stonybrooke in York County; and Lock Haven in Clinton County, all in
Pennsylvania. The Bank is looking forward to the completion of the previously
announced acquisition of a banking office in Oil City that will be consolidated
into our current Venango County operation. We are also looking forward with
great excitement to the completion of a merger announced recently with Corry
Savings Bank in Corry, Pennsylvania. At year end, Northwest was operating 57
community banking facilities consistent with our strategy to remain a strong
community bank committed to quality service, profitability and growth, with
plans to expand services to Pennsylvania's smaller rural communities.
The Bank continues to expand its menu of community oriented products and
services and during the year strengthened its ability to offer affordable loan
products with the introduction of FHA and VA lending; lending initiatives in
conjunction with the United States Department of Agriculture's Rural Development
Guaranteed Housing Program and a new mortgage product designed by our mortgage
department known as the "Equity Builder" loan program. The Bank's mortgage
pre-approval program introduced last year also continued to remain extremely
popular this year. Due to the demand created by the continued consolidation of
regional banking firms in our market areas, the growth in commercial lending
activities to small and medium sized local businesses resulted in new
investments by the Bank in key people and systems in order to serve this rapidly
growing market.
Other new products implemented during the year included the debut of the
Northwest check card and check imaging services. An extensive selection process
was also completed for a new state of the art data processing system that is
expected to be operational before the end of the current fiscal year. This new
system, along with new financial software, will give the Bank the needed
technology to meet customer demands for electronic bill paying, telephone
banking, and other technology related services in the future. In addition to the
core data processing system, by December 31, 1997 all of our offices will be
upgraded with new teller, platform and customer service equipment allowing for
quicker and more efficient transaction handling, new account processing, and
customer information retrieval. The significant investment in these systems will
result in better service, greater efficiency and flexibility in product design.
<PAGE>
Because of the emphasis placed on the communities it serves, the Bank continues
to be recognized for its community reinvestment activities by the Federal Home
Loan Bank of Pittsburgh which awarded the Bank Certificates of Recognition
during 1997 for two projects in Meadville, Pennsylvania and one in Lebanon,
Pennsylvania.
Other corporate developments include the formation of a stock holding company,
known as a mid-tier holding company, which would acquire 100% of the Bank's
outstanding common stock with the current stockholders of the Bank becoming the
owners of the new holding company by exchanging their shares of the Bank's
common stock for shares of the new holding company on a one for one basis. While
considering the merits of the new structure prior to making the decision to
recommend it to the shareholders, the Board of Directors found that the
additional powers and flexibility available in the stock holding company
structure would better position the Bank for continued growth and to meet the
future challenges of the rapidly changing financial world. This new structure
will be recommended to the shareholders for adoption at the annual meeting in
December.
For shareholders, the Bank's steady progress over the year appears to have
created additional shareholder interest in the Bank. The market value of our
stock was $15.50 per share at year end, an increase of 38% from the $11.25
price on June 30, 1996. Also contributing to this increase is the fact that bank
and thrift stocks in general are currently trading at higher multiples of
earnings and of book value than they have in the past, coupled with a strong
stock market. In response to numerous requests from shareholders, the Bank
instituted its dividend reinvestment plan during 1997 and the response was
overwhelming. To date, over 40% of registered shareholders are reinvesting
quarterly dividends through the plan, with many taking advantage of the optional
cash purchase feature to add to their Northwest holdings on a monthly basis.
As we begin our second century of operation, we have every reason to be
optimistic that the Bank is positioned to meet the challenges ahead and to
capitalize on opportunities that are presented. Strong earnings and capital
levels, dedicated employees willing to adapt to the challenges of change, new
technology in order to meet the needs of customers and invaluable support from
the members of management and the Board of Directors will distinguish Northwest
from a crowded field of competitors.
In acknowledging the efforts of the Board of Directors, I would particularly
like to take this opportunity to express our appreciation and thanks to two of
our valued Directors who retired during the year. In October of 1996, Dr. Robert
L. Lasher, who resides in Erie, Pennsylvania, and Taylor W. Foster, who resides
in Franklin, Pennsylvania, were elected Directors Emeritus after serving the
Bank or a predecessor for 34 and 37 years, respectively. We will miss their
presence, dedication, leadership and guidance that we have enjoyed these many
years. We hope they take great pride in their contributions to the successful
growth of this Bank, and we wish them many years of good health and happiness in
their retirement.
Recognition must also be given to our loyal employees whose efforts have helped
the Bank maintain and expand a quality community banking franchise, achieve
record loan levels, create new products and services, operate the bank
efficiently and comply with the increasing financial, administrative and
regulatory challenges of a growing financial institution.
In closing, I would also like to thank our customers, investors, and the
communities that we serve for their continued confidence in the Bank. Our future
success is dependent upon our continued ability to serve each of these
constituencies and each employee, officer and director is mindful that we must
constantly earn that confidence.
Sincerely,
/s/ John O. Hanna
John O. Hanna
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
At year end June 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets $2,091,363,000 $1,877,925,000 $ 1,591,894,000
Loans Receivable, Net $1,536,498,000 $1,374,955,000 $ 1,164,735,000
Deposit Accounts $1,640,815,000 $1,450,047,000 $ 1,283,935,000
Shareholders' Equity $ 198,494,000 $ 190,651,000 $ 178,690,000
Book Value Per Share $8.49 $8.16 $7.74
Last Trade Price $15.50 $11.25 $9.63
- -----------------------------------------------------------------------------------------------------------------------------
For the year ended June 30,
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $72,094,000 $66,493,000 $60,032,000
Net Income/(1)/ $13,664,000 $17,486,000 $16,294,000
Earnings Per Share/(1X2)/ $.59 $.77 $.47
Dividends Per Share $.32 $.30 $.125
- -----------------------------------------------------------------------------------------------------------------------------
Key Financial Ratios for the year ended June 30
- -----------------------------------------------------------------------------------------------------------------------------
Return on Average Shareholders' Equity/(1)/ 7.12% 9.48% 9.29%
Return on Average Assets/(1)/ .70% 1.05% 1.09%
Interest Rate Spread 3.53% 3.72% 3.81%
Nonperforming Assets to Total
Assets at End of Period .72% .81% 1.03%
Allowance for Loan Losses to
Nonperforming Loans at End of Period 130.50% 138.49% 113.52%
- -----------------------------------------------------------------------------------------------------------------------------
Other Data at June 30,
- -----------------------------------------------------------------------------------------------------------------------------
Number of:
Community Banking Offices 57 54 45
Consumer Finance Offices 30 29 28
Mortgage Loan Production Offices 7 8 8
</TABLE>
/(1)/Fiscal 1997 includes an $8.6 million expense ($5.1 million after tax) to
recapitalize the FDIC's Savings Association Insurance Fund, Excluding this
assessment net income was $18,804,000, earnings per share was $.81, return
on average shareholders' equity was 9.80%, and return on average assets was
.96%.
/(2)/Fiscal 1995 earnings per share includes only earnings generated subsequent
to the corporate reorganization and stock issuance completed November 4,
1994.
1
<PAGE>
NORTHWEST SAVINGS BANK
[MAP APPEARS HERE]
CORPORATE HEADQUARTERS
- --------- ------------
Warren
Liberty Street at Second Avenue
(814) 726-2140
<TABLE>
<CAPTION>
COMMUNITY BANKING OFFICES
- -------------------------
<S> <C> <C> <C>
1 Bradford (3), McKean Co. 9 Franklin, Venango Co. 20 Meadville (3), Crawford Co. 29 Springboro, Crawford Co.
Bradford Mall 1301 Liberty Street 932 Diamond Park 105 South Main Street
33 Main Street 1073 Park Avenue
85 West Washington Street 10 Gibsonia, Allegheny Co. 880 Park Avenue 30 St. Marys (2), Elk Co.
Village of St. Barnabas 201 Brusselle Street
2 Bellefonte, Centre Co. 5850 Meridian 21 Mount Joy, Lancaster Co. St. Marys Plaza
117 North Allegheny 24 East Main Street
11 Hanover, York Co. 31 State College (3), Centre Co.
3 Bridgeville, Allegheny Co. 1 Center Square 22 Myerstown, Lebanon Co. 201 West Beaver Avenue
431 Washington Avenue 1 West Main Avenue 611 University Drive
12 Harborcreek, Erie Co. 1524 West College Avenue
4 Centre Hall, Centre Co. 4452 East Lake Road 23 North East, Erie Co.
219 North Pennsylvania Ave. 35 Main Street 32 Titusville, Crawford Co.
13 Hershey, Dauphin Co. Spring & Franklin Streets
5 Clarion (2), Clarion Co. l0 West Chocolate Avenue 24 Oil City (3), Venango Co.
601 Main Street 1 East First Street 33 Valencia, Butler Co.
97 West Main Street 14 Johnsonburg, Elk Co. 301 Seneca Street 1421 Pittsburgh Rood
553 Market Street 259 Seneca Street
6 Columbia, Lancaster Co. 34 Warren (3), Warren Co.
350 Locust Street 15 Kane, McKean Co. 25 Palmyra, Lebanon Co. Warren Mall
56 Fraley Street 1048 East Main Street 1666 Market Street Ext.
7 Cranberry Twp., Venango Co. 125 Ludlow Street
Cranberry Mall 16 Lake City, Erie Co. 26 Pottsville, Schuylkill Co. Liberty at Second
2102 Rice Avenue 104 North Centre Street
8 Erie (9), Erie Co. 35 Wrightsville, York Co.
2256 West 8th Street 17 Lancaster, Lancaster Co. 27 Ridgway, Elk Co. 120 North 4th Street
K-Mart Plaza East 24 West Orange Street Main & Mill Streets
K-Mart Plaza West 36 York, York Co.
Millcreek Mall 18 Lebanon (2), Lebanon Co. 28 Sarver, Butler Co. Queensgate Shopping Center
3805 Peach Street 770 Cumberland Street 735 South Pike Road
5624 Peach Street 547 South 10th Street
401 State Street
121 West 26th Street 19 Lewistown, Mifflin Co.
1328 East Grandview Blvd. 51 West Market Street
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
Year Ended June 30, 1997
(as originally reported and adjusted for stock splits)
. Total Assets grew by $213.4 million, or 11.4%, to $2.091 billion as the
Bank continued to exhibit a history of controlled and profitable growth.
. Loans Receivable grew by $161.5 million, or 11.7%, to $1.536 billion as
the Bank continued to increase both its market share and increase its
ratio of loans to deposits.
. Deposits grew by $190.8 million, or 13.2%, to $1.641 billion with $34.6
million resulting from acquisitions and $156.2 million from internal
growth.
. Borrowed money increased by $11.8 million, or 5.6%, to $223.5 million as
the Bank continued to use borrowed funds to fund additional lending and
investment activities and improve net interest income.
. On September 30, 1997, the Bank recorded an expense of $8.6 million ($5.1
million after tax) for a one-time assessment to recapitalize the FDIC's
Savings Association Insurance Fund (SAIF). As a result of this assessment,
the cost of the Bank's FDIC insurance was reduced from 23 basis points per
$100 of insured deposits to 6.44 basis points per $100 of insured deposits.
. Net income, exclusive of the assessment for the recapitalization of SAIF,
increased by $1.3 million, or 7.4%, to $18.8 million.
. Net interest income increased by $5.6 million, or 8.4%, to $72.1 million.
. Noninterest expense, exclusive of the assessment for the
recapitalization of SAIF, increased by $4.8 million, or 11.8%, as the Bank
continued to expand its operation while controlling the increase in
noninterest expense.
. The Bank's efficiency ratio, which is operating costs divided by net
interest income and other operating income, exclusive of the assessment
for the recapitalization of SAIF, was 57.9%.
. The Provision for loan losses increased by $989,000, or 39.6%, to $2.5
million as increased loan originations necessitated an increase in the loan
loss reserves.
. Asset quality remained exceptionally strong with nonperforming assets at
June 30, 1997 of only $15.0 million, or .72%, of total assets.
. Delinquency remained low with loans ninety days or more past due
representing only .68% of net loans receivable and loans thirty days or
more past due representing only 1.23% of net loans receivable.
Total Assets
(Dollars in millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$1,292 $1,430 $1,592 $1,878 $2,091
</TABLE>
Net Loans Receivable
(Dollars in millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$999 $1,063 $1,165 $1,375 $1,536
</TABLE>
Total Deposits
(Dollars in millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$1,136 $1,235 $1,284 $1,450 $1,641
</TABLE>
3
<PAGE>
Market Value of NWSB Stock
Month End Closing Prices
(Dollars)
[BAR GRAPH APPEARS HERE]
Quarterly Earnings Per Share
(Dollars)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
<S> <C> <C> <C>
$0.18 $0.21 $0.20 $0.22
</TABLE>
[BAR GRAPH APPEARS HERE]
Trading Volume
[BAR GRAPH APPEARS HERE]
SHAREHOLDER HIGHLIGHTS
Year Ended June 30, 1997
(as originally reported and adjusted for stock splits)
. Shareholders' Equity increased by $7.8 million, or 4.1%, to $198.5 million.
. Book value per share increased by $.33, or 4.0%, to $8.49.
. The market value of the Bank's stock increased by $4.25 per share, or
37.8%, to $15.50 per share.
. The Bank's return on average equity, exclusive of the assessment for the
recapitalization of SAIF, was 9.80% compared to 9.48% in the previous year.
. The annualized dividend yield at June 30, 1997 was 2.06% when using
Northwest's current quarterly dividend of $.08 per share and the June 30,
1997 closing price of $15.50 per share.
. Earnings per share were $.18, $.21, $.20 and $.22, respectively, exclusive
of the assessment for the recapitalization of SAIF, for the four quarters
ended June 30, 1997 giving total earnings per share of $.81.
. Market capitalization for the Bank's 7,176,000 publicly traded shares at
June 30, 1997 was $111.2 million.
. Trading volume of the Bank's stock remained strong with an average of
255,751 shares traded each month during the fiscal year.
4
<PAGE>
THE YEAR IN REVIEW
. August 1, 1996--Opened a Northwest Consumer Discount Company office in
Washington, PA.
. October 17, 1996--Opened a full-service office in Bellefonte, Centre
County, PA.
. January, 1997--Beginning of centennial year celebration.
. February 12, 1997--Dividend Reinvestment Plan introduced.
. February 21, 1997--Completed merger with Bridgeville Savings Bank with
assets of $55 million.
. February 28, 1997--Assets exceed $2,000,000,000.
. March 1, 1997--Northwest Consumer Discount Company acquired St. Marys
Consumer in St. Marys, PA--its 30th office.
. April 10, 1997--Opened new full-service office in Cranberry, Venango
County, PA.
. June 5, 1997--Opened new full-service office in Hanover, York County, PA.
. June 19, 1997--Announced the signing of a definitive agreement to acquire
Corry Savings Bank, a mutual savings bank headquartered in Corry, PA, with
assets of $29 million.
[PICTURE APPEARS HERE]
Bridgeville
[PICTURE APPEARS HERE]
Cranberry
[PICTURE APPEARS HERE]
Hanover
[LOGO OF NORTHWEST SAVINGS BANK APPEARS HERE]
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
. 57 community banking offices in 16 counties in Pennsylvania
. 29 consumer finance offices in 16 counties in Pennsylvania and one consumer
finance office in New York
. 4 mortgage loan origination offices in New York, 1 office in Pennsylvania
and 2 offices in South Carolina
BUSINESS
EMPHASIS
. 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 to 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 success of the past, and we challenge them to continue to
contribute to the success 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.
6
<PAGE>
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.
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. As
of June 30, 1997, Northwest Consumer's loans were $111 million. Northwest
Mortgage Corporation continues to originate mortgage loans from its offices in
Pennsylvania, South Carolina and New York which in turn add 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, 1997, the Bank's funds were invested in the following assets:
<TABLE>
<CAPTION>
% of
Amount Assets
------------------------------------
<S> <C> <C>
Real Estate Loans $1,197,227,000 57.2%
Consumer Loans 310,797,000 14.9%
Commercial Loans 86,087,000 4.1%
Mortgage-backed Securities 291,597,000 13.9%
Investment Securities 122,103,000 5.8%
Interest-earning Deposits 57,765,000 2.8%
Other Assets 25,787,000 1.3%
------------------------------------
Total $2,091,363,000 100.0%
====================================
</TABLE>
Of the $2.02 billion the Bank had invested in interest-bearing assets,
$495.0 million, or 24.5%, consisted of assets with adjustable interest rates.
Northwest Consumer Discount Company
Total Loans at June 30
(Dollars in millions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1985 1990 1997
---- ---- ----
<S> <C> <C>
$2.1 $50.2 $111.0
</TABLE>
Asset Mix
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Real Estate Loans 57.2%
Deposits 2.8%
Invest. Sec. 5.8%
Mtg.-backed Sec. 13.9%
Other Assets 1.3%
Commercial Loans 4.1%
Consumer Loans 14.9%
</TABLE>
Loan Mix
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Home Imp.equity 2.4%
Commercial 5.4%
Auto/Other 13.8%
Education 3.3%
Multi-family 6.3%
1-4 Family 68.8%
</TABLE>
7
<PAGE>
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.
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 also relies on borrowings from the Federal Home Loan Bank.
Interest-bearing Liability Mix
<TABLE>
<S> <C>
Money Market 4.5%
Checking 12.0%
Savings 16.0%
Borrowings 12.0%
Certificates 55.5%
</TABLE>
[PIE CHART APPEARS HERE]
At June 30, 1997, the Bank's major sources of funds were as follows:
<TABLE>
<CAPTION>
% of
Interest-
Bearing
Amount Liabilities
-----------------------------
<S> <C> <C>
Savings Accounts $ 299,365,000 16.0%
Checking Accounts 222,845,000 12.0%
Money Market Accounts 83,609,000 4.5%
Certificates of Deposit 1,034,996,000 55.5%
Borrowed Funds 223,458,000 12.0%
-----------------------------
Interest-bearing Liabilities $1,864,273,000 100.0%
=============================
</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.
Net Interest Income
(Dollars in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 $50.3
1994 $55.2
1995 $60.0
1996 $66.5
1997 $72.1
</TABLE>
8
<PAGE>
The Bank plans to continue to improve 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.
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 operations, marketing, FDIC insurance, check
processing and ATM expense.
Noninterest Expense
Before SAIF Assessment
(Dollars in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 $33.9
1994 $34.1
1995 $37.0
1996 $40.8
1997 $45.6
</TABLE>
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.
Net Income
Before SAIF Assessment and
Extraordinary Items
(Dollars in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 $14.0
1994 $16.0
1995 $16.3
1996 $17.5
1997 $18.8
</TABLE>
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 increases in net interest income combined with the ongoing
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 market areas. 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 .72% at June 30, 1997 from 2.42% at June 30, 1993. Total
loans past due 60 days or more have declined to .82% of total loans receivable
at June 30, 1997 as compared to 1.92% at June 30, 1993.
Nonperforming Assets
(As a percent of total assets)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 2.42%
1994 1.53%
1995 1.03%
1996 0.81%
1997 0.72%
</TABLE>
9
<PAGE>
Looking ahead, the Bank intends to maintain a high level of asset quality
while continuing to diversify its lending in an effort to further improve net
interest income.
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 20 mergers and acquisitions while total assets
grew from $285 million to $2.091 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, 1997 caused the Bank's capital to asset ratio to decline to
9.49%. At June 30, 1997, the Bank comfortably exceeds all regulatory capital
requirements.
The Bank has sufficient capital to support growth similar to that of the past
five years when assets grew by 62%. The Bank still recognizes however, that
growth must be controlled to maintain appropriate capital levels and profit
margins.
Capital to Asset Ratio
(Percent)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 6.52%
1994 7.15%
1995 11.22%
1996 10.15%
1997 9.49%
</TABLE>
Net Interest Margin
(Percent)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 4.15%
1994 4.22%
1995 4.15%
1996 4.15%
1997 3.87%
</TABLE>
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, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing within the same period by $142.4 million. 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. The Bank does not currently use derivative to manage
interest rate sensitivity.
Variable Rate Assets
(Dollars in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1993 $307
1994 $302
1995 $402
1996 $465
1997 $495
</TABLE>
10
<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 has never been to be on the "leading
edge" of technology, we have maintained adequate 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 over the next year to upgrade our core application processing
system 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 1997 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.
11
<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,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
Selected Consolidated Financial (In Thousands)
Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $2,091,363 $1,877,925 $ 1,591,894 $1,430,284 $1,292,488
Interest-bearing deposits at other financial institutions 57,765 30,498 59,930 85,705 38,699
Investment securities held-to-maturity 43,419 54,086 65,470 33,180 2,699
Investment securities available-for-sale 78,684 51,961 1,414 -- --
Mortgage-backed securities held-to-maturity 110,561 101,932 204,841 199,165 166,631
Mortgage-backed securities available-for-sale 181,036 189,514 38,343 200 31,436
Loans receivable net:
Real estate 1,156,160 1,066,887 906,276 864,448 819,098
Consumer 306,228 249,051 202,630 179,765 163,036
Commercial 74,110 59,017 55,829 18,320 17,127
Total loans receivable, net 1,536,498 1,374,955 1,164,735 1,062,533 999,261
Deposits 1,640,815 1,450,047 1,283,935 1,235,401 1,136,116
Advances from FHLB and other borrowed funds 223,458 211,761 103,439 71,203 53,637
Shareholders' equity and retained earnings (1) 198,494 190,651 178,690 102,319 84,251
</TABLE>
- ------------------------------------------
footnote below
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
(In Thousands)
Selected Consolidated Operating Data:
<S> <C> <C> <C> <C> <C>
Total interest income $153,518 $135,130 $118,158 $106,492 $106,204
Total interest expense 81,424 68,637 58,126 51,256 55,888
-----------------------------------------------------
Net interest income 72,094 66,493 60,032 55,236 50,316
Provision for loan losses 2,491 1,502 1,098 1,728 1,797
-----------------------------------------------------
Net interest income after provision for loan
losses 69,603 64,991 58,934 53,508 48,519
-----------------------------------------------------
Noninterest income 6,736 4,125 4,512 7,811 8,180
Noninterest expense 54,203 40,827 36,971 34,130 33,898
-----------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 22,136 28,289 26,475 27,189 22,801
Income tax expense 8,472 10,803 10,181 11,191 8,753
-----------------------------------------------------
Income before cumulative effect of accounting
change 13,664 17,486 16,294 15,998 14,048
Cumulative effect of change in accounting for
income taxes -- -- -- 2,070 --
-----------------------------------------------------
Net income $ 13,664 $ 17,486 $ 16,294 $18,068 $14,048
=====================================================
</TABLE>
- ----------------------------------------
(1) Reflects net proceeds of $67 million from the Bank's public offering which
was completed on November 4, 1994.
12
<PAGE>
SELECTED FINANCIAL AND OTHER DATA (continued)
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------
Key Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average total assets) (1) .70% 1.05% 1.09% 1.33% 1.12%
Return on average equity (net income
divided by average equity) (1) 7.12 9.48 11.00 19.25 18.29
Average capital to average assets 9.84 11.03 9.87 6.93 6.11
Capital to total assets 9.49 10.15 11.22 7.15 6.52
Net interest rate spread (average yield on interest-earning assets
less average cost of interest-bearing liabilities) 3.53 3.72 3.81 4.00 3.96
Net interest margin (net interest income as a percentage of average
interest-earning assets) 3.87 4.15 4.15 4.22 4.15
Noninterest expense to average assets 2.78 2.44 2.46 2.52 2.70
Net interest income to noninterest expenses (1) 1.33x 1.63x l.62x l.62x 1.48x
Nonperforming loans to net loans receivable .68 .69 .89 1.33 1.72
Nonperforming assets to total assets .72 .81 1.03 1.53 2.42
Allowance for loan losses to nonperforming loans 130.50 138.49 113.52 79.40 64.18
Allowance for loan losses to net loans receivable .89 .95 1.02 1.06 1.10
Average interest-bearing assets to average
interest-bearing liabilities 1.08x l.l0x 1.08x 1.06x 1.04x
Number of:
Full-service offices 57 54 45 45 38
Consumer finance offices 30 29 28 26 26
Mortgage loan production offices 7 8 8 6 5
</TABLE>
- ------------------------------------
(1) Return on average assets, return on average equity, and net interest income
to noninterest expense for the fiscal year ended June 30, 1997 would have
been .96%, 9.80%, and l.58x without the one-time charge of $8.6 million (or
$5.1 million, after adjusted for taxes) to recapitalize the Savings
Association Insurance Fund. See "Management's Discussion and Analysis--
Deposit Insurance Premiums."
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
General
Total assets increased by $213.4 million, or 11.4%, to $2,091 billion at June
30, 1997 from $1.878 billion at June 30, 1996. This increase was funded
primarily by a $190.8 million increase in deposits, an $11.7 million increase in
borrowed funds and net income of $13.7 million. The Bank's 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, a $108.3 million increase in borrowed funds and net income
of $17.5 million. The additional funds received in both fiscal years 1997 and
1996 were utilized to increase investments in loans receivable, mortgage-backed
securities and other investment securities.
Interest-bearing deposits in other financial institutions
Interest-bearing deposits in other financial institutions increased by $27.3
million, or 89.5%, to $57.8 million at June 30, 1997 from $30.5 million at June
30, 1996 primarily as a result of the receipt on June 30, 1997 of a governmental
deposit in the amount of $30.3 million. Interest-bearing 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 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
Investment securities increased by $16.1 million, or 15.2%, to $122.1 million at
June 30, 1997 from $106.0 million at June 30, 1996. During the previous year,
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. The Bank continues to use
available funds to purchase investment securities in an effort to improve net
interest income.
Mortgage-backed securities
Mortgage-backed securities remained relatively unchanged at $291.6 million at
June 30, 1997 compared to $291.4 million at June 30, 1996. The slight increase
in mortgage-backed securities resulted primarily from the acquisition of
Bridgeville Savings Bank ("Bridgeville"), which held mortgage-backed securities
of $18.8 million, and was partially offset by the sale of approximately $14.5
million of mortgage-backed securities and the receipt of normal principal
payments. 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 as the Bank
utilized borrowed 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 relative 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 designated 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 $161.5 million, or 11.7%, to $1.536 billion at
June 30, 1997 from $1.375 billion at June 30, 1996. This increase resulted
primarily from strong loan demand in all of the Bank's marker areas and was
assisted in part by the receipt of $20.0 million of mortgage loans from the
Bridgeville acquisition. 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
also primarily as a result of strong mortgage loan
14
<PAGE>
demand in almost all of the Bank's market areas. Also contributing to the
increase in net loans receivable during the fiscal year ended June 30, 1996 was
the acquisitions of First Federal Savings Bank of Kane (" Kane") and First
National Bank of Centre Hall ("Centre Hall") which added loans of $32.8 million
and $31.6 million, respectively.
Deposits
Deposits increased by $190.8 million, or 13.2%, to $1.641 billion at June 30,
1997 from $ 1.450 billion at June 30, 1996. This higher than normal increase in
deposits was primarily the result of the Bank's promotion of certificates of
deposit in all market areas. In addition, the Bridgeville acquisition
contributed deposits of $34.6 million. In the previous year, deposits increased
$166.1 million, or 12.9%, to $ 1.450 billion at June 30, 1996 from $1.284
billion at June 30, 1995. The increase in deposits during the fiscal year ended
June 30, 1996 was primarily the result of normal deposit growth and the
acquisitions of Kane, Centre Hall and an office in Pottsville, Pennsylvania
with deposits of $37.9 million, $34.3 million and $23.8 million, respectively.
Borrowings
Borrowings increased by $11.8 million, or 5.6%, to $223.5 million at June 30,
1997 from $211.7 million at June 30, 1996. During the previous year, borrowings
increased $108.3 million, or 104.7%, to $211.7 million at June 30, 1996 from
$103.4 million at June 30, 1995. In both years the Bank increased its borrowed
funds and invested the proceeds in loans, investment securities and
mortgage-backed securities in an effort to improve net interest income.
Shareholders' equity
Shareholder's equity increased by $7.8 million, or 4.1%, to $198.5 million at
June 30, 1997 from $190.7 million at June 30, 1996. This increase was primarily
the result of net income of $13.7 million which was partially offset by the
declaration of common stock dividends in the amount of $7.5 million. The
remaining increase was primarily due to the release of earned shares of common
stock by the Bank's employee stock benefit plans. In the previous year,
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 shares in the Bank's Employee
Stock Ownership Plan ("ESOP") and Recognition and Retention Plan ("RRP").
RESULTS OF OPERATIONS
General
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 borrowed funds. 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 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.
Net Income
Net income totaled $13.7 million, $17.5 million and $16.3 million for fiscal
years ended June 30, 1997, 1996 and 1995, respectively. The $3.8 million, or
21.7%, decrease in net income for the fiscal year ended June 30, 1997 as
compared to the fiscal year ended June 30, 1996 resulted primarily from a
one time special assessment of $8.6 million ($5.1 million after tax) to
recapitalize the Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). See "---Deposit Insurance Premiums."
Also contributing to the
15
<PAGE>
decrease in net income was a $1.0 million increase in the provision for loan
losses and a $4.8 million increase (exclusive of the SAIF assessment) in
noninterest expense. Offsetting these decreases in net income were a $5.6
million increase in net interest income and a $2.6 million increase in
noninterest income. 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.
Interest Income
Interest income increased by $18.4 million, or 13.6%, to $153.5 million for the
fiscal year ended June 30, 1997 from $135.1 million for the fiscal year ended
June 30, 1996. The increase in interest income was primarily attributable to a
$258.6 million, or 16.1%, increase in the balance of average interest-earning
assets to $ 1.863 billion from $1,604 billion. Partially offsetting this
increase was a decrease in the yield on average interest-earning assets to 8.24%
from 8.42%. The increase in the balance of average interest-earning assets was
primarily the result of growth of $206.0 million in the average balance of the
Bank's loan portfolio due primarily to the Bank's attempt to aggressively deploy
funds received from deposit growth to the loan portfolio in an attempt to
improve net interest income. The decrease in the yield on average
interest-earning 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 receivable increased by $15.1 million, or 13.5%, to
$127.0 million for the year ended June 30, 1997 compared to $111.9 million for
the year ended June 30, 1996. This increase primarily resulted from a $206.0
million, or 16.6%, increase in average loans receivable to $1.450 billion for
the year ended June 30, 1997 compared to $1.244 billion for the year ended
June 30, 1996. Partially offsetting this increase was a decrease in the yield
on average loans receivable to 8.76% from 9.00%. The increase in average loans
receivable primarily resulted from strong loan demand throughout the Bank's
market areas and the acquisition of Bridgeville, which contributed net loans of
approximately $20.3 million on February 21, 1997. The decrease in the yield on
average loans receivable for the fiscal year ended June 30, 1997 compared to
the same period in 1996 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 $1.8
million, or 10.4%, to $19.1 million for the year ended June 30, 1997 from $17.3
for the year ended June 30, 1996. This increase resulted primarily from a $19.7
million, or 7.6%, increase in the average balance of mortgage-backed securities
to $278.8 million for the year ended June 30, 1997 from $259.1 million for the
year ended June 30, 1996. Also contributing to the increase in interest income
on mortgage-backed securities was an increase in the average yield to 6.87% from
6.69%. The increase in the average balance of mortgage-backed securities was
primarily due to the Bridgeville acquisition which contributed securities of
$20.6 million in the third quarter of fiscal 1997. The higher average yield on
mortgage-backed securities resulted primarily from adding the securities
acquired from Bridgeville which had higher yields than the Bank's existing
portfolio. Interest income on investment securities increased by $1.8 million,
or 35.3%, to $6.9 million for the year ended June 30, 1997 from $5.1 million for
the year ended June 30, 1996. This increase resulted primarily from a $31.0
million, or 40.8%, increase in the average balance of investment securities to
$106.9 million for the year ended June 30, 1997 from $75.9 million for the year
ended June 30, 1996. Partially offsetting this increase was a decrease in the
average yield to 6.48% from 6.70%. The increase in the average balance of
investment securities resulted primarily 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 Bridgeville, which
added approximately $9.0 million of securities. The decrease in the average
yield was primarily the result of adding the aforementioned securities which had
interest rates that were generally lower than the existing portfolio yield.
Interest income on interest-earning deposits decreased by $309,000, or 41.6%, to
$433,000 for the year
16
<PAGE>
ended June 30, 1997 from $742,000 for the year ended June 30, 1996. This
decrease was primarily the result of a decrease in the average yield to 1.60%
for the year ended June 30, 1997 from 2.94% for the year ended June 30, 1996,
and was partially offset by a $1.9 million, or 7.5%, increase in the average
balance of interest-earning deposits to $27.1 million from $25.2 million. The
decrease in the average yield and the relatively low yield experienced in both
periods resulted from the delay in which the Bank's deposits begin to earn
interest.
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 4.6 1% which resulted from a general decrease in
short-term interest rates between comparable periods.
17
<PAGE>
Interest Expense
Interest expense increased by $12.8 million, or 18.7%, to $81.4 million for the
year ended June 30, 1997 from $68.6 million for the year ended June 30, 1996.
This increase resulted primarily from a $265.7 million, or 18.2%, increase in
average interest-bearing liabilities to $1.727 billion for the year ended June
30, 1997 from $1.462 billion for the year ended June 30, 1996. This increase in
average interest-bearing liabilities resulted primarily from above average
deposit growth combined with the acquisition of Bridgeville with deposits of
$34.6 million, as the average cost of funds remained relatively consistent at
4.71% for the year ended June 30, 1997 compared to 4.70% the previous year.
Also contributing to the increase in interest expense was a $37.5 million, or
28.8%, increase in average borrowed funds to $167.8 million for the year ended
June 30, 1997 from $130.3 million for the year ended June 30, 1996. These
additional borrowings consisted primarily of funds borrowed from the Federal
Home Loan Bank which were used to increase the Bank's portfolio of loans and
marketable securities in an effort to increase the Bank's net interest income.
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 Kane
contributed approximately $37.9 million in deposits and the acquisition of
Centre Hall 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.
Net Interest Income
Net interest income increased $5.6 million, or 8.4%, to $72.1 million for the
year ended June 30, 1997 from $66.5 million for the year ended June 30, 1996.
This increase primarily resulted from a $258.6 million, or 16.1%, increase in
average interest-earning assets, the effect of which was partially offset by a
$265.7 million, or 18.2%, increase in average interest-bearing liabilities and a
decrease in the Bank's net interest spread to 3.53% for the year ended June 30,
1997 from 3.72% for the year ended June 30, 1996.
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 the previous year. This increase in net interest-earning assets
primarily resulted from the Bank having full-year utilization during the year
ended June 30, 1996 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 generally increasing
interest rates.
18
<PAGE>
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
allowance's, 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
$2.5 million, $1.5 million and $1.1 million in loan loss provisions for the
fiscal years ended June 30, 1997, 1996, and 1995 with the annual increases
resulting from the significant increase in the Bank's loan portfolio over the
past two fiscal years.
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 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 increased $2.6 million, or 63.4%, to $6.7 million for the
year ended June 30, 1997 from $4.1 million for the year ended June 30, 1996.
This increase in noninterest income resulted primarily from a gain of $901,000
from the sale of approximately $14.5 million of long-term, fixed rate
mortgage-backed securities in an effort to reduce the Bank's exposure to
increases in interest rates. Also contributing to the increase in noninterest
income was a $602,000, or 58.9%, decline in the net losses incurred from the
origination and sale of loans to $420,000 for the year ended June 30, 1997
compared to $1.0 million for the year ended June 30, 1996. This reduction in
loss resulted from the Bank's improved efficiencies in its mortgage banking
operation. All other components of the Bank's noninterest income also improved
primarily as a result of the expansion of the Bank's business activities.
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 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 and start up
expenses as the Bank realized a full year of operations from a mortgage banking
company that was acquired in April 1995.
Noninterest Expense
Noninterest expense increased $13.4 million, or 32.8%, to $54.2 million for the
year ended June 30, 1997 from $40.8 million for the year ended June 30, 1996.
The primary reason for this increase was the one-time assessment of $8.6 million
to recapitalize the SAIF. (See Notes to the Consolidated Financial Statements
Note 17.) Also contributing to the increase were increases in compensation and
employee benefits of $4.2 million, premises and occupancy costs of $627,000 and
advertising expense of $409,000. These increases resulted primarily from the
continued expansion of the Bank's retail network and from inflationary
increases. Other (miscellaneous) noninterest expense increased by $1.1 million
primarily due to an $821,000 increase in the amortization of intangibles which
is primarily due to the amortization of intangibles recorded as a result of the
acquisition of Kane, Centre Hall and Bridgeville. In addition, a one-time charge
of $350,000 was recorded to write-off an intangible relating to the
restructuring of the Bank's mortgage banking operations. Partially offsetting
these increases in noninterest expense was a decrease in federal insurance
premiums of $1.7 million resulting from the SAIF resolution. The Bank has
committed to purchase new core application hardware
19
<PAGE>
and software with the conversion scheduled for April 1998. The total cost of the
project is approximately $2.0 million with payments scheduled from July 1997 to
April 1998. The cost of the project will be amortized over various periods
ranging from five to ten years. It is estimated that the annual cost of this
technology upgrade, after tax, will be approximately $250,000.
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 shareholders in November 1995. Also
contributing to the increase in noninterest expense were normal increases in all
other areas of the Bank's expenses, except for other (miscellaneous) noninterest
expense, which increased substantially by $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 the loss provision
for real estate owned as well as an increase of approximately $300,000 in office
operations relating to the operations of additional full service banking and
consumer discount company branch offices.
Income Taxes
Income tax expense decreased by $2.3 million, or 21.3%, to $8.5 million for the
year ended June 30, 1997 from $10.8 million for the year ended June 30, 1996.
This decrease resulted primarily from a $6.2 million decrease in income before
income taxes which resulted primarily from the aforementioned one-time SAIF
assessment of $8.6 million recorded in the first quarter of fiscal 1997.
Income tax expense increased $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%.
Deposit Insurance Premiums
The deposits of the Bank are presently insured by the SAIF, which along with
the Bank Insurance Fund (the "BIF"), is one of the two insurance funds
administered by the FDIC. In September 1996, Congress enacted legislation to
recapitalize the SAIF by a one-time assessment on all SAIF-insured deposits held
as of March 31, 1995. The assessment was 65.7 basis points per $100 in deposits,
payable on November 30, 1996. For the Bank, the assessment amounted to $8.6
million (or $5.1 million when adjusted for taxes), based on the Bank's
SAIF-insured deposits, including the March 31, 1995 deposits of all SAIF insured
institutions acquired by Northwest after March 31, 1995, of $1.304 billion. In
addition, beginning January 1, 1997, pursuant to the legislation, interest
payments on FICO bonds issued in the late 1980's by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation
will be paid jointly by BIF-insured institutions and SAIF-insured institutions.
The FICO assessment will be 1.29 basis points per $100 of BIF deposits and 6.44
basis points per $100 of SAIF deposits. Beginning January 1, 2000, the FICO
interest payments will be paid pro-rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 in deposits). The BIF and SAIF will be
merged on January 1, 1999, provided the bank and saving association charters are
merged by that date. In that event, pro-rata FICO sharing will begin on
January 1, 1999.
20
<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 and the average yields earned and
rates paid. 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,
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable /(3)/ $1,449,807 127,019 8.76% $1,243,758 $111,957 9.00% $1,093,602 $ 96,473 8.82%
Mortgage-backed securities /(4)/ 278,801 19,141 6.87 259,090 17,342 6.69 218,747 14,520 6.64
Investment securities /(4)/ 106,945 6.925 6.48 75,911 5,089 6.70 61,547 3.838 6.24
Interest-earning deposits 27,064 433 1.60 25,220 742 2.94 72,204 3,327 4.61
-------------------------------------------------------------------------------------
Total interest-earning assets 1,862,617 153,518 8.24 1,603,979 135,130 8.42 1,446,100 118,158 8.17
Noninterest-earning assets 87,740 69,150 54,871
-------------------------------------------------------------------------------------
Total assets $1,950,357 $1,673,129 $1,500.971
=====================================================================================
Interest-bearing liabilities:
Passbook and statement savings $ 276,659 9,490 3.43 $ 277,339 9,322 3.36 $ 316,197 10,414 3.29
Checking accounts 207,140 3,992 1.93 170,514 3,396 1.99 155,949 3,163 2.03
Money market demand accounts 81,902 2,735 3.34 78,024 2,595 3.33 82,092 2.555 3.11
Certificate accounts 994,028 56,410 5.67 805,558 46,348 5.75 690,604 37,150 5.38
FHLB advances and other
borrowed money 167,761 8,797 5.24 130,337 6.976 5.35 88.868 4.844 5.45
-------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,727,490 81,424 4.71 1,461,772 68.637 4.70 1,333,710 58.126 4.36
-------------------------------------------------------------------------------------
Noninterest-bearing liabilities 31,046 26,826 19.127
-------------------------------------------------------------------------------------
Total liabilities 1,758,536 1,488,598 1,352,837
Retained income 191,821 184,531 148,134
-------------------------------------------------------------------------------------
Total liabilities and
retained income $1,950,357 $1,673,129 $1,500,971
=====================================================================================
Net interest income $ 72,094 $ 66,493 $60,032
=====================================================================================
Net interest rate spread /(1)/ 3.53% 3.72% 3.81%
=====================================================================================
Net interest earning assets $ 135,127 $ 142,207 $ 112,390
========== ========== ==========
Net interest margin /(2)/ 3.87% 4.15% 4.15%
=====================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.08x 1.l0x 1.08x
=====================================================================================
</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,
/(3)/ Average balances include loans which are nonaccruing.
/(4)/ Interest income on marketable securities does not include market value
adjustments for marketable securities held as available-for-sale.
21
<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,
----------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------------------------------------------------------------
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 $(2,990) $18,548 $(495) $15,062 $ 1,968 $13,246 $270 $15,484
Mortgage-backed securities 466 1.319 34 1,799 122 2,678 22 2,822
Investment securities (174) 2,080 (71) 1.836 288 896 67 1,251
Interest-earning deposits (339) 54 (25) (309) (1,203) (2.165) 783 (2,585)
----------------------------------------------------------------------------------------
Total interest-earning assets (3,056) 22,002 (557) 18,388 1,175 14,655 1,142 16,972
Interest-bearing liabilities:
Passbook and statement savings 191 (23) -- 168 214 (1,280) (26) (1,092)
Checking accounts (110) 729 (24) 596 (57) 295 (5) 233
Money market demand accounts 10 129 1 140 176 (127) (9) 40
Certificate accounts (663) 10,844 (148) 10,062 2.584 6,184 430 9,198
FHLB advances and other
borrowed money (141) 2,003 (41) 1,821 (88) 2,261 (41) 2,132
----------------------------------------------------------------------------------------
Total interest-bearing
liabilities (683) 13,682 (212) 12,787 2,829 7,333 349 10,511
----------------------------------------------------------------------------------------
Net change in net
interest income $(2,374) $ 8,319 $(345) $ 5,601 $(1,654) $ 7,322 $793 $ 6,461
========================================================================================
</TABLE>
22
<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, 1997, such loans
constituted $219.6 million, or 13.8%, 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, 1997, totaled $195.9 million or 12.3%
of the Bank's total loan portfolio. Of the Bank's $2.02 billion of interest-
earning assets of June 30, 1997, $495.0 million, or 24.5%, consisted of assets
with adjustable-rates of interest. However, the origination of adjustable-rate
loans was limited during the fiscal year ended June 30, 1997. 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.
At June 30, 1997, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $142.4 million, representing a cumulative negative one-year
gap ratio of 7.04%. The Bank has a Risk 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, 1997, which are expected to
reprice or mature, based upon certain assumptions, in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown that reprice or mature during a particular period were determined in
accordance with the earlier of the term of repricing or the contractual term of
the asset or liability. Management believes that these assumptions approximate
the standards used in the savings industry and considers them appropriate and
reasonable. For information regarding the contractual maturities of the Bank's
loans, investments and deposits, see "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
23
<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 $57,765 $-- $-- $-- $-- $-- $57,765
Mortgage-backed securities:
Fixed 12,777 13,289 6,805 10,505 6,880 -- 50,256
Variable 241,341 -- -- -- -- -- 241,341
Investment securities 15,460 31,014 37,379 5,901 32,349 -- 122,103
Real estate loans:
Adjustable-rate 69,258 9,310 -- -- -- -- 78,568
Fixed-rate 171,608 273,800 211,135 315,576 52,461 52,461 1,077,041
Home equity and home improvement 37,607 -- -- -- -- -- 37,607
Education loans 53,542 -- -- -- -- -- 53,542
Other consumer loans 103,304 88,233 28,111 -- -- -- 219,648
Commercial loans 56,446 29,641 -- -- -- -- 86,087
------------------------------------------------------------------------------
Total rate-sensitive assets $819,108 $445,287 $283,430 $31,982 $91,690 $52,461 $2,023,958
==============================================================================
Rate-sensitive liabilities:
Fixed maturity deposits $607,421 $357,070 $44,174 $26,145 $186 $-- $1,034,996
Money market deposit accounts 27,870 27,870 27,869 -- -- -- 83,609
Passbook accounts 130,000 56,455 56,455 56,455 -- -- 299,365
Checking accounts 20,000 -- -- -- -- 202,845 222,845
FHLB advances 117,000 45,000 -- 899 1,313 -- 164,212
Other borrowings 59,246 -- -- --- -- -- 59,246
------------------------------------------------------------------------------
Total rate-sensitive liabilities $961,537 $486,395 $128,498 $83,499 $1,499 $202,845 $1,864,273
==============================================================================
Interest sensitivity gap per period $(142,429) $(41,108) $154,932 $48,483 $90,191 $(150,384) $159,685
==============================================================================
Cumulative interest sensitivity gap $(142,429) $(183,537) $(28,605) $19,878 $310,069 $159,685 $159,685
==============================================================================
Cumulative interest sensitivity gap
as a percentage of total assets (7.04)% (9.07)% (1.41)% .98% 15.32% 7.89%
==============================================================================
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities 85.19% 87.32% 98.18% 95.17% 100.00% 109.57%
</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 will gradually reprice over the
next five years; 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 estimated, based on
historical trends, that only $20 million of the Bank's checking accounts and
$130 million of the Bank's passbook accounts are interest sensitive and will
reprice in one year or less, and that the remainder will reprice over longer
time periods.
The above assumptions utilized by management are annual percentages based on
remaining balances and should not be regarded as indicative of the actual
prepayments and withdrawals that may be experienced by the 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
24
<PAGE>
rates. Additionally, certain assets, such as some adjustable-rate loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Moreover, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table.
In an effort to assess the market risk, the Bank utilizes a simulation model to
determine the effect of immediate incremental increases or decreases in
interest rates on net interest income and the market value of the Bank's
equity. Certain assumptions are made regarding loan prepayments and decay rates
of passbook and NOW accounts. Because it is difficult to accurately project the
market reaction of depositors and borrowers, the effects of actual changes in
interest on these assumptions may differ from simulated results.
The Bank has established the following guidelines for assuming interest rate
risk:
. Net interest margin simulation. Given a parallel shift of 2% in interest
rates, the estimated net interest margin may not change by more than 30%
within a one-year period.
. Market value of equity simulation. The market value of the Bank's equity is
the net present value of the Company's assets and liabilities. Given a
parallel shift of 2% in interest rates, equity may not decrease by more than
50% of total shareholder' equity.
The following table illustrates the simulated impact of a 1% or 2% upward or
downward movement in interest rates on net interest income, return on average
equity, earnings per share and market value of equity. This analysis was
prepared assuming that interest-earning asset levels at June 30, 1997 remain
constant. The impact of the rate movements was computed by simulating the effect
of an immediate and sustained shift in interest rates over a twelve-month period
from the June 30, 1997 levels.
<TABLE>
<CAPTION>
Movements in interest rates from
June 30, 1997 rates
- ----------------------------------------------------------------------------------------------------------------------------------
Increase Decrease
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Simulated impact over the next 12 months
compared with June 30, 1997: 1.0% 2.0% 1.0% 2.0%
Percentage increase/(decrease) in net income (15.7%) (28.5%) 1.7% 7.0%
Increase/(decrease) in return on average equity (1.52%) (2.76%) .17% .68%
Increase/(decrease) in earnings per share ($.13) ($.23) $.01 $.06
Percentage increase/(decrease) in market value of equity (14.0%) (32.3%) 17.7% 32.45
</TABLE>
Regulatory Capital Requirements
The FDIC has promulgated regulations and adopted a statement of policy regarding
the capital adequacy of stare-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
25
<PAGE>
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, 1997, the
Bank exceeded 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 FDIA and is subject to potential
termination of deposit insurance. However, such an institution will not be
subject to an enforcement proceeding thereunder solely on account of its capital
ratios if it has entered into and is in compliance with a written agreement with
the FDIC to increase its Tier I leverage capital ratio to such level as the FDIC
deems appropriate and to take such other action as may be necessary for the
institution to be operated in a safe and sound manner. The FDIC capital
regulation also provide's, among other things, for the issuance by the FDIC or
its designee(s) of a capital directive, which is a final order issued to a bank
that fails to maintain minimum capital to restore its capital to the minimum
leverage capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.
The 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 OCC, 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.
E26
<PAGE>
The following table summarize's 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, 1997.
<TABLE>
<CAPTION>
June 30, 1997
--------------
<S> <C>
Total shareholders' equity or GAAP capital $ 198,494
Less: unrealized gain on securities available for sale (1,026)
Less: intangible assets (11,278)
--------------
FDIC leverage capital 186,190
Plus: FDIC tier 2 capital (1) 13,605
--------------
Total FDIC risk-based capital $ 199,795
==============
FDIC quarterly average total assets for leverage ratio $2,043,977
==============
FDIC net risk-weighted assets including
off-balance sheet items $1,088,391
==============
FDIC leverage capital ratio 9.11%
Minimum requirement 3.00% to 5.00% (2)
FDIC risk-based capital ratio 18.36%
Minimum requirement 8.00%
</TABLE>
- ---------------------
(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, 1997, 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.
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 25.7% as of
June 30, 1997. 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 $57.8 million at June 30, 1997. Other assets qualifying for
liquidity outstanding at June 30, 1997, amounted to $424.0 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.
27
<PAGE>
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, 1997, the Bank had $164.2 million in advances from
the FHLB. The Bank borrows from the FHLB to reduce interest rate risk and to
provide liquidity when necessary.
At June 30, 1997, the Bank's customers had $57.8 million of unused lines of
credit available. This amount does no include the unfunded portion of loans in
process. Certificates of deposit scheduled to mature in less than one year at
June 30, 1997, totaled $607.4 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with the Bank.
The major sources of the Bank's cash flows are the areas of loans, marketable
securities, deposits and borrowed funds.
Deposits are the Bank's primary source of externally generated funds. The level
of deposit inflows during any given period is heavily influenced by factors
outside of management's control, such as the general level of short-term and
long-term interest rates in the economy, as well as higher alternative yields
that investors may obtain on competing investments such as money market mutual
funds. Financial institutions, such as the Bank, are also subject to deposit
outflows. The Bank's net deposits before interest credited increased by $103.5
million, $22.7 million and $7.2 million for the fiscal years ended June 30,
1997, 1996, and 1995 respectively.
Similarly, the amount of principal repayments on loans and the amount of new
loan originations is heavily influenced by the general level of interest rates
in the economy. Funds received from principal payments on loans for the fiscal
years ended in June 30, 1997, 1996 and 1995 were $371.3 million, $316.6 million
and $229.7 million, respectively. Loan originations for the years ended June 30,
1997, 1996 and 1995 were $563.2 million, $564.4 million and $305.0 million,
respectively. The Bank also sells a portion of the loans it originates and the
cash flows from such sales for the fiscal years ended June 30, 1997, 1996 and
1995 were $47.9 million, $99.1 million and $20.0 million, respectively.
The Bank also experiences significant cash flows from its portfolio of
marketable securities as principal payments are received on mortgage-backed
securities and investment securities, which generally are of short duration,
mature. During recent years, the Bank has utilized cash to increase its
portfolio of investment securities. Cash flow from the repayment of principal
and the maturity of marketable securities for the fiscal years ended June 30,
1997, 1996 and 1995 we're $27.0 million, $26.5 million and $20.7 million,
respectively. During the fiscal years ended June 30, 1997, 1996 and 1995, the
bank utilized cash to purchase marketable securities in the amount of $30.0
million, $99.2 million and $95.4 million, respectively.
The Bank utilizes borrowings as a source of liquidity, when necessary, and as a
source of funds for long term investment when market conditions permit. The net
cash flow from the receipt and repayment of borrowings were net increases of
$6.6 million, $105.2 million and $21.9 million for the fiscal years ended June
30, 1997, 1996 and 1995, respectively.
Other major activity with respect to cash flow was the receipt of $67.0 million
of proceeds from the Bank's initial public offering during the year ended June
30, 1995 and the payment of cash dividends on common stock in the amount of $7.5
million, $9.0 million and $863,000 for the fiscal years ended June 30 1997, 1996
and 1995 respectively.
28
<PAGE>
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 October 1995, the FASB released SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes a fair value based method for stockbased
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. For fiscal 1997, the Bank has
elected to continue to use the intrinsic value method under APB Opinion No. 25
and has disclosed the pro forma effects of SFAS 123 in the footnotes to the
financial statements.
In June 1996, the FASB released SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SAS 125").
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment 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 nor 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 accounted for depending on the
asset's classification as "available-for-sale" or "trading". SFAS 125 is
generally effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, with certain
provisions having been delayed until after December 31, 1997 by SFAS 127,
"Deferral of Effective Date of Certain Provisions of FASB Statement No. 125, an
amendment of Statement No. 125." 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 did not have a material impact on the consolidated financial statements
of the Bank.
In February 1997 the FASB released SFAS 128 "Earnings Per Share." SFAS 128
supersedes APB Opinion No. 15 "Earnings Per Share" and specifies the
computation, presentation and disclosure requirements for earnings per share for
entities with publicly held stock or potential common stock. Essentially, this
promulgation replaces the primary EPS and fully diluted EPS presentations under
APB Opinion No. 15 with a basic EPS and fully diluted EPS presentation. SFAS 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997, earlier application is not permitted. The adoption of
SFAS 128 is nor expected to have a material impact on the financial statements
of the Bank.
In February 1997, the FASB issued SAS No.129, "Disclosure of Information about
Capital Structure". SAS No. 129 summarizes previously issued disclosure guidance
contained within APB Opinions Nos. 10 and 15 as well as SAS No. 47. there will
be no changes to the Bank's disclosures pursuant to the adoption of SAS No. 129.
This statement is effective for financial statements for periods ending after
December 15, 1997.
29
<PAGE>
In June 1997, the FASB issued SAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners." The
comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Bank's income under the requirements of SAS No. 130. This
statement is effective' for fiscal years beginning after December 15, 1997.
30
<PAGE>
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, 16,200,000 shares (adjusted) of Common Stock were issued to
the Holding Company, and 6,900,000 (adjusted) shares were issued and sold to the
Bank's customers at a price of $10.00 per share (adjusted). 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
15, 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, 1996 and 1997,
together with the cash dividends declared, both as adjusted for the stock split.
<TABLE>
<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
<CAPTION>
Fiscal Year Ended Cash Dividends
June 30, 1997 High Low Declared
- -------------------------------------------------------
<S> <C> <C> <C>
First quarter $12.250 $ 10.750 $.080
Second quarter 13.750 11.875 .080
Third quarter 15.750 14.250 .080
Fourth quarter 15.750 14.250 .080
</TABLE>
As of June 30, 1997, the Bank had 4,397 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.
Dividend Waivers by the
Holding Company
The Federal Reserve Board 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;
31
<PAGE>
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, 1997 and
1996.
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.
32
<PAGE>
Stockholder Information
<TABLE>
<CAPTION>
Annual Meeting Independent Auditor
<S> <C>
The Annual Meeting of Stockholders will be held KPMG Peat Marwick LLP
at 11:00 a.m., on December 10, 1997, at the Knights One Mellon Bank Center
of Columbus Hall, 219 2nd Avenue, Warren, Pittsburgh, Pennsylvania 15219
Pennsylvania, 16365.
Transfer Agent
Stock Listing
Address changes and all stockholder inquiries
The Bank's Common Stock trades over-the-counter should be directed to:
on the Nasdaq National Market under the symbol
"NWSB." AMERICAN STOCK TRANSFER AND TRUST COMPANY
40 Wall Street
New York, NY 10005
Special Counsel Annual Report on Form 10-K
Luse Lehman Gorman Pomerenk & Schick A copy of the Bank's Form 10-K for the fiscal year
5335 Wisconsin Avenue, N.W ended June 30, 1997, will be furnished without
Washington, D.C. 20015 charge to stockholders as of November 1, 1997,
upon written request to the Secretary, Northwest
Savings Bank, Liberty and Second Streets, Warren,
Pennsylvania 16365---(814) 726-2140.
</TABLE>
<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, 1997, 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, 1997. 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, 1997, Northwest Savings 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 in compliance, in all significant respects, with
the designated laws and regulations relating to safety and soundness as of the
year ended June 30, 1997.
August 15, 1997
/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
34
<PAGE>
NORTHWEST SAVINGS BANK
AND SUBSIDIARIES
.
CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES
.
June 30, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Merrick LLP
Pittsburgh, Pennsylvania
August 15, 1997
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 13,747 $ 13,806
Interest-bearing deposits in other financial institutions 57,765 30,498
Marketable securities available-for-sale (notes 4 and 11) 259,720 241,475
Marketable securities held-to-maturity (market value
of $152,744 and $154,737) (notes 4 and 11) 153,980 156,018
Loans receivable, net of allowance for estimated
losses of $13,611 and $13,130 (notes 5, 7 and 11) 1,536,498 1,374,955
Accrued interest receivable (note 6) 11,027 9,499
Real estate owned, net 4,549 5,771
Federal Home Loan Bank stock, at cost
(notes 8 and 11) 12,144 10,811
Premises and equipment, net (note 9) 21,481 17,768
Goodwill and other intangibles 11,586 9,648
Other assets 8,866 7,676
--------------------------------------------------
Total assets $ 2,091,363 1,877,925
==================================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 10) $ 1,640,815 1,450,047
Borrowed funds (note 11) 223,458 211,761
Advances by borrowers for taxes and insurance 12,985 12,268
Accrued interest payable 4,312 4,128
Other liabilities 11,299 9,070
--------------------------------------------------
Total liabilities 1,892,869 1,687,274
Shareholders' equity (notes 13 and 16):
Common stock, $.10 par value, authorized 50,000,000
shares; 23,376,000 issued and outstanding at
June 30, 1997 and 1996 2,338 2,338
Paid-in capital 67,854 67,671
Retained earnings, substantially restricted (note 13) 131,423 125,239
Unrealized gain on securities available-for-sale,
net of income taxes 1,026 1,325
Unearned employee stock ownership plan shares (note 14) (2,358) (3,328)
Unearned recognition and retention plan shares (note 14) (1,789) (2,594)
--------------------------------------------------
Total shareholders' equity 198,494 190,651
--------------------------------------------------
Total liabilities and shareholders' equity $2,091,363 1,877,925
==================================================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 127,019 111,957 96,473
Mortgage-backed securities 19,141 17,342 14,520
Investment securities 6,925 5,089 3,838
Interest-bearing deposits 433 742 3,327
---------------------------------------------------------
Total interest income 153,518 135,130 118,158
---------------------------------------------------------
Interest expense:
Deposits (note 10) 72,627 61,661 53,282
Borrowed funds 8,797 6,976 4,844
---------------------------------------------------------
Total interest expense 81,424 68,637 58,126
---------------------------------------------------------
Net interest income 72,094 66,493 60,032
Provision for possible loan losses (note 7) 2,491 1,502 1,098
---------------------------------------------------------
Net interest income after provision
for possible loan losses 69,603 64,991 58,934
---------------------------------------------------------
Noninterest income:
Loan fees and service charges 2,351 1,952 1,740
Gain (loss) on sales of marketable securities, net 901 -- (36)
Loss on sale of loans (420) (1,022) (283)
Gain on sale of real estate owned 496 274 317
Other operating income 3,408 2,921 2,774
---------------------------------------------------------
Total noninterest income 6,736 4,125 4,512
Noninterest expense:
Compensation and employee benefits (note 14) 25,990 21,756 20,548
Premises and occupancy costs 5,163 4,536 4,047
SAIF recapitalization assessment (note 17) 8,565 -- --
Federal insurance premiums 1,302 3,019 2,764
Data processing 1,135 1,170 1,043
Check processing expenses 1,543 1,391 1,088
Advertising 1,606 1,197 949
Other expenses 8,899 7,758 6,532
---------------------------------------------------------
Total noninterest expense 54,203 40,827 36,971
---------------------------------------------------------
Income before income taxes 22,136 28,289 26,475
Income taxes (note 12):
Federal 7,076 8,855 8,660
State 1,396 1,948 1,521
---------------------------------------------------------
Total income taxes 8,472 10,803 10,181
---------------------------------------------------------
Net income $ 13,664 17,486 16,294
=========================================================
Earnings per share (note 1) $ .59 .77 .47
=========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of fiscal year $ 2,338 1,155 --
Issuance of common stock (note 2) -- -- 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 2,338 1,155
Paid-in capital:
Balance at beginning of fiscal year 67,671 65,596 --
Issuance of common stock (note 2) -- -- 65,822
Issuance of recognition and retention plan shares -- 3,229 --
Adjustment resulting from two-for-one stock split -- (1,169) --
Excess of fair value above cost (cost above fair value)
of employee stock ownership plan (ESOP) shares released 183 15 (226)
--------------------------------------------------
Balance at June 30 67,854 67,671 65,596
Retained earnings:
Balance at beginning of fiscal year 125,239 114,724 102,319
Net income 13,664 17,486 16,294
Capitalization of Northwest Bancorp, MHC -- -- (1,000)
Dividends ($.32 per share in 1997, $.30 per share
in 1996 and $.125 per share in 1995) (7,480) (6,971) (2,889)
--------------------------------------------------
Balance at June 30 131,423 125,239 114,724
Unrealized gain on securities available-for-sale:
Balance at beginning of fiscal year 1,325 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 (299) (202) 1,392
--------------------------------------------------
Balance at June 30 1,026 1,325 1,527
Unearned ESOP shares:
Balance at beginning of fiscal year (3,328) (4,312) --
Common shares acquired by ESOP (note 2) -- -- (5,452)
ESOP shares released 970 984 1,140
--------------------------------------------------
Balance at June 30 (2,358) (3,328) (4,312)
Unearned recognition and retention plan (RRP) shares:
Balance at beginning of fiscal year (2,594) -- --
Common shares acquired by RRP -- (3,243) --
RRP shares released 805 649 --
--------------------------------------------------
Balance at June 30 (1,789) (2,594) --
--------------------------------------------------
Total shareholders' equity $ 198,494 190,651 178,690
--------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 13,664 17,486 16,294
Adjustments to reconcile net income to net
cash provided by operations:
Provision for possible loan losses 2,491 1,502 1,098
Net (gain) loss on sales of assets (977) 748 38
Depreciation of premises and equipment 1,879 1,645 1,570
Amortization of deferred loan fees (715) (1,297) (925)
Decrease (increase) in other assets 484 (538) (2,240)
Increase in other liabilities 1,625 413 1,733
Amortization of discounts on
marketable securities (431) (421) (352)
Noncash compensation expense related to
stock benefit plans 2,212 1,648 914
Other -- 163 282
------------------------------------------------------------
Net cash provided by operating activities 20,232 21,349 18,412
Investing activities:
Purchase of marketable securities held-to-maturity -- (18,684) (75,857)
Purchase of marketable securities available-for-sale (29,992) (80,504) (19,513)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 18,315 16,663 19,349
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 8,692 9,881 1,320
Proceeds from sales of marketable securities
available-for-sale 15,496 -- --
Loan originations (563,188) (564,380) (304,974)
Purchases of loans -- -- (36,943)
Proceeds from loan maturities and
principal reductions 371,295 316,574 229,731
Proceeds from loan sales 47,985 99,062 19,956
Purchase of Federal Home Loan Bank stock (973) (1,142) (547)
Proceeds from sale of real estate owned 1,978 2,169 4,419
Purchase of real estate for investment (391) (358) (468)
Purchase of premises and equipment (4,153) (3,928) (3,213)
Acquisitions, net of cash acquired (note 3) (13,959) 11,182 (3,996)
------------------------------------------------------------
Net cash used by investing activities (148,895) (213,465) (170,736)
</TABLE>
(Continued)
40
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Increase in deposits, net $ 156,174 70,118 48,541
Proceeds from long-term borrowings 63,136 18,269 37,225
Repayments of long-term borrowings (75,260) (28,108) (15,327)
Net increase in short-term borrowings 18,821 115,000
Increase in advances by borrowers for
taxes and insurance 480 76 704
Common stock acquired by ESOP -- -- (5,452)
Cash dividends paid (7,480) (8,996) (863)
Proceeds from sale of common stock -- -- 66,977
Capitalization of Northwest Bancorp, MHC -- -- (1,000)
--------------------------------------------------------------
Net cash provided by financing activities 115,871 166,359 130,805
--------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents $ 27,208 (25,757) (21,519)
==============================================================
Cash and cash equivalents at beginning of year 44,304 70,061 91,580
Net increase (decrease) in cash and cash equivalents 27,208 (25,757) (21,519)
--------------------------------------------------------------
Cash and cash equivalents at end of year $ 71,512 44,304 70,061
==============================================================
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of $52,665,
$47,385 and $41,370, respectively) $ 81,240 68,218 57,512
==============================================================
Income taxes $ 8,531 11,408 10,939
==============================================================
Noncash activities:
Business acquisitions:
Fair value of assets acquired $ 59,560 115,220 17,392
Cash paid $ (18,772) (15,028) (5,520)
==============================================================
Liabilities assumed $ 40,788 100,192 11,872
==============================================================
Loans transferred to real estate owned $ 1,654 2,072 2,011
==============================================================
Sale of real estate owned financed by Bank $ 108 700 2,117
==============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
NORTHWEST SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
(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 57 community banking offices in Pennsylvania. Northwest
Savings Bank and its subsidiaries also offer consumer finance products through
29 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, one office in Pennsylvania and two offices 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 cost of securities sold is determined on a specific
identification basis. 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
borrowings.
Loans Receivable
Loans are stated at their unpaid principal balance net of any deferred
origination fees or costs and the allowance for estimated loan losses. Interest
income on loans is credited to income as earned. Interest earned on loans for
which no payments were received during the month is accrued at month end.
Interest accrued on loans more than ninety days delinquent is offset by a
reserve for uncollected interest, and such loans are placed on a nonaccrual
status.
42
<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, 1997 and 1996.
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.
Goodwill and Identified Intangibles
Intangible assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
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.
43
<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.
The Bank accounts for income taxes using the asset and liability method. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for temporary differences between the financial reporting and
tax basis of the Bank's assets and liabilities based on enacted tax rates
expected to be in effect when such amounts are realized or settled.
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 23,150,650 for the year ended
June 30, 1997, 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 $.59 for the year ended June 30, 1997, $.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.
(2) CORPORATE REORGANIZATION AND STOCK ISSUANCE
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 Pennsylvania 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. 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.
44
<PAGE>
(3) BUSINESS COMBINATIONS
During fiscal 1997, the Bank completed the acquisition of a savings bank and a
consumer discount company: the savings bank had assets of approximately
$56,000,000 and was purchased using cash of $17,986,000, and the consumer
discount company had assets of approximately $1,050,000 and was purchased for
cash of $786,000. The acquisitions were recorded using the purchase method of
accounting resulting in goodwill of approximately $3,000,000 which is being
amortized over a 10-year period on a straight-line basis.
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 10-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 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 which was purchased
for cash of $4,234,000 and a mortgage banking company with assets of
approximately $4,000,000 which was purchased for cash of $225,000. The
acquisitions were recorded using the purchase method of accounting resulting in
goodwill of approximately $1,900,000. Goodwill of approximately $350,000
relating to the mortgage banking company was charged to expense in the year
ended June 30, 1997, as a result of restructuring the Bank's mortgage banking
operations, and the goodwill relating to the consumer discount company is being
amortized over a 15-year period on a straight-line basis.
45
<PAGE>
(4) MARKETABLE SECURITIES
Marketable securities at June 30, 1997, 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 $ 12,057 47 -- 12,104
Due after one year--five years 30,811 436 (17) 31,230
Corporate debt issues:
Due in one year or less 201 -- -- 201
Due after one year--five years 100 -- -- 100
Due after ten years 250 -- -- 250
Mortgage-backed securities:
Fixed rate pass-through 10,853 30 (112) 10,771
Variable rate pass-through 13,397 335 (42) 13,690
Fixed rate CMO 1,400 2 (3) 1,399
Variable rate CMO 84,911 673 (2,585) 82,999
----------------------------------------------
Total mortgage-backed securities 110,561 1,040 (2,742) 108,859
----------------------------------------------
Total securities held-to-maturity $ 153,980 1,523 (2,759) 152,744
==============================================
Available-for-sale:
U.S. government and agencies:
Due in one year or less $ 3,197 5 -- 3,202
Due after one year--five years 34,730 431 (100) 35,061
Due after ten years 25,363 11 (365) 25,009
Equity securities 2,169 1,754 -- 3,923
Municipal securities:
Due in one year--five years 2,403 27 (9) 2,421
Due in five years--ten years 5,824 81 (4) 5,901
Due after ten years 3,095 72 -- 3,167
Mortgage-backed securities:
Fixed rate pass-through 36,782 1,198 (84) 37,896
Variable rate pass-through 770 14 -- 784
Fixed rate CMO 99 8 -- 107
Variable rate CMO 143,658 1,225 (2,634) 142,249
----------------------------------------------
Total mortgage-backed securities 181,309 2,445 (2,718) 181,036
----------------------------------------------
Total securities available-for-sale $ 258,090 4,826 (3,196) 259,720
==============================================
</TABLE>
(Continued)
46
<PAGE>
Marketable securities at June 30, 1996, 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 $ 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--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>
Expected maturities for mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations.
(Continued)
47
<PAGE>
The following table presents information regarding the issuers and the carrying
value of the Bank's mortgage-backed securities:
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
-------------------
<S> <C> <C>
Mortgage-backed securities:
FNMA $140,775 140,566
GNMA 29,338 39,729
FHLMC 120,400 109,438
Other (nonagency) 1,084 1,713
------------------
Total mortgage-backed securities $291,597 291,446
==================
</TABLE>
Marketable securities having a carrying value of $71,269,000 at June 30, 1997,
were pledged to secure public deposits. During fiscal year 1997, the Bank sold
marketable securities available-for-sale for $15,496,000 realizing a gross
pretax profit of $901,000. During fiscal years 1996 and 1995, the Bank did not
sell any marketable securities.
(5) LOANS RECEIVABLE
Loans receivable at June 30, 1997 and 1996, are summarized in the table below:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Real estate loans:
One- to four-family $1,096,315 1,008,288
Multi-family and commercial 100,912 97,612
----------------------
Total real estate loans 1,197,227 1,105,900
Consumer loans:
Home equity and home improvement 37,607 38,146
Education loans 53,542 47,842
Loans on savings accounts 7,176 6,543
Other 212,472 159,532
----------------------
Total consumer loans 310,797 252,063
Commercial loans 86,087 67,045
----------------------
Total loans receivable, gross 1,594,111 1,425,008
Deferred loan fees (2,384) (3,495)
Undisbursed loan proceeds (real estate loans) (41,618) (33,428)
Allowance for loan losses (real estate loans) (6,898) (9,133)
Allowance for loan losses (other loans) (6,713) (3,997)
----------------------
Total loans receivable, net $1,536,498 1,374,955
======================
</TABLE>
As of June 30, 1997 and 1996, the Bank serviced loans for others approximating
$97,869,000 and $85,865,000, respectively. These loans serviced for others are
nor assets of the Bank and are appropriately excluded from the Bank's financial
statements.
48
<PAGE>
At June 30, 1997, 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, 1997, include $195,869,000 of adjustable rate loans
and $1,398,242,000 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, 1997 and 1996, are presented in the following table:
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Mortgage loan commitments $22,434 22,682
Undisbursed lines of credit 57,838 53,620
Standby letters of credit 2,319 1,889
---------------------
$82,591 78,191
=====================
</TABLE>
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 counterpart. Collateral held varies but generally may include cash,
marketable securities and property.
Outstanding mortgage loan commitments at June 30, 1997, for fixed and
adjustable rate loans, are $21,984,000 and $450,000, respectively. The interest
rates on these commitments approximate market rates at June 30, 1997.
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 nonaccrual loans, which totaled $10,430,000 at
June 30, 1997, and $9,481,000 at June 30, 1996, are considered to be impaired
loans. Average impaired loans during 1997 and 1996 we're $11,818,000 and
$10,394,000, respectively. All of the Bank's impaired loans at June 30, 1997,
were collateral dependent. Since at June 30, 1997, the value of the collateral
for each impaired loan exceeded the carrying value of the impaired loan, no
impairment reserve was established. Interest income on impaired loans for fiscal
1997, recognized using a cash basis method of accounting, was $305,000. There
was no interest income recognized on impaired loans during fiscal 1996.
The foregone interest on nonaccrual loans for the year ended June 30, 1995, was
$870,000. There were no commitments to lend additional funds to debtors on
nonaccrual status.
49
<PAGE>
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable as of June 30, 1997 and 1996, is presented in the
following table:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Investment securities $ 2,072 1,787
Mortgage-backed securities 1,264 1,114
Loans receivable 7,691 6,598
----------------------
$ 11,027 9,499
======================
</TABLE>
(7) ALLOWANCE FOR ESTIMATED LOSSES
Changes in the allowance for losses on loans receivable for the years ended
June 30, 1997, 1996 and 1995, are presented in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Balance, beginning of fiscal year $ 13,130 11,833 11,238
Provision 2,491 1,502 1,098
Charge-offs (2,537) (1,333) (1,071)
Acquisitions 153 700 235
Recoveries 374 428 333
------------------------------------
Balance, end of fiscal year $ 13,611 13,130 11,833
====================================
</TABLE>
Management believes that the allowance for estimated losses is adequate as of
June 30, 1997. 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 requite 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.
50
<PAGE>
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1997 and 1996, are summarized by major
classification in the following table:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Land and land improvements $ 2,413 2,250
Office buildings and improvements 21,636 18,437
Furniture, fixtures and equipment 15,098 13,156
Leasehold improvements 3,023 2,862
----------------------
Total, at cost 42,170 36,705
Less accumulated depreciation and amortization 20,689 18,937
----------------------
Premises and equipment, net $ 21,481 17,768
======================
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1997, 1996
and 1995, was $1,879,000, $1,645,000 and $1,570,000, 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>
1998 $ 1,074
1999 790
2000 584
2001 319
2002 197
Thereafter 884
-------
Total $ 3,848
=======
</TABLE>
Rental expense for the years ended June 30, 1997, 1996 and 1995, was $1,362,000,
$1,268,000 and $1,016,000, respectively.
(10) SAVINGS DEPOSITS
Savings deposit balances at June 30, 1997 and 1996, are shown in the table
below:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Passbook accounts $ 299,365 296,099
Interest-bearing checking accounts 206,299 184,289
Noninterest-bearing checking accounts 16,546 10,730
Money market deposit accounts 83,609 82,552
Certificates of deposit 1,034,996 876,377
-------------------------
$1,640,815 1,450,047
=========================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$ 100,000 was approximately $111,362,000 at June 30, 1997.
51
<PAGE>
The following table summarizes the contractual maturity of the certificate
accounts:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Due within one year $ 607,421 512,392
Due between one and two years 264,117 196,962
Due between two and three years 92,953 62,577
Due between three and four years 22,861 33,966
After four years 47,644 70,480
-----------------------------
$1,034,996 876,377
=============================
</TABLE>
The following table summarizes the interest expense incurred on the respective
savings deposits:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 9,490 9,322 10,414
Interest-bearing checking accounts 3,992 3,396 3,163
Money market deposit accounts 2,735 2,595 2,555
Certificate accounts 56,410 46,348 37,150
---------------------------------------
$72,627 61,661 53,282
=======================================
</TABLE>
(11) BORROWED FUNDS
Borrowed funds at June 30, 1997 and 1996, are presented in the following table:
Term notes payable to the Federal Home Loan Bank of Pittsburgh:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------
Average Average
Amount rate Amount rate
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 11,000% 5.86 $23,459% 5.78
Due between one and two years 43,000 5.94 39,000 5.94
Due between two and three years 2,000 7.18 2,000 7.18
Due between three and five years -- -- -- --
Due between five and ten years 350 3.43 350 3.43
Due between ten and twenty years 1,862 3.65 794 4.56
-------------------------------------------------------------
58,212 5.88 65,603 5.89
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh 106,000 6.25 135,000 5.46
ESOP note payable, variable rate
equal to prime, payable in five annual
installments of $862, excluding interest,
beginning January 1996 (note 14) 2,358 8.31 3,328 8.25
Investor note's payable, due various
dates through 2002 6,772 6.42 7,830 6.33
Securities sold under agreement to repurchase,
due various dates through 1998 50,116 5.60 -- --
-------------------------------------------------------------
Total borrowed finds $223,458 $211,761
=============================================================
</TABLE>
52
<PAGE>
Borrowings 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 note's outstanding. Certain of these
borrowings are subject to restrictions or penalties in the event of prepayment.
The revolving line of credit with the Federal Home Loan Bank of Pittsburgh
carries a commitment of $150,000,000 maturing on June 29, 1998. The rate is
adjusted daily by the Federal Home Loan Bank and any borrowings on this line may
be repaid at any time without penalty.
The securities sold under agreements to repurchase are collateralized by various
securities held in safekeeping by the Federal Home Loan Bank of Pittsburgh. The
market value of such securities exceeds the value of the securities sold under
agreements to repurchase. The average amount of agreements outstanding in fiscal
year 1997 was $16,578,000. The maximum amount of security repurchase agreements
outstanding during fiscal year 1997 was $50,116,000.
(12) INCOME TAXES
Total income tax expense (benefit) was allocated for the years ended June 30,
1997, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Income before income taxes $8,472 10,803 10,181
Net worth for unrealized gain on securities (226) (109) 939
------------------------------
$8,246 10,694 11,120
==============================
</TABLE>
Income tax expense (benefit) applicable to income before taxes consists of:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Current $ 9,633 10,203 10,101
Deferred (1,161) 600 80
------------------------------
$ 8,472 10,803 10,181
==============================
</TABLE>
The significant components of deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
June 30,
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Deferred income tax expense (benefit) $(1,324) 571 (44)
NOL carryforward 163 29 124
------------------------------
$(1,161) 600 80
==============================
</TABLE>
53
<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>
Year ended June 30,
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (1.3) (1.9) (1.1)
State income tax, net of federal and
state taxes 4.1 4.7 3.8
Other differences, net .5 .4 .8
------------------------------
Effective tax rate % 38.3 38.2 38.5
==============================
</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, 1997 and
1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------
<S> <C> <C>
Deferred tax assets:
Deferred fee income $1,131 1,363
Deferred compensation expense 850 762
Net operating loss carry forwards 292 257
Bad debts 1,418 963
Accrued post retirement benefit cost 395 340
Pension expense 209 166
Other 1,196 405
-------------------
5,491 4,256
Deferred tax liabilities:
Marketable securities 604 830
Other 276 202
-------------------
880 1,032
-------------------
Net deferred tax asset $4,611 3,224
===================
</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
$833,000 of net operating losses which expire in years 2005 through 2010. 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 eliminated the
percentage of taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also generally
requires a thrift to 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.
54
<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.
In tax years prior to fiscal 1997, the Bank was permitted, under the Internal
Revenue Code (the Code), to deduct an annual addition to a reserve for bad debts
in determining taxable income, subject to certain limitations. Bad debt
deductions for income tax purposes are included in taxable income of later
years only if the bad debt reserve is used subsequently for purposes other than
to absorb bad debt losses. Because 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, 1997, includes approximately
$27,160,000 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 plans,
was approximately $1,644,000, $1,762,000 and $1,426,000 for the years ended June
30, 1997, 1996 and 1995, respectively. Net periodic pension cost for the Bank's
defined benefit pension plans consist of the following:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Service cost $ 924 670 631
Interest cost 896 775 627
Actual return on plan assets (1,903) (1,291) (473)
Net amortization and deferral 1,206 1,076 337
-----------------------------
Net periodic pension cost $ 1,123 1,230 1,122
=============================
</TABLE>
55
<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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $11,034 and
$9,512, respectively $(11,538) (9,953)
=====================
Projected benefit obligation (15,076) (12,881)
Plan assets at fair value (primarily equity
and fixed income securities) 12,911 10,245
---------------------
Projected benefit obligation
in excess of plan assets (2,165) (2,636)
Unrecognized transition asset (419) (459)
Unrecognized net loss 811 1,351
Unrecognized prior service cost 988 1,082
Adjustment to recognize minimum liability (96) (64)
---------------------
Accrued pension cost $ (881) (726)
=====================
</TABLE>
The following table sets forth the assumptions used to develop the net pension
cost:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
--------------------------------
<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.
Net periodic cost for the Bank's postretirement healthcare benefits consist of
the following:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Service cost $ 71 71 64
Interest cost 88 81 65
--------------------------------
Net periodic cost $159 152 129
================================
</TABLE>
56
<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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
Accumulated benefit obligation $ (639) (997)
Plan assets at fair value -- --
------------------
Accumulated benefit obligation in excess
of plan assets (639) (997)
Unrecognized net loss (478) 2
------------------
Accrued postretirement benefit cost $(1,117) (995)
==================
</TABLE>
The assumptions used to develop the preceding information for postretirement
healthcare benefits are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Discount rate % 7 7 7
Monthly cost of healthcare insurance
per beneficiary $92.73 102.74 93.40
Annual rate of increase in healthcare costs % 4 8 8
</TABLE>
If the assumed rate of increase in healthcare costs were increased by one-
percentage-point to 5% from the level of 4% presented above, the service and
interest cost components of net periodic postretirement healthcare benefit cost
would increase by $8,508, in the aggregate, and the accumulated postretirement
benefit obligation for healthcare benefits would increase by $61,959.
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 $1,437,000, $1,359,000 and $1,300,000 for the
fiscal years ended June 30, 1997, 1996 and 1995, respectively.
The ESOP shares as of June 30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------
<S> <C> <C>
Allocated shares 313,282 215,104
Unearned shares 238,718 336,896
-----------------
552,000 552,000
=================
Fair value of unearned shares at June 30 $ 3,700 3,790
=================
</TABLE>
57
<PAGE>
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 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 authorized 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 461,000 incentive
stock options to employees at an exercise price of $11.75 per share. On March
22, 1996, the Bank granted 61,400 incentive stock options to employees at an
exercise price of $11.25 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 46,000 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.
The following table summarizes the activity in the Bank's Stock Option Plan
during the periods ending June 30:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Weighted Weighted
average average
Number exercise price Number exercise price
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 644,000 $11.59 -- $ --
Granted -- -- 644,000 11.59
Exercised -- -- -- --
----------------------------------------------------------------------
Balance at end of year 644,000 $11.59/(a)/ 644,000 $11.59
======================================================================
Exercisable at end of year 257,600 $11.59 128,800 $11.59
Weighted average grant date
fair value of options
granted during the year $ -- $ 2.31
======================================================================
</TABLE>
/(a)/ Exercise price range: $11.16 to $11.75.
58
<PAGE>
The average remaining contractual life of the options as of June 30, 1997, is
8.5 years.
The Bank applies APB Opinion No. 25 and related interpretations in accounting
for its plans. Had compensation costs for the Stock Option Plan been determined
consistent with SFAS 123, "Accounting for Stock-Based Compensation," which
permits entities to expense an estimated fair value of employee stock options
granted, the Bank's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Net income:
As reported $ 13,664 17,486
Pro forma 13,391 17,350
Earnings per share:
As reported .59 .77
Pro forma .58 .76
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 2.76 percent for all
years; expected volatility of 12.83 percent; risk-free interest rate of 5.65%;
and expected lives of seven years. The effects of applying SFAS No. 123 may not
be representative of the effects on reported net income in future years.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107),
requires disclosure of fair value information about financial instruments
whether or not recognized in the consolidated statement of financial condition.
SFAS 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank. The carrying
amounts reported in the consolidated statement of financial condition
approximate fair value for the following financial instruments: cash on hand and
interest-earning deposits in other institutions, accrued interest receivable,
accrued interest payable and marketable securities available-for-sale.
The carrying value of marketable securities held-to-maturity exceeded market
value by $1,236,000 and $1,281,000 at June 30, 1997 and 1996, 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 market value of loans exceeded the carrying value at June 30, 1997, by
approximately $1,734,000 and was $12,008,000 less than the carrying value of
loans at June 30, 1996. 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.
59
<PAGE>
The carrying amounts and estimated fair values of deposits at June 30, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------------------------------------------
<S> <C> <C> <C> <C>
NOW and MMDA accounts $ 306,454 306,454 277,571 277,571
Passbook accounts 299,366 299,366 296,099 296,099
Time deposits 1,034,996 1,034,712 876,377 871,873
----------------------------------------------
Total deposits $1,640,816 1,640,532 1,450,047 1,445,543
==============================================
</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, 1997 and 1996, by $11,000 and $1,384,000, respectively. Variable rate
borrowings and investor notes 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) 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.
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, 1997, the Bank exceeds all capital adequacy
requirements to which it is subject.
As of May 30, 1997, 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.
60
<PAGE>
The Bank's actual capital amounts and ratios as of June 30, 1997 and 1996, are
presented in the following table:
<TABLE>
<CAPTION>
To be well
Actual capital Required capital capitalized
--------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital
(to risk-
weighted assets) $ 199,795 % 18.4 $ 87,071 % 8.0 $ 108,839 % 10.0
Tier I capital
(to risk-
weighted assets) 186,190 17.1 43,536 4.0 65,303 6.0
Tier I capital
(to average assets) 186,190 9.1 61,319 3.0/(*)/ 102,199 5.0
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/(*)/ 91,179 5.0
</TABLE>
/(*)/ 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, 1997, the Bank had not been
advised of any additional requirements in this regard.
61
<PAGE>
(17) 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 (SAIF). 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. The Bank's 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 net income of the Bank for the fiscal year ended June
30, 1997, was $5.1 million after tax. As a result of the recapitalization of the
SAIF, the Bank was not required to pay a regular deposit insurance premium for
the three months ended December 31, 1996. Effective January 1, 1997, as a result
of the SAIF now being fully funded, the premium the Bank pays for deposit
insurance fell to .064% of insured deposits from the previous level of .23%.
(18) 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 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
June 30, 1997, the plaintiff has not sought further review or initiated
additional proceedings. Management intends to continue to vigorously defend
against any such proceedings. Accordingly, no provision for liability, if any,
that may result has been recorded in the consolidated financial statements.
62
<PAGE>
(19) 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>
Fiscal 1997
Interest income $ 37,040 37,400 38,306 40,772
Interest expense 19,641 20,087 20,203 21,493
----------------------------------------------
Net interest income 17,399 17,313 18,103 19,279
Provision for possible loan losses 217 394 574 1,306
Noninterest income 1,603 2,221 1,485 1,427
Noninterest expenses 19,981 10,886 11,441 11,895
----------------------------------------------
Income before income taxes (1,196) 8,254 7,573 7,505
Provision for income taxes (364) 3,390 2,977 2,469
----------------------------------------------
Net income (loss) $ (832) 4,864 4,596 5,036
==============================================
Earnings (loss) per share $ (.04) .21 .20 .22
==============================================
<CAPTION>
Three months ended
----------------------------------------------
September 30 December 31 March 31 June 30
----------------------------------------------
(in thousands, except per share data)
----------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996
Interest income $ 32,328 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
==============================================
</TABLE>
Results for the quarter ended September 30, 1996, include expense of $8,600,000
($5,100,000 after tax) for the recapitalization of the SAIF. See note 17.
63
<PAGE>
CORPORATE INFORMATION
Annual Meeting:
December 10, 1997
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>
CORPORATE INFORMATION
MARKET MAKERS
Name of Firm Phone
- ------------ -----
Friedman Billings Ramsey & Co. (800) 688-3272
Parker/Hunter, Inc. (412) 562-8025
F.J. Morrissey & Co., Inc. (800) 842-8928
Wheat First Securities, Inc. (800) 446-1016
Legg Mason Wood Walker, Inc. (800) 221-9732
Sandler O'Neill & Partners, Inc. (800) 635-6860
Ryan Beck & Co., Inc. (800) 395-7926
DIVIDEND REINVESTMENT PLAN
The Northwest Savings Bank Dividend Reinvestment Plan enables
holders of common stock to reinvest quarterly dividends toward
the purchase of additional shares. Shareholders who enroll in
the Automatic Dividend Reinvestment Plan may also elect to do
optional cash investments conveniently and without paying
brokerage commissions or service charges. A prospectus and
enrollment card may be obtained by contacting:
American Stock Transfer and Trust Company
Attention: Dividend Reinvestment Department
(800) 278-4353 (U.S. calls only)
(718) 921-8283 (outside of U.S.)
or:
Northwest Savings Bank
Shareholder Relations Department
(814) 726-2140
(Fax) (814) 726-1980
65
<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
Dr. Richard E. McDowell President of the University of Pittsburgh
at Bradford
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.
66
<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 Senior Vice President, Administration
John M. Blair Senior Vice President, Mortgage Lending
Raymond R. Parry Senior Vice President, Consumer Lending
Timothy A. Huber Senior Vice President, Commercial Lending
Robert A. Ordiway Senior Vice President, Region Manager
Robert G. Norton Vice President, Human Resources
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 Executive Vice President
John E. Hall Senior Vice President
NORTHWEST MORTGAGE
CORPORATION
Robert O. Rogers President
67
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE BANK
<PAGE>
SUBSIDIARIES OF THE BANK
------------------------
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
